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A T M O S E N E R G Y C O R P O R A T I O N 1 9 9 8 A N N U A L R E P O R T
A T M O S
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F I N A N C I A L H I G H L I G H TS
Year ended September 30,
1998
1997
% change
(Dollars in thousands, except per share amounts)
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 848,208
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 331,836
Utility net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-utility net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
42,147
13,118
55,265
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,141,390
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 769,706
Net income per share – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1.84
1.06
12.21
Total throughput (MMcf). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
215,597
Heating degree days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Degree days as a % of normal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,799
95%
Meters in service at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,004,532
Return on average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.8%
Shareholders’ equity as a % of total
capitalization at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41.5%
Shareholders of record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average shares outstanding – diluted (000’s) . . . . . . . . . . . . . . . . . . . . . . . .
36,949
30,031
$ 906,835
$ 329,654
$
$
$
16,991
6,847
23,838
$1,088,311
$ 630,241
$
$
$
.81
1.01
11.04
213,008
3,909
98%
985,448
7.3%
40.3%
29,867
29,422
-6.5%
0.7%
148.1%
91.6%
131.8%
4.9%
22.1%
127.2%
5.0%
10.6%
1.2%
-2.8%
-3.1%
1.9%
116.4%
3.0%
23.7%
2.1%
TA B L E O F C O N T E N T S
Letter to Shareholders
Chief Executive Q&A
Utility Operations
2
5
8
Energas Company Information
10
Greeley Gas Company
Information
Trans Louisiana Gas Company
Information
United Cities Gas Company
Information
Western Kentucky Gas Company
Information
Non-Utility Operations
Shared Services
Financial Information
Board of Directors
Corporate Information
12
14
16
18
20
22
23
56
57
Atmos has a tradition of delivering safe, reliable,
economical and environmentally friendly natural gas to customers, doing so
with a focus on exceptionalcustomer service.
Even though our industry is changing, our commitment to customers
is not. This report outlines our successes in 1998 and highlights
ways we are delivering on our commitment to be counted
among the best in the industry. We also feature some outstanding
citizens from the communities served by our company who display a
winning attitude. They passionately pursue
excellence, dare to reach for the summit, utilize their unique talents
to make a difference, translate dreams into realities, help others
to succeed and perform theirbest with precision, stamina
and heart. By (cid:210)thinking like a winner,(cid:211) they have become
winners indeed.
AT M O S AT A G L A N C E
Year ended September 30,
1998
1997
1996
Utility Meters In Service (1)
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
889,074
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial (including agricultural) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,302
16,322
4,834
Total natural gas meters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,004,532
Propane customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,400
870,747
92,703
17,217
4,781
985,448
29,097
860,229
91,960
19,403
4,716
976,308
26,108
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,041,932
1,014,545
1,002,416
Heating Degree Days
Actual (weighted average) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,799
Percent of normal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95%
Sales Volumes (MMcf)
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial (including agricultural) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation Volumes (MMcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Throughput (MMcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Propane – Gallons (000’s). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73,472
36,083
44,881
4,937
159,373
56,224
215,597
33,676
Operating Revenues (000’s)
Gas Revenues
3,909
98%
75,215
37,382
46,416
5,195
164,208
48,800
213,008
32,975
4,043
101%
77,001
38,247
57,863
5,182
178,293
44,146
222,439
40,723
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 410,538
$ 452,864
$ 409,039
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial (including agricultural). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other gas revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184,046
161,382
20,504
776,470
23,971
8,121
Total gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
808,562
Propane revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,091
10,555
193,302
168,386
23,898
838,450
19,885
6,385
864,720
33,194
8,921
186,032
187,693
21,738
804,502
18,872
13,751
837,125
38,372
11,194
Total Operating Revenues (000’s). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 848,208
$ 906,835
$ 886,691
Other Statistics
Gross plant (000’s)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,446,420
Net plant (000’s)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 917,860
Miles of pipe (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,108
2,193
$1,332,672
$ 849,127
30,902
2,679
$1,219,774
$ 770,211
30,163
2,863
(1) Balances as of September 30, 1998
Based in Dallas,Texas, Atmos Energy Corporation distributes natural gas and propane to more
than one million customers in Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana,
Missouri, North Carolina, South Carolina,Tennessee,Texas and Virginia through its operating
divisions – Energas Company, Greeley Gas Company,Trans Louisiana Gas Company, United Cities
Gas Company,Western Kentucky Gas Company and Atmos Propane, Inc.
A
Atmos Energy Corporation
company’s accomplishments can be gauged
in a variety of ways, but the ultimate measure
of a company’s performance is its total
return to shareholders. For fiscal 1998, Atmos’
total return to shareholders (simple price appreciation
plus reinvestment of dividends) was 19.2 percent during a
period when U.S. equity markets experienced dramatic
volatility. The total return to Atmos shareholders for the fiscal
year exceeded the return of the Dow Jones Industrial Average,
the S&P 500 and was among the best of our peer group of mid-
cap local distribution companies for the same 12-month period.
For the past three- , five- , and 10-year periods, the total return to
shareholders was 18.2 percent, 11.7 percent and 16.2 percent,
respectively. We believe our returns to shareholders reflect
the Company’s underlying financial and operational successes.
We would like to highlight the 1998 achievements.
Atmos achieved record earnings. Net income for 1998 was $1.84 per share on a
fully diluted basis, compared with $.81 per share the previous year on a fully diluted
basis. Winter weather in 1998 was 5 percent warmer than normal and 3 percent
warmer than last year. However, the negative effect of weather was offset by a signifi-
cant reduction in operations and maintenance expenses resulting from the restructuring of
our organization and the successful integration of United Cities Gas Company, acquired
through the merger completed in 1997. In addition, gas sales to Texas farmers for power-
ing irrigation pumps were higher in fiscal 1998 compared to 1997 due to the hot, dry
summer weather. Irrigation volumes increased 34 percent in 1998 compared with last
year, providing more revenue during late spring, summer and early fall when natural gas
sales are typically low because there are generally no sales or transportation of natural
gas for space heating.
The dividend was increased for the 11th consecutive year. In November 1998,
the Company increased its quarterly dividend by 3.8 percent to $.275 per share, or
$1.10 annually. With the payment of the quarterly dividend on December 10, 1998, to
shareholders of record on November 25, 1998, the Company will have paid a quarterly
dividend for 60 consecutive quarters.
United Cities was successfully integrated into Atmos’ utility operations.
During 1998, United Cities’ integration into Atmos’ operations was substantially
completed. United Cities’ operations were restructured to match Atmos’ highly efficient
utility business unit model and to gain the advantages of Atmos’ “shared services”
Dear
fellow
share-
holders:
94 95 96 97 98
Earnings
Per Share
(fully diluted)
n 94 $1.05
n 95 $1.06
n 96 $1.42
n 97 $0.81
n 98 $1.84
2
approach to administrative and support functions. The benefits of the United Cities
restructuring along with others throughout the Atmos utility operations are reflected in
lower operation and maintenance expenses for fiscal 1998 compared to 1997. Net income
in 1998 also included a one-time gain totaling $2.2 million, or $.07 per diluted share,
from the sale of certain real estate and equipment owned by the United Cities Division
that were no longer essential to Atmos’ operations or those of the United Cities Division.
Atmos has completed four major acquisitions since 1986, nearly tripling the number of
meters served to over one million in 12 states. Closing a merger or acquisition is an
achievement in itself, but deriving value from the transaction is an even greater accom-
plishment. Atmos has demonstrated the abilities to integrate companies quickly and
without unnecessary expense. Atmos retains the acquired company’s name, capitalizes
on its local identity and reputation with customers, but utilizes its business unit and
shared services structure to achieve economies of scale without replicating administrative
and support functions in each business unit.
We continued to enhance utility customer service and operating efficiency.
The Company is showing the benefits of a restructuring of its customer service opera-
tions begun in 1997 for all of our utility business units, including United Cities. We
enhanced service and convenience for our customers by employing technology to
improve our already efficient operations. Our Customer Support Center is now provid-
ing 24-hour a day, seven days a week customer call support to utility customers of all
five utility divisions. The Customer Support Center and a new state-of-the-art customer
information system currently being developed will further improve our responsiveness
to our customers.
Atmos strives to be among the best of its peers in terms of efficiency in utility operations.
One measure of this is operating and maintenance expense per meter. Atmos’ 1998
operating and maintenance expense of $136 per meter achieved our goal of being among
the best, if not the best, of our peers. This is the result of a dedicated, focused employee
team that serves on average 475 meters per employee, again a measure that puts Atmos
among the best, if not the best, of our peers.
We continued to add meters in our current service areas. Atmos added more
than 19,000 new utility meters in 1998, with the largest number of additions in the
United Cities and Greeley Divisions. We are focusing on untapped market potential
in our existing service areas, particularly in residential gas fireplaces, water heating and
94 95 96 97 98
gas lighting. We are initiating programs to pursue these opportunities and target areas
where we can increase market penetration.
Non-utility contributions to consolidated net income increased. Atmos’
non-utility operations include a propane operation, a leasing and rental operation, and
an energy services operation that includes storage, gas marketing, irrigation, and energy
services. In 1998, about 24 percent of the Company’s reported net income was from
non-utility operations, primarily from irrigation, gains on asset sales and Woodward
Marketing, LLC. Excluding the one-time gain on asset sales, non-utility operations con-
tributed 20 percent to 1998 consolidated net income compared to 17 percent in 1997.
The 1997 contribution to consolidated net income excludes the one-time charge for
reserve for integration and management reorganization. The contributions to net income
from each non-utility operation are described elsewhere in this report.
Operating and
Maintenance
Expense
Per Customer
n 94 $169
n 95 $163
n 96 $160
n 97 $183
n 98 $136
3
Atmos will be
working
to make
shareholders,
customers,
communities
and employees
winners,
too.
Established compensation more closely aligned with financial performance.
We instituted a new total rewards program in October 1998 that more directly aligns the
interests of our Board of Directors, officers and employees with those of our shareholders
by basing compensation on the Company’s financial performance. Starting at the very
top of our organization, our Board of Directors has elected to replace the directors’ retirement
plan with a plan providing for deferred payment of annual compensation and meeting
fees in the form of cash or company stock. Directors may also receive annual current
compensation and meeting fees in the form of company stock. The total rewards program
establishes share ownership guidelines for Atmos executives at a minimum of one and
one-half to five times their annual salary, and a new officer incentive plan will base stock
option grants on the achievement of financial performance measures. A variable pay program
will give all employees the opportunity to share in the success of the Company based on
the attainment of certain financial targets. Nearly all our employees are shareholders, and
together the board, officers and employees currently hold more than 12 percent of Atmos
stock. Certain of our compensation plans will require a vote of the shareholders at the
February 1999 shareholders meeting.
Thinking ahead. Atmos has been a successful company. Our challenge is to build on
that success, and to be as successful in the future as we have been in the past. Our successful
past sets a high standard for future performance.
We devoted much of 1998 to assessing every aspect of our business, defining our organiza-
tional structure, governance policies and strategies that will position the Company for what
we believe will be a successful future. I would like to recognize our employees for their
openness to change, their unwavering dedication to exceptional customer service even in times
of change, and their commitment to excellence. I also want to thank our Board of Directors
for their counsel and ongoing support of the Company’s vision and strategies for growth.
Now, all our focus and energies are dedicated to executing our plans. We intend to be a
winner and measured among the best. And we know that while our accomplishments can
be described in a variety of ways, in the final analysis, the measure of our accomplishments
will be the total return to you, our shareholder. By thinking like a winner in everything we
do, Atmos will be working to make shareholders, customers, employees and communities
winners, too.
Robert W. Best
Chairman of the Board, President
and Chief Executive Officer
Robert W. Best
Chairman, President and Chief Executive Officer
4
A Conversation with Bob Best
Describe Atmos’ vision for the future and its underlying operating philosophy.
Best: Since joining the Company in March 1997, we have reconfirmed the vision for the
future with four major strategies for achieving the vision. We intend to be as successful
in the future as we have been in the past by running our utility operations exceptionally
well; growing the market share of the non-utility operations (propane and gas marketing);
developing retail energy services; and growing through acquisitions.
We have worked to define our organizational structure and governance policies. Our
business units have established brand names and are closest to our customers, giving them
greater ability to determine customer expectations. Our shared services approach to
administration and support avoids duplication of functions in our business units and
allows us to quickly integrate acquisitions. We are committed to providing the highest
level of service to our customers, and investing in technology to remain competitive and
efficient in our operations. We intend to grow our net income every year. Our new total
rewards compensation and benefits strategy supports our values and aligns the interests
of our Board of Directors, officers and employees with those of our shareholders.
I have visited every business unit communicating to our employees our values and how
we will live out those values in the workplace. We’ve invested considerable time this year
in team-building and visiting with all employees about their role in achieving our vision
and strategy.
The Company has pursued an aggressive corporate development strategy. Will
that strategy continue in the future?
With our vision and strategy confirmed, our top priorities are execution of our plans and
acquisition strategy. We will not be satisfied as a “maintenance” utility just managing,
although very well, our current operations. To achieve our objective, we must continue the
acquisition strategy that has successfully brought Atmos to this point. We also believe
that larger scale operations will have an even greater competitive advantage with the
unbundling of energy services and an increasingly competitive marketplace.
We continually evaluate opportunities. However, the decision is not solely in our hands.
Potential partners have to share our vision and see the benefits and synergies of a larger
company. We have been successful in acquiring companies, integrating them quickly and
efficiently, retaining the local company’s brand identity, and adding value to the share-
holders of both companies. Our track record makes us an attractive partner for a company
looking for a partner that is focused on a combination that is “seamless” to the customer
and value creating for shareholders.
How do you intend to grow your non-utility business?
Our non-utility operations contributed about 24 percent of our consolidated net income in
1998. If you exclude the one-time gain from asset sales, our non-utility business contributed
20 percent of 1998 consolidated net income. Our objective is for continued growth in both
our utility and non-utility businesses, and for our non-utility operations to continue to
contribute about 20 percent to net income each year.
Q A
Thinking
like a
winner.
94 95 96 97 98
Gross Profit
n 94 $297,020
n 95 $300,158
n 96 $324,412
n 97 $329,654
n 98 $331,836
5
Q A
94 95 96 97 98
Total Assets
n 94 $ 829,385
n 95 $ 900,948
n 96 $1,010,610
n 97 $1,088,311
n 98 $1,141,390
6
A Conversation with Bob Best (continued)
The Company is committed to improving the profitability of its propane operations through
internal growth and through acquisitions. Currently, Atmos Propane, Inc. is the 33rd largest
propane company in the United States. Our non-utility operations also include a 45 percent
interest in Woodward Marketing, LLC, a natural gas services firm. Woodward’s strategy
for continued growth is to increase gas usage by existing customers and to add new
customers. We also may seek an electric partner to become a member of Woodward
Marketing, LLC, and create the opportunity to market electricity to Woodward customers.
How does Atmos plan to offer retail services to its customers?
The cornerstone of our retail services strategy is to position the Company to sell the gas
commodity to customers behind the meter through partnerships with commodity
providers. We are limited in our ability to implement this part of our retail strategy until
the states in which we operate permit us to offer these services. Until unbundling
occurs, we are focusing on three key areas. First, we are preparing to sell other products
and services to our customers by establishing partnerships with third parties that have
mass marketing expertise. Our focus is on products and services that have recurring
monthly revenues. A second key area is restructuring our non-regulated agricultural and
industrial businesses to separate them from the utility so that we can clearly focus on
the needs and expectations of these customers. The third key area is identifying tech-
nological opportunities that can increase our cash flow, earnings and gas throughput, such
as introducing natural gas-fired electric generator units for irrigation.
We believe our approach to retail services offers many advantages, including minimal
investment or operating expenses with limited risk. Our retail strategy also positions the
Company for unbundling when it does occur.
What competitive advantages does Atmos have in providing services in an
unbundled environment?
Tomorrow’s customers will insist on competitive rates, a choice of providers, superior
customer service that exceeds expectations, and enhanced product and service offerings
beyond the core business. We believe unbundling will occur in the long-term, although
it may be slower and less comprehensive than some have predicted. The states we serve
are taking a very measured, cautious approach to make sure that customers receive real
benefits. We have developed a consistent set of guiding principles for unbundling across
all regulatory jurisdictions in the areas we serve, and are participating in the proceedings
in those jurisdictions to ensure rules being developed provide for a level playing field.
As unbundling occurs, we believe that the incumbent utility or one of its affiliates will
have an advantage, both as a seller of the natural gas commodity and as the seller of other
products and services. We have an organization that is efficient and responsive to customers,
and our desire is to make it convenient for customers to do business with us.
How is Atmos using technology to support its vision for growth?
We are using technology to gain efficiencies in our current operations and to enhance
the services and convenience provided to our customers. We plan to eventually allow
customers the opportunity to receive their bills on line and remit payment electronically,
for example. We also are investing in information technology to respond to future
customer growth that occurs through acquisitions and to prepare for unbundling.
Unbundling will require the capability to bill in many different ways, and will make our
financial systems more complex. We are automating many functions of our billing and
financial systems to give us flexibility in the wake of unbundling and allow us to integrate
acquisitions in months instead of a year or more. We are implementing an enterprise
resource planning system that will get more timely financial and human resources infor-
mation to the desktop, and also addresses Year 2000 (Y2K) issues. We are automating
the way we handle customer service requests through our new customer information system,
and our next step is to implement an automated workforce management system to
handle construction, cathodic protection of our pipe and facilities management.
We’re also planning the development of a comprehensive gas supply and capacity
management system.
I’m often asked about our Year 2000 readiness. Our goal is to make the Year 2000 a
non-event for our customers and the Company. We formed a Y2K team in October 1996
to inventory all internal and external systems and to address related issues throughout
Atmos and with our external business partners. We are working with our vendors,
particularly our gas suppliers, to ensure that they are Y2K compliant and that we have
gas flowing into our distribution system. Our new customer information system is
being implemented to allow us more capabilities and flexibility, but has the upside of
taking care of most customer issues related to Y2K.
What are the strengths that will make the Company continue to be a winner in
the future?
Our strategy of growth by acquisition and the diversity we have created through that
strategy are tremendous strengths that set us apart from other companies. We operate in
13 states with great variety in economic climates, regulatory environments, markets and
weather patterns – Atmos’ breadth of operations is unmatched in the industry. Our
agricultural market in Texas and Colorado is an example of a unique market niche,
94 95 96 97 98
providing spring and summer sales of natural gas for powering irrigation pumps. Our
non-regulated operations, particularly propane distribution and our interest in Woodward
Marketing, also complement our utility operations and promote real earnings growth
opportunities.
Let’s look at some of the intangibles that set us apart. I believe that we have an excellent
team that is diverse in thinking and open to pursuing best practices. The way we think
and work matches the diversity of our operations and our physical assets. We have a vision
and strategy we believe in, and we expect to be successful. We have passionate, well-
trained employees who take great pride in our Company and their work, and they
want to be the best. We have a new total rewards strategy that supports our vision and
rewards employees for achieving our financial goals. Our Board of Directors supports
our vision and is fully committed to the growth of this Company.
I feel good about where our Company is positioned. I am confident about our Company’s
prospects for growth. We are a company with a bright and exciting future.
Book Value
Per Share
n 94 $10.33
n 95 $10.77
n 96 $11.27
n 97 $11.04
n 98 $12.21
7
RUNNING THE UTILIT Y OPERATIONS EXTREMELY WELL
Atmos’ five utility business units – Energas Company, Greeley Gas Company, Trans
Louisiana Gas Company, Western Kentucky Gas Company and United Cities Gas Company –
serve over one million natural gas meters in 12 states. Utility operations produced revenues
of $744.6 million in 1998, or about 88 percent of Atmos’ total revenues. Utility revenues
were about 8 percent lower than in 1997, generally the result of lower gas cost and winter
weather that was 5 percent warmer than normal and 3 percent warmer than last year.
However, utility net income for 1998 was $42 million, or about 76 percent of Atmos’
consolidated net income, and up from 1997 utility net income of $17 million.
Our utility operations are the core of Atmos’ business, and we are intensely focused on
running our utility operations exceptionally well. We measure our utility performance
in terms of superior customer satisfaction ratings; operating efficiency; earning our allowed
rate of return each year in each jurisdiction; and growing utility earnings annually.
Customer Service Enhancements
In 1998, the Company’s utility division continued to invest in developing and implementing
its program of customer service enhancements. By investing in the technology of a new
Customer Support Center and customer information system, Atmos is positioning itself
to provide more convenience and extended service hours to its customers while continuing
to enhance the efficiency of its field operations.
In early 1998, Atmos opened a central Customer Support Center in Amarillo, Texas,
that provides customer call support 24 hours a day, seven days a week for all of its utility
customers. The Company also is in the process of installing a state-of-the-art customer
information system that is expected to be in service by the end of fiscal 1999. The new
customer information system will provide more information than ever before on customer
bills regarding energy usage and will provide customer service representatives more
readily available information to handle customer inquiries. The system supports new
technology that makes our customer service more responsive and efficient, such as automatic
dispatching of service orders to in-truck terminals and computerized meter reading units
that improve accuracy and reduce the time for reading meters.
The Company also established a network of payment centers in convenient locations
such as banks and grocery stores, many of which offer extended business hours. With the
payment centers and Customer Support Center in place, Atmos was able to consolidate
its field offices.
Internal Growth
The Company added over 19,000 new utility meters in its current service areas in fiscal
1998. The largest number of additions occurred in the United Cities and Greeley Divisions.
The Company participates in economic development efforts in the communities it serves.
For example, Energas actively supported initiatives that helped Amarillo, Texas, attract a
new helicopter assembly plant that will create 1,200 jobs, and the location of five call
centers to the area that will create new jobs. Western Kentucky Gas was a leader in the effort
to build a new airpark in Owensboro, Kentucky, that initially attracted five new businesses
to the Western Kentucky area. These new businesses will create nearly 1,500 jobs.
Our strong
local presence
provides us
with a
distinct
competitive
advantage.
8
The Company undertook an extensive assessment of its utility marketing initiatives in 1998.
The results of the re-evaluation were to focus on untapped market potential in our
existing service areas, particularly in residential gas fireplaces, water heating and gas lighting.
We are initiating programs to pursue these opportunities and target areas where we can
increase market penetration. Responsibility for marketing strategy and program develop-
ment is in each business unit, giving each business unit the opportunity to promote
greater market segmentation and customization of programs for local market conditions.
A companywide marketing council was established to share expertise and successful
marketing ideas across the utility business units.
The true measure of success of our service enhancement efforts will be in achieving
superior customer satisfaction ratings. We are planning to regularly survey our customers
to ensure they are totally satisfied with our service and that we are truly meeting their
expectations. We will continually evaluate and modify our programs and practices to
be responsive to what our customers are telling us. We want to go beyond just satisfied
customers – we want happy, satisfied and loyal customers.
Earning our allowed rates of return
In 1998, none of our utility business units filed any general rate cases. During the year,
we evaluated the financial performance in each jurisdiction under each current rate case,
and no rate cases were filed in 1998. The Company will continue to carefully monitor
performance under the current rate cases and make the filings when necessary to ensure
the Company is achieving adequate returns on its utility investments and the capital
employed in its utility operations.
In June, Western Kentucky Gas received approval for a three-year, performance-based
gas cost incentive plan in Kentucky. Under the plan, Western Kentucky Gas shares equally
with customers any savings in gas costs it achieves, as measured against certain predeter-
mined industry benchmarks. United Cities Gas has a similar performance-based gas cost
incentive plan in effect in Georgia, and a plan is under review in Tennessee.
Local identity
Our five utility business units are committed to being good citizens in the communities
they serve. We believe in the importance of supporting and improving the well-being
of those who are in need or less fortunate. Our interests include such areas as
community development, education systems, and health and welfare agencies. Our
employees are active in civic and community organizations – several of our employees
serve in public office.
Part of our strategy includes using established brand identity. Each acquired company
continues to operate under its name, ensuring the trust and respect that was developed
decades ago with our customers continues to grow. We believe that our strong
local presence provides us with a distinct competitive advantage in an increasingly
competitive marketplace.
9
Being a winner
demands the
passionate pursuit
of excellence seven days
a week.
Between daily practice sessions and weekend travel to competitions, seven-year-old Tyler Burns of
Amarillo, Texas, devotes seven days a week to his passion for Motocross racing. “He started asking for a
motorcycle at age three. I told him he’d have to wait until he could ride his bicycle without training wheels.
He’s been riding in Motocross events since he was five,” says Energas employee, Michael Burns, Tyler’s dad
and coach. For Atmos, providing convenient customer call support is a seven-day per week passion.
10
Amarillo, Texas will be
the home of the world’s first
tiltrotor assembly plant.
Amarillo’s Economic
Development Corporation
prepared an aggressive
proposal to attract
Bell Helicopter, creating
1,200 new jobs.
ENERGAS CO. The company serves a unique non-utility agricultural market in Texas
that provides revenues during the summer when heating sales are low. Farmers use
natural gas to power irrigation pumps.
Energas Company is headquartered in Lubbock, Texas. Energas serves more than 300,000 customers
in 92 West Texas towns and communities, including Amarillo, Lubbock, and Midland/Odessa.
Energas has 401 employees. Operating revenues in 1998 were $220.7 million.
Winners dream
big
and dare to
reach
the top.
Greg Bardin and Chip White started a home-sewing operation making funky athletic headwear for
skiers and for college students in Colorado. Today, their Durango-based company, Bula Inc., is a world-class
manufacturer of headwear, and is a sponsor of the U.S. Olympic ski team and many athletes, including
Gold Medalist Tommy Moe. “Bula is the Fijian greeting meaning life, health and happiness. That’s the Bula
attitude: Punch it. Go BIG. No matter how much we grow, we’ll keep our attitude,” said President Chip
White. Atmos dares to dream big, measuring itself against the best in this and other industries.
12
Neosho Gardens in
Council Grove, Kansas,
depends on natural gas
to keep plants warm
and growing when the
temperature is below
65 degrees, and has been
assisted by Greeley Gas
as the greenhouse opera-
tions have expanded.
GREELEY GAS CO. Service technicians receive customer service orders automatically
from our state-of-the-art customer information system through in-truck computers,
increasing their responsiveness to customer requests for service.
Greeley Gas Company is headquartered in Denver, Colorado, and serves more than 115,000
customers in 123 communities in Colorado, Kansas and Missouri. Towns served include Greeley,
Steamboat Springs, Durango and Cañon City, Colorado, and Bonner Springs, and Johnson County,
Kansas. Greeley Gas has 193 employees. Operating revenues in 1998 were $85.0 million.
Winners use
unique talents
to play
in the big
leagues.
Stanley Dural Jr. played organ, fronting his own R&B band. He was not initially interested in the traditional
music he grew up with in Carencro, Louisiana. Then he rediscovered his Creole roots, picked up the accordion
and 20 years ago this year became Buckwheat Zydeco. Fifteen acclaimed albums later, nominated for four
Grammy awards, Buckwheat Zydeco says, “Don’t criticize what you don’t understand, or you’ll be the loser.”
Atmos is taking what it understands and employing a strategy to play in the big leagues.
14
Stuller Settings, a customer in
Lafayette, Louisiana, has grown
from a small jewelry operation to
become one of the world’s largest
distributors of jewelry-related
products, and a major employer.
Stuller’s accomplishments have
been recognized with the
U.S. Senate Productivity Award
and numerous state awards.
TRANS LA GAS CO. New trenching technology allows installation of new pipe
without tearing up the customer’s lawn and landscaping.
Trans Louisiana Gas Company is headquartered in Lafayette, Louisiana, and serves more than
81,000 customers in 41 communities in Louisiana, including Monroe, Natchitoches, Pineville
and Lafayette. Trans La has 134 employees. Operating revenues in 1998 were $41.9 million.
Winners are not
limited by
what they see...
they are driven by what
can be.
Developer Calvin LeHew has created remarkable transformations in downtown Franklin, Tennessee,
rehabilitating abandoned industrial buildings into tourist attractions. “I don’t see broken bricks and
walls when I walk through these old buildings — I see people attending concerts, and visiting art galleries
and restaurants,” he says. Atmos’ vision is to be among the top competitors in the industry in customer
service and financial performance.
16
Four educational institutions in
Tennessee are using new natural
gas cooling technology, which
provide a year-round gas load for
the Company. The Company
offers technical assistance to
large users to help them improve
their energy efficiency.
UNITED CITIES GAS CO. Our marketing study pinpointed untapped market
potential in residential gas lighting and fireplaces.
United Cities Gas Company is headquartered in Franklin, Tennessee, and serves more than
316,000 customers in 383 communities in Illinois, Tennessee, Iowa, Virginia, Georgia, South Carolina,
Kansas and Missouri. Towns served include Franklin and Johnson City, Tennessee, and Columbus,
Georgia. United Cities has 621 employees. Operating revenues in 1998 were $337.4 million.
Reward for
a winner
is helping others
succeed.
A gospel singer and Owensboro, Kentucky, city employee who served three terms on the city commis-
sion of her hometown of Beaver Dam, Alma Randolph heads a charitable foundation that provides new
back-to-school clothes and supplies for more than 500 disadvantaged children each year. “I’ve never forgotten
my family’s struggle through poverty after my father died when I was a child, and I wanted to use my talent
to help children traveling the same road I once traveled,” she said. Atmos has built its success on helping its
customers succeed by providing reliable, affordable and environmentally friendly natural gas service.
18
Biosource Technologies, Inc. is
developing pharmaceutical uses
of tobacco at its Owensboro,
Kentucky facility. The company is
one of five companies attracted
to the city’s MidAmerica AirPark
creating 1,500 new jobs for the
area. Western Kentucky Gas
assisted in the development of
the airpark and recruiting of the
companies, as well as providing
natural gas services.
WESTERN KENTUCKY GAS CO. Our service technicians use computerized
meter reading devices that improve accuracy and reduce paperwork.
Western Kentucky Gas Company is headquartered in Owensboro, Kentucky, and serves more
than 176,000 customers in 163 communities in Kentucky, including Owensboro, Paducah,
Danville and Bowling Green. Western Kentucky Gas has 267 employees. Operating revenues
in 1998 were $123.6 million.
Winners
combine
precision, stamina and
heart.
Our growing propane
operations include service to
new upscale developments
that have hidden, underground
propane tanks like this
subdivision near Franklin,
Tennessee.
ATMOS PROPANE, INC. Atmos Propane, Inc. distributes propane to 37,400 customers in
240 communities in Tennessee, Kentucky, Virginia and North Carolina. The propane division has
186 employees. Operating revenues from propane were $29.1 million in 1998.
Rolling Stone is a nine-year-old stallion named 1998 World Grand Champion in the show pleasure class
at the National Walking Horse Celebration in Shelbyville, Tennessee, trained by David Landrum Stables.
Landrum’s stables in Franklin, Tennessee, breed and train winning Tennessee Walking Horses. “These horses were
developed through 150 years of selective breeding to implant stamina, style and spirit, mild manners and
an easy-going ride,” said Landrum. For Atmos, customer service is a combination of precise performance
and the personal touch in caring for our customers’ needs.
20
GROWING THE MARKET SHARE OF THE NON-UTILIT Y OPERATIONS
Non-utility operations contributed about 24 percent of
reported net income in 1998, including the sale of certain
United Cities’ assets. Atmos’ non-utility operations include
propane distribution, gas storage and energy services, and
leasing and rental operations.
Atmos Propane, Inc.
Atmos currently is the 33rd largest propane distributor in
the country according to the 1998 survey published by LP
Gas Magazine. Our goal is to increase the size of our propane
operation with the objective of creating value through the
economies of scope and scale that we think can be achieved
by consolidation in the currently very fragmented industry.
The propane operations serve more than 37,000 customers
in Tennessee, Kentucky, Virginia and North Carolina. During
1998, the Company completed five propane acquisitions
that added 8,500 new customers in Tennessee. The
Company’s primary competitors are independent operators
and co-ops.
The Company’s propane operations reported a loss of
$66,000 for fiscal 1998 compared to a loss of $90,000 for
fiscal 1997. In each of these years, propane operations were
significantly impacted by warmer weather and lower margins
due to increased competition. The Company is committed
to profitability in its current propane operations as well as
growth of the propane business. To that end, the propane
operation is changing its strategic direction to focus on retail
and wholesale propane distribution, and will be exiting less
profitable segments of the business including transportation,
propane cylinder exchange and propane appliance sales and
service. To increase margins, the Company is continuing its
strategy of pre-buying propane in the off-season to lock in
its supply so that it avoids price spikes in the winter months.
The Company has targeted its Southeast service area to
increase market penetration, and is also evaluating marketing
incentive programs to increase market share.
Gas Storage and Energy Services
The Company’s gas storage and energy services segment
includes wholesale gas services through Woodward
Marketing, irrigation, natural gas storage, and retail services.
Woodward Marketing, LLC Woodward Marketing, LLC, a
natural gas services firm, contributed $3.9 million pre-tax
earnings in 1998 compared with $3.3 million in 1997, due
to an increase in gas volumes sold in 1998 compared to
1997 as well as a modest average margin improvement.
Atmos owns a 45 percent interest in Woodward, which is
based in Houston, Texas. Woodward provides natural gas
services to the Company, industrial customers, municipali-
ties and natural gas utilities in the Southeast, Midwest and
California. Woodward’s management services include contract
negotiation and administration, load forecasting, nominations
and scheduling, storage management, capacity utilization
and risk management. Atmos expects Woodward’s growth to
continue through increased gas usage by existing customers
and by adding new customers. Atmos continues to consider
opportunities for electricity marketing as an added service
through Woodward Marketing, LLC.
Irrigation Atmos serves a unique agricultural market in West
Texas, selling natural gas to farmers who use natural gas-fired
engines that pump water for irrigation. Due to hotter and
drier weather in 1998, irrigation sales volumes increased 34
percent and revenues increased to $52.0 million compared to
$40.8 million in 1997.
Natural Gas Storage Atmos has underground storage facilities
in Kansas and Kentucky that allow the Company to pur-
chase natural gas during the summer when prices are lower
and store it for the Company’s use or to sell it to others dur-
ing the winter months when natural gas prices are higher.
Storage contributed $1.8 million in net income in 1998,
compared to $.7 million in 1997.
Retail Energy Services Our retail energy services strategy is
to develop partnerships to sell the natural gas commodity,
and eventually the electric commodity, to customers behind
the meter when unbundling occurs in the states where we
operate. Until then, we are focusing on three retail initiatives
through Atmos Energy Services: selling other products and
services to our customers by developing partnerships with
experienced mass marketers; restructuring our non-regulated
agricultural and industrial businesses to separate them from
our utility businesses; and identifying technological opportu-
nities that can increase our cash flow, earnings and gas
throughput. We believe our approach to retail services limits
our investment and operating expenses, minimizes risk, and
positions the Company for unbundling when it does occur.
Leasing and Rental
The Company leases and rents appliances, real estate, equipment
and vehicles to the United Cities Division. Net income from
leasing and rental increased to $3.3 million in 1998, compared
with $1.1 million in 1997, due to the sale of certain assets.
21
SHARED SERVICES
Shared
services
offers significant
economies
of scale and
efficiency.
Atmos provides call support 24
hours a day, seven days
a week to its utility customers
from a central Customer
Support Center and is
Atmos continues to achieve efficiencies in its day-to-day operations by providing
administrative and support services to its business units through a central group called
“shared services.” The Company gains significant economies of scale, efficiency and
consistency in work practices by having one unit performing support functions rather
than duplicating them in each business unit. This structure also enables the Company
to integrate the operations of acquired companies quickly and efficiently.
Atmos’ shared services include accounting, customer billing, bill payment processing,
treasury, purchasing, legal, human resources, information technology, investor relations
and corporate communications, gas supply, and internal audit.
Atmos added an important new function to shared services during 1998: the
Customer Support Center. The Company opened the central Customer Support
Center in Amarillo, Texas, to provide response to customer calls 24 hours a day, seven
days a week. Previously, the Company had staffed business offices in locations
throughout its service areas to handle customer inquiries and requests for service. The
Atmos Customer Support Center demonstrates the Company’s shared services philoso-
phy: providing service to the business units from a central location that is responsive,
efficient, economical and expandable to serve new customers added by internal
growth and through acquisitions.
Atmos has been a pioneer in operating with a shared services structure. The
Company regularly reviews its support functions to ensure that they are located where
implementing a state-of-the-art
it makes the most sense for efficiency, customer service or strategic reasons.
information system.The
Company achieves significant
economies of scale
and efficiency by having one unit
performing support functions
rather than duplicating them in
each business unit.
22
Shared Services Officers
David L. Bickerstaff
Vice President, Controller
Donald P. Burman
Treasurer
Lee A. Everett
Vice President, Price Policy and Administration
Cleaburne H. Fritz
Vice President, Information Technology
Tom S. Hawkins, Jr.
Vice President, Budget and Planning
Lynn L. Hord
Vice President, Investor Relations and Corporate
Communications
J. Patrick Reddy
Vice President, Corporate Development
Gordon J. Roy
Vice President, Gas Supply
Mark G.Thessin
Vice President, Regulatory Affairs
F I N A N C I A L R E V I E W
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management’s Responsibility for
Financial Statements
Report of Independent Auditors
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Selected Quarterly Financial Data (unaudited)
Market Price of Common Stock and
Related Matters
Selected Financial Data
Consolidated Five-Year Financial and
Statistical Summary
Board of Directors
24
25
26
27
28
42
42
43
53
54
54
55
56
Corporate Information
Inside Back Cover
Senior Management Team
Business Units
Robert W. Best
Chairman of the Board, President and Chief Executive Officer
Thomas R. Blose, Jr.
President, United Cities Gas Company
Glen A. Blanscet
Vice President, General Counsel and Corporate Secretary
Larry J. Dagley
Executive Vice President and Chief Financial Officer
J. Charles Goodman
Executive Vice President, Utility Operations
Wynn D. McGregor
Vice President, Human Resources
Eugene A. Ehler
President, Energas Company (retiring January 1, 1999)
R. Earl Fischer
President, Energas Company (effective January 1, 1999)
Conrad E. Gruber
President, Western Kentucky Gas Company (effective January 1, 1999)
B.J. Hackler
President, Trans Louisiana Gas Company
Robert E. Mattingly
Vice President, New Business Ventures – Retail Services
Ron W. McDowell
Vice President, New Business Ventures
Gary L. Schlessman
President, Greeley Gas Company
Anthony W. Slayden
Vice President and General Manager, Atmos Propane, Inc.
C O N S O L I DAT E D B A L A N C E S H E E T S
Assets
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets
September 30,
1998
1997
(In thousands, except share data)
$1,333,556
112,864
1,446,420
528,560
917,860
$1,301,004
31,668
1,332,672
483,545
849,127
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,735
6,016
Accounts receivable, less allowance
for doubtful accounts of $1,969
in 1998 and $2,188 in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gas in storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred charges and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,887
15,219
48,909
3,630
107,380
116,150
71,217
12,333
48,122
6,017
143,705
95,479
$1,141,390
$1,088,311
Capitalization and Liabilities
Shareholders' equity
Common stock, no par value (stated at
$.005 per share); 75,000,000 shares
authorized; issued and outstanding
1998 – 30,398,319 shares,
1997 – 29,642,437 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
152
$
148
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable to banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
271,637
99,369
371,158
398,548
769,706
57,783
66,400
44,742
12,736
12,029
30,369
224,059
80,213
67,412
$1,141,390
251,174
75,938
327,260
302,981
630,241
15,201
167,300
62,626
416
15,098
52,582
313,223
87,828
57,019
$1,088,311
See accompanying notes to consolidated financial statements.
24
A T M O S E N E R G Y C O R P O R A T I O N
C O N S O L I DAT E D STAT E M E N T S O F I N C O M E
Year ended September 30,
1998
1997
1996
(In thousands, except per share data)
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 848,208
Purchased gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
516,372
331,836
Operating expenses
Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131,336
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes, other than income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense)
Interest and investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,278
47,555
29,788
31,806
250,763
81,073
5,430
4,341
9,771
35,579
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 55,265
Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1.85
1.84
1.06
Weighted average shares outstanding
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,822
30,031
See accompanying notes to consolidated financial statements.
$ 906,835
577,181
329,654
173,683
11,974
45,257
32,131
14,298
277,343
52,311
5,410
(288)
5,122
33,595
$ 23,838
$
$
$
.81
.81
1.01
29,409
29,422
$ 886,691
562,279
324,412
148,196
11,719
41,666
30,254
23,316
255,151
69,261
3,867
(300)
3,567
31,677
$ 41,151
$
$
$
1.42
1.42
.98
28,978
28,994
A T M O S E N E R G Y C O R P O R A T I O N
25
C O N S O L I DAT E D STAT E M E N T S O F S H A R E H O L D E R S(cid:213) E Q U I T Y
Common stock
Number
of shares
Stated
value
Additional
paid-in capital
Retained
earnings
(In thousands, except share data)
Balance, September 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,246,392
$141
$230,630
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends ($.98 per share). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued:
Restricted stock grant plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct stock purchase plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term stock plan for
United Cities Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outside directors stock-for-fee plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monarch Gas Co. acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oceana Heights acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-
-
41,700
251,224
161,477
16,900
3,389
207,366
313,411
-
-
-
1
1
1
-
-
1
1
-
-
-
733
4,322
3,641
241
76
1,499
304
212
Balance, September 30, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,241,859
146
241,658
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends ($1.01 per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued:
Restricted stock grant plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct stock purchase plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outside directors stock-for-fee plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESOP/401(k) plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: UCGC net income for the quarter ended December 31, 1996 . . . . .
-
-
100,000
85,243
3,008
212,327
-
-
-
1
-
-
1
-
-
-
2,443
1,888
72
5,113
-
Balance, September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,642,437
148
251,174
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends ($1.06 per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued:
Restricted stock grant plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESOP/401(k) plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term stock plan for
-
-
114,250
531,353
52,473
United Cities Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,500
Outside directors
stock-for-fee plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,306
-
-
1
3
-
-
-
-
-
2,898
14,482
1,485
1,533
65
$73,578
41,151
(28,478)
-
-
-
-
-
933
594
-
87,778
23,838
(26,415)
-
-
-
-
(9,263)
75,938
55,265
(31,834)
-
-
-
-
-
Balance, September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,398,319
$152
$271,637
$99,369
See accompanying notes to consolidated financial statements.
26
A T M O S E N E R G Y C O R P O R A T I O N
C O N S O L I DAT E D STAT E M E N T S O F C A S H F L OW S
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization:
Charged to depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charged to other accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of non-utility assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
(Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in gas in storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in deferred charges and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in deferred credits and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,555
5,861
(3,968)
(3,335)
-
36,330
(2,886)
(787)
2,387
(20,671)
(17,884)
8,673
(3,069)
(22,213)
10,393
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,651
Cash flows from investing activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirements of property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(134,989)
178
15,997
Year ended September 30,
1998
1997
1996
(In thousands)
$ 55,265
$ 14,575
$ 41,151
39,970
2,237
5,807
-
-
32,198
1,562
(4,772)
(3,208)
(29,683)
(17,695)
(837)
(1,714)
28,716
1,593
68,749
(122,312)
1,189
-
41,666
3,580
7,585
-
(1,866)
(12,697)
(1,238)
(15,949)
1,966
(4,623)
23,796
7,099
592
(4,165)
4,836
91,733
(117,589)
5,708
-
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(118,814)
(121,123)
(111,881)
Cash flows from financing activities
Net increase (decrease) in notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(100,900)
154,445
(16,296)
(31,834)
20,467
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,882
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . .
(1,281)
6,016
38,812
40,000
(14,659)
(26,415)
9,518
47,256
(5,118)
11,134
62,675
-
(20,734)
(28,478)
8,523
21,986
1,838
9,296
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,735
$ 6,016
$ 11,134
See accompanying notes to consolidated financial statements.
A T M O S E N E R G Y C O R P O R A T I O N
27
N O T E S T O C O N S O L I DAT E D F I N A N C I A L STAT E M E N T S
Contents of Notes to Consolidated Financial Statements
Kansas and Illinois and to provide storage services to other cus-
1 Summary of significant accounting policies . . . . . . . . . 28
2 Business combinations . . . . . . . . . . . . . . . . . . . . . . . . 30
3 Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
tomers that may be in other states.
Through Atmos Propane, Inc. (“Propane”), a non-regulated
utility business and a wholly-owned subsidiary of UCG Energy
Corporation (“UCG Energy”), which is a wholly-owned subsidiary
4
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
of Atmos, the Company is engaged in the retail distribution of
5 Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
propane (LP) gas, the wholesale supply and the transportation of
6 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7 Long-term debt and notes payable . . . . . . . . . . . . . . . 35
8 Statement of cash flows supplemental disclosures . . . . 36
9 Common stock and stock options . . . . . . . . . . . . . . . . 36
LP gas, the transportation of certain products for other companies
and the direct merchandising and repair of propane gas appli-
ances. Propane currently has operation and storage centers and
store front offices located in Tennessee, Kentucky, and North
Carolina with a total company storage capacity of approximately
10 Employee retirement and stock ownership plans. . . . . 38
2.3 million gallons. As of September 30, 1998, Propane served
11 Other postretirement benefits . . . . . . . . . . . . . . . . . . 39
approximately 37,400 customers.
12 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
13 Related party transactions . . . . . . . . . . . . . . . . . . . . . 41
1 S U M M A R Y O F
S I G N I F I C A N T
A C C O U N T I N G P O L I C I E S
Forward-Looking Statements These notes to consolidated finan-
cial statements, particularly notes 2, 5, 9, and 11 may contain “for-
ward-looking statements” as discussed herein in Management’s
Discussion and Analysis of Financial Condition and Results of
Operations under the heading, “Cautionary Statement for the
Purposes of the Safe Harbor under the Private Securities
Litigation Reform Act of 1995” and should be read in conjunction
with such discussion.
Description of Business Atmos Energy Corporation and its sub-
sidiaries (“Atmos” or the “Company”) are engaged primarily in the
natural gas utility business as well as certain non-utility businesses.
The Company distributes through sales and transportation
arrangements natural gas to approximately 1.0 million residential,
commercial, industrial and agricultural customers through its five
regulated utility divisions: Energas Company (“Energas
Division”) in Texas; Trans Louisiana Gas Company (“Trans La
Division”) in Louisiana; Western Kentucky Gas Company
(“Western Kentucky Division”) in Kentucky; Greeley Gas
Company (“Greeley Division”) in Colorado and Kansas; and
United Cities Gas Company (“United Cities Division”) in Illinois,
Tennessee, Iowa, Virginia, Georgia, South Carolina, Kansas and
Missouri. Such business is subject to federal and state regulation
and/or regulation by local authorities in each of the twelve states
Through UCG Energy’s 45% interest in Woodward Marketing,
L.L.C. (“WMLLC”), a limited liability company formed in Delaware
and headquartered in Houston, Texas, the Company is engaged in
gas marketing and energy management services. WMLLC provides
gas marketing services to industrial customers, municipalities and
local distribution companies, including the United Cities, Energas,
Greeley, and Trans La Divisions. The Company utilizes equity
accounting for its investment in WMLLC.
Finally, the Company, through UCG Energy, leases and rents
appliances, real estate, equipment, and vehicles to the United
Cities Division and others, and owns a small interest in a partner-
ship engaged in exploration and production activities.
Principles of Consolidation The accompanying consolidated
financial statements include the accounts of Atmos Energy
Corporation and its subsidiaries. Each subsidiary is wholly owned
and all material intercompany transactions have been eliminated.
Accounting for Unconsolidated Investments The Company
accounts for its 45% interest in WMLLC, using the equity method
of accounting for investments. Equity in pre-tax earnings of
WMLLC included in the interest and investment income caption
in the consolidated statement of income were $3.9 million, $3.3
million and $2.0 million in 1998, 1997 and 1996, respectively.
Restatement for Pooling of Interests The consolidated financial
statements for all periods prior to July 31, 1997 have been restated
for the pooling of interests of the Company with United Cities
Gas Company. Certain changes in account classifications have
been made to conform United Cities Gas Company’s classifica-
tions to Atmos’ presentation.
in which the utility divisions operate.
Regulation The Company’s utility operations are subject to regu-
Through United Cities Gas Storage Company (“Storage”), a
lation with respect to rates, service, maintenance of accounting
non-regulated utility business, the Company also owns and oper-
records and various other matters by the respective regulatory
ates natural gas storage fields in Kentucky and Kansas to supple-
authorities in the states in which it operates. Atmos’ accounting
ment natural gas used by regulated customers in Tennessee,
policies recognize the financial effects of the ratemaking and
28
A T M O S E N E R G Y C O R P O R A T I O N
accounting practices and policies of the various regulatory com-
depreciated at various rates on a straight-line basis over the esti-
missions. Regulated utility operations are accounted for in accor-
mated useful lives of the assets. The composite rates were 4.0%
dance with Statement of Financial Accounting Standards No. 71,
and 3.9% for the years ended September 30, 1998 and 1997,
“Accounting for the Effects of Certain Types of Regulation.” This
respectively. At the time property, plant and equipment is retired,
statement requires cost-based rate regulated entities that meet
the cost, plus removal expenses and less salvage, is charged to
certain criteria to reflect the authorized recovery of costs due to
accumulated depreciation.
regulatory decisions in their financial statements.
The Company records regulatory assets which represent
assets which are being recovered through customer rates or are
probable of being recovered through customer rates. Significant
regulatory assets as of September 30, 1998 included the following:
unamortized debt expense of $5.6 million, merger and integration
costs of $59.8 million, environmental costs of $4.0 million, and
deferred cost of purchased gas proceeding of $1.1 million.
Regulatory liabilities represent probable future reductions in rev-
enues associated with amounts that are to be credited to cus-
tomers through the ratemaking process. As of September 30,
1998, the Company had recorded a regulatory liability of $2.2
million for deferred income taxes.
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. The Company follows 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.
Utility Property, Plant and Equipment Utility property, plant and
equipment is stated at original cost net of contributions in aid of
construction. The cost of additions includes direct construction
costs, payroll related costs (taxes, pensions and other fringe bene-
fits), administrative and general costs, and the estimated cost of
an allowance for funds used during construction (See AFUDC
below). Major renewals and betterments are capitalized, while
the costs of maintenance and repairs are charged to expense as
Allowance for Funds Used During Utility Construction (“AFUDC”)
AFUDC represents the estimated cost of funds used to finance the
construction of major projects. Under regulatory practices, the
costs are capitalized and included in rate base for ratemaking pur-
poses when the completed projects are placed in service. Interest
expense of $4.1 million, $1.2 million and $.4 million was capital-
ized in 1998, 1997 and 1996, respectively. The increased amounts
in 1998 and 1997 were related to CSI.
Non-Utility Property, Plant and Equipment Balances are stated at
cost and depreciation is computed generally on the straight-line
method for financial reporting purposes.
Inventories Inventories consist primarily of materials and supplies
and merchandise held for resale. These inventories are stated at
the lower of average cost or market. Inventories also include
propane inventories of $979,000 and $722,000 at September 30,
1998 and 1997, respectively. Propane is priced at average cost.
Gas in Storage Net additions of inventory gas to storage and
withdrawals of inventory gas from storage are priced using the
average cost method for all Atmos utility divisions, except for the
United Cities Division, where it is priced on the first-in first-out
method. Gas stored underground and owned by Storage is priced
on the last-in first-out (“LIFO”) method. In accordance with the
United Cities Division’s purchased gas adjustment (“PGA”) clause,
the liquidation of a LIFO layer would be reflected in subsequent
gas adjustments in customer rates and does not affect the results
of operations. Noncurrent gas in storage is classified as property,
plant and equipment and is priced at cost.
Income Taxes The Company provides deferred income taxes for
significant temporary differences in the recognition of revenues
incurred. The costs of large projects are accumulated in construc-
and expenses for tax and financial reporting purposes.
tion in progress until the project is completed. When the project
Cash and Cash Equivalents The Company considers all highly
is completed, tested and placed in service, the balance is trans-
liquid debt instruments purchased with a maturity of three
ferred to the utility plant in service account, included in rate base
months or less to be cash equivalents.
and depreciation begins. As of September 30, 1998, the Company
has invested approximately $80 million in its Customer Service
Initiative (“CSI”). The CSI investment is currently recorded in
construction in progress. CSI is a group of projects that are reor-
ganizing processes throughout the Company to leverage technol-
ogy and implement industry best practices. It is expected to be
fully placed in service in 1999. Property, plant and equipment is
Deferred Charges and Other Assets Deferred charges and other
assets at September 30, 1998 and 1997 include merger and inte-
gration costs of $59.8 million and $49.0 million in 1998 and 1997,
respectively; the related reserve for merger and integration costs
of $20.3 million in both 1998 and 1997; and the investment in
WMLLC of $11.9 million and $10.0 million in 1998 and 1997,
respectively. Also included in deferred charges and other assets
A T M O S E N E R G Y C O R P O R A T I O N
29
are assets of the Company’s qualified defined benefit retirement
including certain derivative instruments embedded in other con-
plans in excess of the plans’ obligations, Company assets related
tracts, and for hedging activities. This Statement does not allow
to the nonqualified retirement plans, unamortized debt expense,
retroactive application to financial statements of prior periods.
and deferred compensation expense related to non-vested
The Company believes that adoption of these Statements will
restricted stock grants.
not have a material impact on its reported financial condition,
Deferred Credits and Other Liabilities Deferred credits and other
liabilities include customer advances for construction, obligations
under capital leases, obligations under other postretirement benefits,
results of operations, or cash flows.
2 B U S I N E S S C O M B I N A T I O N S
and obligations under the Company’s nonqualified retirement plans.
On July 31, 1997, Atmos acquired by means of a merger all of the
Earnings Per Share The calculation of basic earnings per share is
based on income available to common stockholders divided by
weighted average common shares outstanding. The calculation of
diluted earnings per share is based on net income available to com-
mon stockholders divided by weighted average shares outstanding
plus the dilutive shares related to the United Cities Division’s Long-
term Stock Plan and Atmos’ Restricted Stock Grant Plan.
Use of Estimates The preparation of financial statements in con-
formity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contin-
gent 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 The
Company has not yet adopted Statement of Financial Accounting
Standards No. 130 “Reporting Comprehensive Income.” The
Statement will be effective for the Company’s 1999 fiscal year. It
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. Reclassification
of financial statements for earlier periods provided for comparative
purposes is required.
The Company has not yet adopted Statement of Financial
Accounting Standards No. 131 “Disclosures about Segments of an
Enterprise and Related Information.” The Statement will be
effective for the Company’s 1999 fiscal year. It establishes stan-
dards for the way that public business enterprises report informa-
tion about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to share-
holders. In the initial year of application, comparative information
for earlier years is to be restated.
In addition, the Company has not yet adopted Statement of
Financial Accounting Standards No. 133 “Accounting for
Derivative Instruments and Hedging Activities.” The Statement
will be effective for the Company’s fiscal year 2000. It establishes
accounting and reporting standards for derivative instruments,
assets and liabilities of United Cities Gas Company (“UCGC”) in
accordance with the terms and provisions of an Agreement and
Plan of Reorganization dated July 19, 1996 and amended October
3, 1996. A total of 13,320,221 shares of Atmos common stock were
issued in a one-for-one exchange for all outstanding shares of
UCGC common stock. UCGC was a natural gas utility company
engaged in the distribution and sale of natural gas. At the time of
the merger, UCGC served approximately 306,000 utility customers
in Georgia, Illinois, Iowa, Kansas, Missouri, South Carolina,
Tennessee, and Virginia, and approximately 29,000 propane cus-
tomers in Kentucky, North Carolina, Tennessee, and Virginia. Its
assets consisted of the property, plant and equipment used in its
natural gas and propane sales and distribution businesses.
UCGC was merged with and into Atmos by means of a tax-
free reorganization. The transaction was accounted for as a pooling
of interests; therefore, historical financial statements for periods
prior to the merger have been restated. UCGC prepared its finan-
cial statements on a December 31 fiscal year-end. UCGC’s fiscal
year has been changed to September 30 to conform to the
Company’s year end. The restated consolidated statements of
income and cash flows for the year ended September 30, 1996
include Atmos operations for the year then ended and UCGC
operations for the year ended December 31, 1996. The consolidated
statement of income for the year ended September 30, 1997
includes Atmos and UCGC operations for the twelve months
then ended. As a result, UCGC’s operations for the three months
ended December 31, 1996 (operating revenues of approximately
$123.0 million and net income of $9.3 million) are included in
both the 1997 and 1996 consolidated statements of income, and
the UCGC net income for this period has been deducted in
calculating the shareholders’ equity balances at September 30,
1997 and cash flows for the year then ended. Certain account
reclassifications were made to conform UCGC ’s classifications
to Atmos’ presentation.
Following the merger, UCGC’s business began operating as
United Cities Gas Company, a division of Atmos (“United Cities
Division”) and integration of the companies began. The United
Cities Division is structured like other divisions of Atmos. To
achieve this structure, approximately 560 utility positions in the
30
A T M O S E N E R G Y C O R P O R A T I O N
United Cities Division were eliminated by September 1998. An
Results of operations and net income for the previously sepa-
additional 75 Atmos positions were eliminated as part of the inte-
rate companies for the periods prior to the merger are as follows:
gration, resulting in approximately 635 total position reductions in
the combined Company by September 1998. Atmos also has initi-
ated plans to enhance its customer service in Texas, Louisiana,
Kentucky, Colorado, Kansas and Missouri through business process
changes which resulted in a net reduction of approximately 240
Operating revenues:
positions. These changes include restructuring business office oper-
Atmos
ations, establishing a network of payment centers and creating a
UCGC
customer support center, all part of the CSI project.
The Company has recorded as regulatory assets through
Net income:
September 30, 1998 the costs of the merger and integration of the
Atmos
United Cities Division, which amounted to $59.8 million. The
UCGC
Company believes there are substantial long term benefits to its
customers and shareholders from the merger of the two companies,
Dividends per share:
which are expected to result in operating cost savings over the
Atmos
next 10 years totaling approximately $375 million. The Company
UCGC
believes a significant amount of the costs to achieve these benefits
will be recovered through rates and future operating efficiencies
3 R A T E S
10 Months ended
Year ended
July 31, 1997
September 30,
(Unaudited)
1996
(In thousands)
$474,069
356,325
$830,394
$ 23,079
19,434
$ 42,513
$
.75
$
.76
$483,744
402,947
$886,691
$ 23,949
17,202
$ 41,151
$
.96
$ 1.02
of the combined operations. Therefore, the merger and integration
costs will be charged to operations concurrent with the benefits
received. However, in the fourth quarter of fiscal 1997 the
Company established a general reserve of approximately $20.3
million ($12.6 million after-tax), to account for costs that may
not be recovered through rates.
The statements above concerning anticipated cost savings in
the future constitute “forward-looking statements,” as defined in
the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements should be read in conjunction with
the Company’s disclosures under the heading “Cautionary
Statement for the Purposes of the Safe Harbor provisions of the
Private Securities Litigation Reform Act of 1995” at the beginning
of Management’s Discussion and Analysis.
As of September 30, 1998, the Company did not have any general
rate cases currently pending. The Trans La Division does have a
hearing scheduled before the Louisiana Public Service Commission
in April 1999 for the Louisiana Commission to consider the Trans
La Division rate of return. Rate proceedings completed during the
three years ended September 30, 1998 are summarized as follows.
In September 1998, the Company and the staff of the
Virginia State Corporation Commission presented a Stipulation
and Settlement of issues to the Virginia State Corporation
Commission. It was adopted effective October 1, 1998. The
Stipulation and Settlement provided for a reduction of approxi-
mately $249,000 in annual gross revenues of the United Cities
Division. This represents approximately a .2% reduction in the
gross profit of the United Cities Division and less than .08%
reduction in the consolidated gross profit of the Company.
In fiscal 1997, the Colorado Office of Consumer Counsel filed
a complaint with the Colorado Public Utilities Commission
(“Colorado Commission”) requesting a $3.5 million reduction in
the annual revenues in Colorado of the Greeley Division. On
December 17, 1997, a hearing was held at the Colorado
Commission presenting a Stipulation and Agreement reached by
the Greeley Division and the Colorado Office of Consumer
Counsel. It settled the Consumer Counsel’s complaint against the
Greeley Division for a $1.6 million reduction in annual revenues.
The Stipulation and Agreement became effective in January 1998.
The reduction decreased the annual gross profit of the Greeley
Division by approximately 4% and the gross profit of the
Company by approximately .5%.
A T M O S E N E R G Y C O R P O R A T I O N
31
On June 9, 1998, the Kentucky Public Service Commission
Deferred income taxes reflect the tax effect of differences
issued an Order approving an Experimental Performance-Based
between the basis of assets and liabilities for book and tax pur-
Ratemaking (“PBR”) mechanism related to gas procurement and
poses. The tax effect of temporary differences that give rise to sig-
gas transportation activities filed by the Western Kentucky
nificant components of the deferred tax liabilities and deferred
Division. The PBR mechanism is incorporated into the Western
tax assets at September 30, 1998 and 1997 are presented below:
Kentucky Division’s Gas Cost Adjustment Clause.
The Georgia Public Service Commission and the Tennessee
Regulatory Authority have approved Weather Normalization
1998
1997
(In thousands)
Adjustments (“WNA”). The WNAs, effective October through
Deferred tax assets:
May each year in Georgia, and November through April each
Costs expensed for book purposes
year in Tennessee, allow the United Cities Division to increase
and capitalized for tax purposes
$ 1,049
$
641
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 WNA was an increase/
(decrease) in revenues of $.7 million, $2.6 million and $(2.6)
million in 1998, 1997 and 1996, respectively.
In May 1996, the Company filed to increase revenues by
approximately $7.7 million for a portion of its Energas Division
service area, which includes approximately 200,000 customers
inside the city limits of 67 cities in West Texas. All cities either
approved, or took no action to reject, a settlement allowing a
$5.3 million increase in annual revenues to be effective for bills
rendered on or after November 1, 1996. In October 1996, the
Company filed a rate request with the Railroad Commission of
Texas to increase revenues by approximately $.5 million for the
remaining 22,000 rural customers in West Texas. The rate request
was approved and became effective in April 1997.
4 I N C O M E T A X E S
Accruals not currently deductible
for tax purposes
Customer advances
Nonqualified benefit plans
Postretirement benefits
Unamortized investment tax credit
Regulatory liabilities
Other, net
Total deferred tax assets
Deferred tax liabilities:
Difference in net book value
7,189
3,730
11,297
10,093
1,427
3,175
2,838
40,798
12,398
3,160
9,118
5,757
1,723
3,117
3,758
39,672
and net tax value of assets
(114,229)
(102,038)
Pension funding
Gas cost adjustment
Regulatory assets
Other, net
(4,120)
8,943
(4,941)
(6,664)
(4,190)
(6,568)
(8,673)
(6,031)
Total deferred tax liabilities
Net deferred tax liabilities
(121,011)
$ (80,213)
(127,500)
$ (87,828)
The components of income tax expense for 1998, 1997 and 1996
SFAS No. 109 deferred accounts for
are as follows:
rate regulated entities (included
1998
1997
1996
in other deferred credits)
$ 13,475
$ 15,072
(In thousands)
$31,694
4,503
$ 7,917
1,000
Reconciliations of the provisions for income taxes computed
$13,641
at the statutory rate to the reported provisions for income taxes
2,515
for 1998, 1997 and 1996 are set forth below:
Current
Federal
State
Deferred
Federal
State
Investment tax credits
(3,352)
(616)
(423)
4,807
1,000
(426)
7,024
561
(425)
1998
1997
1996
(In thousands)
Tax at statutory rate of 35%
$30,474
$13,348
$22,564
$31,806
$14,298
$23,316
Common stock dividends
deductible for tax reporting
(695)
State taxes
Other, net
2,526
(499)
(706)
1,300
356
(684)
2,000
(564)
Provision for income taxes
$31,806
$14,298
$23,316
32
A T M O S E N E R G Y C O R P O R A T I O N
5 C O N T I N G E N C I E S
Litigation
Trans La Division In November 1997, a jury in Plaquemine,
Louisiana awarded Brian L. Heard General Contractor, Inc.,
(“Heard”) a total of $177,929 in actual damages and $15 million in
punitive damages resulting from a lawsuit by Heard against the
Trans La Division, the successor in interest to Oceana Heights Gas
Company, which the Company acquired in November 1995. The
trial judge also awarded interest on the total judgment amount.
The claims are for events that occurred prior to the time Atmos
acquired Oceana Heights Gas Company. Heard claimed damages
associated with delays he allegedly incurred in constructing a
sewer system in Iberville Parish, Louisiana. Heard filed the suit
against the Trans La Division and two other defendants, alleging
that gas leaks had caused delays in Heard’s completion of a sewer
project, resulting in lost business opportunities for the contractor
during 1994.
The jury awarded punitive damages under a prior Louisiana
statute that allowed punitive damages to be awarded in cases
involving hazardous substances, which, as defined in the statute,
included natural gas. Although not retroactive, the Louisiana legis-
lature repealed the statute in 1996. The Company has appealed the
verdict and intends to aggressively pursue obtaining reversal of the
judgment. However, the Company cannot assess, at this time, the
likelihood of the judgment being reversed on appeal. The Company
is in the process of reviewing its insurance coverage with respect
to this case. To date, the insurance companies have denied coverage
and one company has filed a declaratory action to determine its
obligations under the policy. The Company does not expect the
that the defendants violated antitrust laws of the state of
Louisiana by manipulating the cost-of-gas component of the
Trans La Division’s gas rate to the purported customer class,
thereby causing such purported class members to pay a higher
rate. The plaintiffs made no specific allegation of an amount of
damages. The case was concluded on December 15, 1997 when
the Court entered its final approval of the settlement whereby
LIG made a payment of $10.3 million to the Trans La Division for
the benefit of its customers in the form of credits to customers’
bills during the period November 1997 through March 1998. The
suit was dismissed with prejudice at the same fairness hearing on
December 15, 1997.
Greeley Division In Colorado, the Greeley Division is a defendant
in several lawsuits filed as a result of a fire in a building in
Steamboat Springs, Colorado on February 3, 1994. The plaintiffs
claim that the fire resulted from a leak in a severed gas service line
owned by the Greeley Division. On January 12, 1996, the jury
awarded the plaintiffs approximately $2.5 million in compensatory
damages and approximately $2.5 million in punitive damages. The
jury assessed the Company with liability for all of the damages
awarded. The Company appealed the judgment to the Colorado
Court of Appeals. On June 11, 1998, the Colorado Court of
Appeals reversed the trial court verdict and ordered a new trial.
The plaintiffs have appealed the case to the Colorado Supreme
Court. The Company does not expect the final outcome of this
case to have a material adverse effect on the financial condition,
the results of operations or the cash flows of the Company
because the Company believes it has adequate insurance and
reserves to cover any damages that may ultimately be awarded.
final outcome of this case to have a material adverse effect on the
Western Kentucky Division In March 1997, Western Kentucky Gas
financial condition, the results of operations or the cash flows of
Company (“Western Kentucky Division”) was named as a defen-
the Company because in the Company’s opinion, it is more likely
dant in a lawsuit in the District Court in Danville, Kentucky, as a
than not that the amount of punitive damages ultimately awarded
result of an explosion and fire at a residence in Danville, Kentucky
will be substantially reduced.
on March 4, 1997. The plaintiffs, Lisa Benedict, et al, who were
On March 15, 1991, suit was filed in the 15th Judicial District
leasing the residence, suffered serious burns in the accident and
Court of Lafayette Parish, Louisiana, by the “Lafayette Daily
alleged that the Western Kentucky Division was negligent in
Advertiser” and others against Trans Louisiana Gas Company
installing and servicing gas lines at the residence. In September
(“Trans La Division”), Trans Louisiana Industrial Gas Company,
1998, the Company and the plaintiffs entered into a confidential
Inc., a wholly owned subsidiary of the Company, and Louisiana
settlement of all claims in this case and the case was dismissed.
Intrastate Gas Corporation and certain of its affiliates (“LIG”). LIG
The majority of the settlement was paid by the Company’s insur-
is the Company’s primary supplier of natural gas in Louisiana and
ance carriers and the remainder borne by the Company and
is not otherwise affiliated with the Company.
charged to the reserve for litigation losses.
The plaintiffs purported to represent a class consisting of all
From time to time, other claims are made and lawsuits are filed
residential and commercial gas customers in the Trans La
against the Company arising out of the ordinary business of the
Division’s service area. Among other things, the lawsuit alleged
A T M O S E N E R G Y C O R P O R A T I O N
33
Company. In the opinion of the Company’s management, liabili-
Missouri. Atmos, through its United Cities Division, agreed in the
ties, if any, arising from these other claims and lawsuits are either
order to perform a removal action, a subsequent site evaluation and
covered by insurance, adequately reserved for by the Company or
to reimburse the response costs incurred by the state of Missouri in
would not have a material adverse effect on the financial condition,
connection with the property. The removal action was conducted
results of operations, or cash flows of the Company.
and completed in August 1998 and the site evaluation will be com-
Guarantees
The Company’s wholly-owned subsidiary, UCG Energy, and
Woodward Marketing, Inc. (“WMI”), sole members of WMLLC,
act as guarantors of up to $12.5 million of balances outstanding
under a $30 million bank credit facility for WMLLC. UCG Energy
guarantees the payment of up to $5.6 million of borrowings
under this facility. No balance was outstanding under this credit
facility at September 30, 1998. UCG Energy and WMI also act as
joint and several guarantors on certain accounts payable for gas
purchases. UCG Energy has agreed to guarantee payables of
WMLLC up to $40.0 million of natural gas purchases and trans-
portation services from suppliers. WMLLC payable balances
outstanding that were subject to these guarantees amounted to
$8.5 million at September 30, 1998.
Environmental Matters
Atmos is the owner or previous owner of manufactured gas plant
sites which were used to supply gas prior to availability of natural
gas. The gas manufacturing process resulted in certain by-prod-
ucts and residual materials including coal tar. It was an acceptable
and satisfactory process at the time such operations were being
conducted. Under current environmental protection laws and reg-
ulations, the Company may be responsible for response actions
with respect to such materials, if response actions are necessary.
The United Cities Division owns or owned former manufac-
tured gas plant sites in Johnson City and Bristol, Tennessee,
Hannibal, Missouri and Americus, Georgia. UCGC and the
Tennessee Department of Environment and Conservation entered
into a consent order effective January 23, 1997, for the purpose of
facilitating the investigation, removal and remediation of the
Johnson City site. UCGC began the implementation of the con-
sent order in the first quarter of 1997.
The Company is unaware of any information which suggests
that the Bristol site gives rise to a present health or environmen-
tal risk as a result of the manufactured gas process or that any
response action will be necessary. The Tennessee Regulatory
Authority granted UCGC permission to defer, until its next rate
case, all costs incurred in Tennessee in connection with state and
federally mandated environmental control requirements.
On July 22, 1998, Atmos entered into an Abatement Order on
Consent with the Missouri Department of Natural Resources
addressing the former manufactured gas plant located in Hannibal,
pleted in 1999. The Company has requested an Accounting
Authority Order from the Missouri Public Service Commission
(“MSPC”) that would authorize it to defer its response costs related
to the Hannibal site. On July 7, 1998, the MPSC Staff recommended
that the MPSC approve the application.
As of September 30, 1998, the Company had incurred and
deferred for recovery $1.1 million including $258,000 related to
an insurance recoverability study, and accrued and deferred for
recovery an additional $750,000 associated with the preliminary
survey and invasive study of the Johnson City, Hannibal and
Bristol sites.
On December 16, 1997, the Company, through its United
Cities Division, entered into a Settlement Agreement with two
other responsible parties at the Americus, Georgia former manufac-
tured gas plant site. UCGC was a former owner of the property. In
the Settlement Agreement, the Company agreed to pay $250,000
to resolve its liability for response costs and property damages
associated with the site. The Company has paid the $250,000. The
agreement contains a covenant not to sue, an indemnification
provision from the other parties and gives the other parties all
responsibility for investigation and response actions at the site.
On October 20, 1998, the Company filed a proposal with the
Georgia Public Service Commission for recovery of this amount
through a rate rider. In November 1998, the Commission
approved recovery through the rate rider which will take affect
December 1, 1998.
Atmos is currently conducting an investigation pursuant to a
Consent Order between the Kansas Department of Health and
Environment and UCGC. The Order provides for the investiga-
tion, and a possible response action, for mercury contamination at
gas pipeline sites which utilize or formerly utilized mercury
meter equipment in Kansas. As of September 30, 1998, the
Company had identified approximately 720 sites where mercury
may have been used and had incurred and deferred for recovery
$100,000. In addition, based upon available current information,
the Company accrued and deferred for recovery an additional
$280,000 for the investigation of these sites. The Kansas
Corporation Commission has authorized the Company to defer
these costs and seek recovery in a future rate case.
The Company addresses other environmental matters from
time to time in the regular and ordinary course of its business.
Management expects that future expenditures related to response
action at any site will be recovered through rates or insurance, or
34
A T M O S E N E R G Y C O R P O R A T I O N
shared among other potentially responsible parties. Therefore, the
7 L O N G - T E R M D E B T A N D N O T E S
P A Y A B L E
costs of responding to these sites are not expected to materially
affect the results of operations, financial condition or cash flows
Long-term debt at September 30, 1998 and 1997 consisted
of the following:
of the Company.
6 L E A S E S
1998
1997
(In thousands)
The Company has entered into noncancelable operating leases
for office and warehouse space used in its operations. The remain-
Unsecured 7.95% Senior Notes, due 2006,
payable in annual installments of $1,000
$ 8,000
$ 9,000
ing lease terms range from one to 20 years and generally provide
Unsecured 9.57% Senior Notes, due 2006,
for the payment of taxes, insurance and maintenance by the lessee.
payable in annual installments of $2,000
16,000
18,000
The Company has also entered into capital leases for division
Unsecured 9.76% Senior Notes, due 2004,
offices and operating facilities. Net property, plant and equipment
payable in annual installments of $3,000
21,000
24,000
included amounts for capital leases of $3.2 million and $2.3 million
Unsecured 11.2% Senior Notes, due 2002,
at September 30, 1998 and 1997, respectively.
payable in annual installments of $2,000
The related future minimum lease payments at September
Unsecured 10% Notes, due 2011
10,000
2,303
30, 1998 were as follows:
Unsecured 6.09% Note, due November 1998
40,000
12,000
2,303
40,000
Capital
leases
Operating
leases
Unsecured 8.07% Senior Notes, due 2006,
payable in annual installments of
(In thousands)
$4,000 beginning 2002
20,000
20,000
$ 735
$ 9,633
payable in annual installments of
Unsecured 8.26% Senior Notes, due 2014,
1999
2000
2001
2002
2003
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of net minimum
lease payments
9,199
8,810
8,679
8,172
52,564
$97,057
735
735
735
735
4,119
7,794
(4,215)
$3,579
Consolidated lease and rental expense amounted to $9.2 mil-
lion, $10.5 million and $9.7 million for fiscal 1998, 1997 and 1996,
respectively. Rents for the regulated business are expensed and
the Company receives rate treatment as a cost of service on a
pay-as-you-go basis.
$1,818 beginning 2004
Unsecured 6.75% Debentures, due 2028
First Mortgage Bonds
Series J, 9.40% due 2021
Series N, 8.69% due 2000
Series P, 10.43% due 2017
Series Q, 9.75% due 2020
Series R, 11.32% due 2004
Series T, 9.32% due 2021
Series U, 8.77% due 2022
Series V, 7.50% due 2007
Medium term notes
Series A, 1995-1, 6.67%, due 2025
Series A, 1995-2, 6.27%, due 2010
Series A, 1995-3, 6.20%, due 2000
Rental property, propane and other term
notes due in installments through 2013
Total long-term debt
Less current maturities
20,000
150,000
17,000
3,000
25,000
20,000
12,860
18,000
20,000
10,000
10,000
10,000
2,000
21,168
456,331
(57,783)
$398,548
20,000
–
17,000
5,000
25,000
20,000
15,000
18,000
20,000
10,000
10,000
10,000
2,000
20,879
318,182
(15,201)
$302,981
In July 1998, the Company issued $150 million of 30-year
6.75% debentures. The proceeds were used to refinance short-
term borrowings.
Most of the Senior Notes and First Mortgage Bonds contain
provisions that allow the Company to prepay the outstanding
balance in whole at any time, subject to a prepayment premium.
The Senior Note agreements and First Mortgage Bond indentures
A T M O S E N E R G Y C O R P O R A T I O N
35
provide for certain cash flow requirements and restrictions on
30, 1998. These uncommitted lines expire at various dates from
additional indebtedness, sale of assets and payment of dividends.
May through August 1999, and are renewed or renegotiated at
Under the most restrictive of such covenants, cumulative cash
least annually. The uncommitted lines have varying terms and the
dividends paid after December 31, 1988 may not exceed the sum
Company pays no fee for the availability of the lines. Borrowings
of accumulated net income for periods after December 31, 1988
under these lines are made on a when and as-available basis at the
plus $15.0 million. At September 30, 1998, approximately $60.9
discretion of the banks. The weighted average interest rate on
million of retained earnings was unrestricted.
short-term borrowings outstanding was 6.2% and 6.1% at
As of September 30, 1998, all of the Greeley Division utility
September 30, 1998 and 1997, respectively.
plant assets with a net book value of approximately $88.3 million
are subject to a lien under the 9.4% Series J First Mortgage Bonds
assumed by the Company in the acquisition of Greeley Gas
Company. Also, substantially all of the United Cities Division
utility plant assets, totaling approximately $324.7 million, are sub-
ject to a lien under the Indenture of Mortgage of the Series N
through V First Mortgage Bonds.
Based on the borrowing rates currently available to the
Company for debt with similar terms and remaining average
maturities, the fair value of long-term debt at September 30,
1998 and 1997 is estimated, using discounted cash flow analysis,
to be $489.0 million and $348.3 million, respectively. It is not
Commercial Paper Program The Company implemented a $250
million commercial paper program in October 1998. It is support-
ed by the $250 million committed line of credit described above.
The Company’s commercial paper was rated A-2 by Standard and
Poor’s and P-2 by Moody’s.
8 S TAT E M E N T O F C A S H F LO W S S U P P L E M E N TA L D I S C LO S U R E S
Supplemental disclosures of cash flow information for 1998, 1997
and 1996 are presented below.
1998
1997
1996
(In thousands)
currently advantageous for the Company to refinance its long-
Cash paid for
term debt because of costs of prepayment required in the
various debt agreements.
Interest
Income taxes
$29,980
$25,598
$25,216
$ 9,736
$32,778
$14,562
Maturities of long-term debt at September 30, 1998 are as
follows (in thousands):
9 C O M M O N S T O C K A N D S T O C K O P T I O N S
1999
2000
2001
2002
2003
Thereafter
Short-term debt
$
57,783
16,389
17,934
15,823
22,745
325,657
$ 456,331
Shareholders’ Rights Plan On November 12, 1997, the Board of
Directors approved a new Rights Agreement to become effective
upon the expiration of the then existing Rights Agreement on
May 10, 1998. Under the Rights Agreement, each right (“Right”)
will entitle the holder thereof, until May 10, 2008 or the date of
redemption the Rights, to buy two additional shares of Common
Stock of the Company at the exercise price of $80.00, subject to
adjustment. At no time will the Rights have any voting rights.
The exercise price payable and the number of shares of Common
Stock or other securities or property issuable upon exercise of the
Committed Credit Facilities The Company has two short-term
Rights are subject to adjustment from time to time to prevent
committed credit facilities. The committed lines are renewed or
dilution. At the date upon which the rights become separate from
renegotiated at least annually. One short-term, unsecured credit
the Company’s Common Stock (the “Distribution Date”), the
facility from a group of eight banks is for $250 million. This facili-
Company will issue one right with each share of Common Stock
ty expires in August 1999. No balance was outstanding under it at
that becomes outstanding so that all shares of Common Stock
September 30, 1998. This facility requires a commitment fee of
will have attached Rights. After the Distribution Date, the
.06% on the unused portion. A second facility is for $12 million
Company may issue Rights when it issues Common Stock if the
with a single bank. This facility expires March 31, 1999. It
Board deems such issuance to be necessary or appropriate.
requires a commitment fee of .075% on the unused portion.
The Rights will separate from the Common Stock and a
Uncommitted Credit Facilities The Company also has unsecured
short-term uncommitted credit lines from three banks totaling
$80 million, of which $25.6 million was unused as of September
Distribution Date will occur upon the occurrence of certain
events specified in the Agreement, including but not limited to,
the acquisition by certain persons of at least 10% of the beneficial
ownership of the Company’s Common Stock. The Rights have
36
A T M O S E N E R G Y C O R P O R A T I O N
certain anti-takeover effects and may cause substantial dilution to
Stock Purchase Plan (“DSPP”). Participants in the DSPP may have
a person or entity that attempts to acquire the Company on
all or part of their dividends reinvested at a 3% discount from
terms not approved by the Board of Directors except pursuant to
market prices. DSPP participants may purchase additional shares
an offer conditioned upon a substantial number of Rights being
of Company common stock as often as weekly with voluntary
acquired. The Rights should not interfere with any merger or
cash payments of at least $25, up to an annual maximum of
other business combination approved by the Board of Directors
$100,000.
because, prior to the time that the Rights become exercisable or
transferable, the Rights may be redeemed by the Company at
$.01 per Right.
Outside Directors Stock-For-Fee Plan In November 1994, the
Board adopted the Outside Directors Stock-for-Fee Plan, which
was approved by the shareholders of the Company in February
Shares Issued Under Various Plans The following table presents
1995 and was amended and restated in November 1997. The plan
the number of shares issued under various plans in 1998 and 1997,
permits non-employee directors to receive all or part of their
as well as the number of shares available for future issuance at
annual retainer and meeting fees in stock rather than in cash.
September 30, 1998.
Shares issued
Shares available
for issuance at
September 30,
United Cities Long-Term Stock Plan Prior to the UCGC merger,
certain officers and key employees of UCGC were covered under
UCGC’s Long-term Stock Plan implemented in 1989. At the time
1998
1997
1998
of the UCGC merger on July 31, 1997, Atmos adopted this plan
Restricted Stock Grant Plan
114,250
Employee Stock Ownership Plan
52,473
Direct Stock Purchase Plan
531,353
100,000
212,327
85,243
788,250
460,398
968,217
Outside Directors
Stock-For-Fee Plan
2,306
3,008
42,379
United Cities Long-term
Stock Plan
55,500
–
194,500
Restricted Stock Grant Plan The Company’s Restricted Stock
Grant Plan (“Plan”) for management and key employees of the
Company, which became effective October 1, 1987 and was
amended and restated in November 1997, provides for awards of
common stock that are subject to certain restrictions. The Plan is
administered by the Board of Directors. The members of the
Board who are not employees of the Company make the final
determinations regarding participation in the Plan, awards under
the Plan, and restrictions on the restricted stock awarded. The
restricted stock may consist of previously issued shares purchased
on the open market or shares issued directly from the Company.
During 1998 the Company increased the number of shares of its
common stock that may be issued under the plan by 650,000
shares. Compensation expense of $1,238,000, $437,000 and
by registering a total of 250,000 shares of Atmos stock to be
issued under the Long-term Stock Plan for the United Cities
Division. Under this plan, incentive stock options, nonqualified
stock options, stock appreciation rights, restricted stock or any
combination thereof may be granted to officers and key employ-
ees of the United Cities Division. During 1998, 55,500 options
and rights were exercised under the plan. At September 30, 1998,
there were 26,500 options outstanding. No incentive stock
options, nonqualified stock options, stock appreciation rights, or
restricted stock have been granted under the plan since 1996.
In October 1995, the FASB issued Statement No. 123 (“SFAS
123”), “Accounting for Stock-Based Compensation.” This state-
ment establishes a fair-value-based method of accounting for
employee stock options or similar equity instruments and encour-
ages, but does not require, all companies to adopt that method of
accounting for all of their employee stock compensation plans.
SFAS 123 allows companies to continue to measure compensation
cost for employee stock options or similar equity instruments
using the intrinsic value method of accounting described in
Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees.” The Company has elected to continue
using this method. Because of the limited nature of the Company’s
stock-based compensation plans, the effect of adoption of SFAS 123
$795,000 was recognized in 1998, 1997 and 1996, respectively, in
would not materially impact reported earnings per share.
connection with the issuance of shares under the Plan.
Employee Stock Ownership Plan Atmos has an Employee Stock
Ownership Plan (“ESOP”) and the United Cities Division has a
401(k) savings plan, as discussed in Note 10. The ESOP will be
amended effective January 1, 1999, as is more fully discussed in
Note 10.
Long-Term Incentive Plan On August 12, 1998, the Board of
Directors approved and adopted the 1998 Long-Term Incentive
Plan (the “LTIP”), which became effective October 1, 1998, sub-
ject to the approval of the shareholders of the Company at the
Annual Meeting of Shareholders on February 10, 1999. The LTIP
represents a part of the Company’s total rewards strategy, which
Direct Stock Purchase Plan The Company also has a Direct
the Company developed as a result of a study it conducted of all
A T M O S E N E R G Y C O R P O R A T I O N
37
employee, executive and non-employee director compensation
Participants are fully vested in their account balances after five
and benefits. The LTIP is a comprehensive, long-term incentive
years of service and may choose to receive their account balances
compensation plan, providing for discretionary awards of incen-
as a lump sum or an annuity. The obligations shown as of
tive stock options, non-qualified stock options, stock appreciation
September 30, 1998 anticipate the changes which will be effective
rights, bonus stock, restricted stock and performance-based stock
January 1, 1999.
to help attract, retain, and reward employees and non-employee
The Company’s funding policy is to contribute annually an
directors of the Company and its subsidiaries. The maximum
amount in accordance with the requirements of the Employee
aggregate number of shares that may by issued under the LTIP
Retirement Income Security Act of 1974. Contributions are
shall not exceed 1,500,000 shares of common stock.
intended to provide not only for benefits attributed to service to
10 E M P L O Y E E R E T I R E M E N T A N D S T O C K
O W N E R S H I P P L A N S
date but also for those expected to be earned in the future.
Supplemental Executive Benefits Plan The Company has a non-
qualified Supplemental Executive Benefits Plan (“Supplemental
In fiscal 1998, the Company adopted SFAS No. 132, “Employers
Plan”) which provides additional pension, disability and death
Disclosures about Pensions and Other Postretirement Benefits.”
benefits to the officers and certain other employees of the
The Statement revises employers’ disclosures about pension and
Company. The supplemental plan was amended and restated in
other postretirement benefit plans. It does not change the meas-
November 1997. In addition, in August 1998, the Company
urement or recognition of those plans. Disclosures for earlier
adopted the Performance-Based Supplemental Executive Benefits
periods have been restated as required by SFAS No. 132.
Plan, which will cover all employees who become officers or
Defined Benefit Plans As of September 30, 1998, the Company had
four defined benefit pension plans, covering the Western Kentucky
Division employees, the Greeley Division employees, the United
Cities Division employees, and the fourth covering all other Atmos
employees. The plans provide similar benefits to all employees.
Prior to January 1, 1999, the benefits are based upon years of
service and the highest paid five consecutive calendar years of
compensation within the last 10 years of employment.
Effective January 1, 1999, the plans will be merged into the
Western Kentucky Gas plan, and will be known as the Pension
Account Plan which will cover all employees of the Company.
Participants will have an opening account balance established for
them as of January 1, 1999 equal to the present value of their
respective accrued benefits under the pension plans as of
December 31, 1998. The Pension Account Plan will credit an allo-
cation to each participant’s account at the end of each year
according to a formula based on his age, service and total pay
(excluding incentive pay).
The Pension Account Plan provides for an additional annual
through December 31, 2008. In addition, at the end of each year,
a participant’s account will be credited with interest on the
employee’s prior year account balance. A special grandfather ben-
efit also applies through December 31, 2008, for participants who
will be at least age 50 as of January 1, 1999, and who were partici-
pants in one of the prior plans on December 31, 1998.
38
A T M O S E N E R G Y C O R P O R A T I O N
business unit presidents after August 12, 1998.
The following table sets forth the combined total for the four
defined benefit pension plans and the Supplemental Plan’s funded
status for 1998 and 1997:
1998
1997
Change in benefit obligation:
Benefit obligation at beginning of year
$247,948
$235,943
Service cost
Interest cost
Curtailments/Special termination benefits
Plan amendments
Actuarial (gain)/loss
Benefits paid
Benefit obligation at end of year
Change in plan assets:
5,761
17,901
(2,645)
(14,041)
15,028
(14,937)
255,015
Fair value of plan assets at beginning of year
259,852
Actual return on plan assets
Employer contribution
Benefits paid
40,062
1,731
(14,937)
286,708
31,693
(294)
(524)
(38,844)
6,124
16,054
4,557
2,314
(6,561)
(10,483)
247,948
224,699
42,416
3,219
(10,482)
259,852
11,904
(414)
13,490
(35,681)
Unrecognized prior service cost
Unrecognized net (gain)/loss
Accrued pension cost
(net amount recognized)
$ (7,969)
$ (10,701)
allocation based upon a participant’s age as of January 1, 1999 for
Fair value of plan assets at end of year
those participants who were participants in the prior pension
Funded status
plans. The plan will credit this additional allocation each year
Unrecognized transition asset
1998
1997
ing contribution for the account of the participant in an amount
Weighted average assumptions
for end of year disclosure:
Discount rate
Rate of compensation increase
Expected return on plan assets
7.0%
4.0%
9.0%
7.5%
4.0%
9.0%
determined each year by the Board of Directors, which amount
must be at least equal to 25% of all or a portion of the partici-
pant’s salary reduction. For the 1998 plan year, the Board of
Directors elected to match 100% of each participant’s salary
reduction contribution up to 4% of the participant’s salary.
Matching contributions to the ESOP amounted to $1.8 million,
$2.1 million, and $1.9 million for 1998, 1997 and 1996, respectively.
The plan assets consist primarily of investments in common
The directors may also approve discretionary contributions, subject
stocks, interest bearing securities and interests in commingled
to the provisions of the Internal Revenue Code of 1986 and appli-
pension trust funds.
cable regulations of the Internal Revenue Service. The Company
The projected benefit obligation, accumulated benefit obliga-
recorded a charge of $1.5 million for a discretionary contribution
tion, and fair value of plan assets for the pension plan with accu-
in the year ended September 30, 1996. No discretionary contribu-
mulated benefit obligations in excess of plan assets were $36.8
tions were made for 1997 and 1998. Company contributions to
million, $31.4 million, and none, respectively, as of September 30,
the plan are expensed as incurred. The Company’s ESOP has been
1998, and $30.8 million, $26.0 million, and none, respectively, as of
amended effective January 1, 1999 to provide for deferral of a
September 30, 1997.
portion of a participant’s salary of up to 21%. In addition, among
Net periodic pension cost for the combined pension benefit
other changes to the ESOP as of January 1, 1999, participants will
plans for 1998, 1997 and 1996 included the following components:
be provided with automatic matching contributions of 100% of
1998
1997
1996
each participant’s salary reduction up to 4% of the participant’s
salary, and will be provided the option of taking out loans against
(In thousands)
their ESOP accounts, subject to certain restrictions.
Components of net periodic
pension cost:
Service cost
Interest cost
Expected return on assets
Amortization of:
Transition obligation/(asset)
Prior service cost
Actuarial (gain)/loss
Net periodic pension cost
Curtailment (gain)/loss and
$ 5,761
$ 6,903
$ 6,786
17,901
(23,249)
17,234
(19,730)
16,288
(18,695)
(146)
1,660
(1,091)
836
(335)
1,731
390
6,193
(354)
1,048
279
5,352
special termination benefits
(1,840)
4,758
56
Total pension cost accruals
$ (1,004)
$ 10,951
$ 5,408
Employee Stock Ownership Plan Atmos sponsors an ESOP for
employees other than those in the United Cities Division. Full-
time employees who have completed one year of service, as
defined in the plan, are eligible to participate. Each participant
enters into a salary reduction agreement with the Company pur-
suant to which the participant’s salary is reduced by an amount
not less than 2% nor more than 10%. Taxes on the amount by
which the participant’s salary is reduced are deferred pursuant to
Section 401(k) of the Internal Revenue Code. The amount of the
salary reduction is contributed by the Company to the ESOP for
the account of the participant. The Company may make a match-
401(k) savings plan The Company sponsors a 401(k) savings plan
for the United Cities Division employees. The plan allows partici-
pants to make contributions toward retirement savings. Each par-
ticipant may contribute up to 15% of qualified compensation. For
employee contributions up to 6% of the participant’s qualified
compensation, the Company will contribute 30% of the employ-
ee’s contribution. The Company may also contribute up to an
additional 20% of the employee’s contribution based on certain
criteria specified in the plan. Effective January 1, 1995, any addi-
tional contribution made by the Company will be through the
issuance of the Company’s common stock. The Company con-
tributed $648,000 for the year ended September 30, 1998,
$694,000 for the nine months ended September 30, 1997, and
$826,000 for the year ended December 31, 1996. This 401(k) sav-
ings plan will be merged into the ESOP effective January 1, 1999,
and the United Cities Division employees will receive the same
benefits as other Atmos employees.
11 O T H E R P O S T R E T I R E M E N T B E N E F I T S
Atmos sponsors two postretirement plans other than pensions.
Each provides health care benefits to retired employees. One pro-
vides benefits to the United Cities Division retirees and the other
provides medical benefits to all other retired Atmos employees.
Substantially all of the Company’s employees become eligible
A T M O S E N E R G Y C O R P O R A T I O N
39
for these benefits if they reach retirement age while working for
the Company and attain certain specified years of service.
Although specific terms of the two plans are different, participant
contributions are required under these plans.
Weighted average assumptions
for end of year disclosure:
Effective January 1, 1999, the United Cities plan will provide
Discount rate
benefits to future retirees that are essentially the same as provided
Rate of compensation increase
to other Atmos employees. The obligations as of September 30,
Expected return on plan assets
1998 anticipate this plan change.
Initial trend rate
The following table sets forth the combined total for the two
Ultimate trend rate
postretirement plans other than pensions:
Number of years from initial
to ultimate trend
1998
1997
7.0%
4.0%
5.3%
9.0%
4.5%
6
7.5%
4.0%
5.3%
7.5%
5.0%
3
Change in benefit obligation:
1998
1997
(In thousands)
Net periodic pension cost for the combined postretirement
benefit plans for 1998, 1997 and 1996 included the following
Benefit obligation at beginning of year
$ 53,295
$ 46,801
components:
Components of net periodic
pension cost:
Service cost
Interest cost
Expected return on assets
Amortization of:
Transition obligation/(asset)
1,862
Prior service cost
Actuarial (gain)/loss
269
(58)
Net periodic pension cost
7,307
1998
1997
1996
(In thousands)
$ 1,659
$ 1,772
$ 1,622
3,810
(235)
3,467
(225)
1,994
202
4
7,214
3,260
(196)
1,994
–
98
6,778
Curtailment (gain)/ loss and
special termination benefits
5,915
3,043
–
Total pension cost accruals
$13,222
$10,257
$ 6,778
Service cost
Interest cost
Plan participants’ contributions
Curtailments/Special termination benefits
Plan amendments
Actuarial (gain)/loss
Benefits paid
Benefit obligation at end of year
Change in plan assets:
1,659
3,809
382
2,125
1,888
6,210
(4,874)
64,494
Fair value of plan assets at beginning of year
5,614
Actual return on plan assets
Employer contribution
Plan participants’ contribution
Benefits paid
Fair value of plan assets at end of year
Funded status
Unrecognized transition obligation
Unrecognized prior service cost
Unrecognized net loss
Accrued pension cost
295
4,963
382
(4,874)
6,380
(58,114)
23,243
3,614
8,571
1,734
3,208
275
2,292
2,427
135
(3,577)
53,295
4,642
249
4,024
276
(3,577)
5,614
(47,681)
30,131
2,125
996
(net amount recognized)
$(22,686)
$(14,429)
40
A T M O S E N E R G Y C O R P O R A T I O N
Assumed health care cost trend rates have a significant effect
lar to the previously reported fully diluted earnings per share.
on the amounts reported for the plans. A one-percentage point
Earnings per share amounts for all historical periods presented
change in assumed health care cost trend rates would have the
have been restated to conform to the Statement 128 requirements.
following effects on the latest actuarial calculations:
Adoption of Statement 128 did not change the fully diluted earn-
1 – Percentage
1 – Percentage
Point Increase
Point Decrease
(In thousands)
ings per share amounts for the years ended September 30, 1997
and 1996. Reconciliations of the numerators and denominators of
the basic and diluted per-share computations for net income for
Effect on total of service and
interest cost components
$ 504
$ (495)
Effect on postretirement
benefit obligation
$6,890
$(5,828)
1998 are as follows:
Income
Shares
(Numerator)
(Denominator)
Per-Share
Amount
(In thousands, except per share amounts)
The Company is currently recovering other postretirement
Basic EPS:
benefits (“OPEB”) costs through its regulated rates under SFAS
Income available to
No. 106 accrual accounting in Colorado, Kansas, the majority of its
common stockholders
$55,265
29,822
$ 1.85
Texas service area and in Kentucky (effective November 1, 1995).
Effect of dilutive securities:
It receives rate treatment as a cost of service item for OPEB costs
Restricted stock
on the pay-as-you-go basis in Louisiana. OPEB costs have been
specifically addressed in rate orders in each jurisdiction served by
Stock options
Diluted EPS:
–
–
199
10
the United Cities Division or have been included in a rate case
and not disallowed. However, the Company was required to
recover the portion of the UCGC transition obligation applicable
to Virginia operations over 40 years, rather than 20 years, as in
other states. Management believes that accrual accounting in
accordance with SFAS No. 106 is appropriate and will continue to
seek rate recovery of accrual-based expenses in its ratemaking
jurisdictions that have not yet approved the recovery of these
expenses.
12 E A R N I N G S
P E R S H A R E
Income available to
common stockholders and
assumed conversions
$55,265
30,031
$ 1.84
13 R E L A T E D P A R T Y T R A N S A C T I O N S
Included in purchased gas cost were purchases from WMLLC of
$124.7 million, $103.0 million and $46.9 million in 1998, 1997, and
1996, respectively. Volumes purchased were 53.4 billion cubic feet
(“Bcf”), 38.6 Bcf and 21.7 Bcf in 1998, 1997 and 1996, respectively.
These purchases were made in a competitive open bidding process
In 1997, the Financial Accounting Standards Board issued
and reflect market prices. Average prices per thousand cubic feet
Statement of Financial Accounting Standards No. 128, Earnings
(“Mcf”) for gas purchased from WMLLC were $2.33, $2.67 and
per Share. Statement 128 replaced the previously reported pri-
$2.17 in 1998, 1997 and 1996, respectively.
mary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earn-
ings per share excludes any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share is very simi-
A T M O S E N E R G Y C O R P O R A T I O N
41
MANAGEMENT(cid:213)S RESPONSIBILIT Y FOR FINANCIAL STATEMENTS
R E P O RT O F E R N ST & YO U N G LLP, I N D E P E N D E N T AU D I T O R S
Management is responsible for the preparation, presentation
Board of Directors
and integrity of the financial statements and other financial infor-
Atmos Energy Corporation
mation in this report. The accompanying financial statements
have been prepared in accordance with generally accepted
We have audited the accompanying consolidated balance
accounting principles, and include estimates and judgments made
sheets of Atmos Energy Corporation at September 30, 1998 and
by management that were necessary to prepare the statements in
1997, and the related consolidated statements of income, share-
accordance with such accounting principles.
holders’ equity and cash flows for each of the three years in the
The Company maintains a system of internal accounting con-
period ended September 30, 1998. These financial statements are
trols designed to provide reasonable assurance that assets are safe-
the responsibility of the Company’s management. Our responsi-
guarded from loss and that transactions are executed and recorded
bility is to express an opinion on these financial statements based
in accordance with established procedures. The concept of reason-
on our audits. We did not audit the financial statements of United
able assurance is based on the recognition that the cost of main-
Cities Gas Company, wholly owned by Atmos Energy
taining a system of internal accounting controls should not exceed
Corporation (see Note 2), which statements reflect total revenues
related benefits. The system of internal accounting controls is sup-
of $402,947,000 for the year ended December 31, 1996. Those
ported by written policies and guidelines, internal auditing and the
statements were audited by other auditors whose report has been
careful selection and training of qualified personnel.
furnished to us and our opinion, insofar as it relates to data
The financial statements have been audited by the Company’s
included for United Cities Gas Company is based solely on the
independent auditors. Their audit was made in accordance with
report of the other auditors.
generally accepted auditing standards, as indicated in the Report
We conducted our audits in accordance with generally accept-
of Independent Auditors, and included a review of the system of
ed auditing standards. Those standards require that we plan and
internal accounting controls and tests of transactions to the
perform the audit to obtain reasonable assurance about whether
extent they considered necessary to carry out their responsibilities
the financial statements are free of material misstatement. An audit
for the audit.
includes examining, on a test basis, evidence supporting the
Management has considered the internal auditors’ and the
amounts and disclosures in the financial statements. An audit also
independent auditors’ recommendations concerning the
includes assessing the accounting principles used and significant
Company’s system of internal control and has taken actions that
estimates made by management, as well as evaluating the overall
are believed to be cost-effective in the circumstances to respond
financial statement presentation. We believe that our audits and the
appropriately to these recommendations. The Audit Committee of
report of other auditors provide a reasonable basis for our opinion.
the Board of Directors meets periodically with the internal audi-
In our opinion, based on our audits and the report of other
tors and the independent auditors to discuss the Company’s inter-
auditors, the financial statements referred to above present fairly,
nal accounting controls, auditing and financial reporting matters.
in all material respects, the consolidated financial position of
Atmos Energy Corporation at September 30, 1998 and 1997, and
its consolidated results of operations and its cash flows for each of
the three years in the period ended September 30, 1998 in con-
formity with generally accepted accounting principles.
Dallas, Texas
November 10, 1998
42
A T M O S E N E R G Y C O R P O R A T I O N
M A N AG E M E N T(cid:213) S D I S C U S S I O N A N D A N A LYS I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S
Introduction This section provides management’s discussion of
tem. Its non-utility operations include a propane operation; a
Atmos Energy Corporation’s (“the Company” or “Atmos”) finan-
leasing and rental operation; and an energy services operation that
cial condition, cash flows and results of operations with specific
includes storage, gas marketing, irrigation and energy services.
information on liquidity, capital resources and results of opera-
The Company’s primary source of revenues, net income and
tions. It includes management’s interpretation of such financial
cash flows is its utility business which is composed of five local
results, the factors affecting these results, the major factors
distribution companies that are operated as divisions of Atmos.
expected to affect future operating results, and future investment
For additional information about these businesses, please see the
and financing plans. This discussion should be read in conjunction
“Description of Business” section of Note 1 in the accompanying
with the Company’s consolidated financial statements and notes
notes to consolidated financial statements.
thereto.
Each segment’s contribution to net income is reflected in the
Cautionary Statement for the Purposes of the Safe Harbor Under
table below:
the Private Securities Litigation Reform Act of 1995
The matters discussed or incorporated by reference in this
Annual Report may contain “forward-looking statements” within
Year ended September 30,
1998
1997
1996
the meaning of Section 21E of the Securities Exchange Act of 1934.
Utility
All statements other than statements of historical facts included in
Propane
this “Management’s Discussion and Analysis of Financial Condition
Leasing / Rental
and Results of Operations” and the notes to consolidated financial
Storage and Energy Services
statements, regarding the Company’s financial position, business
Total
strategy and plans and objectives of management of the Company
76.3 %
(0.1)%
5.9 %
17.9 %
100.0 %
71.3 %
(.4)%
4.7 %
24.4 %
100.0 %
77.5%
3.1%
3.0%
16.4%
100.0%
for future operations, are forward-looking statements made in
Acquisitions and Mergers The Company has expanded its cus-
good faith by the Company and are intended to qualify for the
tomer base and sought to diversify the regulatory climates, weather
safe harbor from liability established by the Private Securities
patterns and local economic conditions to which it is subject
Litigation Reform Act of 1995. When used in this Report or in
through acquisitions in fiscal years 1997, 1994, 1987, and 1986.
any of the Company’s other documents or oral presentations, the
The Company plans to continue its acquisition strategy to add
words “anticipate,” “expect,” “estimate,” “plans,” “believes,” “objec-
new customers and service areas for both natural gas and
tive,” “forecast,” “goal” or similar words are intended to identify
propane. It has an excellent track record of acquiring local distri-
forward-looking statements. Such forward-looking statements are
bution company (“LDC”) operations and achieving synergies and
subject to risks and uncertainties that could cause actual results
benefits quickly, while preserving brand equity.
to differ materially from those expressed or implied in the state-
In addition to growing through acquisitions, the Company’s
ments relating to the Company’s operations, markets, services,
strategy includes running the utility operations exceptionally
rates, recovery of costs, availability of gas supply, and other fac-
well, increasing the size and market share of non-utility opera-
tors. These risks and uncertainties include, but are not limited to,
tions (gas marketing, related storage and energy services and
national, regional and local economic and competitive conditions,
propane) and developing plans to participate in retail services
regulatory and business trends and decisions, technological devel-
behind the meter.
opments, Year 2000 issues, inflation rates, weather conditions, and
other uncertainties, all of which are difficult to predict and many
of which are beyond the control of the Company.
Accordingly, while the Company believes that the expecta-
tions reflected in the forward-looking statements are reasonable,
there can be no assurance that such expectations will be realized
or will approximate actual results.
Ratemaking Procedures The Company’s five utility divisions are
regulated by various state or local public utility authorities. The
method of determining regulated rates varies among the 12 states
in which the Company has utility operations. It is the responsibility
of the regulators to determine that utilities under their jurisdiction
operate in the best interests of customers while providing the
utilities the opportunity to earn a reasonable return on investment.
Organization The Company distributes and sells natural gas
In a general rate case, the applicable regulatory authority,
through 1,004,532 meters in service areas located in Texas,
which is typically the state public utility commission, establishes
Louisiana, Kentucky, Colorado, Kansas, Illinois, Tennessee, Iowa,
a base margin, which is the amount of revenue authorized to be
Virginia, Georgia, South Carolina and Missouri. The Company
collected from customers to recover authorized operating
also transports gas for others through parts of its distribution sys-
expense (other than the cost of gas), depreciation, interest, taxes
A T M O S E N E R G Y C O R P O R A T I O N
43
and return on rate base. The utility divisions perform annual defi-
The Georgia Public Service Commission and the Tennessee
ciency studies for each rate jurisdiction to determine when to file
Regulatory Authority have approved Weather Normalization
rate cases, which are typically filed every two to five years.
Adjustments (“WNA”). The WNA, effective October through
Substantially all of the sales rates charged by the Company to
May each year in Georgia and November through April each year
its customers fluctuate with the cost of gas purchased by the
in Tennessee, allow the United Cities Division to increase the
Company. Rates established by regulatory authorities are adjusted
base rate portion of customers’ bills when weather is warmer
for increases and decreases in the Company’s purchased gas cost
than normal and decrease the base rate when weather is colder
through automatic purchased gas adjustment mechanisms.
than normal. The net effect of the WNA was an increase/(decrease)
Therefore, while the Company’s operating revenues may fluctu-
in revenues of $.7 million, $2.6 million and $(2.6) million in
ate, gross profit (which is defined as operating revenues less pur-
1998, 1997 and 1996, respectively. Approximately 170,000 of the
chased gas cost) is generally not eroded or enhanced because of
Company’s customers are located in Georgia and Tennessee.
gas cost increases or decreases.
The Company has not sought weather normalization clauses
The Georgia Commission and Tennessee Regulatory
in its other rate jurisdictions because of the effect of its geograph-
Authority have approved Weather Normalization Adjustments as
ical diversification strategy and the potential for increased profits
discussed below under “Weather and Seasonality.”
in unusually cold years.
The Company received rate reductions of $1.8 million in 1998,
and rate increases totaling $9.4 million in 1997, and $6.8 million in
Year 2000 Issues
1996. For further information regarding rate activity please see
Note 3, “Rates,” in notes to consolidated financial statements.
Weather and Seasonality The Company’s natural gas and
propane distribution businesses and irrigation sales business are
seasonal due to weather conditions in the Company’s service
areas. Natural gas sales to residential, commercial, and public cus-
tomers and propane sales are affected by winter heating season
requirements. Sales to industrial customers are much less weather
sensitive. Sales to agricultural customers (who use natural gas to
power irrigation pumps) during the period from April through
September are affected by rainfall amounts. These factors general-
ly result in higher operating revenues and net income during the
period from October through March of each year and lower
operating revenues, and either net losses or lower net income dur-
ing the period from April through September of each year.
Degree day information is shown below. For further information
regarding the impact of weather and seasonality on operating
results, see the Supplementary Quarterly Financial Data following
the notes to consolidated financial statements herein.
Year ended September 30,
1998
1997
1996
The Year 2000 issues arose because many computer systems and
software applications as well as embedded computer chips in plant
and equipment currently in use were constructed using an abbre-
viated date field that eliminates the first two digits of the year. On
January 1, 2000, these systems, applications and embedded com-
puter chips may incorrectly recognize the date as January 1, 1900.
Accordingly, many computer systems and software applications, as
well as embedded chips, may incorrectly process financial and
operating information or fail to process such information com-
pletely. The Company recognized this problem and is addressing
its potential effects on its computer systems, software applications
and plant and equipment.
State of Readiness In October 1996, the Company established its
Year 2000 Project Team with the mission of ensuring that all criti-
cal systems, facilities and processes are identified, analyzed for Year
2000 compliance, corrected if necessary, and tested if changes are
necessary. The Year 2000 Project Team is headed by an officer of
the Company and consists of representatives from all business
units and shared services units of the Company. The Company,
including all of its departments and business units, has a Year 2000
strategy in place and has begun the implementation of the Year
2000 plan to manage and minimize risks associated with the Year
2000 issues.
Sales volumes – Bcf
Transportation volumes – Bcf
Total
Degree days:
Actual
Normal
% of normal
159.4
56.2
215.6
3,799
3,989
95%
164.2
48.8
213.0
3,909
3,990
98%
178.3
44.1
222.4
4,043
3,990
The Company has also obtained an assessment from an inde-
pendent consulting firm, who specializes in such matters, of the
risks posed for the Company and its business units by the Year
2000 issues, including an assessment of its risks in every area
involving the use of computer technology and an assessment of
the business and legal risks created for the Company by the Year
101%
2000 issues. Such assessment also includes the risks associated
with the Company’s embedded technologies such as micro-con-
44
A T M O S E N E R G Y C O R P O R A T I O N
trollers or microchips embedded in non-information technology-
also in the process of testing vendor products that provide mission
related equipment.
critical goods or services to ensure their Year 2000 compliance. In
With respect to information technology (“IT”) systems, the
addition, the Company has identified its key suppliers, including
Company has conducted an inventory of and is evaluating and
gas suppliers, and is communicating with them for the purpose of
reviewing its application software on all platforms such as the
evaluating the status of their solutions to their respective Year
mainframe, local area network and personal computers. Concerning
2000 issues. The expected date of completion of these procedures
non-IT systems, including embedded technology, the Company
is September 30, 1999.
has conducted an inventory of and is reviewing and evaluating all
of its telecommunications, security access and building control
systems, forms, reports and other business processes and activities
as well as the equipment and facilities utilized in the Company’s
gas distribution and storage systems. In addition, several members
of the Year 2000 Project Team have completed training on an
American Gas Association-sponsored database relating to testing
of embedded technology. This database will help expedite the
review and compliance efforts related to embedded technology.
The Company’s Year 2000 plan includes specific timetables
for the following categories of tasks for each of its shared services
units and business units with respect to both IT systems and
embedded technology as follows:
n Identification of Year 2000 issues – substantially completed;
n Prioritization of Year 2000 issues – substantially completed;
n Estimation of total Year 2000-related costs – in process and to
be completed by December 31, 1998;
Costs to Address Year 2000 Issues As of September 30, 1998, the
Company had incurred a total of less than $300,000 in fees and
expenses in connection with its Year 2000 efforts. The Company
currently expects to spend no more than $1.0 million directly on
its Year 2000 efforts by December 31, 1999. As part of its normal
systems upgrade in the ordinary course of business, the Company
is in the process of replacing its customer information system,
accounting and financial reporting system, and human resources
system with systems that happen to be Year 2000 compliant.
However, the installation of these systems was not accelerated in
an attempt to deal with the Year 2000 issues.
Risks of Year 2000 Issues and Contingency Plans The Company
has identified what it believes are its most significant worst case
Year 2000 scenarios. These scenarios are (i) interference with the
Company’s ability to receive and deliver gas to customers; (ii)
interference with the Company’s ability to communicate with
customers; and (iii) the temporary inability to send invoices to
and receive payments from customers.
n Implementation of Year 2000 solutions – in process and to be
The most likely primary business risk associated with the Year
completed by May 31, 1999;
n Testing of Year 2000 solutions – in process and to be completed
by September 30, 1999;
n Certification of Year 2000 compliance by third party vendors
and suppliers – in process and to be completed by September
30, 1999;
n Monitoring of all systems for changes in current systems that
would require changes in Year 2000 plan – in process and to
be completed by September 30, 1999;
n Development of Year 2000 contingency plans – in process and
to be completed by March 31, 1999; and
2000 issues is the Company’s ability to continue to transport and
distribute gas to its customers without interruption. In the event
the Company and/or its suppliers and vendors are unable to
remediate the Year 2000 issues prior to January 1, 2000, operations
of the Company could be significantly impacted. In order to miti-
gate this risk, the Company is developing a contingency plan to
continue operations through manual intervention and other pro-
cedures should it become necessary to do so. Such procedures are
expected to include back-up power supply for its critical distribu-
tion and storage operations and, if necessary, curtailment of supply.
The Company’s storage capacity could be used to supplement
system supply in the event its suppliers can not make deliveries.
n Final Year 2000 tests – to be conducted starting September 30,1999.
The Company expects to complete its operational contingency
The Company is also currently in the process of conducting
an inventory and review of computer systems provided by out-
side vendors. The Year 2000 Project Team is contacting all vendors
to coordinate their Year 2000 compliance schedules with those of
the Company. The Company is requiring vendors who provide
mission critical goods or services to submit to the Company their
compliance plans and to certify compliance in order to continue
to do business with the Company. As discussed, the Company is
plan by March 31, 1999.
With respect to the communications with customers, which is
heavily reliant on services provided by third parties, the Company
is in the process of evaluating Year 2000 compliance by such third
parties and will be developing contingency plans to address any
worst case scenarios that may be determined after such evalua-
tions are complete. Concerning the billing and payment systems, as
previously discussed, the Company is in the process of replacing
A T M O S E N E R G Y C O R P O R A T I O N
45
its customer information system, accounting and financial reporting
Results of Operations
system, and human resources system with systems that are Year
2000 compliant, which should substantially diminish the risk of
Year 2000 issues. Nevertheless, the Company will be developing
contingency plans by March 31, 1999 in case the billing and pay-
ment systems prove not to be Year 2000 compliant.
Despite the Company’s efforts, there can be no assurance that
all material risks associated with Year 2000 issues relating to sys-
tems within its control will have been adequately identified and
corrected before the end of 1999. However, as the result of its
Year 2000 plan and the replacement of the customer information
system, accounting and financial reporting system, and human
resources system in 1999, the Company does not believe that in
the aggregate, Year 2000 issues with respect to both its own IT
and non-IT systems will be material to its business, operations or
financial condition. On the other hand, while the Company is in
the process of researching the Year 2000 readiness of its suppliers
and vendors, the Company can make no representation regarding
the Year 2000 compliance status of systems or parties outside its
control, and currently cannot assess the effect on it of any non-
compliance by such systems or parties.
All statements concerning Year 2000 issues other than historical
statements, including, without limitation, estimated costs and the
projected timetable of Year 2000 compliance, constitute “forward-
looking statements,” as defined in the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements should be
read in conjunction with the Company’s disclosures under the
Year ended September 30, 1998 compared with
year ended September 30, 1997
To assist in management’s discussion of results of operations,
the following table presents the effects of certain non-recurring
charges and weather on reported consolidated net income.
Earnings per share amounts presented in this discussion are
on a diluted basis.
Year ended September 30,
1998
1997
1996
Amount
Per
Share
Per
Per
Amount
Share Amount Share
(In thousands, except per share data)
Net income as reported
$55,265 $1.84
$23,838
$ .81
$41,151 $1.42
Non-recurring charges:
Management reorganization
Reserve for
integration costs
–
–
–
–
Sale of assets
(2,244)
(.07)
–
Normalized net income
except for effects
2,800
.10
12,630
.43
–
–
–
–
–
–
–
of weather
53,021
1.77
39,268
1.34
41,151 1.42
Effects of weather
3,485
.11
3,571
.12
(1,838)
(.06)
Normalized net income
$56,506 $1.88
$42,839 $1.46
$39,313 $1.36
heading “Cautionary Statement for the Purposes of the Safe Harbor
Net Income as Reported For the fiscal year ended September 30,
under the Private Securities Litigation Reform Act of 1995” at the
1998, the Company reported net income of $55.3 million, or $1.84
beginning of Management’s Discussion and Analysis.
Environmental Matters The Company is involved in certain envi-
ronmental matters as discussed in Note 5 “Contingencies” of notes
to consolidated financial statements.
per diluted share, on operating revenues of $848.2 million. The
1998 net income includes one-time gains totaling $2.2 million or
$.07 per diluted share, from the sales of real estate and equipment
owned by UCG Energy. Although revenues for 1998 were lower as
a result of winter weather that was 5% warmer than normal, as
well as warmer than last year, earnings improved due to gains on
asset sales, lower operation and maintenance expenses and
increased irrigation sales. Operations and maintenance expenses
were lower for 1998 due to a company-wide restructuring of the
organization and Atmos’ integration of United Cities Gas
Company. Sales of gas in Texas to farmers for fueling irrigation
pumps increased due to hot and dry summer weather in 1998.
Irrigation volumes increased 34% in 1998 compared with 1997.
Utility operations contributed about 76% of 1998 net income,
with non-utility operations generating about 24%.
For the fiscal year ended September 30, 1997, the Company
reported net income of $23.8 million, or $.81 per share, on operat-
ing revenues of $906.8 million. The 1997 net income included the
effects of non-recurring after-tax charges related to management
46
A T M O S E N E R G Y C O R P O R A T I O N
reorganization ($2.8 million or $.10 per share) and reserves relat-
The following table sets forth the net income (loss) of each of
ed to the UCGC merger and integration ($12.6 million or $.43 per
these business operations for the years 1998, 1997 and 1996.
share). Excluding the effect of these charges, the Company’s net
income would have been $39.3 million or $1.34 per share in 1997,
compared with $41.2 million, or $1.42 per share for 1996. The
1997 results include UCGC, which merged with Atmos effective
July 31, 1997, and operating results for years prior to the merger
have been restated to reflect the pooling of interests accounting
which was used for the merger.
Non-Recurring Charges In 1998 the Company sold the office
building in which UCGC had headquartered its operation in
Year ended September 30,
1998
1997
1996
(In thousands)
$42,147
$16,991
$31,905
(66)
3,272
9,912
(90)
1,117
5,820
1,276
1,237
6,733
Utility
Propane
Leasing/Rental
Storage and Energy Services
Reported net income
$55,265
$23,838
$41,151
Brentwood, Tennessee; two office buildings and a piece of land in
Results of Utility Operations Key financial and operating data for the
Franklin, Tennessee UCGC had held for investment; and an air-
plane. The Company realized a pre-tax gain on the sale of assets
totaling $3.3 million or $2.2 million after-tax.
In 1997 the Company completed a management reorganiza-
tion and recorded a charge of $4.4 million ($2.8 million after-tax)
Company’s utility operations are highlighted in the following table.
Year ended September 30,
1998
1997
1996
(Dollars in thousands)
in related costs.
Financial
In connection with the UCGC merger and integration in 1997,
Operating revenues
$744,652
$811,537
$778,208
the Company recorded approximately $17 million of transaction
costs and $42.8 million for separation and other costs. There are
substantial longer term benefits to the Company’s customers and
shareholders from the merger of the two companies, which the
Company expects to result in cost savings over the next 10 years
totaling about $375 million. The Company believes a significant
amount of the costs to achieve these benefits will be recovered
through rates and future operating efficiencies of the combined
operations. Therefore, the Company recorded as regulatory assets
the costs of the merger and integration of UCGC. However, the
Company established a reserve of $20.3 million ($12.6 million
after-tax), to account for costs that may not be recovered. For
further information regarding the merger please see Note 2 of
notes to consolidated financial statements.
The statements in the preceding paragraph relating to the
anticipated cost savings over the next 10 years constitute “forward-
looking statements.” Such forward-looking statements should be
read in conjunction with the Company’s disclosures under the
heading “Cautionary Statement for the Purposes of the Safe Harbor
provisions of the Private Securities Litigation Reform Act of 1995”
at the beginning of Management’s Discussion and Analysis.
Net Income by Segment As previously discussed, the Company
currently has four business segments: utility operations, propane
Purchased gas cost
Gross profit
Operating expenses
Other income
Interest charges
Net income
Operating
444,288
300,364
225,933
901
33,185
510,943
300,594
253,997
846
30,452
488,575
289,633
229,158
429
28,999
$ 42,147
$ 16,991
$ 31,905
Sales volumes (MMcf ):
Residential
Commercial
Public authority and other
Industrial and irrigation
Total
Transportation (MMcf )
Total volumes (MMcf )
73,472
36,083
4,937
24,057
138,549
56,224
194,773
Meters in service, end of year
1,004,532
75,215
37,382
5,195
29,452
147,244
48,800
196,044
985,448
77,001
38,247
5,182
34,898
155,328
44,146
199,474
976,308
Average gas sales price/Mcf
$ 5.37
Average cost of gas/Mcf
$ 3.21
$ 5.51
$ 3.47
$ 5.01
$ 3.15
Average transportation
revenue/Mcf
$
.43
$
.41
$
.43
Year ended September 30, 1998 compared with
year ended September 30, 1997
Utility operating revenues decreased 8% to $744.7 million for
operations, leasing/rental operations, and storage and energy serv-
1998 from $811.5 million for 1997 due to lower total volumes deliv-
ices including the Company’s 45% interest in WMLLC.
ered and a lower average sales price per Mcf. The lower total vol-
umes delivered resulted from weather that was 3% warmer than
1997 and 5% warmer than 30-year normals. Sales volumes and rev-
enues were also reduced by certain industrial customers switching
A T M O S E N E R G Y C O R P O R A T I O N
47
from sales service to transportation service. Gross profits are not
ganization. The $3.3 million increase in depreciation was due to
significantly affected by such switching. Gross profit was basically
utility plant additions placed in service in 1996 and 1997.
unchanged at $300.4 million for 1998 as compared with 1997.
Operating expenses, excluding income taxes, decreased $42.0
million for 1998 as compared with 1997 due to a $20.3 million
reserve for integration included in 1997, and a $21.7 million
reduction in 1998 operating expenses due to the company-wide
reorganization related to the Customer Service Initiative (“CSI”)
and UCGC integration. CSI is composed of a combination of
enhancements including a customer call center, a new customer
information system on client server architecture, mobile data ter-
minals, ITRON electronic meter reading technology, a network of
third party payment centers, and implementation of industry best
practices. Interest charges increased 9% to $33.2 million due to an
increased level of debt in 1998 as compared with 1997.
Year ended September 30, 1997 compared with
year ended September 30, 1996
Operating revenues increased approximately 4% to $811.5
million in 1997 from $778.2 million in 1996 due to an increase of
10% in the average sales price per thousand cubic feet (“Mcf”) of
gas sold, which more than offset a 5% decrease in total volumes
delivered. The increase in sales price reflects an increase in the
commodity cost of gas which is passed through to end users and
Effects of Weather Annual sales volumes and revenues vary in
relation to winter heating degree days and summer irrigation
demand. The Company has weather normalization adjustments in
its rates in Georgia and Tennessee, but not in the other 10 states
in which it has natural gas distribution operations. The estimated
effect on net income of weather different from 30-year normals is
included in the normalized income statement presented at the
beginning of Management’s Discussion and Analysis. The decline
in net income, excluding the charges and reserves, was the result
of the effects of warmer than normal weather during the winter
months, which negatively impacted gas throughput and sales.
Normal weather conditions would have added $.11 per share to
net income in 1998 and $.12 per share to net income in 1997.
Rates The Company received rate increases totaling $9.4 million
and $6.8 million in fiscal 1997 and 1996, respectively, in jurisdic-
tions in Texas, Kentucky, Illinois, Georgia, Iowa, Tennessee,
Missouri and Virginia. Weather normalization adjustments in
Georgia and Tennessee contributed approximately $.7 million to
gross profit in 1998, $2.6 million in 1997, and a reduction of $2.6
million in 1996. The Company received rate reductions totaling
approximately $1.8 million in Colorado and Virginia in fiscal 1998.
rate increases implemented in 1996 and 1997. Average gas sales
Results of Propane Operations Key financial and operating data
revenues per Mcf increased by $.50 to $5.51 in 1997, while the
for the propane operations are presented in the following table.
average cost of gas per Mcf sold increased $.32 to $3.47 in 1997.
Sales to weather sensitive residential, commercial and public
authority customers decreased approximately 2.6 billion cubic
feet (“Bcf”) in 1997 while sales and transportation volumes deliv-
ered to industrial and agricultural customers decreased approxi-
mately 0.8 Bcf. Total sales and transportation volumes delivered
Financial Data:
Operating revenues
Purchased gas cost
decreased 2% to 196.0 Bcf in 1997, as compared with 199.5 Bcf in
Gross profit
1996. The decrease was primarily due to lower demand as a result
of 3% warmer weather in 1997 than in 1996.
Gross profit increased by approximately 4% to $300.6 million
in 1997 from $289.6 million in 1996. The primary factor contribut-
ing to the higher gross profit was annual rate increases totaling
Operating expenses
Other income
Interest charges
Net income (loss)
Operating Data:
Propane heating degree days:
Year ended September 30,
1998
1997
1996
(Dollars in thousands)
$29,091
$33,194
$38,372
17,709
11,382
10,725
72
795
(66)
$
21,193
12,001
11,508
159
742
(90)
$
24,858
13,514
11,766
223
695
$ 1,276
approximately $16.2 million implemented in fiscal 1997 and 1996 in
Texas, Kentucky, Tennessee, Iowa, Missouri, Georgia, and Illinois.
Actual
% of normal
3,799
94%
3,847
96%
4,258
108%
This was partially offset by a decrease in sales volumes of 8.1 Bcf or
Sales volumes (000 gallons):
5% due to the effect of warmer than normal weather and switching
of certain industrial customers from sales service to transportation
service. Operating expenses increased $24.9 million or 11% to
$254.0 million in 1997. The increase in operating expenses was due
primarily to the non-recurring $20.3 million reserve for merger and
integration costs, and the $4.4 million charge for management reor-
Retail
Wholesale
Total
Average selling price/gallon:
Retail
Wholesale
Average cost of propane/gallon
Customers, end of year
17,229
16,447
33,676
$ 1.02
$ .51
$ .53
37,400
17,145
15,830
32,975
$ 1.12
$ .65
$ .65
29,097
19,724
20,999
40,723
$ 1.09
$ .63
$ .61
26,108
48
A T M O S E N E R G Y C O R P O R A T I O N
Year ended September 30, 1998, compared with
year ended September 30, 1997
Revenues from propane operations decreased from $33.2 mil-
lion in 1997 to $29.1 million in 1998 primarily due to the
decreased selling price per gallon to retail and wholesale cus-
tomers. This decreased selling price was the result of the lower
demand because of warmer weather and increased competition
for customers as compared to the prior year. Partially offsetting
this decrease was an increase in total gallon sales. The increase in
volumes sold resulted from the acquisitions of Ingas, Inc. in May
1998, Harris Propane Gas Co., Inc. in July 1998, Massey Propane
Gas Company and E-con Gas, Inc. in August 1998 and Shaw LP
Gas, Inc. in September 1998.
Purchased gas cost decreased from $21.2 million in 1997 to
$17.7 million in 1998 primarily due to the decreased market cost
of propane to the Company amounting to approximately $.12 per
gallon. Partially offsetting this decrease was increased retail and
wholesale gallon sales in 1998 as compared to 1997.
Operating expenses decreased from $11.5 million in 1997 to
$10.7 million in 1998 primarily due to decreased administrative
and general expenses due to control of operating expenses during
1998. Partially offsetting this decrease was an increase in deprecia-
tion and amortization expense from $2.1 million in 1997 to $2.3
million in 1998 due to the acquisitions in 1997 and in 1998, and
depreciation on additional plant placed in service.
Interest expense increased from $.74 million in 1997 to $.80
million in 1998 due to increased short-term borrowings and long-
term interest payments associated with the acquisitions in 1998,
as well as increased short-term borrowings to cover cash flow
deficits from decreased sales.
Net loss from propane operations decreased from $90,000 in 1997
to $66,000 in 1998, due primarily to the favorable operating expense
Purchased gas cost decreased $3.7 million from $24.9 million
in 1996 to $21.2 million 1997 due primarily to decreased propane
volumes sold as a result of warmer than normal weather. This
decrease was partially offset by an increase in wholesale cost per
gallon of $.04 per gallon from $.61 per gallon in 1996 to $.65 per
gallon in 1997.
Operating expenses decreased $.3 million from $11.8 million
in 1996 to $11.5 million in 1997 due primarily to a decrease in
income tax expense of $.9 million, which was partially offset by
increased administrative and general expenses due to the acquisi-
tions of Harlan LP Gas, Inc. and Propane Sales and Services, Inc.
in 1997. Additionally, depreciation and amortization expense
increased from $1.9 million in 1996 to $2.1 million in 1997. This
increase was due primarily to the acquisitions, and increased
depreciation expense on additional plant and equipment placed
in service.
Interest expense increased from $.7 million in 1996 to $.74
million in 1997 due to increased short-term borrowings and long-
term interest payments associated with the acquisitions in 1997,
as well as increased short-term borrowings to cover cash flow
deficits from decreased sales.
Net income from propane operations decreased from $1.3
million in 1996 to a net loss of $90,000 in 1997, due primarily to
warmer than normal weather. The decrease in gross profit of $1.5
million more than offset the decrease in operating expenses of
$.3 million, resulting in 1997 being less profitable when compared
to 1996.
Effects of Weather Like the utility operations, annual sales vol-
umes and revenues of the propane operation vary in relation to
winter heating degree days. The table above presents data for
propane heating degree days, propane volumes delivered and
profitability of the propane business for 1998, 1997 and 1996.
variances discussed above. The Company is committed to substan-
Gas Storage and Energy Services This segment is currently com-
tially improving the profitability of its propane operations. To
posed of four parts: United Cities Gas Storage Company, which
that end, the Company plans to exit the less profitable propane
owns underground storage fields in Kansas and Kentucky and
transportation, cylinder exchange, and appliance sales and service
provides storage services to the United Cities Division and other
segments in 1999.
Year ended September 30, 1997 compared with
year ended September 30, 1996
non-regulated customers; EnerMart, Inc. and EGASCO, which
market gas to industrial and irrigation customers in West Texas;
Atmos Energy Services, which is developing plans for marketing
various non-regulated services and products; and the Company’s
Propane revenues decreased $5.2 million from $38.4 million in
45% investment in WMLLC, a gas marketing and energy manage-
1996 to $33.2 million in 1997 primarily due to decreased retail
ment services business.
and wholesale volumes sold as a result of warmer than normal
weather. The weather in 1997 was 4% warmer than normal, com-
pared to 8% colder than normal in 1996. Partially offsetting the
decrease in volumes sold was an increase in the average selling
price per gallon in 1997.
A T M O S E N E R G Y C O R P O R A T I O N
49
are set forth below.
Operating revenues
Purchased gas cost
Gross profit
Operating expense
Other income
Equity in WMLLC
Interest charges
Net income
Key financial data for the storage and energy services segment
to $58.1 million in 1997 due primarily to decreased West Texas
Year ended September 30,
non-regulated irrigation and industrial revenues. The decrease in
irrigation revenues was due to increased rainfall and cooler sum-
1998
1997
1996
mer temperatures in West Texas. Storage revenues also decreased
(In thousands)
due to decreased volumes withdrawn from underground storage
as a result of warmer than normal winter weather in Kansas and
$70,488
$58,099
$65,907
Tennessee.
54,375
16,113
10,357
1,418
3,920
1,182
45,045
13,054
9,230
358
3,254
1,616
48,846
17,061
11,509
432
1,997
1,248
$ 9,912
$ 5,820
$ 6,733
Year ended September 30, 1998 compared with
year ended September 30, 1997
Operating revenues increased 21% from $58.1 million for 1997
to $70.5 million for 1998 due to increases of $10.7 million in non-
regulated West Texas irrigation and industrial revenues, and $1.7
million for gas storage operations. The increase in irrigation and
industrial revenues was primarily due to hotter and drier than
normal weather in West Texas. The increase in storage revenues
was due to increased volumes withdrawn from underground stor-
age in 1998 as compared with 1997. Like the utility and propane
operations, gas storage volumes and revenues vary in relation to
winter heating degree days.
Operating expenses increased $1.1 million in 1998 as com-
Operating expenses decreased $2.3 million due primarily to
decreased irrigation volumes in West Texas and storage with-
drawals in Kansas and Tennessee.
Interest charges increased $.4 million due primarily to
increased short-term debt due to lower cash flows and revenues
from irrigation and storage operations in 1997 as compared
with 1996.
Net income decreased to $5.8 million in 1997 as compared
with $6.7 million in 1996. The primary factor causing the
decreased net income was a $7.1 million decrease in West Texas
irrigation revenues in 1997 as discussed above.
Equity in Earnings of WMLLC The Company accounts for its 45%
investment in WMLLC through UCG Energy using the equity
method of accounting. Against the 45% of the net income before
tax recorded in the WMLLC financial statements, the Company
records the amortization of the excess of the purchase price over
the value of the net tangible assets, amounting to approximately
$5.4 million which was allocated to intangible assets consisting of
customer contracts and goodwill, and are being amortized over
ten and twenty years, respectively, as well as the provision for
pared with 1997 due primarily to the increased volumes delivered
income taxes.
to West Texas irrigation customers and storage customers in
Kansas and Tennessee.
Other income increased to $1.4 million for 1998 as compared
with $.4 million for 1997. The increase was primarily due to gas
brokering and utilization of storage capacity in excess of that dedi-
cated to regulated markets to serve certain non-regulated markets.
Interest charges decreased $.4 million in 1998 as compared
with 1997 due primarily to reduced debt balances in EnerMart
Inc., the Company’s wholly-owned subsidiary that conducts non-
regulated utility operations in West Texas.
Net income for 1998 increased by $4.1 million from 1997 pri-
marily due to increased West Texas irrigation revenues, favorable
returns from its 45% investment in WMLLC, increased other
income from non-regulated storage services and gas brokering,
and a reduction in interest expense.
Year ended September 30, 1997 compared with
year ended September 30, 1996
Operating revenues decreased 12% from $65.9 million in 1996
The following table presents the WMLLC financial results
recorded by Atmos for the years ended September 30, 1998,
1997 and 1996. WMLLC has a calendar year for financial report-
ing purposes.
Year ended September 30,
1998
1997
1996
(In thousands)
$8,711
3,920
$7,231
3,254
$4,438
1,997
400
1,337
359
1,100
352
625
WMLLC net income
Atmos share @ 45%
Less:
Amortization of excess
purchase price
Provision for taxes
Atmos equity in WMLLC
earnings
$2,183
$1,795
$1,020
The net income of WMLLC increased from $4.4 million for
1996, to $7.2 million for 1997, to $8.7 million for 1998, due to
growth in number of customers and gas marketing revenues each
year. Gross brokerage profit increased approximately 48% in 1998
50
A T M O S E N E R G Y C O R P O R A T I O N
as compared with 1997 due to increases in both sales volumes and
Capital Resources and Liquidity
margins, due primarily to customer growth. The Company’s equi-
ty investment in WMLLC has grown from $5.8 million in 1995 to
$11.9 million at September 30, 1998.
(S E E “C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S”)
Because of the pooling of interests of Atmos, which has a
September 30 fiscal year end, with UCGC, which had a December
Leasing and Rental Operations Key financial and operating data
31 year end, as required by generally accepted accounting princi-
for the leasing and rental operations are presented in the follow-
ples, the activities of UCGC for the quarter ended December 31,
ing table.
Operating revenues
Operating expenses
Operating income
Other income
Interest charges
Net income
Year ended September 30,
1996 are included in the restated 1996 consolidated statement of
cash flows instead of the 1997 consolidated statement of cash flows.
1998
1997
1996
As a result, amounts in the 1997 consolidated statement of cash
(In thousands)
$4,005
2,609
1,396
505
784
$3,977
3,748
229
3,460
417
$4,204
2,718
1,486
486
735
flows as reported are different than they would have been, had
they included a full 12 month’s activity for UCGC.
The following pro forma condensed consolidated statement of
cash flows reflects activities of both Atmos and UCGC for the full
12 months ended September 30, 1997.
$3,272
$1,117
$1,237
(In thousands)
This segment leases buildings, vehicles, and other equipment
to the Company and other non-related customers.
Year ended September 30, 1998 compared with
year ended September 30, 1997
Operating revenues remained consistent due to the stable
nature of the leasing business (the leasing and rental segment
leases buildings and equipment to the United Cities Division and
other third parties).
Operating expenses increased $1.1 million from $2.6 million
in 1997 to $3.7 million in 1998 primarily due to the tax effect of
gains on sales of real estate and equipment.
Cash flows from operating activities:
Net income
Depreciation
Other
Net cash provided by operating activities
Net cash used in investing activities
Cash flows from financing activities:
Increase in notes payable, net
Issuance of long-term debt
Repayment of long-term debt
Issuance of common stock
Cash dividends paid
Other income increased $3.0 million from $.5 million in 1997
Net cash provided by financing activities
to $3.5 million in 1998 primarily due to gains on the sale of real
Decrease in cash
estate and equipment.
Cash at beginning of year
Interest expense decreased $.4 million from $.8 million in 1997
Cash at end of year
$ 23,838
47,494
(11,054)
60,278
(131,286)
63,600
40,000
(16,037)
10,482
(29,778)
68,267
(2,741)
8,757
$ 6,016
to $.4 million in 1998 due to decreased debt, which was retired
using the proceeds from the sales of real estate and equipment.
Year ended September 30, 1997 compared with
year ended September 30, 1996
Operating revenues, operating expenses, other income, and
interest charges remained relatively consistent between 1997 and
1996 due to the stable nature of the business. No buildings or
equipment were purchased or sold during 1997.
Cash Flows From Operating Activities Cash flows from operating
activities as reported in the consolidated statement of cash flows
totaled $91.7 million for 1998 compared with $68.7 million for
1997 and $91.7 million for 1996. The decline in net cash provided
by operating activities from 1996 to 1997 was primarily the result
of only including nine months of UCGC activity in the 1997 state-
ment of cash flows. Likewise, the increase in net cash provided
from 1997 to 1998 was the result of the full 12 months activity for
1998 for the combined companies. Using 1997 beginning balances
for UCGC as of December 31, 1996 resulted in large swings in cer-
tain seasonal asset and liability accounts like accounts receivable
and accounts payable. Gas in storage increased in 1996 because of
higher gas cost, but was lower in 1997 and 1998 because of sub-
stantially lower gas prices during the summers of 1997 and 1998
A T M O S E N E R G Y C O R P O R A T I O N
51
when the storage reservoirs were being refilled. The changes in
Purchase Plan (“DSPP”). The increase in 1997 was primarily due to
deferred charges and other assets and other current liabilities in
increased cash requirements related to merger and integration
1997 and 1998 were related to merger and integration costs
costs and CSI investments, as well as the effects of the nonrecur-
accrued and the related regulatory assets recorded in the fourth
ring charges and reserves previously discussed. The Company
quarter of 1997. See “Consolidated Statements of Cash Flows” for
plans to decrease the debt to capitalization ratio to nearer its tar-
other changes in assets and liabilities.
get range of 50-52% over the next two years through cash flow
Cash Flows From Investing Activities A substantial portion of the
Company’s cash resources is used to fund its ongoing construc-
tion program in order to provide natural gas services to a growing
generated from operations, issuance of new common stock under
its DSPP and ESOP, recovery of CSI and merger/integration costs
and from the possible sale of certain remaining real estate assets.
customer base and CSI which will upgrade processes and systems
Future Capital Requirements Short-term borrowings are expect-
companywide. Net cash used in investing activities totaled $118.8
ed to continue to increase somewhat in fiscal 1999 due to budget-
million in 1998 compared with $121.1 million in 1997 and $111.9
ed capital expenditures discussed above and scheduled maturities
million in 1996. In 1998, the Company received $16.0 million
of long-term debt of $57.8 million. The Company has access to
from the sale of office buildings and an airplane. Capital expendi-
$262.0 million under its committed lines of credit and $80.0 mil-
tures in fiscal 1998 amounted to $135.0 million compared with
lion under its uncommitted lines. A committed line of credit of
$122.3 million in 1997 and $117.6 million in 1996. Currently bud-
$250.0 million is used to support the Company’s $250.0 million
geted capital expenditures for 1999 total $86.8 million and
commercial paper program which was begun in October 1998.
include funds for completing the CSI project and implementing
Forward-looking cash requirements beyond fiscal 1999 include
new financial systems, as well as funds for additional mains, serv-
capital expenditures and possible contingencies and environmen-
ices, meters, and vehicles. The CSI project includes application
tal matters as discussed in the notes to consolidated financial
software, related technology infrastructure and business process
statements. The Company plans to fund future requirements
changes. Capital expenditures on the CSI project to date include
through internally generated cash flows, credit facilities and its
approximately $26 million in 1997 and $54 million in 1998.
access to the public debt and equity capital markets.
Benefits related to the CSI project include enabling the
Company’s ability to achieve its vision by positioning for future
growth, using industry best practices, timely integration of new
acquisitions and resolution of Year 2000 issues. Capital expendi-
tures for fiscal 1999 are planned to be financed from internally
generated funds and financing activities, as discussed below.
The following table reflects the Company’s capitalization,
including short-term debt except for the portion related to cur-
rent storage gas.
September 30,
1998
1997
(In thousands)
Working capital
Short-term debt(1)
Short-term debt
Long-term debt
Shareholders’ equity
$ 48,909
$ 17,491
456,331
371,158
$ 48,122
$119,178
318,182
327,260
2.1%
54.0%
43.9%
15.6%
41.6%
42.8%
Cash Flows From Financing Activities Net cash provided by
financing activities totaled $25.9 million for 1998 compared with
$47.3 million for 1997 and $22.0 million for 1996. Financing activi-
ties during these periods included issuance of common stock, div-
idend payments, short-term borrowings from banks under the
Company’s credit lines, and issuance and repayments of long-
term debt.
Cash Dividends Paid The Company paid $31.8 million in cash div-
idends during 1998 compared with $26.4 million in 1997 (exclud-
ing dividends of $3.4 million paid by UCGC in the quarter ended
December 31, 1996) and $28.5 million in 1996. Prior to the UCGC
merger in July 1997, Atmos increased its actual annual dividend
rate by $.04 in each of the years presented. It also raised the divi-
dend rate $.04 for 1998 and 1999. Including fiscal 1999, the
Company has increased its dividend rate for 11 consecutive years.
Short-Term Financing Activities At September 30, 1998, the
Total capitalization
$844,980
100.0%
$764,620
100.0%
Company had committed lines of credit totaling $262.0 million,
(1) Includes short-term borrowings associated with working gas inventories.
$250.0 million of which was unused, in order to provide for short-
term cash requirements. These credit facilities are negotiated at
As of the end of fiscal 1998, the debt to capitalization ratio
least annually. At September 30, 1998, the Company also had
had decreased to 56.1% from 57.2% for 1997 which was an
uncommitted short-term credit lines of $80.0 million, of which
increase from 53.4% for 1996. The improvement in 1998 reflects
$25.6 million was unused. Subsequent to September 30, 1998, the
the benefits of 1998 net income in excess of dividend require-
Company began a commercial paper program under which it is
ments and the issuance of equity under the Direct Stock
authorized to issue up to $250.0 million. The commercial paper
52
A T M O S E N E R G Y C O R P O R A T I O N
program is supported by the $250.0 million committed line of
In November 1995, the Company exchanged 313,411 shares of
credit. During 1998, notes payable decreased $100.9 million, after
its common stock valued at approximately $6.4 million in
the application of a portion of the $150.0 million proceeds from
exchange for privately held Oceana Heights Gas Company of
the issuance of 6.75% debentures to reduce notes payable, com-
Thibodaux, Louisiana.
pared with an increase of $38.8 million during 1997 and an
In June 1996, in connection with the acquisition of Monarch
increase of $62.7 million in 1996.
Long-term Financing Activities In July 1998, the Company issued
$150.0 million of 30-year 6.75% debentures. The debentures are
rated A3 by Moody’s and A- by Standard & Poor’s. In November
1996, the Company issued $40.0 million of 6.09% unsecured notes
due in November 1998 to a bank. The proceeds were used to refi-
nance short-term debt. Long-term debt payments totaled $16.3
million, $14.7 million, and $20.7 million for the years ended
September 30, 1998, 1997 and 1996, respectively. The amount for
Gas Company (“Monarch”), 207,366 shares of UCGC’s common
stock were exchanged for the common stock of Monarch. The
merger added approximately 2,900 natural gas customers in the
Vandalia, Illinois area.
The Company believes that internally generated funds, its
credit facilities, commercial paper program and access to the pub-
lic debt and equity capital markets will provide necessary work-
ing capital and liquidity for capital expenditures and other cash
needs for 1999.
1997 excludes repayments of $1.4 million by UCGC in the quarter
Inflation The Company believes that inflation has caused and
ended December 31, 1996. Payments of long-term debt in 1998,
will continue to cause increases in certain operating expenses and
1997 and 1996 consisted of annual installments under the various
has required and will continue to require assets to be replaced at
loan documents. No long-term debt was issued in fiscal 1996.
higher costs. The Company continually reviews the adequacy of
The loan agreements pursuant to which the Company’s
its gas rates in relation to the increasing cost of providing service
Senior Notes and First Mortgage Bonds have been issued contain
and the inherent regulatory lag in adjusting those gas rates.
covenants by the Company with respect to the maintenance of
certain debt-to-equity ratios and cash flows, and restrictions on
the payment of dividends. Also see Note 7 of the accompanying
notes to consolidated financial statements.
UCG Energy and Woodward Marketing, Inc. (“WMI”), sole
members of WMLLC, act as guarantors of up to $12.5 million of
balances outstanding under a $30 million bank facility for
WMLLC. UCG Energy guarantees the payment of up to $5.6 mil-
lion of borrowings under this facility. No balance was outstanding
on this credit facility at September 30, 1998. UCG Energy and
WMI also act as joint and several guarantors on certain purchases
of natural gas and transportation services from suppliers by
WMLLC. UCG Energy has agreed to guarantee such payables up
to $40.0 million. These outstanding obligations amounted to $8.5
million at September 30, 1998.
Issuance of Common Stock The Company issued 755,882, 400,578
and 995,467 shares of common stock in 1998, 1997 and 1996,
respectively, for its Direct Stock Purchase Plan, Employee Stock
Ownership Plans, Long-term Stock Plan for United Cities
Division, Restricted Stock Grant Plan, Outside Directors Stock-
for-Fee Plan, and acquisitions of Oceana Heights and Monarch
Gas Company in 1996. See the Consolidated Statements of
Shareholders’ Equity for the number of shares issued under each
of the plans and for other transactions. Please see Note 9 of the
accompanying notes to consolidated financial statements for the
number of shares registered and available for future issuance
under each of the Company’s plans.
S E L E C T E D Q UA RT E R LY F I N A N C I A L DATA (U N AU D I T E D)
Summarized unaudited quarterly financial data are presented
below. The sum of net income per share by quarter may not
equal the net income per share for the year due to variations in
the weighted average shares outstanding used in computing such
amounts. The Company’s natural gas and propane distribution
businesses are seasonal due to weather conditions in the
Company’s service areas. For further information on its effects on
quarterly results, please see the “Seasonality” discussion included
in the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section herein.
Fiscal year 1998
Quarter ended
December 31, March 31,
June 30,
September 30,
(In thousands, except per share data)
Operating revenues
$295,331
$288,550
$137,311
$127,016
Gross profit
Operating income
Net income (loss)
Net income (loss)
99,601
28,668
20,122
123,971
57,366
50,898
44,493
37,398
6,931
1,676
981
(3,931)
per share
.68
1.25
.06
(.13)
A T M O S E N E R G Y C O R P O R A T I O N
53
Fiscal year 1997
Quarter ended
S E L E C T E D F I N A N C I A L DATA
December 31,
March 31,
June 30,
September 30,
The following table sets forth selected financial data of the
(In thousands, except per share data)
Company and should be read in conjunction with the consolidated
Operating revenues
$280,624
$362,636
$143,714
$119,861
Gross profit
97,269
124,249
59,546
48,590
Operating income
(loss)
Net income (loss)
Net income (loss)
25,968
18,155
37,075
30,625
4,599
(3,018)
(15,331)
(21,924)
financial statements included herein. Amounts for 1998 and 1997
reflect the pooled operations of Atmos and the United Cities
Division. Prior year amounts have been restated for the pooling.
Year ended September 30,
1998
1997
1996
1995
1994
(In thousands, except per share data)
per share
.62
1.04
(.10)
(.74)
M A R K E T P R I C E O F C O M M O N ST O CK A N D R E L AT E D M AT T E R S
The Company’s stock trades on the New York Stock Exchange
under the trading symbol “ATO”. The high and low sale prices and
dividends paid per share of the Company’s common stock for fis-
cal 1998 and 1997 are listed below. Dividends paid for 1997 have
been restated to reflect the merger of Atmos and UCGC account-
Operating revenues
$ 848,208 $ 906,835 $ 886,691
$ 749,555
$ 826,302
Net income
Net income
per share
Cash dividends
per share
Total assets
$
$
$
55,265 $
23,838 $
41,151
$ 28,808
$ 26,772
1.84 $
.81 $
1.42
$
1.06
$
1.05
1.06 $
1.01 $
.98
$
.96
$
.91
at end of year
$ 1,141,390 $1,088,311 $ 1,010,610
$ 900,948
$ 829,385
ed for as a pooling of interests. The high and low prices listed are
Long-term debt
the actual closing NYSE quotes for Atmos shares.
at end of year
$ 398,548 $ 302,981 $ 276,162
$ 294,463
$ 282,647
Quarter ended:
December 31
March 31
June 30
September 30
Quarter ended:
December 31
March 31
June 30
September 30
Fiscal year 1998
Dividends
High
Low
Paid
$ 30 1/2
$24 5/16
30 5/16
31 3/16
3015/16
26 1/16
28 3/16
24 3/4
$.265
.265
.265
.265
$1.06
Fiscal year 1997
Dividends
High
Low
Paid
$24 3/4
$22 5/8
26 1/4
25 1/2
27 7/8
22 1/8
22 1/2
24 1/2
$.251
.252
.252
.255
$1.01
See Note 7 of notes to consolidated financial statements for
restriction on payment of dividends. The number of record holders of
the Company’s common stock on September 30, 1998 was 36,949.
54
A T M O S E N E R G Y C O R P O R A T I O N
C O N S O L I DAT E D F I V E-Y E A R F I N A N C I A L A N D STAT I ST I C A L S U M M A RY (1)
Year ended September 30,
1998
1997
1996
1995
1994
Balance Sheet Data at September 30
(In thousands)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . .
Net property, plant and equipment . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, excluding current maturities . . . .
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . .
$ 134,989
917,860
1,141,390
371,158
398,548
769,706
$ 122,312
849,127
1,088,311
327,260
302,981
630,241
$ 117,589
770,211
1,010,610
329,582
276,162
605,744
$103,904
697,287
900,948
304,349
294,463
598,812
Income Statement Data
(In thousands, except per share data)
Operating revenues . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share - diluted . . . . . . . . . . . . . .
$ 848,208
331,836
55,265
1.84
$ 906,835
329,654
23,838
.81
$ 886,691
324,412
41,151
1.42
Common Stock Data
Shares outstanding (in thousands)
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share . . . . . . . . . . . . . . . . . . .
Shareholders of record . . . . . . . . . . . . . . . . . . . .
Market price - High . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . .
End of year . . . . . . . . . . . . . . . . . .
Book value per share at end of year . . . . . . . . . . .
Price/Earnings ratio at end of year . . . . . . . . . . . .
Market/Book ratio at end of year . . . . . . . . . . . .
Annualized dividend yield at end of year . . . . . . .
Customers and Volumes (as metered)
Gas sales volumes (MMcf ) . . . . . . . . . . . . . . . . . .
Gas transportation volumes (MMcf ) . . . . . . . . . .
Total throughput (MMcf ) . . . . . . . . . . . . . . . . . . .
Meters in service at end of year . . . . . . . . . . . . . .
Total meters and propane customers . . . . . . . . . .
Heating degree days (weighted average) . . . . . . .
Degree days as % of normal . . . . . . . . . . . . . . . .
Average gas sales price per Mcf sold . . . . . . . . . .
Average purchased gas cost per Mcf sold . . . . . .
Average transportation fee per Mcf . . . . . . . . . . .
Statistics
Return on average shareholders’ equity . . . . . . . .
Number of employees . . . . . . . . . . . . . . . . . . . . .
Net plant per meter . . . . . . . . . . . . . . . . . . . . . . .
Operating, maintenance and
administrative expense per customer . . . . . . .
Meters/customers per employee . . . . . . . . . . . .
Times interest earned before income taxes . . . . .
$
$
$
$
$
30,398
30,031
1.06
36,949
31 3/16
24 5/16
28 9/16
12.21
15.52
2.34
3.7%
159,373
56,224
215,597
1,004,532
1,041,932
3,799
$
$
$
$
$
95%
4.87
3.24
.43
15.8%
2,193
914
136
475
3.09
$
$
$
$
$
29,642
29,422
1.01
29,867
27 7/8
22 1/8
24 7/8
11.04
30.71
2.25
4.1%
164,208
48,800
213,008
985,448
1,014,545
3,909
$
$
$
$
$
98%
5.11
3.51
.41
7.3%
2,679
862
183
379
2.04
$
$
$
$
$
29,242
28,994
.98
36,472
31
18
23 3/8
11.27
16.46
2.07
4.2%
178,293
44,146
222,439
976,308
1,002,416
4,043
$
$
$
$
$
101%
4.51
3.15
.43
13.0%
2,863
789
160
350
3.00
$749,555
300,158
28,808
1.06
28,246
27,208
.96
31,782
$
20 5/8
15 7/8
19 3/8
$
$
$
$ 10.77
18.28
1.80
5.0%
166,656
47,647
214,303
949,213
972,572
3,706
$
$
$
$
$
93%
4.07
2.70
.42
10.1%
2,944
735
163
330
2.44
(1) Amounts have been restated for poolings of interests with United Cities in July 1997 and Greeley Gas Company in December 1993,
and share data have been adjusted for a 3-for-2 stock split in May 1994.
$ 85,471
638,787
829,385
267,584
282,647
550,231
$826,302
297,020
26,772
1.05
25,911
25,604
.91
27,005
$
21 1/8
16 3/8
17 3/4
$
$
$
$ 10.33
16.90
1.72
5.1%
170,691
47,882
218,573
943,728
965,421
3,855
$
$
$
$
$
97%
4.41
3.10
.45
10.3%
3,052
677
169
316
2.45
A T M O S E N E R G Y C O R P O R A T I O N
55
B OA R D O F D I R E C T O R S
Top:
Front, from left
Dan Busbee, Lee Schlessman (Honorary Director)
Rear, from left
Richard Cardin, Phillip Nichol, Richard Ware,
Carl Quinn, Robert Best
Bottom:
Front
Vincent Lewis
Rear, from left
Thomas Meredith, Gene Koonce, Travis Bain,
Thomas Garland, Charles Vaughan
56
A T M O S E N E R G Y C O R P O R A T I O N
Travis W. Bain II
President, Bain Enterprises, Inc.
Plano, Texas
Board member since 1988
Vincent J. Lewis
Senior Vice President
Legg Mason Wood Walker Inc.
Rutherford, New Jersey
Committees: Work Session/Annual
Board member since 1997
Meeting (Chairman), Audit,
Committees: Audit, Nominating
Human Resources
Robert W. Best
Chairman of the Board, President
and Chief Executive Officer
Atmos Energy Corporation,
Dallas, Texas
Board member since 1997
Committee: Executive
Dan Busbee
Of Counsel with Gibson Dunn
& Crutcher
Dallas,Texas
Board Member since 1998
Committees: Audit (Chairman),
Human Resources
Richard W. Cardin
Consultant and retired partner
of Arthur Andersen LLP
Nashville, Tennessee
Board Member since 1997
Committees: Audit, Nominating
Dr. Thomas C. Meredith
Chancellor of the University
of Alabama System
Tuscaloosa, Alabama
Board member since 1995
Committees: Audit, Nominating
Phillip E. Nichol
Senior Vice President and Divisional
Hiring Officer for Central Division
PaineWebber Incorporated
Fort Worth, Texas
Board member since 1985
Committees: Nominating (Chairman),
Human Resources, Work Session/
Annual Meeting
Carl S. Quinn
General Partner, Quinn Oil
Company, Ltd.
East Hampton, New York
Board member since 1994
Thomas J. Garland
Chairman of the Tusculum Institute
Committees: Human Resources (Chairman),
Executive
for Public Leadership and Policy
Charles K. Vaughan
Greeneville, Tennessee
Board Member since 1997
Committees: Human Resources,
Work Session/Annual Meeting
Gene C. Koonce
Formerly Chairman of the Board,
President and Chief Executive Officer
United Cities Gas Company
Brentwood, Tennessee
Board member since 1997
Committees: Executive, Nominating,
Work Session/Annual Meeting
Honorary Director
Lee E. Schlessman
President, Dolo Investment Company
Denver, Colorado
Retired from Board in 1998
Formerly Chairman of the Board
Atmos Energy Corporation
Dallas, Texas
Board member since 1983
Committees: Executive (Chairman)
Richard Ware II
President, Amarillo National Bank
Amarillo, Texas
Board member since 1994
Committees: Audit, Work Session/
Annual Meeting
Gene C. Koonce retired from active service
with United Cities Gas Company in December,
1997 with 20 years of service. He remains a
member of our Board of Directors, and his
counsel and industry expertise will continue
to be of great value to Atmos.
C O R P O R AT E I N F O R M AT I O N PAG E
Common Stock Listing
New York Stock Exchange
Trading Symbol
ATO
Stock Transfer Agent and Registrar
Shareholder inquiries on stock transfers may be directed to
Boston EquiServe, L.P., Mail Stop 45-02-64, P.O. Box 644,
Boston, MA 02102-0644. You may call the Interactive Voice
Response System 24 hours a day at 1-800-543-3038, or to
speak to a customer service representative, call between 9 a.m.
and 6 p.m. EST, Monday through Friday.
Independent Auditors
Ernst & Young LLP
2121 San Jacinto, Suite 1500
Dallas, Texas 75201
(214) 969-8000
Form 10-K
The Atmos Energy Corporation Annual Report on Form 10-K
is available upon request from Investor Relations, Atmos Energy
Corporation, P.O. Box 650205, Dallas, Texas 75265-0205, or
by calling 1-800-38-ATMOS (382-8667) 7:30 a.m. – 4:30 p.m.
CST. Form 10-K may also be viewed on Atmos’ website:
http://www.atmosenergy.com.
Annual Meeting of Shareholders
The Annual Meeting of Shareholders will be held at The Westin
Hermitage, 231 Sixth Ave. North, Nashville, Tennessee, at 11 a.m.
CST on Feb. 10, 1999.
This is not an offer to sell nor a solicitation to buy any securities
of Atmos. Shares of Atmos common stock purchased through the
Direct Stock Purchase Plan will be offered only by Prospectus.
Atmos Information by Phone
Atmos Energy Corporation shareholder information is available
by phone seven days a week, 24 hours a day through Boston
EquiServe, L.P.’s interactive voice response system. To perform
stock transfers, listen to current company information and access
daily stock quotes without the assistance of a customer service
representative, call 1-800-543-3038 and have your Atmos Energy
shareholder account number and Social Security or taxpayer ID
number ready.
Atmos on the Internet
Information about Atmos and its business units may be accessed
over the Internet. The Atmos home page, located at
http://www.atmosenergy.com, includes current and historical
financial reports and other investor information, management
biographies, employment opportunities and information about the
company’s operations and service areas. Each business unit has its
own home page, with details about products and services. You can
reach the business units directly at the following web addresses:
http://www.energas.com
http://www.greeleygas.com
http://www.transla.com
http://www.westernkentuckygas.com
http://www.unitedcitiesgas.com
http://www.atmospropane.com
Please visit us on the worldwide web.
Direct Stock Purchase Plan
Atmos Energy Corporation Contacts:
Atmos Energy Corporation has a Direct Stock Purchase Plan that
is available to all investors.
Shareholder and Direct Stock Purchase Plan Information:
1-800-38-ATMOS (382-8667), 7:30 a.m. – 4:30 p.m. CST
For an initial Investment Form or Enrollment Authorization Form
and a Plan Prospectus, please call Atmos Shareholder Relations at
1-800-38-ATMOS (382-8667) 7:30 a.m. – 4:30 p.m. CST; or
Boston EquiServe, L.P., at 1-800-543-3038. The Prospectus is also
available on the Internet at http://www.atmosenergy.com. You
may also obtain information by writing to Shareholder Relations,
Atmos Energy Corporation, P.O. Box 650205, Dallas, Texas
75265-0205.
Financial Information for Securities Analysts,
Investment Managers and General Information:
Lynn Hord
Vice President of Investor Relations
and Corporate Communications
(972) 855-3729
Atmos Energy Corporation
P.O. Box 650205
Dallas, Texas 75265-0205
(972) 934-9227
3100-AR-98