Atmos Energy Corporation 1999 Annual Report Financial Highlights Year ended September 30, 1999 1998 % change (Dollars in thousands, except per share amounts) Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utility net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-utility net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ 690,196 299,794 10,800 6,944 17,744 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,230,537 Total capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per share – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value per share at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total throughput (MMcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Heating degree days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 755,146 0.58 1.10 12.09 195,587 3,374 Degree days as a % of normal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85% Total meters and propane customers at end of year. . . . . . . . . . . . . . . . . 1,077,534 Return on average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7% Shareholders’ equity as a % of total capitalization (including short-term debt) at end of year . . . . . . . . . . . . . . . . . . . . . . 40.1% Shareholders of record. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average shares outstanding – diluted (000’s) . . . . . . . . . . . . . . . . . . . . . . 35,179 30,819 $ 848,208 $ 331,836 $ $ $ 43,332 11,933 55,265 $ 1,141,390 $ 769,706 $ $ $ 1.84 1.06 12.21 215,597 3,799 95% 1,041,932 15.8% 41.5% 36,949 30,031 -18.6% -9.7% -75.1% -41.8% -67.9% 7.8% -1.9% -68.5% 3.8% -1.0% -9.3% -11.2% -10.5% 3.4% -70.3% -3.4% -4.8% 2.6% Table of Contents Letter to Shareholders Growing through Acquisitions Utility Operations Non-Utility Operations Shared Services Financial Information Officers Board of Directors Corporate Information 2 5 10 16 22 23 63 64 65 Atmos at a Glance Year ended September 30, 1999 1998 1997 Meters In Service Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 919,012 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial (including agricultural) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public authority and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,268 14,329 6,386 Total meters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,037,995 Propane customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,539 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,077,534 Heating Degree Days 889,074 94,302 16,322 4,834 1,004,532 37,400 1,041,932 870,747 92,703 17,217 4,781 985,448 29,097 1,014,545 Actual (weighted average) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,374 Percent of normal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85% 3,799 95% 3,909 98% Sales Volumes (MMcf) Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial (including agricultural) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public authority and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,128 31,457 35,741 5,793 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,119 Transportation Volumes (MMcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,468 Total Throughput (MMcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,587 Propane – Gallons (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,291 Operating Revenues (000’s) Gas revenues 73,472 36,083 44,881 4,937 159,373 56,224 215,597 23,412 75,215 37,382 46,416 5,195 164,208 48,800 213,008 25,204 Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 349,691 $ 410,538 $ 452,864 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial (including agricultural) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public authority and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,836 117,382 22,330 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634,239 Transportation revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,101 4,500 Total gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661,840 Propane revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,944 5,412 184,046 161,382 20,504 776,470 23,971 8,121 808,562 29,091 10,555 193,302 168,386 23,898 838,450 19,885 6,385 864,720 33,194 8,921 Total Operating Revenues (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 690,196 $ 848,208 $ 906,835 Other Statistics Gross plant (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,549,258 Net plant (000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965,782 Miles of pipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,670 2,062 $ 1,446,420 $ 917,860 30,108 2,193 $ 1,332,672 $ 849,127 30,902 2,679 G R E E L E Y G A S C O . D E N V E R , C O L O R A D O W E S T E R N K E N T U C K Y G A S C O . O W E N S B O R O , K E N T U C K Y E N E R G A S C O . L U B B O C K , T E X A S AT M O S D A L L A S , T E X A S U N I T E D C I T I E S G A S C O . F R A N K L I N , T E N N E S S E E U N I T E D C I T I E S P R O PA N E G A S , I N C . F R A N K L I N , T E N N E S S E E B U S I N E S S U N I T H E A D Q U A R T E R S U T I L I T Y O P E R AT I O N S P R O PA N E O P E R AT I O N S AT M O S H E A D Q U A R T E R S T R A N S L O U I S I A N A G A S C O . L A FAY E T T E , L O U I S I A N A Headquartered 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 United Cities Propane Gas, Inc. Atmos is a strong company built on a firm foundation, with solid prospects for growth. We are aggressively executing strategies designed to serve us well in an increasingly competitive environment and to continue building value over the long-term. We’re resourceful, implementing new technologies to improve efficiency and enhance customer convenience. We’re building loyalty by providing superior customer service, shown by our high marks in customer satisfaction. We’re growing our customer base through acquisitions, new construction and promoting new gas equipment. We’re committed to the communities we serve and have established strong local brand identities. We’re innovative, preparing to introduce new retail products and services through our unregulated businesses. We’re creating a spirited team of dedicated employees whose productivity and innovation will ensure Atmos’ continued success. Atmos Energy Corporation 1 Letter To Shareholders I am more optimistic about the prospects of Atmos Energy Corporation than I have been at any time since I joined the Company two and a half years ago. Dear Fellow Shareholders: I am more optimistic about the prospects of Atmos Energy Corporation than I have been at any time since I joined the Company two and a half years ago. While that may seem odd given the disappointing earnings year we had in 1999, I want to use the majority of this letter to explain why I feel so confident about the future of Atmos. First, let me address 1999. While we are disappointed with our financial results, we do not believe they are a reflection of Atmos’ true earnings power. Even with a diverse 13-state service area, Atmos was not immune to the worst possible combination of weather conditions in 1999. Winter weather in 1999 was the warmest in Atmos’ history, about 15 percent warmer than normal across Atmos and about 11 percent warmer than last year, reducing heating sales to weather sensitive customers. The exceptionally warm winter was followed by a significant increase in rainfall in West Texas throughout the spring and summer, reducing gas sales to farmers for powering irrigation pumps in what normally is a strong off-season market for Atmos. Our results were further diminished by increased depreciation and interest expense related to assets placed in service but not yet included in rates. In addition, operating and maintenance expenses increased due to the first full year of operation for our Customer Support Center; costs for Year 2000 readiness; improvements in systems, processes and pro- cedures related to the new customer information and billing system and the accounting and human resource systems placed in service; and the costs of a litigation settlement in Louisiana and associated legal fees. Finally, the impact of special items made a very bad year even worse. Let me emphasize that one trying year does not undermine our optimism about the future or lessen our confidence in our ability to be successful. Atmos is a strong company built on a firm foundation, with solid prospects for growth. Our focus and commitment to our vision and strategies for growth have not wavered. In fact, we remain convinced that we are headed in the right direction. In developing our strategies, we foresaw an operating environment characterized by unbundling, convergence of gas and electric providers, and industry mergers. We’re pursuing four strategies designed to serve us well in this environment and to continue building value over the long-term: running our utilities exceptionally well, expanding our non-utility businesses, developing our retail strategy, and making acquisitions. Robert W. Best Chairman of the Board, President and Chief Executive Officer 2 2 Atmos Atmos Energy Energy Corporation Corporation We had many accomplishments in 1999 that we believe will help us achieve our vision for growth and prepare us for future success. Ensuring adequate returns through rate filings. We continually review our rates of return to make sure that we are earning our authorized rate of return in every jurisdiction. This year’s review determined that we were under-earning in our Western Kentucky and Energas divisions. In 1999, Atmos filed for additional revenues totaling $27.3 million in Kentucky, West Texas, and Amarillo. We have proposed alternative rate designs in the filings to mitigate the effects of weather which will help stabilize both customer bills and the Company’s earnings. We expect to have new rates in effect in Kentucky, West Texas and Amarillo during fiscal year 2000. In October 1999, Atmos received a final order from the Louisiana Public Service Commission related to a rate proceeding involving its Trans Louisiana Gas Company division. The favorable decision allowed Trans La to increase its monthly customer charge on November 1, 1999, from $6 to $9, which will help minimize the effects of warm weather on earnings. Trans La also received a three-year extension on a rate stabilization clause authorizing it to earn up to 11.5 percent before sharing benefits with customers. These combined rate proceedings will affect more than 50 percent of the Company’s customer base. Investing in technology to improve efficiency and service. Atmos has been among the most efficient providers of natural gas in the industry, and we are using technology to enhance our efficiency. We are just as committed to providing superior customer satisfaction. Our goal is to balance the efficiencies gained through technology and our customers’ desire Operating and Maintenance Expense Per Customer $200 $150 $100 for quality service with a human touch. We’ve made great strides in enhancing our efficiency $ 50 with our Customer Support Center in Amarillo, Texas, that provides customer call support 24 hours a day, seven days a week. Having just completed the first full year of operation of $ 0 the center, we believe our concept of serving all our customers from a central location is 95 96 97 98 99 sound, although we are fine-tuning our execution. As with the implementation of any new technology, the transition has not always been as smooth as we would have liked. We made the investments in the center and an integrated state-of-the-art customer information system because our goal is to improve both customer service and efficiency. We’ve also re-engineered our human resources and financial systems with the installation of Oracle-based software. The new customer information and Oracle software systems not only improved our productivity, but also addressed many of the Company’s Year 2000 issues. Our Year 2000 planning began in 1996 to manage and minimize risks associated with Year 2000 issues, and we announced that the Company was Year 2000 ready on September 30, 1999. Building customer loyalty. We believe the best way to retain existing customers and attract new ones is by providing unparalleled service at reasonable rates, and making it easy for customers to do business with us. Building customer loyalty grows ever more important as we move toward more customer choice. A utility customer satisfaction survey conducted in 1999 showed that our customers are considerably more satisfied and more loyal than the industry average. As exceptional as the survey results are, we continually seek ways to improve service and strive to exceed the expectations of our customers. Atmos Energy Corporation 3 Letter To Shareholders c o n t i n u e d $1.20 $1.00 $0.80 $0.60 $0.40 Creating a performance culture. Our vision of building value at Atmos and our strate- gies for growth will only come to life in the hands, hearts and minds of skilled, committed employees working every day as one team with a shared set of values and expectations. We are creating an atmosphere at Atmos that fosters, measures and rewards performance. Our Total Rewards program ties compensation for the Board, management and employees to company performance, and addresses ways to improve the workplace environment. By working from the inside out, we are creating a performance culture with employees who take pride in their work and convey that spirit of caring to our customers. Acquisition strategy. Growth through acquisitions is a key component of our strategy for growing earnings and increasing the value of the Company. In October 1999, Atmos entered into a definitive agreement to acquire the Missouri natural gas distribution assets of Associated Natural Gas, part of a wholly-owned subsidiary of Southwestern Energy Company. Under the terms of the agreement, Atmos will purchase the Missouri gas system for $32 Dividend History million in cash. The transaction will add 48,000 customers in Missouri, and is expected to be completed by mid-year 2000, subject to regulatory approvals. Atmos has a proven history of successfully making acquisitions and integrating the operations quickly and efficiently. 1985 1990 1995 2000* * Indicated Annual Dividend Track record of increasing the dividend. Nowhere is our confidence in the future shown more clearly than in Atmos’ history of increasing its dividend. For the 12th consecutive year, Atmos has increased its quarterly dividend. A 3.6 percent increase was approved for fiscal 2000, bringing the regular quarterly dividend to $.285 per share, for an annual indicated dividend of $1.14 per share. The Company has paid 64 consecutive quarterly dividends. Looking ahead. Our actions over the past two and one-half years have established a firm foundation for profitable growth in the more competitive environment we expect in the future. We will continue to be aggressive and proactive, focusing on profitably growing the market share of our utility and non-utility businesses, and making acquisitions to sustain our growth rate. The combined talents and energy of the Atmos Board of Directors, management and employees are dedicated to building the value of Atmos. I’d like to close by recognizing the outstanding contribution of our employees this year in achiev- ing many of our goals and helping to position Atmos for future success. They tirelessly devoted untold hours configuring and testing our new customer information and financial systems, often over nights, weekends and holidays away from home and family. The result is that the conversions were as seamless as possible for our customers. The added urgency of completing our Year 2000 plans required yet another level of dedication and planning by our employees. We counted on the best from them in a very demanding period, and they delivered with unwavering enthusiasm while continuing to provide excellent customer service. The high marks we received in our customer satisfaction survey are a testament to our employees. With this spirited team focused on building value, you can see why I am confident about the future of Atmos. 4 Atmos Energy Corporation Robert W. Best Chairman, President and Chief Executive Officer November 10, 1999 Growing through Acquisitions Growth through acquisitions is a key component of Atmos’ strategy for increasing earnings and building the value of the Company. Atmos is continuing the acquisition strategy that has led to its position today of serving over one million customers in 13 states. The geographic, economic and regulatory diversity created through acquisitions is a strength that sets Atmos apart from other natural gas utilities. In October 1999, Atmos entered into a definitive agreement to acquire the Missouri natural gas distribution assets of Associated Natural Gas, a division of Arkansas Western Gas, which is a wholly-owned subsidiary of Southwestern Energy Company. Under the terms of the agreement, Atmos will purchase the Missouri gas system for $32 million in cash. The trans- action will add 48,000 customers in Missouri, increasing Atmos’ presence in that state. The transaction is expected to be completed by mid-year 2000, subject to regulatory approvals. Growth through acquisitions is a key component of Atmos’ strategy for increasing earnings and building value for the Company. As a larger company, Atmos will have an even greater competitive advantage as the natural gas industry continues toward unbundling and becomes more competitive. The Company continually evaluates acquisition opportunities. Atmos looks for ways through the combination of companies to be more efficient, share resources, eliminate duplications and create opportunities to increase earnings. The combination must create synergies so that the earnings per share of Atmos stock on an annual basis are greater with the combination than for Atmos before the combination. Atmos has completed four major acquisitions since 1986, nearly tripling the number of cus- tomers served. The Company has achieved a track record of successfully making acquisitions, integrating companies quickly and efficiently with its shared services support functions, retaining local brand identities and creating value for its shareholders. This makes Atmos an attractive partner. Atmos Energy Corporation 5 Atmos has re-engineered its human resources and financial systems with the installation of Oracle- based software. Atmos’ new cus- tomer information and human resources and financial systems have not only improved productivity, but also addressed Year 2000 issues. Atmos announced it was Year 2000 ready on September 30, 1999. Leveraging technology to enhance efficiency Atmos has invested in technology that allows us to provide exceptional customer service while improving our operating efficiency. In 1999, we completed the implementation of a state-of-the-art customer information system that integrates our Customer Support Center with other technology used in the field, including automated dispatching of service orders to in-truck terminals and electronic meter reading devices. Customer support associates like Nina Soliz (right) handle calls at our Customer Support Center for all our utility customers 24 hours a day, seven days a week so that our customers can contact us at their convenience. 6 Atmos Energy Corporation [Resourceful] Atmos Energy Corporation 7 [Building Loyalty] 8 Atmos Energy Corporation Serving our customers exceptionally well Customers of all Atmos utility companies are more loyal than the industry average, according to a recent customer satisfaction survey. Building customer loyalty grows ever more important as we move toward more customer choice. We continually seek ways to improve service and strive to exceed the expectations of our customers. Our customers believe that we care about satisfying their needs, according to a recent utility customer satisfaction survey. We continually look for new ways to make it easier to do business with our company, and go the extra step that makes every customer’s experience a positive one. For example, George Teater, a 40-year veteran of Western Kentucky Gas Company, installed a thermostat specially designed for the visually impaired in the home of 94-year-old Hollis Young, a customer in Danville, Kentucky. Atmos Energy Corporation 9 Running Our Utilities Exceptionally Well Utility Operations Snapshot: Atmos serves more than one million natural gas customers in Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Missouri, South Carolina, Tennessee, Texas, and Virginia through five utility business units with their own local brand identities – Energas Company, Greeley Gas Company, Trans Louisiana Gas Company, United Cities Gas Company, and Western Kentucky Gas Company. Atmos’ utility operations remain our core business. We are intensely focused on running our utility operations exceptionally well. We intend to grow earnings year over year by profitably growing our customer base, improving our efficiency and earning our allowed rates of return. We are dedicated to building customer loyalty through ensuring safe, reliable gas service; achieving exceptional customer satisfaction ratings; making it easy for customers to do business with us; providing competitive gas rates; and capitalizing on our strong local brand identities. Financial performance. Utility operations reported net income of $10.8 million on revenues of $621.2 million in 1999, or about 89 percent of total revenues and about 61 percent of total net income. This compares with utility net income of $43.3 million on revenues of $739.9 million in 1998. Utility revenues and net income were lower in 1999 primarily because of winter weather that was about 15 percent warmer than normal and about 11 percent warmer than last year, reducing sales to weather sensitive customers. Enhancing efficiency and convenience. Our 1999 utility operating and maintenance costs of $141 per meter remain among the best in the industry. We are ahead of many com- panies in having the technology that gives Atmos the foundation for exceptional customer service while improving our efficiency. In 1999, the Company completed the implementation of a new customer information system that integrates the Company’s Customer Support Center with other technology used in the field, including automated dispatching of service orders to in-truck terminals and electronic meter reading devices. To make it easy for customers to do business with Atmos, the Customer Support Center han- dles customer calls from all five utility business units 24 hours a day, seven days a week. A net- work of nearly 300 payment centers in convenience and grocery stores offers extended hours to customers. The implementation of the new customer information system included a new bill 10 Atmos Energy Corporation format which provides more information to customers but also makes more information avail- able at the fingertips of our customer support associates to handle customer inquiries. Customer additions. We added new meters in 1999 through internal growth, with the greatest increases occurring in the Greeley Gas and United Cities Gas service areas. The Company’s focus is on profitably adding new customers through new construction, conversion from other energy sources, and by marketing the advantages of additional gas products such as gas logs and gas lights to our residential customers and builders. Our marketing team has been successful in promoting the use of new natural gas applications such as gas-powered chilling technology for cooling large commercial buildings and dehumidification technology that reduces humidity and improves indoor air quality. Both these technologies increase summer sales of natural gas. Earning allowed rates of return. Atmos is seeking $28.4 million in rate increases in Western Kentucky Gas and Energas. A Western Kentucky rate case filed in May 1999 requested $14.1 million in additional revenues. Energas is seeking a total of $14.3 million in additional revenues, filing in early August for $13.2 million, and will request an additional $1.1 million later in 1999 or early 2000. The rate filings incorporate the Company’s strategy to stabilize the effects of weather on the Company’s revenues and customer bills through weather normalization adjustment and rate design. New rates and rate structures are expected to be in effect during 2000. In October 1999, Atmos received a final order from the Louisiana Public Service Commission regarding a rate proceeding involving its Trans Louisiana Gas Company division. The favorable decision allowed Trans La to increase its monthly customer charge on November 1, 1999, from $6 to $9, which will help minimize the effects of warm weather on earnings. Trans La also received a three-year extension on a rate stabilization clause authorizing it to earn up to 11.5 percent before sharing benefits with customers. These combined rate proceedings affect more than 50 percent of the Company’s total customers. Beyond customer satisfaction. One of the key measures of performance in our utility operations is achieving outstanding customer satisfaction ratings. A utility customer satisfaction survey conducted during 1999 shows that we are on the right track – all Atmos utility divisions received excellent satisfaction ratings. Our customer satisfaction ratings are significantly higher than the national average, with nearly 74 percent of our customers totally satisfied with our service, compared with less than 45 percent of customers who are satisfied industrywide. About half our customers feel very loyal toward the Company, an even more significant result as we look toward a more competitive marketplace in the future. We continue to look for ways to enhance customer satisfaction by making sure that our utility divisions are easy to do business with, have reasonable rates, and that we follow up to make sure any problems are solved. We also expanded the information provided on our customer bills, including past usage history, with the implementation of our new customer information system. Atmos Energy Corporation 11 [Growing] 12 Atmos Energy Corporation Atmos has successfully promoted new gas cooling technologies for large customers. A Columbus, Georgia, hospital recently installed a natural gas chiller that handles 75 percent of the cooling require- ments for the facility. The Company has also helped industrial customers whose processes are affected by humidity levels to install desiccant dehumidification systems that remove moisture from the air. The chillers and desiccant systems operate at full capacity during the summer months when gas usage typically declines. Adding new customers Atmos is adding customers through internal growth and acquisitions. Atmos recently announced an agreement to acquire distribution assets in Missouri that will increase our customer count by nearly 5 percent. The Company also has programs to target builders and new construction, convert customers from other energy sources, and assist commercial customers in implementing energy-efficient natural gas equipment. In addition to water and space heating, we are promoting gas logs and gas lights to residential customers. For example, the Company serves a suburban area of Kansas City, Kansas, one of the Company’s fastest growing service areas, with many homes built with beautiful and environmentally-friendly gas logs as well as gas space heating, like the home shown at left. Atmos Energy Corporation 13 Atmos focuses its re- sources so that we can make the most difference in our communities. We target funds and employee volunteer efforts toward communi- ty development and civic programs; health and welfare organizations that improve the well being of those in need; education targeted at kindergarten through 12th grade; and arts and culture organizations that support and improve the quality of life in the community. Supporting our communities We are a strong supporter of the communities we serve. Our employees serve on industrial development boards, in civic and community organizations, even as public officials. Joe Bishop (right), a Trans La service technician, serves on the City Council in Pineville, Louisiana, dedicated to attracting new business to the area and preservation of historical buildings. We believe that being a good corporate citizen builds goodwill and support in the communities we serve. 14 Atmos Energy Corporation [Committed] Atmos Energy Corporation 15 Growing the Market Share of Non-Utility Businesses and Developing a Retail Strategy Non-Utility Operations Snapshot: Natural gas distribution to unregulated agricultural and industrial customers; providing natural gas services through an interest in Woodward Marketing, LLC of Houston; propane distribution to nearly 40,000 customers in four states through United Cities Propane Gas, Inc.; storage operations; and preparing to offer retail products and services to the Company’s one million utility cus- tomers through Atmos Energy Services, Inc. Our strategy is to expand the market share of our non-utility businesses, which includes propane, the sale of natural gas for agricultural and industrial customers in West Texas, a 45 percent interest in a natural gas services company, and natural gas storage. We are also developing strategies to offer retail products and services to our connected utility customers. In 1999, non-utility operations reported net income of $6.9 million or 39 percent of total net income. Propane. Propane net income decreased in 1999 due to weather that was 15 percent warmer than normal and 9 percent warmer than last year. In 1999, the Company narrowed the focus of its propane operations to the more profitable retail and wholesale propane distribution activities, exiting propane appliance sales and service, the transport business and cylinder sales. The Company serves nearly 40,000 propane customers in Tennessee, Kentucky, Virginia and North Carolina, up from 37,400 in 1998. To increase its market share in existing propane service areas, the Company began offering customers the option of purchasing their tanks instead of leasing them. United Cities Propane plans to continue making acquisitions that will create value for the Company by taking advantage of the economies of scale that can be achieved through consolidation of the fragmented propane industry. 16 Atmos Energy Corporation Woodward Marketing, LLC. Woodward Marketing, LLC contributed $7.2 million pre-tax earnings in 1999, up from $3.9 million in 1998, due to increased sales to existing customers, adoption of EITF 98-10 in 1999 and new customer additions. Atmos owns a 45 percent interest in the natural gas services company, which serves the Company, industrial customers, municipalities and natural gas utilities in the Southeast, Midwest and California. Atmos expects Woodward’s growth to continue through increased gas usage by existing customers and by the addition of new customers. Atmos is considering opportunities to market electricity as an added service through Woodward Marketing, LLC. Enermart Energy Services, Inc. The Company serves a large agricultural market and also industrial customers in West Texas through Enermart Energy Services, Inc. The Company took significant steps in 1999 to restructure its industrial and agricultural marketing business and to separate it from the Company’s utility operations. Enermart markets natural gas to farmers for powering irrigation pumps during the spring and summer months. Irrigation revenues in West Texas decreased by 45 percent in 1999 compared with last year, due to rainfall that exceeded average rainfall levels for the region by more than 32 percent. Industrial customers include feedlots and cotton gins, as well as other non-agricultural large natural gas users. Enermart also promotes new natural gas technologies, such as gas- powered electric generators. The Company sells the generators, performs the installation, assists with the startup and provides project financing. The generators significantly reduce electricity costs, require little maintenance and are portable. In 1999, Enermart opened three customer service centers to provide hands-on customer support, including analysis of customer needs and information about new gas equipment and technologies. Atmos Energy Services, Inc. Atmos Energy Services, Inc. (AESI) is preparing to market new retail products and services to Atmos‘ approximately one million existing natural gas customers. AESI is evaluating a number of products and services to offer to customers by developing partnerships with experienced mass marketers. The Company conducted a pilot offering of a utility security product during 1999, and received a very favorable response to the offering. In addition, when unbundling does occur, AESI will offer customers the natural gas commodity, and possibly electricity, as well. Natural gas storage. The Company’s natural gas storage facilities contributed $1.3 million in net income in 1999, compared with $1.8 million in 1998. Underground storage facilities in Kansas and Kentucky allow the Company to purchase natural gas during the summer when prices are lower, and store it for use by the Company or to sell to others during the winter when natural gas prices are typically higher. Atmos Energy Corporation 17 To increase its market share in existing propane service areas, United Cities Propane has begun offering customers the option of purchasing their tanks instead of leasing them. Customers also can pre-buy propane for even greater savings. New propane customers include an experimental farm at the University of Tennessee, above. Pursuing new ways to serve customers through unregulated businesses While utility operations remain our primary business, Atmos is developing its unregulated businesses and pursuing new ways to serve its customers. In West Texas, Enermart Energy Services markets natural gas to industrial customers, as well as agricultural customers who use natural gas to power irrigation pumps. Enermart has pioneered the use of natural gas-powered generators that allow farmers to produce their own electricity for irrigation pumps. Farmers like Freddy Bell of Plainview, Texas, shown with Enermart Vice President Kelley Grimes, are benefiting from lower energy costs and reduced maintenance. 18 Atmos Energy Corporation [Innovative] Atmos Energy Corporation 19 Creating a performance organization Atmos’ spirited employees are among the most productive in the industry. We are creating an atmosphere that fosters, measures and rewards performance. Our employees have been willing time and time again to go the extra mile to provide superior customer service, day or night, weekends and holidays, and this dedication has resulted in exceptional customer satisfaction ratings. For example, Troy Wilson (right), a United Cities Gas service technician, noted an increase in gas usage during his monthly meter reading at a Columbia, Tennessee, hospital and informed the facili- ties manager. The hospital quickly identified and repaired an equipment problem, praising Wilson for his attention to their account instead of just passing on a higher bill. Shown above (from left) are Russell Murph, Energas; Tina Ingrahm, Trans La; Jackie Madrid and Donald Eason, Shared Services. 20 Atmos Energy Corporation [Dedicated] Achieving Best Practices in Shared Services Shared Services Snapshot: A central support group provides administrative and support services to Atmos’ business units, including accounting, customer call support, customer billing, treasury, planning and budgeting, purchasing, legal, human resources, information technology, investor relations and corporate commu- nications, and gas supply. Atmos achieves efficiency and consistency in its day-to-day operations and gains significant economies of scale by having one unit perform primary support functions rather than dupli- cating them in each business unit. This “shared services” structure also enables the Company to quickly and efficiently integrate operations of acquired companies. During 1999, Atmos further enhanced its internal efficiency by establishing new benchmarks for providing support services. By conducting interviews with over 150 highly regarded companies in America, Atmos gained new ideas on ways to provide support services at the optimum cost. Our business unit personnel are partners with shared services personnel, negotiating the services they want as well as appropriate pricing. For example, Atmos’ Purchasing group streamlined its operations by initiating and maintain- ing on-line supply contracts and managing supplier relationships. An electronic ordering process rests with the business units, while the Company still obtains economies of scale by negotiating with suppliers based on the total material requirements of the enterprise. Providing best practices service to the business units at a lesser price creates value for the Company. By controlling our costs of operations, we create value for our customers and shareholders. 22 Atmos Energy Corporation Financial Review Selected Financial Data Market Price of Common Stock and Related Matters Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Responsibility for Financial Statements Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Consolidated Five-Year Financial and Statistical Summary 24 24 25 37 37 38 39 40 41 42 61 Atmos Energy Corporation 23 Selected Financial Data The following table sets forth selected financial data of the Company and should be read in conjunction with the consolidated financial statements included herein. 1999 1998 1997 1996 1995 Year ended September 30, (In thousands, except per share data) Operating revenues . . . . . . . . . . . . . . . . . . . . . $ 690,196 $ 848,208 $ 906,835 $ 886,691 $ 749,555 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per share . . . . . . . . . . . . . . Cash dividends per share . . . . . . . . . . . . . . . . . $ $ $ 17,744 .58 1.10 $ $ $ 55,265 1.84 1.06 $ $ $ 23,838 .81 1.01 $ $ $ 41,151 1.42 .98 $ $ $ 28,808 1.06 .96 Total assets at end of year . . . . . . . . . . . . . . . . $ 1,230,537 $ 1,141,390 $ 1,088,311 $ 1,010,610 $ 900,948 Long-term debt at end of year . . . . . . . . . . . . . $ 377,483 $ 398,548 $ 302,981 $ 276,162 $ 294,463 Market Price of Common Stock and Related Matters 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 fiscal 1999 and 1998 are listed below. The high and low prices listed are the actual closing NYSE quotes for Atmos shares. Fiscal year 1999 Dividends Fiscal year 1998 Dividends High Low Paid High Low Paid Quarter ended: December 31 March 31 June 30 September 30 $ 321⁄4 $ 283⁄8 3211⁄16 265⁄16 263⁄8 231⁄16 24 237⁄8 Quarter ended: December 31 March 31 June 30 September 30 $.275 .275 .275 .275 $1.10 $ 307⁄16 $ 245⁄8 $.265 305⁄16 311⁄16 307⁄8 265⁄16 2813⁄16 253⁄4 .265 .265 .265 $1.06 See Note 4 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, 1999 was 35,179. 24 Atmos Energy Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction Year 2000 Readiness This section provides management’s discussion of Atmos Energy The Year 2000 issues arose because many computer systems and Corporation’s (the “Company” or “Atmos”) financial condition, cash software applications, as well as embedded computer chips in plant and flows and results of operations with specific information on liquidity, equipment currently in use, were constructed using an abbreviated date capital resources and results of operations. It includes management’s field that eliminates the first two digits of the year. On January 1, 2000, interpretation of such financial results, the factors affecting these these systems, applications and embedded computer chips may incor- results, the major factors expected to affect future operating results, rectly recognize the date as January 1, 1900. Accordingly, many com- and future investment and financing plans. This discussion should be puter systems and software applications, as well as embedded chips, read in conjunction with the Company’s consolidated financial state- may incorrectly process financial and operating information or fail to ments and notes thereto. Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995 The matters discussed or incorporated by reference in this Annual Report may contain “forward-looking statements” within the mean- ing of Section 21E of the Securities Exchange Act of 1934. All state- ments other than statements of historical facts included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to consolidated financial state- ments, regarding the Company’s financial position, business strategy and plans and objectives of management of the Company for future operations, are forward-looking statements made in good faith by the Company and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report or in any of the Company’s other documents or oral presentations, the words “anticipate,” “expect,” “estimate,” “plans,” “believes,” “objective,” “forecast,” “goal” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertain- ties that could cause actual results to differ materially from those expressed or implied in the statements relating to the Company’s process such information completely. The Company has been aware of these issues and has continued to address their potential effects on its computer systems, software applications and plant and equipment. State of Readiness In October 1996, the Company established its Year 2000 Project Team with the mission of ensuring that all critical systems, facilities and processes are identified, analyzed for Year 2000 readiness, 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 has a Year 2000 strate- gy in place and has continued to implement its Year 2000 plan to manage and minimize risks associated with the Year 2000 issues. The Company also received comprehensive assessments in April and July 1999, updating an earlier assessment completed in June 1998, by an independent consulting firm, which specializes in such matters, of the risks posed for the Company and its business units by the Year 2000 issues, including assessments of the risks in each area of the Company involving the use of computer technology and assessments of the business and legal risks created for the Company by the Year 2000 issues. Such assessments also addressed the risks associated with the Company’s embedded technologies such as micro-controllers or microchips embedded in non-information tech- operations, markets, services, rates, recovery of costs, availability of nology-related equipment. gas supply, and other factors. These risks and uncertainties include, but are not limited to, national, regional and local economic and competitive conditions, regulatory and business trends and decisions, technological developments, Year 2000 issues, inflation rates, weath- er conditions, and other uncertainties, all of which are difficult to pre- dict and many of which are beyond the control of the Company. Accordingly, while the Company believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations will be realized or will approximate actual results. With respect to information technology (“IT”) systems, the Company has conducted an inventory and review of its application software on all platforms including the mainframe, H-P Unix, local area network and personal computers and has remediated Year 2000 issues relating to such operating environments. Concerning non-IT systems, including embedded technology, the Company has conduct- ed an inventory and review of all of its telecommunications, security access and building control systems, forms, reports and other busi- ness processes and activities as well as the equipment and facilities utilized in the Company’s gas distribution and storage systems and has remediated all Year 2000 issues identified. Atmos Energy Corporation 25 The Company’s Year 2000 plan includes specific timetables for Risks of Year 2000 Issues and Contingency Plans As required by the following categories of tasks for each of its shared services units the United States Securities and Exchange Commission (“SEC”), the and business units with respect to both IT systems and embedded Company has identified what it believes are its “most reasonably likely technology as follows: • Identification of Year 2000 issues—completed; • Prioritization of Year 2000 issues—completed; • Estimation of total Year 2000-related costs—completed; • Implementation of Year 2000 solutions—completed; • Testing of Year 2000 solutions—completed; • Certification of Year 2000 readiness by third party vendors and suppliers—completed; • Monitoring of all systems for changes in current systems that would require changes in Year 2000 plan—completed; • Development of Year 2000 contingency plans—completed; • Final Year 2000 tests—began October 1, 1999, and ongoing, including the Clean Management Program. worst case Year 2000 scenarios.” These scenarios are (i) the temporary interference with the Company’s ability to receive gas from upstream suppliers and deliver gas to customers; (ii) the temporary interference with the Company’s ability to communicate with customers regarding any problems with service they may encounter; and (iii) the temporary inability to send invoices to and receive payments from customers. The “most reasonably likely worst case scenario” associated with the Year 2000 issues would be the Company’s temporary inability to continue to transport and distribute gas to its customers without inter- ruption. In the event the Company and/or its suppliers and vendors were unable to remediate critical Year 2000 issues prior to January 1, 2000, the ability of the Company to deliver gas to its customers with- out interruption could be impacted. In order to address this scenario, the Company has developed contingency plans to continue to deliver The Company has also conducted an inventory and review of gas primarily through manual intervention and other procedures mission critical computer systems provided by outside vendors and should it become necessary to do so. Such procedures include back-up has contacted all major vendors to coordinate their Year 2000 readi- power supply for its critical distribution and storage operations, manu- ness schedules with those of the Company. The Company has al operation of the Company’s gas distribution and storage systems, required vendors who provide mission critical goods or services to and, if necessary, curtailment of supply. The Company’s storage capac- submit to the Company their readiness plans and to certify readiness ity would be used to supplement system supply in the event its suppli- in order to continue to do business with the Company. As discussed ers or gas pipelines are unable to make deliveries. above, the Company has also tested vendor products that provide With respect to communications with customers, which is heavily mission critical goods or services to ensure their Year 2000 readiness. reliant on services provided by third parties, the Company has evaluat- In addition, the Company has identified its key suppliers, including ed Year 2000 readiness by such third parties and has continued to gas suppliers and gas pipelines, and has communicated with them, refine its contingency plans to address any worst case scenarios. including conducting on-site visits, for the purpose of evaluating the Concerning the billing and payment systems, as previously discussed, status of their solutions to their respective Year 2000 issues. the Company has replaced its customer information system, account- Costs to Address Year 2000 Issues As of September 30, 1999, the Company had incurred a total of over $900,000 in direct fees and expenses in connection with its Year 2000 efforts. The Company expects to spend approximately $1.0 million in direct fees and expenses on its Year 2000 efforts by December 31, 1999. In addition, as part of its normal systems upgrade in the ordinary course of busi- ness, the Company has replaced its customer information system, accounting and financial reporting system, and human resources sys- tem. Although these systems are Year 2000 ready, the replacement of these systems was not accelerated to 1999 solely in an attempt to address Year 2000 issues. ing and financial reporting system, and human resources system with systems that are Year 2000 ready, which should substantially diminish the risk of Year 2000 issues. Nevertheless, the Company has devel- oped contingency plans and has continued to refine such plans in case the billing and payment systems prove not to be Year 2000 ready. Despite the Company’s efforts, there can be no assurance that all material risks associated with Year 2000 issues relating to systems and embedded technology 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 26 Atmos Energy Corporation in the aggregate, Year 2000 issues with respect to both its own IT and cases. All the while, as was the case for Atmos in 1999, the Company non-IT systems will be material to its business, operations or financial suffers the negative financial effects of having placed assets in service condition. On the other hand, while the Company has researched the without the benefit of rate relief. In that regard, the Company Year 2000 readiness of its suppliers and vendors, the Company can engaged in three rate proceedings in 1999: a rate investigation in make no representations regarding the Year 2000 readiness status of Trans Louisiana Gas Company (“Trans La Division”) before the systems or parties outside its control, and cannot assess the effect on Louisiana Public Service Commission (“Louisiana Commission”); a it of any non-readiness by such systems or parties. rate case before the Kentucky Public Service Commission (“Kentucky Ratemaking Procedures The Company’s five utility divisions are regulated by various state or local public utility authorities. The method of determining regulat- ed 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 cus- tomers while providing the utilities the opportunity to earn a reason- able return on investment. Commission”) in Western Kentucky Gas Company (“Western Kentucky Division”); and, two rate cases before the cities in Energas Company (“Energas Division”). In August 1998, the Trans La Division filed with the Louisiana Commission requesting a commodity performance mechanism and a rate freeze, and the Louisiana Commission responded by ordering a rate investigation. During the rate proceeding, the Trans La Division sought to: In a general rate case, the applicable regulatory authority, which • Preserve revenues; is typically the state public utility commission, establishes a base mar- • Maintain competitive rates and create a use-based billing method gin, which is the amount of revenue authorized to be collected from for the cost of service; and customers to recover authorized operating expense (other than the cost of gas), depreciation, interest, taxes and return on rate base. The Company’s utility divisions perform annual deficiency studies for each rate jurisdiction to determine when to file rate cases, which are typi- cally filed every two to five years. Substantially all of the sales rates charged by the Company to its customers fluctuate with the cost of gas purchased by the Company. Rates established by regulatory authorities are adjusted for increases and decreases in the Company’s purchased gas cost through auto- matic purchased gas adjustment mechanisms. Therefore, while the Company’s operating revenues may fluctuate, gross profit (which is defined as operating revenues less purchased gas cost) is generally not eroded or enhanced because of gas cost increases or decreases. The overall reduction in net revenue from 1998 to 1999, other than the reduction resulting from the effects of warmer than normal weather, confirms the need for revised rates in certain jurisdictions. This is generally the result of depreciation, operating expenses and interest expense associated with assets placed in service but for which new rates have not been placed in effect to allow the Company to recover the costs associated with those assets and to provide a reason- able return on the investments made. In the regulatory environment, assets have to be placed in service and historical test periods estab- lished before rate cases can be filed. Once filed, regulatory bodies can suspend implementation of the new rates while studying the • Restructure rates to be revenue neutral and reduce weather sensitivity. In October 1999, a settlement was reached and the Louisiana Commission issued an order, effective November 1, 1999, addressing each of these issues as described in Note 3 of notes to the accompa- nying consolidated financial statements. In May 1999, the Western Kentucky Division requested an increase in revenues of approximately $14.1 million from the Kentucky Public Service Commission. In this case the Western Kentucky Division sought: • To support the Company’s business plans with regulatory strategy; • To apply marketing principles to develop rate proposals maximizing customer satisfaction and profitability; • To eliminate revenue deficiency resulting from investments since the last rate case; • To use Year 2000 projected costs to design future rates; • To set rates to recover cost of each service; and • To consistently earn authorized returns via long-term price stability proposals, such as weather normalization adjustment and industrial rate proposals designed to protect industrial margin losses resulting from potential bypass. The hearing is scheduled to begin in December 1999, and the final order is required by statute by April 24, 2000. Atmos Energy Corporation 27 In August 1999, the Energas Division filed rate cases with the net losses or lower net income during the period from April through cities served by its West Texas System and the City of Amarillo. The September of each year. The effect of significantly warmer than nor- Company is seeking to: • Eliminate revenue deficiency resulting from investments since the last rate case; • Develop funding mechanisms for projects which maintain safety and reliability of the system; • Differentiate customer rates and classes by true cost of service; • Earn authorized return on equity in all Energas rate divisions; • Eliminate or reduce the number of future rate filings; • Prepare Energas for unbundling; • Design rates that provide stable income regardless of weather; and mal winter weather in 1999 on the Company’s consolidated volumes delivered is illustrated by the following degree day information. Sales volumes (Bcf) Transportation volumes (Bcf) Total Degree days: Actual % of normal Year ended September 30, 1999 140.1 55.5 195.6 1998 159.4 56.2 215.6 1997 164.2 48.8 213.0 3,374 3,799 3,909 85% 95% 98% • Implement depreciation rates that reflect the actual retirements and The effects of weather that is above or below normal are offset replacements. The City of Amarillo is required by statute to reach a decision on the case by the end of December 1999. The West Texas Cities must reach a decision by the end of January 2000. If a settlement is not reached in either case at the cities’ level, the case will be appealed to the Railroad Commission of Texas. The Company’s rate activity for the last three fiscal years can be summarized as follows: no rate changes in 1999, rate reductions of $1.8 million in 1998, and rate increases of $9.4 million in 1997. For further information regarding rate activity, see Note 3, “Rates,” in notes to consolidated financial statements. in the Tennessee and Georgia jurisdictions served by the United Cities Gas Company Division (“United Cities Division”) through Weather Normalization Adjustments (“WNA”). The Georgia Public Service Commission and the Tennessee Regulatory Authority have approved WNAs. The WNA, effective October through May each year in Georgia, and November through April each year in Tennessee, allow the United Cities Division to increase the base rate portion of cus- tomers’ 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 in revenues of $4.4 million, $.7 million and $2.6 million in 1999, 1998 and 1997, respectively. Approximately 186,000 or 18% of the Company’s meters in service are located in Weather and Seasonality Georgia and Tennessee. The Company’s natural gas and propane distribution businesses and irrigation sales business are seasonal and dependent upon weather conditions in the Company’s service areas. Natural gas sales to resi- dential, commercial, and public authority customers and propane sales are affected by winter heating season requirements. Sales to industrial customers are much less weather sensitive. Sales to agricul- tural customers, who typically use natural gas to power irrigation pumps during the period from March through September, are affect- ed by rainfall amounts. These factors generally result in higher oper- ating revenues and net income during the period from October through March of each year, and lower operating revenues and either The Company recognizes the benefits of mitigating the effects of weather where possible. In that regard, the Company is currently seeking a WNA in its rate case in Kentucky and is seeking to increase its customer charge in Texas to help offset some of the negative effects of weather. However, the Company cannot predict whether it will receive the WNA in Kentucky or the increased customer charges in Texas, or how much benefit might be achieved. For further information regarding the impact of weather and sea- sonality on operating results, see Note 17, “Selected Quarterly Financial Data (unaudited)” in notes to consolidated financial statements herein. 28 Atmos Energy Corporation Capital Resources and Liquidity expenses due to lower pretax income. See “Consolidated Statements (SEE “CONSOLIDATED STATEMENTS OF CASH FLOWS”) of Cash Flows” for other changes in assets and liabilities. Fiscal 1999, like fiscal 1998, was a year in which total cash out- Cash Flows from Investing Activities A substantial portion of the flows exceeded total cash inflows. This was generally the result of the Company’s cash resources is used to fund its ongoing construction combination of lower than normal cash flows from operating activi- program in order to provide natural gas services to a growing cus- ties as a result of warmer than normal weather, higher than normal tomer base. Net cash used in investing activities totaled $109.6 mil- capital expenditures and mandatory long-term debt retirement. This lion in 1999 compared with $118.8 million in 1998 and $121.1 mil- cash shortfall was financed with short-term debt and sales of com- lion in 1997. In 1998, the Company received $16.0 million from the mon stock through the Company’s Employee Stock Ownership Plan sale of office buildings and an airplane. Capital expenditures in fiscal (“ESOP”) and its Direct Stock Purchase Plan (“DSPP”). Cash Flows from Operating Activities Cash flows from operating activities as reported in the consolidated statement of cash flows totaled $84.7 million for 1999 compared with $91.7 million for 1998 and $68.7 million for 1997. The decrease in net cash provided by operating activities from 1998 to 1999 was the result of lower net income in 1999 primarily due to lower sales volumes because of 11% warmer winter weather, more rainfall in its agricultural service area and increased operating expenses. The increase in net cash provided by operating activities from 1997 to 1998 was the result of including a full 12 months of activity for the United Cities Division in the 1998 statement of cash flows for the combined companies. Using 1997 beginning balances for United Cities Gas Company (“UCGC”) as of 1999 amounted to $110.4 million, compared with $135.0 million in 1998 and $122.3 million in 1997. Currently budgeted capital expen- ditures for fiscal 2000 total approximately $75 million and include funds for additional mains, services, meters, and equipment. Completion of technology infrastructure and business process changes, implementation of the Oracle enterprise resource planning system, and Year 2000 readiness in 1999 allowed the Company to significantly reduce its planned capital expenditures for fiscal 2000. Capital expenditures for fiscal 2000 are planned to be financed from internally generated funds and financing activities as discussed below. The excess of cash outflows over inflows has resulted in an increase in debt as a percentage of total capitalization, including short-term debt, except for the portion related to current storage gas, December 31, 1996 resulted in large swings in certain seasonal asset as shown in the table below. and liability accounts like accounts receivable and accounts payable. The changes in deferred charges and other assets and other current liabilities in 1997 and 1998 were related to merger and integration costs accrued and the related regulatory assets recorded in the fourth quarter of 1997. The $35.7 million increase in accounts receivable in 1999 was due to a change in over/under recovered gas costs from a September 30, 1999 1998 (In thousands) Working capital Short-term debt (1) $ 44,653 $ 48,909 credit (over-recovered) balance of $16.2 million at September 30, Short-term debt $123,651 13.8% $ 17,491 2.1% 1998 to a debit (under-recovered) balance of $7.6 million at Long-term debt 395,331 44.1% 456,331 54.0% September 30, 1999, and a temporary suspension in service cutoffs and normal efforts to collect past due receivables in connection with the Company’s conversion to the new customer information and billing system. The over-recovered balance from 1998 was returned Shareholders’ equity 377,663 42.1% 371,158 43.9% Total capitalization $896,645 100.0% $844,980 100.0% (1) Includes short-term borrowings associated with working gas inventories. to customers through reductions in their 1999 bills. The $12.0 million The debt as a percentage of total capitalization was 57.9% and increase in deferred charges and other assets net of non-cash 56.1% at September 30, 1999 and 1998, respectively. The amounts in 1999 was primarily due to increased pension assets. The Company’s longer term plans are to decrease the debt to capitaliza- $19.4 million increase in accounts payable in 1999 was primarily due tion ratio to nearer its target range of 50-52% through cash flow to increased gas costs payable. The $11.9 million decrease in taxes generated from operations, continued issuance of new common payable in 1999 resulted from approximately 70% lower income tax Atmos Energy Corporation 29 equity ratios and cash flows, and restrictions on the payment of divi- stock under its DSPP and ESOP, and reduction of capital expenditures dends. See Note 4 of the accompanying notes to consolidated finan- to the range of $75.0 million to $80.0 million from the range of cial statements for more information on these covenants. $110.4 million to $135.0 million in 1999 and 1998. See Note 6 “Contingencies” for information regarding guaran- Cash Flows from Financing Activities Net cash provided by financ- ing activities totaled $28.7 million for 1999 compared with $25.9 tees of certain accounts payable and short-term borrowings of Woodward Marketing, LLC (“WMLLC”). million for 1998 and $47.3 million for 1997. Financing activities dur- Issuance of Common Stock The Company issued a total of ing these periods included issuance of common stock, dividend pay- 849,481, 755,882 and 400,578 shares of common stock in 1999, ments, short-term borrowings from banks under the Company’s cred- 1998 and 1997, respectively, under its various plans. See the it lines, and issuance and repayment of long-term debt. Consolidated Statements of Shareholders’ Equity and Note 7 of the Cash Dividends Paid The Company paid $33.9 million in cash divi- dends during 1999 compared with $31.8 million in 1998 and $26.4 million in 1997 (excluding dividends of $3.4 million paid by UCGC in accompanying notes to consolidated financial statements for the number of shares previously issued and available for future issuance under each of the Company’s plans. the quarter ended December 31, 1996). Atmos raised the dividend Future Capital Requirements The Company believes that internally rate a total of $.04 per share for both 1998 and 1999. generated funds, its credit facilities, commercial paper program and Short-Term Financing Activities At September 30, 1999, the Company had committed lines of credit for $250.0 million and $12.0 million to provide for short-term cash requirements. These credit facil- ities are negotiated at least annually. At September 30, 1999, the Company also had uncommitted short-term credit lines of $74.0 mil- lion, of which $70.4 million was unused. In October 1998, the Company began a commercial paper program under which it is authorized to issue up to $250.0 million. The commercial paper pro- gram is supported by a $250.0 million committed line of credit. At September 30, 1999, the Company had $152.7 million of commer- access to the public debt and equity capital markets will provide nec- essary working capital and liquidity for capital expenditures and other cash needs for fiscal 2000. The Company has access to $262.0 mil- lion under its committed lines of credit and $74.0 million under its uncommitted lines. A committed line of credit of $250.0 million is used to support the Company’s $250.0 million commercial paper pro- gram. In early fiscal 2000, the Company plans to seek regulatory approvals and register a shelf offering with the SEC for the issuance from time to time of up to $500 million in debt and equity securities for general corporate purposes. cial paper outstanding. During 1999, short-term debt increased Pro Forma Statement of Cash Flows for 1997 Because of the pooling $101.9 million due largely to lower net income and cash require- of interests of Atmos, which has a September 30 fiscal year-end, with ments of $61.0 million for repayments of long-term debt and capital UCGC, which had a December 31 year-end, the activities of UCGC for expenditures of $110.4 million. Short-term debt decreased $100.9 the quarter ended December 31, 1996 were included in the restated million in 1998, due to the application of a portion of the $150.0 1996 consolidated statement of cash flows instead of the 1997 consoli- million proceeds from the issuance of 6.75% debentures. Short-term dated statement of cash flows. As a result, amounts in the 1997 consoli- debt increased $38.8 million during 1997. dated statement of cash flows as reported are different than they would Long-Term Financing Activities No long-term debt was issued in fis- cal 1999. 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 and Poor’s. Long-term debt payments totaled $61.0 million, $16.3 million, and $14.7 million for the years ended September 30, 1999, 1998 and 1997, respectively. The amount for 1997 excludes repayments of $1.4 million by UCGC in the quarter ended December 31, 1996. Payments of long-term debt in 1999, 1998 and 1997 con- sisted of annual installments under the various loan documents. The loan agreements pursuant to which the Company’s Senior Notes and First Mortgage Bonds have been issued contain covenants by the Company with respect to the maintenance of certain debt-to- have been, had they included a full 12 month’s activity for UCGC. The following amounts summarize the pro forma condensed con- solidated statement of cash flows of Atmos and UCGC for the full 12 months ended September 30, 1997. Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities Decrease in cash Cash at beginning of year Cash at end of year (In thousands) $ 60,278 (131,286) 68,267 (2,741) 8,757 6,016 $ 30 Atmos Energy Corporation Results of Operations – Consolidated YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998 To assist in management’s discussion of results of operations, the following table presents the effects of certain special items and weather on reported consolidated net income. Earnings per share amounts presented in this discussion are on a diluted basis. 1999 Per Share Amount Year ended September 30, 1998 Per Share Amount (In thousands, except per share data) 1997 Per Share Amount Net income as reported $ 17,744 $ .58 $ 55,265 $1.84 $ 23,838 $ .81 Special items: Management reorganization Reserve for integration costs Sale of assets Litigation settlement Normalized net income except for effects of weather Effects of weather Normalized net income — — — 2,070 19,814 28,224 — — — .07 .65 .91 $ 48,038 $1.56 — — (2,244) — 53,021 3,485 $ 56,506 — — (.07) — 1.77 .11 $1.88 2,800 12,630 — — 39,268 3,571 $ 42,839 .10 .43 — — 1.34 .12 $ 1.46 Net Income as Reported The Company reported net income of normal efforts to collect past due receivables in connection with the $17.7 million, or $.58 per diluted share, on operating revenues of Company’s conversion to the new customer information and billing $690.2 million for the fiscal year ended September 30, 1999. Net system. In addition to lower gross profit resulting from adverse income for 1998 was $55.3 million, or $1.84 per diluted share, on weather conditions, gross profit for the year was reduced $4.3 million operating revenues of $848.2 million, which included one-time gains by reserves established for deferred gas costs that are not expected to totaling $2.2 million or $.07 per diluted share, from the sales of real be recoverable. estate and equipment owned by the United Cities Division. Finally, 1999 results were positively impacted by a change in Results for the year were negatively impacted by the warmest win- accounting principle adopted by WMLLC, a gas marketing and servic- ter on record for Atmos. Across the Atmos system, weather was more es company in which Atmos owns a 45% interest. WMLLC adopted than 15 percent warmer than normal and more than 11 percent Emerging Issues Task Force Issue No. 98-10, “Accounting for warmer than last year. Rainfall in West Texas exceeded average rainfall Contracts Involved in Energy Trading and Risk Management levels for the region by more than 32% during the 1999 irrigation Activities” (“EITF 98-10”), the effect of which added $2.4 million to season, resulting in a 43% decrease in irrigation sales over last year. In other income. addition, increased depreciation and interest expense related to assets For fiscal year 1998, the Company reported net income of $55.3 placed in service in advance of recognition in rates adversely affected million, or $1.84 per diluted share, on operating revenues of $848.2 financial results. Earnings were also reduced by a charge in the second million. The 1998 net income included one-time gains totaling $2.2 quarter of $.07 per share for settlement of litigation in Louisiana. million or $.07 per diluted share, from the sales of real estate and Net income for 1999 was also negatively impacted by operating equipment. Although revenues for 1998 were lower as a result of win- and maintenance expenses that were higher than last year as a result ter weather that was 5% warmer than normal, as well as warmer than of the first full year of operation of the Company’s Customer Support 1997, earnings improved due to gains on asset sales, lower operation Center in Amarillo; process improvement initiatives related to the new and maintenance expenses and increased irrigation sales. Operation customer information and billing system and the accounting and and maintenance expenses were lower for 1998 due to a company- human resource systems placed in service during the year; and Year wide restructuring of the organization and Atmos’ integration of the 2000 readiness initiatives. Operation expenses also included increased United Cities Division. Sales of gas in West Texas to farmers for reserves of $5.0 million for the possible write-off of accounts receiv- able resulting from a temporary suspension in service cutoffs and Atmos Energy Corporation 31 fueling irrigation pumps increased due to hot and dry summer WMLLC adopted EITF 98-10, the effect of which added $2.4 million weather in 1998. Irrigation volumes increased 34% in 1998 to equity in earnings of unconsolidated investment. compared with 1997. Interest income was $.8 million, $1.5 million and $2.2 million for For fiscal year 1997, the Company reported net income of $23.8 1999, 1998 and 1997, respectively. The decreases in 1998 and 1999 million, or $.81 per share, on operating revenues of $906.8 million. were due to maintaining lower overnight cash balances for short- The 1997 net income included the effects of special after-tax charges term investing. related to management reorganization ($2.8 million or $.10 per share) Other, net was $2.2 million, $4.3 million and $(.3) million for and reserves related to the UCGC merger and integration ($12.6 mil- 1999, 1998 and 1997, respectively. The increase from 1997 to 1998 lion or $.43 per share). Excluding the effect of these charges, the was primarily due to the $3.3 million gain from sale of certain assets Company’s net income would have been $39.3 million or $1.34 per obtained in the merger with UCGC. The $2.2 million in 1999 was pri- share in 1997, compared with $41.2 million, or $1.42 per share for marily due to income from performance-based rates (“PBR”) which 1996. The 1997 results include UCGC, which merged with Atmos were implemented in Kentucky in 1998. effective July 31, 1997. Interest Charges Interest charges totaled $37.1 million, $35.6 million Special Items The Company became successor in interest in connec- and $33.6 million in 1999, 1998 and 1997, respectively. The increases tion with a lawsuit filed against a gas company it acquired in for 1998 and 1999 were related to increases in total debt outstanding Louisiana in 1995. In 1999, the Company settled the lawsuit for for funding the infrastructure, technology, process changes and cus- $3.25 million or $2.07 million after-tax. tomer support investments made in 1997, 1998 and 1999. In 1998, the Company sold UCGC’s former headquarters office building in Brentwood, Tennessee; two office buildings and a piece of land in Franklin, Tennessee that UCGC had held for investment; and an airplane. 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) in related costs. In connection with the UCGC merger and integration in 1997, the Company recorded approximately $17.0 million of transaction costs and $42.8 million for separation and other costs. The Company believes a significant amount of these costs will be recovered through rates and future operating efficiencies of the combined operations. Therefore, the Company recorded these costs as regulatory assets and 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, see Note 2 of notes to consolidated financial statements. Consolidated Other Income, Interest Charges and Income Taxes Income Taxes The provision for income taxes was $9.6 million, $31.8 million and $14.3 million for 1999, 1998 and 1997, respective- ly. Changes in income taxes are primarily related to changes in pre- tax income. For further information regarding income taxes, see Note 5 of notes to consolidated financial statements. Net Income by Segment The Company has three business seg- ments: utility operations, propane operations and energy services, which includes the Company’s 45% interest in WMLLC. The follow- ing table sets forth the net income (loss) of each of these segments for 1999, 1998 and 1997. Year ended September 30, 1999 1998 1997 (In thousands) $10,800 $ 43,332 $19,739 (869) 7,813 (66) 11,999 (90) 4,189 Utility Propane Energy Services Reported net income $17,744 $ 55,265 $23,838 For additional financial information regarding the Company’s segments, see Note 12 of notes to consolidated financial statements Other Income Equity in earnings of unconsolidated investment and the following discussion of the “Results of Operations” for each amounted to $7.2 million, $3.9 million and $3.3 million for 1999, segment. 1998 and 1997, respectively. The increase for 1999 was primarily attributable to a change in accounting principle adopted by WMLLC. 32 Atmos Energy Corporation Results of Operations – Utility through to end users, and rate decreases implemented in 1998. Sales Key financial and operating data for the Company’s utility opera- to weather sensitive residential, commercial and public authority cus- tions are highlighted in the following table. Year ended September 30, 1999 1998 1997 (Dollars in thousands, except Mcf data) Financial tomers decreased approximately 10.1 billion cubic feet (“Bcf”) in 1999 while sales and transportation volumes delivered to industrial and agricultural customers decreased approximately 2.1 Bcf. Total sales and transportation volumes delivered decreased 6% to 180.7 Bcf in 1999, as compared with 193.0 Bcf in 1998. The volume decrease was primarily due to lower demand as a result of weather Operating revenues $ 621,211 $ 739,930 $ 807,428 that was 11% warmer in 1999 than in 1998. Purchased gas cost Gross profit Operating expenses Litigation settlement Operating income Other income Interest charges Income taxes Net income 343,338 277,873 225,623 3,250 49,000 2,763 35,799 5,164 438,920 301,010 200,345 — 100,665 843 33,181 24,995 505,716 301,712 240,499 — 61,213 1,242 30,882 11,834 $ 10,800 $ 43,332 $ 19,739 Operating Sales volumes (MMcf): Residential Commercial Public authority and other Industrial Total Transportation (MMcf) Total volumes (MMcf) Meters in service, 67,128 31,457 5,793 20,901 125,279 55,468 180,747 73,472 36,083 4,937 22,256 136,748 56,224 192,972 75,215 37,382 5,195 27,545 145,337 48,800 194,137 end of year 1,037,995 1,004,532 985,448 Average gas sales price/Mcf Average cost of gas/Mcf Average margin per Mcf sold Average transportation revenue/Mcf $ $ $ $ 4.71 2.74 1.97 .42 $ $ $ $ 5.17 3.21 1.96 .43 $ $ $ $ 5.36 3.48 1.88 .41 YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998 Operating revenues decreased approximately 16% to $621.2 mil- lion in 1999 from $739.9 million in 1998 due to a decrease of 8% in sales volumes and a decrease of 9% in the average sales price per thousand cubic feet (“Mcf”) of gas sold. The decrease in sales price reflects a decrease in the commodity cost of gas, which is passed Gross profit decreased by approximately 8% to $277.9 million in 1999 from $301.0 million in 1998. Factors contributing to the lower gross profit were a decrease in sales volumes of 11.5 Bcf or 8% due to the effect of 11% warmer weather than in 1998, rate decreases totaling approximately $1.8 million implemented in fiscal 1998 in Colorado and Virginia and a reserve of $4.3 million established for deferred gas costs that are not expected to be recoverable. Operating expenses increased $25.3 million or 13% to $225.6 mil- lion in 1999. The increase in operating expenses was due to the first full year of operation of the Company’s Customer Support Center in Amarillo; process improvement initiatives related to the new customer information and billing system and the accounting and human resource systems placed in service during the year; and Year 2000 readiness ini- tiatives. Operation expenses also included increased reserves of $5.0 million for the possible write-off of accounts receivable resulting from a temporary suspension in service cutoffs and normal efforts to collect past due receivables in connection with the Company’s conversion to the new customer information and billing system. YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1997 Utility operating revenues decreased approximately 8% to $739.9 million in 1998 from $807.4 million for 1997 due to a decrease of 6% in sales volumes and a decrease of 4% in the average sales price per Mcf. The decrease in sales volumes resulted from weather that was 3% warmer than 1997 and 5% warmer than 30-year normals. Sales volumes and revenues were also reduced by certain industrial customers switching from sales service to transportation service. Gross profit was not significantly changed at $301.0 million for 1998 as compared with $301.7 million for 1997. The switching from sales to transportation service did not significantly affect gross profit for 1998. Operating expenses decreased $40.2 million for 1998 as compared with 1997 primarily due to a $20.3 million reserve for integration includ- ed in 1997, a $4.4 million charge for a management reorganization in Atmos Energy Corporation 33 1997, and a significant reduction in 1998 operating expenses due to the Inc. in September 1998. The Company exited the less profitable company-wide restructuring of the organization and the integration of propane transportation, cylinder exchange, and appliance sales and the United Cities Division. Interest charges increased 7% to $33.2 mil- service businesses in 1999. lion primarily due to an increased level of debt and slightly higher aver- Purchased gas cost decreased $6.5 million from $17.7 million in age short-term rates in 1998 as compared with 1997. 1998 to $11.2 million in 1999 due primarily to decreased wholesale Results of Operations – Propane Key financial and operating data for the propane operations are presented in the following table. volumes sold. Additionally, the average cost per gallon decreased $.09 per gallon from $.53 per gallon in 1998 to $.44 per gallon in 1999. This decrease was partially offset by the cost of increased retail gallons sold due to the acquisitions made during fiscal 1998. Year ended September 30, Operating expenses increased $1.6 million from $10.8 million in 1999 1998 1997 1998 to $12.3 million in 1999 due primarily to the acquisitions made (Dollars in thousands, except per gallon data) during fiscal 1998. Financial Operating revenues $ 22,944 $ 29,091 $ 33,194 Purchased gas cost Gross profit Operating expenses Operating income (loss) Other income Interest charges Income tax benefit 11,155 11,789 12,332 (543) 482 1,231 (423) Net income (loss) $ (869) $ 17,709 11,382 10,763 619 174 897 (38) (66) 21,193 12,001 11,596 405 159 744 (90) (90) $ Operating Propane heating degree days: Actual % of normal 3,440 85% 3,799 94% 3,847 96% Sales volumes (000 gallons): Retail Wholesale Total Average selling price/gallon Average cost/gallon 19,700 2,591 22,291 $ $ .88 .44 17,229 6,183 23,412 $ $ .88 .53 17,145 8,059 25,204 $ $ .90 .65 Interest expense increased $.3 million due to increased debt related to the acquisitions in 1998 and slightly higher interest rates in 1999. YEAR ENDED SEPTEMBER 30, 1998, COMPARED WITH YEAR ENDED SEPTEMBER 30, 1997 Revenues from propane operations decreased from $33.2 million in 1997 to $29.1 million in 1998 primarily due to the decreased sell- ing price per gallon to retail and wholesale customers. 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 retail gallon sales. The increase in retail volumes sold resulted from the acquisitions discussed above. 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 gal- lon. Partially offsetting this decrease was increased gas purchased for retail sales in 1998 as compared to 1997. Operating expenses decreased from $11.6 million in 1997 to $10.8 million in 1998 primarily due to decreased administrative Customers, end of year 39,539 37,400 29,097 and general expenses due to decreased bad debt expense and a YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998 Propane revenues decreased $6.2 million from $29.1 million in 1998 to $22.9 million in 1999 primarily due to decreased wholesale volumes sold as a result of the implementation of the Company’s plan to exit the wholesale propane supply and transportation busi- ness. Partially offsetting this decrease was an increase in the retail gallons sold as a result of the acquisitions of Ingas, Inc. in May, 1998; Harris Propane Gas Company, Inc. in July 1998; Massey Propane Gas Company and E-Con Gas, Inc. in August 1998; and Shaw LP Gas, reduction of staff through attrition during 1998. Partially reducing this decrease was an increase in depreciation and amortization 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 $.7 million in 1997 to $.9 million in 1998 due to increased short-term borrowings and long-term debt associated with the acquisitions in 1998, as well as increased short- term borrowings to cover cash flow deficits from decreased sales. 34 Atmos Energy Corporation Results of Operations – Energy Services Enermart had previously classified as operation expense being classi- This segment is currently composed of four parts. Atmos Storage, Inc., owns underground storage fields in Kansas and Kentucky and pro- fied as cost of gas in 1999. Decreased irrigation volumes in West Texas and storage withdrawals in Kansas and Tennessee also reduced oper- vides storage services to the United Cities Division and the Greeley Gas ating costs. Company (“Greeley Division”) and other non-regulated customers. Atmos Energy Services, Inc., (“AESI”) markets gas to irrigation and industrial customers in West Texas through Enermart Energy Services Trust (“Enermart”) and to industrial customers in Louisiana, and is developing plans for marketing various non-regulated services and products. Atmos Energy Marketing, LLC, owns the Company’s 45% investment in WMLLC, a gas marketing and energy management serv- ices business. Atmos Leasing, Inc., leases buildings and vehicles to the Other income decreased $4.9 million in 1999 from 1998 primarily due to a $3.3 million gain on sale of assets in 1998, as discussed below. Equity in earnings of unconsolidated investment increased $3.2 million in 1999 from 1998 primarily because of the $2.4 million of income resulting from WMLLC’s adoption of EITF 98-10 in 1999. Interest charges decreased $1.3 million due primarily to decreased short-term debt in 1999 as compared with 1998. YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH YEAR ENDED United Cities Division and gas appliances to residential customers. SEPTEMBER 30, 1997 Key financial data for the energy services segment are set forth below. Operating revenues increased 18% from $68.4 million for 1997 to $80.7 million for 1998 due to increases of $10.7 million in non-regulat- Year ended September 30, ed West Texas irrigation and industrial revenues, and $1.6 million for gas 1999 1998 1997 storage operations. The increase in irrigation and industrial revenues was $ 7,813 $ 11,999 $ 4,189 piece of land in Franklin, Tennessee that UCGC had held for invest- Operating revenues $ 53,416 $ 80,672 $ 68,389 (Dollars in thousands) Purchased gas cost Gross profit Operating expenses Operating income Other income (loss) Equity in earnings of unconsolidated investment Interest charges Income taxes Net income Gas Sales (MMcf): Irrigation Industrial Total 43,284 10,132 4,350 5,782 (96) 7,156 215 4,814 61,228 19,444 7,849 11,595 4,834 3,920 1,501 6,849 52,448 15,941 10,950 4,991 467 3,254 1,969 2,554 9,655 5,185 14,840 17,018 5,607 22,625 12,743 6,094 18,837 YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998 Operating revenues decreased 34% from $80.7 million in 1998 to $53.4 million in 1999 due primarily to decreased West Texas non- regulated irrigation and industrial revenues. The decrease in irrigation revenues was due to increased rainfall and cooler summer tempera- tures in West Texas. Storage revenues also decreased due to decreased volumes withdrawn from underground storage as a result of warmer than normal winter weather in Kansas and Tennessee. Operating expenses decreased $3.5 million in 1999 due primarily to Enermart entering into an all-inclusive gas transportation service agreement with the Energas Division which resulted in costs which primarily due to hotter and drier than normal weather in West Texas in 1998. The increase in storage revenues was due to increased volumes withdrawn from underground storage in 1998 as compared with 1997. Like the utility and propane operations, gas storage volumes and rev- enues vary in relation to winter heating degree days. Operating expenses decreased $3.1 million in 1998 as compared with 1997 due primarily to operating efficiencies and cost savings from restructuring irrigation and gas storage operations. Other income increased to $4.8 million for 1998 as compared with $.5 million for 1997. The increase was primarily due to the sales of UCGC’s former headquarters office, two office buildings and a ment, and an airplane. Also contributing to the increase was gas bro- kering and utilization of storage capacity in excess of that dedicated to regulated markets to serve certain non-regulated markets. Interest charges decreased $.5 million in 1998 as compared with 1997 due primarily to reduced debt balances in Enermart, AESI’s wholly-owned trust that conducts non-regulated gas marketing oper- ations in West Texas. Equity in Earnings of WMLLC The Company accounts for its 45% investment in WMLLC using the equity method of accounting. Against the 45% of WMLLC’s net income before tax, 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 cus- tomer contracts and goodwill, and is being amortized over 10 and 20 years, respectively, as well as the provision for income taxes. Atmos Energy Corporation 35 The following table presents the WMLLC financial results recorded not predict the outcome of the approximately $28.4 million of rev- by Atmos for the years ended September 30, 1999, 1998 and 1997. enue increases it is seeking in Texas and Kentucky. WMLLC has adopted the calendar year for financial reporting purposes. Weather The Company’s natural gas and propane sales volumes and Twelve months ended September 30, related revenues are directly correlated with space heating require- 1999 1998 1997 ments that result from cold winter weather. Its agricultural sales vol- (In thousands) umes are associated with the rainfall levels during the growing sea- son in its West Texas irrigation market. Weather is a significant factor WMLLC net income before taxes Atmos share @ 45% Less: Amortization of excess purchase price Provision for taxes Atmos equity in $ 15,902 7,156 $ 8,711 3,920 $ 7,231 3,254 407 2,362 400 1,337 359 1,100 WMLLC earnings $ 4,387 $ 2,183 $ 1,795 influencing the Company’s performance. Control of Expenses Historically, the Company has been able to budget and control operating expenses and investment within the amounts authorized to be collected in rates, and intends to continue to do so. The ability to control expenses is an important factor that will influence future results. Environmental Matters The Company is involved in certain environ- mental matters and expenditures to comply with these laws and reg- The net income before taxes of WMLLC increased from $7.2 mil- ulations are expected to be recovered through rates, insurance, or lion for 1997, to $8.7 million for 1998, to $15.9 million for 1999, shared with other potentially responsible parties. These matters are due to growth in number of customers and gas marketing volumes not expected to materially affect the results of operations, financial and revenues each year. Additionally, WMLLC adopted EITF 98-10 in condition or cash flows of the Company. See Note 6 of notes to con- 1999, the effect of which added $2.4 million to the Company’s equi- solidated financial statements for further information. ty in earnings of unconsolidated investment. Performance-based Regulation Regulators in Georgia, Kentucky Factors Influencing Future Performance and Tennessee allow the Company and its customers to share in pur- Performance of the Company in the near future will primarily depend on the results of its utility operations since utility operations are expected to continue to be the substantial contributor to the chased gas cost savings when the Company can obtain gas supplies below certain benchmark indices. Acceptance of such incentives in other states would contribute to the profitability of the Company’s Company’s consolidated net income. Because of the changing energy utility operations. marketplace, there are several factors that will influence Atmos’ Deregulation or Unbundling The Company is closely monitoring future financial performance. Some of these factors are described the development of unbundling initiatives in the natural gas industry. below. Allowed Rate of Return The Company’s utility business is subject to various regulated returns on its rate base in each of the 12 states in Because of its brand loyalty in its service areas, its enhanced technol- ogy and distribution system infrastructures, the Company believes that it is now positively positioned as unbundling evolves. which it operates. The Company constantly monitors the allowed Growth through Acquisitions Achieving economies of scale, there- rates of return, its effectiveness in earning such rates, and initiates by spreading the fixed costs of the utility business over a large cus- rate proceedings or operating changes as needed. tomer base is a basic tenet in the Company’s plan to continue to be a Outcome of Pending Rate Cases In the normal course of the regu- low cost provider among its industry peers. latory environment, assets are placed in service and historical test peri- Inflation The Company believes that inflation has caused, and will ods are established before rate cases can be filed. Once rate cases are continue to cause, increases in certain operating expenses and has filed, regulatory bodies have the authority to suspend implementation required and will continue to require assets to be replaced at higher of the new rates while studying the cases. Because of this process, the costs. The Company has a process in place to continually review the Company must suffer the negative financial effects of having placed adequacy of its gas rates in relation to the increasing cost of providing assets in service without the benefit of rate relief. Management can- service and the inherent regulatory lag in adjusting rates. 36 Atmos Energy Corporation Management’s Responsibility for Financial Statements Report of Independent Auditors Board of Directors Management is responsible for the preparation, presentation and Atmos Energy Corporation integrity of the financial statements and other financial information in We have audited the accompanying consolidated balance sheets this report. The accompanying financial statements have been pre- of Atmos Energy Corporation at September 30, 1999 and 1998, and pared in accordance with generally accepted accounting principles, the related consolidated statements of income, shareholders’ equity and include estimates and judgments made by management that and cash flows for each of the three years in the period ended were necessary to prepare the statements in accordance with such September 30, 1999. These financial statements are the responsibility accounting principles. of the Company’s management. Our responsibility is to express an The Company maintains a system of internal accounting controls opinion on these financial statements based on our audits. designed to provide reasonable assurance that assets are safeguarded We conducted our audits in accordance with generally accepted from loss and that transactions are executed and recorded in accor- auditing standards. Those standards require that we plan and per- dance with established procedures. The concept of reasonable assur- form the audit to obtain reasonable assurance about whether the ance is based on the recognition that the cost of maintaining a sys- financial statements are free of material misstatement. An audit tem of internal accounting controls should not exceed related bene- includes examining, on a test basis, evidence supporting the amounts fits. The system of internal accounting controls is supported by writ- and disclosures in the financial statements. An audit also includes ten policies and guidelines, internal auditing and the careful selection assessing the accounting principles used and significant estimates and training of qualified personnel. made by management, as well as evaluating the overall financial The financial statements have been audited by the Company’s statement presentation. We believe that our audits provide a reason- independent auditors. Their audit was made in accordance with gen- able basis for our opinion. erally accepted auditing standards, as indicated in the Report of In our opinion, the financial statements referred to above present Independent Auditors, and included a review of the system of inter- fairly, in all material respects, the consolidated financial position of nal accounting controls and tests of transactions to the extent they Atmos Energy Corporation at September 30, 1999 and 1998, and considered necessary to carry out their responsibilities for the audit. the consolidated results of its operations and its cash flows for each Management has considered the internal auditors’ and the inde- of the three years in the period ended September 30, 1999, in con- pendent auditors’ recommendations concerning the Company’s sys- formity with generally accepted accounting principles. tem of internal accounting controls and has taken actions that are believed to be cost-effective in the circumstances to respond appro- priately to these recommendations. The Audit Committee of the Board of Directors meets periodically with the internal auditors and Dallas, Texas the independent auditors to discuss the Company’s internal account- November 9, 1999 ing controls, auditing and financial reporting matters. Atmos Energy Corporation 37 Consolidated Balance Sheets September 30, 1999 1998 (In thousands, except share data) Assets Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,526,834 Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current assets 22,424 1,549,258 583,476 965,782 $ 1,333,556 112,864 1,446,420 528,560 917,860 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,585 4,735 Accounts receivable, less allowance for doubtful accounts of $9,231 in 1999 and $1,969 in 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred charges and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,564 8,209 44,653 3,142 135,153 129,602 34,887 15,219 48,909 3,630 107,380 116,150 $ 1,230,537 $ 1,141,390 Capitalization and Liabilities Shareholders’ equity Common stock, no par value (stated at $.005 per share); 100,000,000 shares authorized; issued and outstanding: 1999 – 31,247,800 shares, 1998 – 30,398,319 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 156 $ 152 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customers’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred credits and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293,359 83,231 917 377,663 377,483 755,146 17,848 168,304 64,167 848 9,657 25,951 286,775 112,610 76,006 271,637 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 $ 1,230,537 $ 1,141,390 See accompanying notes to consolidated financial statements. 38 Atmos Energy Corporation Consolidated Statements of Income Year ended September 30, 1999 1998 1997 (In thousands, except per share data) Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 690,196 $ 848,208 $ 906,835 Purchased gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390,402 299,794 Operating expenses Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,815 Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes, other than income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense) Equity in earnings of unconsolidated investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,141 3,250 56,874 31,475 245,555 54,239 7,156 765 2,202 10,123 37,063 27,299 9,555 516,372 331,836 131,336 10,278 — 47,555 29,788 218,957 112,879 3,920 1,510 4,341 9,771 35,579 87,071 31,806 577,181 329,654 173,683 11,974 — 45,257 32,131 263,045 66,609 3,254 2,156 (288) 5,122 33,595 38,136 14,298 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,744 $ 55,265 $ 23,838 Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ .58 .58 1.10 $ $ $ 1.85 1.84 1.06 $ $ $ .81 .81 1.01 Weighted average shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,566 30,819 29,822 30,031 29,409 29,422 See accompanying notes to consolidated financial statements. Atmos Energy Corporation 39 Consolidated Statements of Shareholders’ Equity Common stock Number of shares Stated value Additional paid-in capital Accumulated other comprehensive Retained earnings income Total (In thousands, except share data) Balance, September 30, 1996 . . . . . . . . . . . . . . . . . . 29,241,859 $ 146 $ 241,658 $ — $ 87,778 $ 329,582 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: UCGC net income for the — — 100,000 85,243 3,008 212,327 — — 1 — — 1 — — 2,443 1,888 72 5,113 quarter ended December 31, 1996 . . . . . . . . . . . . . . — 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term stock plan for United Cities Division . . . . . . . . . . . . . . . . . . . . . . Outside directors stock-for-fee plan . . . . . . . . . . . . . . — — 114,250 531,353 52,473 55,500 2,306 — — 1 3 — — — — — 2,898 14,482 1,485 1,533 65 Balance, September 30, 1998 . . . . . . . . . . . . . . . . . . 30,398,319 152 271,637 Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized holding gains on investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends ($1.10 per share) . . . . . . . . . . . . . . . . . . Common stock issued: Restricted stock grant plan . . . . . . . . . . . . . . . . . . Direct stock purchase plan . . . . . . . . . . . . . . . . . . ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term stock plan for United Cities Division . . . . . . . . . . . . . . . . . . . . Outside directors stock-for-fee plan . . . . . . . . . . . — — — 56,850 694,905 89,435 6,450 1,841 — — — — 4 — — — — — — 1,732 17,429 2,362 150 49 — — — — — — — — — — — — — — — — — 23,838 (26,415) 23,838 (26,415) — — — — (9,263) 75,938 55,265 (31,834) — — — — — 2,444 1,888 72 5,114 (9,263) 327,260 55,265 (31,834) 2,899 14,485 1,485 1,533 65 99,369 371,158 17,744 17,744 917 — — 917 (33,882) (33,882) — — — — — — — — — — 1,732 17,433 2,362 150 49 Balance, September 30, 1999 . . . . . . . . . . . . . . . . . . 31,247,800 $ 156 $ 293,359 $ 917 $ 83,231 $ 377,663 See accompanying notes to consolidated financial statements. 40 Atmos Energy Corporation Consolidated Statements of Cash Flows Year ended September 30, 1999 1998 1997 (In thousands) Cash Flows from Operating Activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,744 $ 55,265 $ 14,575 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,874 4,800 31,874 — Changes in assets and liabilities: (Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35,677) (Increase) decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in deferred charges and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in customers’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in deferred credits and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,010 4,256 488 (12,012) 19,425 (11,888) (2,372) (4,418) 8,594 84,698 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 91,651 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 Cash Flows from Investing Activities Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (110,353) (134,989) (122,312) Retirements of property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 757 — 178 15,997 1,189 — Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109,596) (118,814) (121,123) Cash Flows from Financing Activities Net increase (decrease) in short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,904 — (61,000) (33,882) 21,726 28,748 3,850 4,735 (100,900) 154,445 (16,296) (31,834) 20,467 25,882 (1,281) 6,016 38,812 40,000 (14,659) (26,415) 9,518 47,256 (5,118) 11,134 Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,585 $ 4,735 $ 6,016 See accompanying notes to consolidated financial statements. Atmos Energy Corporation 41 Notes to Consolidated Financial Statements Contents of Notes to Consolidated Financial Statements Division”) in Kentucky; Greeley Gas Company (“Greeley Division”) in 1) Summary of Significant Accounting Policies . . . . . . . . . . 42 2) Business Combinations . . . . . . . . . . . . . . . . . . . . . . . . . 45 Colorado and Kansas; and United Cities Gas Company (“United Cities Division”) in Illinois, Tennessee, Iowa, Virginia, Georgia, South Carolina and Missouri. Such business is subject to federal and state 3) Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 regulation and/or regulation by local authorities in each of the twelve 4) Long-Term Debt and Short-Term Debt . . . . . . . . . . . . . . 47 states in which the utility divisions operate. Its shared services unit is 5) Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 6) Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 7) Common Stock and Stock Options . . . . . . . . . . . . . . . . . 51 located in Dallas, Texas and its Customer Support Center is located in Amarillo, Texas. Its nonregulated businesses include propane sales and various energy services businesses as described below. The Company is engaged in the retail and wholesale distribution 8) Employee Retirement and Stock Ownership Plans . . . . . . 53 of propane gas through United Cities Propane Gas, Inc. (“Propane”). 9) Other Postretirement Benefits . . . . . . . . . . . . . . . . . . . . . 56 It currently has operation and storage centers and storefront offices 10) Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 11) Statement of Cash Flows Supplemental Disclosures . . . . . 57 located in Tennessee, Kentucky, and North Carolina with a total com- pany storage capacity of approximately 2.5 million gallons. As of September 30, 1999, Propane served approximately 40,000 cus- 12) Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 tomers in the states listed above as well as Virginia. 13) Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Through Atmos Storage, Inc. (“Storage”), the Company owns and 14) Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 15) Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . 60 16) Subsequent Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 operates natural gas storage fields in Kentucky and Kansas to supple- ment natural gas used by customers of the regulated utility divisions in Tennessee, Kansas and Illinois and to provide storage services to other customers that may be in other states. 17) Selected Quarterly Financial Data (Unaudited) . . . . . . . . 60 Through Atmos Energy Services, Inc., the Company markets gas 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to industrial and irrigation customers primarily in West Texas through Enermart Energy Services Trust (“Enermart”) and to industrial cus- Forward-Looking Statements These notes to consolidated financial tomers in Louisiana, and is developing plans for marketing various statements, particularly notes 2, 3, 6, 7, 9, 14, and 16, may contain non-regulated services and products. “forward-looking statements” as discussed herein in Management’s Through Atmos Energy Marketing, LLC’s 45% interest in Discussion and Analysis of Financial Condition and Results of Woodward Marketing, LLC (“WMLLC”), a limited liability company Operations under the heading “Cautionary Statement for the formed in Delaware with headquarters in Houston, Texas, the Purposes of the Safe Harbor under the Private Securities Litigation Company is engaged in gas marketing and energy management serv- Reform Act of 1995” and should be read in conjunction with such ices. WMLLC provides gas supply management services to industrial 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-regulated business- es. The Company distributes through sales and transportation customers, municipalities and local distribution companies, including the Company’s five regulated utility divisions. Finally, the Company, through Atmos Leasing Inc. and Atmos Energy Marketing, LLC, leases real estate and vehicles to the United Cities Division and leases appliances to residential customers. arrangements natural gas to approximately 1.0 million residential, Principles of Consolidation The accompanying consolidated finan- commercial, public authority and industrial customers through its five cial statements include the accounts of Atmos Energy Corporation and regulated utility divisions: Energas Company (“Energas Division”) in its subsidiaries. Each subsidiary is wholly owned and intercompany Texas; Trans Louisiana Gas Company (“Trans La Division”) in transactions have been eliminated. Louisiana; Western Kentucky Gas Company (“Western Kentucky 42 Atmos Energy Corporation Accounting for Unconsolidated Investments The Company Company had recorded a regulatory liability of $2.2 million for accounts for its 45% interest in WMLLC using the equity method of deferred income taxes. accounting for investments. Equity in pre-tax earnings of WMLLC included in the consolidated statement of income was $7.2 million, $3.9 million and $3.3 million in 1999, 1998 and 1997, respectively. The Company amortizes 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 cus- tomer contracts and goodwill over 10 and 20 years, respectively. WMLLC adopted Emerging Issues Task Force 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities” (“EITF 98-10”). EITF 98-10 requires that energy trading contracts should be marked to market (that is, measured at fair value determined as of the balance sheet date) with the gains and losses included in earnings and separately disclosed. Atmos’ 45% after-tax share of WMLLC’s income from the adoption of EITF 98-10 was $2.4 million or $.08 per share. 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 classifications to Atmos’ presentation. 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 rev- enues 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 con- struction. The cost of additions includes direct construction costs, payroll related costs (taxes, pensions and other fringe benefits), 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 incurred. The costs of large projects are accumulated in construction in progress until the project is completed. When the project is completed, tested and placed in service, the balance is transferred to the utility plant in service account, included in rate base and depreciation begins. Regulation The Company’s utility operations are subject to regula- Property, plant and equipment is depreciated at various rates on a tion with respect to rates, service, maintenance of accounting records straight-line basis over the estimated useful lives of the assets. The and various other matters by the respective regulatory authorities in composite rates were 4.0%, 4.0% and 3.9% for 1999, 1998 and the states in which it operates. Atmos’ accounting policies recognize 1997, respectively. At the time property, plant and equipment is the financial effects of the ratemaking and accounting practices and retired, the cost, plus removal expenses less salvage, is charged to policies of the various regulatory commissions. Regulated utility oper- accumulated depreciation. ations are accounted for in accordance with Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation.” This statement requires cost-based rate regulat- ed entities that meet certain criteria to reflect the authorized recovery of costs due to 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, 1999 included the following: merger and inte- gration costs of $35.9 million, net of related reserve, environmental costs of $3.9 million, and deferred cost of purchased gas of $.5 mil- lion. Regulatory liabilities represent probable future reductions in rev- enues associated with amounts that are to be credited to customers through the ratemaking process. As of September 30, 1999, the Allowance for Funds Used During 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 purposes when the completed projects are placed in service. Interest expense of $3.7 million, $4.1 million and $1.2 million was capitalized in 1999, 1998 and 1997, respectively. The increased amounts in 1999 and 1998 were related to the Customer Support Center and customer information, accounting and human resource technology systems that were completed and placed in service in 1999. 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. Atmos Energy Corporation 43 Inventories Inventories consist primarily of materials and supplies Deferred Credits and Other Liabilities Deferred credits and other and merchandise held for resale. These inventories are stated at the liabilities include customer advances for construction, obligations lower of average cost or market. Inventories also include propane under capital leases, obligations under other postretirement benefits, inventories of $768,000 and $979,000 at September 30, 1999 and and obligations under the Company’s nonqualified retirement plans. 1998, respectively. Propane is priced at average cost. Earnings Per Share The calculation of basic earnings per share is Gas Stored Underground Net additions of inventory gas to storage based on net income divided by the weighted average number of and withdrawals of inventory gas from storage are priced using the common shares outstanding. The calculation of diluted earnings per average cost method for all Atmos utility divisions, except for the share is based on net income divided by the weighted average num- United Cities Division, where it is priced on the first-in first-out ber of shares outstanding plus the dilutive shares related to the method. Gas stored underground and owned by Storage is priced on United Cities Division’s Long-term Stock Plan and Atmos’ Restricted the last-in first-out (“LIFO”) method. In accordance with the United Stock Grant Plan. Cities Division’s purchased gas adjustment (“PGA”) clause, the liqui- dation of a LIFO layer would be reflected in subsequent gas adjust- ments in customer rates and does not affect the results of operations. Noncurrent gas in storage is classified as property, plant and equip- ment and is priced at cost. Segment Information In 1999, the Company adopted Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). SFAS No. 131 supersedes Statement of Financial Accounting Standards No. 14, “Financial Reporting for Segments of a Business Enterprise,” replacing Income Taxes Income taxes are provided based on the deferred the “industry segment” approach with the “management” approach. method, resulting in income tax assets and liabilities due to tempo- The management approach requires financial information to be dis- rary differences. Temporary differences are differences between the closed for segments whose operating results are reviewed by the tax bases of assets and liabilities and their reported amounts in the “chief operating decision maker.” It also requires related disclosures financial statements that will result in taxable or deductible amounts about products and services. The adoption of SFAS No. 131 did not in future years. The deferred method requires the effect of tax rate affect results of operations or financial position, but did affect the dis- changes on current and accumulated deferred income taxes to be closure of segment information. reflected in the period in which the rate change was enacted. The deferred method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized. Comprehensive Income In 1999, the Company adopted Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income.” This statement requires reporting of comprehensive income and its components (revenues, expenses, gains and losses) in any Cash and Cash Equivalents The Company considers all highly liquid complete presentation of general purpose financial statements. debt instruments purchased with a maturity of three months or less Comprehensive income describes all changes, except those resulting to be cash equivalents. Deferred Charges and Other Assets Deferred charges and other assets at September 30, 1999 and 1998 include merger and integra- tion costs of $35.9 million and $39.5 million in 1999 and 1998, respec- tively, net of the related reserve for possible non-recovery; and the investment in WMLLC of $16.0 million and $11.9 million in 1999 and 1998, respectively. Also included in deferred charges and other assets are assets of the Company’s qualified defined benefit retirement plans in excess of the plans’ obligations, Company assets related to the non- qualified retirement plans, unamortized debt expense, and deferred compensation expense related to non-vested restricted stock grants. from investments by owners and distributions to owners, in the equity of a business enterprise from transactions and other events including, as applicable, foreign-currency items, minimum pension liability adjust- ments and unrealized gains and losses on certain investments in debt and equity securities. While the primary component of comprehensive income is the Company’s reported net income, the other components of comprehensive income relate to unrealized gains and losses asso- ciated with certain investments held as available for sale. 44 Atmos Energy Corporation Use of Estimates The preparation of financial statements in conformity and Missouri through business process changes which resulted in a with generally accepted accounting principles requires management to net reduction of approximately 240 positions. These changes includ- make estimates and assumptions that affect the reported amounts of ed restructuring business office operations, establishing a network of assets and liabilities and disclosure of contingent assets and liabilities at payment centers and creating a customer support center, and the date of the financial statements and revenues and expenses during installing a new customer information center. the reporting period. Actual results could differ from those estimates. During fiscal 1997 and 1998, the Company recorded as regulatory Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. Recently Issued Accounting Standards Not Yet Adopted 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 2001. It establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement does not allow retroactive application to financial statements of prior periods. The Company’s management is currently assets the costs of the merger and integration of the United Cities Division. The Company believes there are substantial long term bene- fits to its customers and shareholders from the merger of the two companies. 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 merger and integration costs are being charged to operations concur- rent 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. in the process of evaluating the impact of adopting this Statement on 3) RATES its reported financial condition, results of operations and cash flows. 2) BUSINESS COMBINATIONS On July 31, 1997, Atmos acquired by means of a merger all of the 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 was issued in a one-for-one exchange for all outstanding shares of UCGC common stock. 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 were restated. 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 United Cities Division were eliminated by September 1998. An additional 75 Atmos positions were eliminated as part of the integration, resulting in approximately 635 total position reductions in the combined Company by September 1998. Atmos also initiated plans to enhance its customer service in Texas, Louisiana, Kentucky, Colorado, Kansas The following is a discussion of the Company’s ratemaking activi- ty for rate cases that are currently pending as of September 30, 1999 or rate proceedings completed during the three years ended September 30, 1999. In August 1999, the Energas Division filed rate cases in its West Texas System cities and Amarillo, Texas, requesting rate increases total- ing approximately $13.2 million. In addition to the rate increase to recover investments in technology and distribution plant expansion and maintenance, the proposed rate design would increase the cus- tomer charge, reducing the impact on earnings of warmer than nor- mal winter weather. Pursuant to Texas law, municipalities have original jurisdiction in the establishment of rates. The City of Amarillo has until December 1999 to decide on the rate request and the West Texas Cities have until January 2000. If the Company and the cities cannot agree on the amount of a rate increase, the Company must appeal to the Railroad Commission of Texas and a final resolution could be expected in the summer of 2000. Later in 1999 or early 2000, the Company plans to request a rate increase of approximately $1.1 mil- lion in the environs areas outside the city limits of the West Texas System cities and Amarillo, Texas for total increases of $14.3 million being sought in Texas. Rates in areas outside the city limits in Texas are subject to the jurisdiction of the Railroad Commission of Texas. Management cannot predict the outcomes of these rate proceedings. Atmos Energy Corporation 45 In June 1999, the Trans La Division appeared before the Louisiana On June 9, 1998, the Kentucky Public Service Commission issued Public Service Commission for a rate investigation and to redesign an Order approving an Experimental Performance-based Ratemaking rates to mitigate the effects of warm winter weather. A decision was (“PBR”) mechanism related to gas procurement and gas transportation rendered by the Louisiana Commission in October 1999 that activities filed by the Western Kentucky Division. The PBR mechanism is increased service charges associated with customer service calls, and incorporated into the Western Kentucky Division’s Gas Cost Adjustment increased the monthly customer charges from $6 to $9, both effec- Clause. It provides for sharing of purchased gas cost savings between tive November 1, 1999. While these changes are revenue neutral, this the consumers and the Company. The Company recognized other will mitigate the impact of warmer than normal winter weather on income of $2.0 million under the Kentucky PBR in fiscal 1999. earnings. The decision also included a three-year rate stabilization Effective April 1, 1999, the Tennessee Regulatory Authority clause, which will allow the Trans La Division’s rates to be adjusted approved the United Cities Division’s request to continue its PBR annually to allow the Company to earn a minimum return on equity mechanism related to gas procurement and gas transportation activi- of 10.5%. ties for a three-year period. The Authority revised the mechanism In May 1999, the Western Kentucky Division requested from the from the original two-year experimental period, by increasing the cap Kentucky Public Service Commission an increase in revenues of for incentive gains and/or losses to $1.25 million per year. Similar to approximately $14.1 million, a weather normalization adjustment Tennessee, the Georgia Public Service Commission renewed the (“WNA”) and changes in rate design to shift a portion of revenues Company’s PBR program for an additional three years effective May from commodity charges to fixed rates. The WNA, if approved, 1, 1999. The gas purchase and capacity release mechanisms of the would be similar to what the Company has in Georgia and Tennessee PBRs are designed to provide the Company incentives to find innova- and would be in effect from November through April, beginning in tive methods to lower gas costs to its customers. The Company rec- November 2000. The Kentucky Commission suspended the proposed ognized other income of $176,000 in fiscal year 1999 for the rates for six months in July 1999. It must, by statute, make a decision Georgia and Tennessee PBRs. by April 2000. Management cannot predict the outcome of this rate The Georgia Public Service Commission and the Tennessee proceeding. Regulatory Authority approved WNAs in fiscal 1991 and 1992, In fiscal 1997, the Colorado Office of Consumer Counsel filed a respectively. The WNAs, effective October through May each year in complaint with the Colorado Public Utilities Commission (“Colorado Georgia and November through April each year in Tennessee, allow Commission”) requesting a $3.5 million reduction in the annual rev- the United Cities Division to increase the base rate portion of cus- enues in Colorado of the Greeley Division. On December 17, 1997, a tomers’ bills when weather is warmer than normal and decrease the hearing was held at the Colorado Commission presenting a base rate when weather is colder than normal. The net effect of the Stipulation and Agreement reached by the Greeley Division and the WNA was an increase in revenues of $4.4 million, $.7 million and Colorado Office of Consumer Counsel. It settled the Consumer $2.6 million in 1999, 1998 and 1997, respectively. 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 1998 gross profit of the Greeley Division by approximately 4% and the gross profit of the Company by approximately .5%. 46 Atmos Energy Corporation 4) LONG-TERM DEBT AND SHORT-TERM DEBT Most of the Senior Notes and First Mortgage Bonds contain Long-term debt at September 30, 1999 and 1998 consisted of the following: 1999 1998 provisions that allow the Company to prepay the outstanding bal- ance in whole at any time, subject to a prepayment premium. The Senior Note agreements and First Mortgage Bond indentures pro- vide for certain cash flow requirements and restrictions on addition- (In thousands) al indebtedness, sale of assets and payment of dividends. Under the Unsecured 11.2% Senior Notes, due 2002, payable in annual installments of $2,000 $ 8,000 $ 10,000 Unsecured 9.76% Senior Notes, due 2004, most restrictive of such covenants, cumulative cash dividends paid after December 31, 1988 may not exceed the sum of accumulated net income for periods after December 31, 1988 plus $15.0 million. payable in annual installments of $3,000 18,000 21,000 At September 30, 1999, approximately $44.8 million of retained Unsecured 9.57% Senior Notes, due 2006, earnings was unrestricted. payable in annual installments of $2,000 14,000 16,000 As of September 30, 1999, all of the Greeley Division utility plant Unsecured 7.95% Senior Notes, due 2006, payable in annual installments of $1,000 Unsecured 10% Notes, due 2011 Unsecured 8.07% Senior Notes, due 2006, payable in annual installments of $4,000 7,000 2,303 8,000 2,303 beginning 2002 20,000 20,000 assets with a net book value of approximately $173.7 million are sub- ject 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 $293.0 million, are subject 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 Unsecured 8.26% Senior Notes, due 2014, payable in annual installments of $1,818 beginning 2004 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 Unsecured 6.09% Note, due November 1998 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 Rental property, propane and other term notes due in installments through 2013 Total long-term debt Less current maturities 20,000 20,000 for debt with similar terms and remaining average maturities, the fair 10,000 10,000 2,000 10,000 10,000 2,000 — 40,000 value of long-term debt at September 30, 1999 and 1998 is estimat- ed, using discounted cash flow analysis, to be $387.7 million and $489.0 million, respectively. It is not currently advantageous for the Company to refinance its long-term debt because of costs of prepay- ment required in the various debt agreements. Maturities of long-term debt at September 30, 1999 are as fol- 150,000 150,000 lows (in thousands): 17,000 1,000 22,500 20,000 10,720 18,000 20,000 10,000 17,000 3,000 25,000 20,000 12,860 18,000 20,000 10,000 14,808 395,331 (17,848) 21,168 456,331 (57,783) $ 377,483 $ 398,548 2000 2001 2002 2003 2004 Thereafter $ 17,848 15,434 15,323 20,995 17,656 308,075 $ 395,331 Short-Term Debt At September 30, 1999, short-term debt was composed of $152.7 million of commercial paper and $15.6 million outstanding under bank credit facilities. At September 30, 1998, it was composed of $66.4 million outstanding under bank credit facil- ities. The weighted average interest rate on short-term borrowings outstanding was 5.7% and 6.2% at September 30, 1999 and 1998, respectively. Atmos Energy Corporation 47 Committed Credit Facilities The Company has two short-term Deferred income taxes reflect the tax effect of differences committed credit facilities. The committed lines are renewed or rene- between the basis of assets and liabilities for book and tax purposes. gotiated at least annually. One short-term unsecured credit facility The tax effect of temporary differences that give rise to significant from a group of 10 banks is for $250.0 million. This facility expires in components of the deferred tax liabilities and deferred tax assets at August 2000. No balance was outstanding under this facility at September 30, 1999 and 1998 are presented below: September 30, 1999 or 1998. This facility requires a commitment fee of .08% on the unused portion. A second facility is for $12.0 million with a single bank. This facility expires April 1, 2000. It requires a 1999 1998 (In thousands) commitment fee of .05% on the unused portion. Borrowings totaling Deferred tax assets: $12.0 million were outstanding under this facility at both September Costs expensed for book purposes 30, 1999 and 1998. and capitalized for tax purposes $ 629 $ 1,049 Uncommitted Credit Facilities The Company also has unsecured short-term uncommitted credit lines from two banks totaling $74.0 million. Borrowings under uncommitted credit facilities totaled $3.6 million and $54.4 million at September 30, 1999 and 1998, respec- Accruals not currently deductible for tax purposes Customer advances Nonqualified benefit plans Postretirement benefits tively. These uncommitted lines expire in May and August 2000, and Unamortized investment tax credit are renewed or renegotiated at least annually. The uncommitted lines Regulatory liabilities have varying terms and the Company pays no fee for the availability of the lines. Borrowings under these lines are made on a when and as-available basis at the discretion of the banks. Commercial Paper Program The Company implemented a $250.0 Tax net operating loss and credit carryforwards Other, net Total deferred tax assets Deferred tax liabilities: million commercial paper program in October 1998. It is supported Difference in net book value and 12,657 4,535 7,947 10,356 1,304 3,159 12,504 4,787 57,878 7,189 3,730 11,297 10,093 1,427 3,175 — 2,838 40,798 by the $250.0 million committed line of credit described above. The net tax value of assets (139,324) (114,229) Company’s commercial paper was rated A-2 by Standard and Poor’s Pension funding and P-2 by Moody’s. A total of $152.7 million of commercial paper was outstanding at September 30, 1999. 5) INCOME TAXES The components of income tax expense for 1999, 1998 and 1997 are as follows: Gas cost adjustments Regulatory assets Cost capitalized for book purposes and expensed for tax purposes Other, net (5,480) 3,997 (4,462) (19,112) (6,107) (4,120) 8,943 (4,941) — (6,664) Total deferred tax liabilities (170,488) (121,011) Net deferred tax liabilities $ (112,610) $ (80,213) 1999 1998 1997 SFAS No. 109 deferred accounts for (In thousands) rate regulated entities (included in other deferred credits) $ 1,896 $ 1,548 Current Federal State Deferred Federal State Investment tax credits $ (18,761) $ 31,694 $ 7,917 (4,081) 4,503 1,000 27,370 5,321 (294) (3,352) (616) (423) 4,807 1,000 (426) $ 9,555 $ 31,806 $ 14,298 48 Atmos Energy Corporation Reconciliations of the provisions for income taxes computed at Greeley Division In Colorado, the Greeley Division is a defendant in the statutory rate to the reported provisions for income taxes for several lawsuits filed as a result of a fire in a building in Steamboat 1999, 1998 and 1997 are set forth below: Springs, Colorado on February 3, 1994. The plaintiffs claimed that 1999 1998 1997 (In thousands) 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 Tax at statutory rate of 35% $ 9,555 $ 30,474 $ 13,348 approximately $2.5 million in punitive damages. The jury assessed the Common stock dividends deductible for tax reporting State taxes Other, net (701) 841 (140) (695) 2,526 (499) (706) 1,300 356 Provision for income taxes $ 9,555 $ 31,806 $ 14,298 Company with liability for all of the damages awarded. The Company appealed the judgment to the Colorado Court of Appeals, which reversed the trial court verdict and ordered a new trial. The Colorado Supreme Court upheld the Court of Appeals reversal and order for a new trial. As a result of mediation, a settlement was reached with The Company has net operating loss carryforwards amounting to five of the claimants, leaving only three remaining claimants with $23.9 million which will expire in the year 2019. The Company also aggregate claims of approximately $2 million. The Company does not has tax credit carryforwards amounting to $4.1 million, the majority of expect the final outcome of this case to have a material adverse which represent alternative minimum tax credits which do not expire. effect on the financial condition, the results of operations or the cash 6) CONTINGENCIES LITIGATION Trans La Division In November 1997, a jury in Plaquemine, Louisiana awarded Brian L. Heard General Contractor, Inc., (“Heard”) a total of approximately $178,000 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 were for events that occurred prior to the time Atmos acquired Oceana Heights Gas Company. 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 oppor- tunities for the contractor during 1994. The Company immediately appealed the verdict. However, on March 24, 1999, the Company announced that it had reached a settlement of the case as a result of mediation discussions. The parties agreed to settle the case for $3.5 million. In the settlement, neither Atmos nor the Trans La Division con- ceded liability. Atmos paid $3.25 million and the remaining $.25 mil- lion was paid by Oceana Heights Gas Company’s insurers. In exchange, the Company obtained a full release from Heard of all claims against Atmos and the Trans La Division. flows of the Company because the Company believes it has adequate insurance and reserves to cover any damages that may ultimately be awarded. On September 23, 1999, a suit was filed in the District Court of Stevens County, Kansas, by Quinque Operating Company, Tom Boles and Robert Ditto, against more than 200 companies in the natural gas industry, including the Company and the Greeley Gas Division. The plaintiffs, who purport to represent a class consisting of gas pro- ducers, royalty owners, overriding royalty owners, working interest owners and state taxing authorities, accuse the defendants of under- paying royalties on gas taken from wells situated on non-federal and non-Indian lands throughout the United States and offshore waters predicated upon allegations that the defendants’ gas measurements are simply inaccurate and that the defendants failed to comply with applicable regulations and industry standards over the last 25 years. Although the plaintiffs do not specifically allege an amount of dam- ages, they do contend that this suit is brought to recover billions of dollars in revenues that the defendants have allegedly unlawfully diverted from the plaintiffs to themselves. Since the filing of the peti- tion, this case has been removed to the United States District Court in Wichita, Kansas, where there are numerous and various motions pending, including a request for remand by the plaintiffs as well as a notice filed to consolidate this case with other similar pending litiga- tion in federal court in Wyoming in which the Company is also a defendant along with over 200 other defendants, the case of Jack J. Grynberg, on behalf of the United States of America. Atmos Energy Corporation 49 The Company believes that the plaintiffs’ claims are lacking in resulted in certain by-products and residual materials including coal merit and intends to vigorously defend this action. However, the tar. The manufacturing process used by the Company was an accept- Company cannot assess, at this time, the likelihood of whether or able and satisfactory process at the time such operations were being not the plaintiffs may prevail on any one or more of their asserted conducted. Under current environmental protection laws and regula- claims. In any event, the Company does not expect the final outcome tions, the Company may be responsible for response actions with of this case to have a material adverse effect on the financial condi- respect to such materials, if response actions are necessary. tion, the results of operations or the net cash flows of the Company As of September 30, 1999, the Company had accrued and because the Company believes that it has adequate reserves to cover deferred for recovery $1.1 million, including $258,000 that was any damages that may ultimately be awarded. incurred for an insurance recoverability study, and $750,000 for the The Company is a party to other litigation matters and claims that investigations of the Johnson City and Bristol, Tennessee, and arise out of the ordinary business of the Company. While the results of Hannibal, Missouri, sites. As of September 30, 1999, the Company these litigation matters and claims cannot be predicted with certainty, has incurred costs of approximately $492,000 for these sites. the Company does not believe the final outcome of such litigation and claims will have a material adverse effect on the financial condi- tion, the results of operations or the cash flows of the Company because the Company believes that it has adequate insurance and reserves to cover any damages that may ultimately be awarded. GUARANTEES Iowa Sites In June 1995, UCGC entered into an agreement to pay $1.8 million to Union Electric Company, now Ameren, whereby Union Electric agreed to assume responsibility for UCGC’s continuing investi- gation and environmental response action obligations as outlined in the feasibility study related to a former manufactured gas plant in Keokuk. The $1.8 million was paid in five annual installments, with The Company’s wholly-owned subsidiary, Atmos Energy the last installment being paid in July 1999. In a rate case effective Marketing, LLC (“AEM”), and Woodward Marketing, Inc. (“WMI”), June 1, 1996, UCGC began collecting increased rates which included sole members of Woodward Marketing, LLC (“WMLLC”), act as guar- a 10-year amortization of the $1.8 million payment to Union Electric. antors of up to $12.5 million of balances outstanding under a $30.0 million bank credit facility for WMLLC. AEM 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, 1999. AEM and WMI also act as joint and several guarantors on payables of WMLLC up to $40.0 million of natural gas purchases and transporta- tion services from suppliers. WMLLC payable balances outstanding that were subject to these guarantees amounted to $18.8 million at September 30, 1999. ENVIRONMENTAL MATTERS Tennessee Sites UCGC and the Tennessee Department of Environment and Conservation entered into a consent order effective January 23, 1997, for the purpose of facilitating the investigation, removal and remediation of the Johnson City site. UCGC began the implementation of the consent order in the first quarter of 1997 which continued throughout fiscal year 1999. The Company is unaware of any information which suggests that the Bristol site gives rise to a present health or environmental risk as a result of the manufactured gas process or that any response action will be necessary. The United Cities Division is the owner or previous owner of manufactured gas plant sites in Keokuk, Iowa; Johnson City and Bristol, Tennessee; and Hannibal, Missouri, which were used to supply The Tennessee Regulatory Authority granted UCGC permission to defer, until its next rate case, all costs incurred in Tennessee in con- nection with state and federally mandated environmental control gas prior to availability of natural gas. The gas manufacturing process requirements. 50 Atmos Energy Corporation Missouri Sites On July 22, 1998, Atmos entered into an Abatement 7) COMMON STOCK AND STOCK OPTIONS Order on Consent with the Missouri Department of Natural Resources addressing the former manufactured gas plant located in Hannibal, Missouri. Atmos, through its United Cities Division, agreed in the order to perform a removal action, a subsequent site evaluation and to reimburse the response costs incurred by the state of Missouri in connection with the property. The removal action was conducted and completed in August 1998 and the site evaluation field work was conducted in August 1999. On March 9, 1999, the Missouri Public Service Commission issued an Order authorizing Atmos to defer the costs associated with this site until the next rate increase, which must be proposed before March 9, 2001. Kansas Sites Atmos is currently conducting investigation and reme- diation activities pursuant to Consent Orders between the Kansas Department of Health and Environment (“KDHE”) and UCGC. The Orders provide for the investigation and remediation of mercury contamination at gas pipeline sites which utilize or formerly utilized mercury meter equipment in Kansas. As of September 30, 1999, the Company had identified approximately 720 sites where mercury may have been used and had incurred $100,000 for recovery. In addition, based upon available current information, the Company accrued and deferred for recovery an additional $280,000 for the investigation of these sites. The Kansas Corporation Commission has authorized the Company to defer these costs and seek recovery in a future rate case. The Company is a party to other environmental matters and claims that arise out of the ordinary business of the Company. While the ultimate results of response actions to these environmental mat- ters and claims cannot be predicted with certainty, the Company does not believe the final outcome of such response actions will have a material adverse effect on the financial condition, the results of operations or the cash flows of the Company because the Company believes that the expenditures related to such response actions will either be recovered through rates, shared with other parties, or cov- ered by adequate insurance or reserves. 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 enti- tle the holder thereof, until May 10, 2008 or the date of redemption of the Rights, to buy one share 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 Rights are subject to adjustment from time to time to prevent dilution. At the date upon which the rights become separate from the Company’s Common Stock (the “Distribution Date”), the Company will issue one right with each share of Common Stock that becomes outstanding so that all shares of Common Stock will have attached Rights. After the Distribution Date, the Company may issue Rights when it issues Common Stock if the Board deems such issuance to be necessary or appropriate. The Rights will separate from the Common Stock and a Distribution Date will occur upon the occurrence of certain events specified in the Agreement, including but not limited to, the acquisi- tion by certain persons of at least 15% of the beneficial ownership of the Company’s Common Stock. The Rights have certain anti-takeover effects and may cause substantial dilution to a person or entity that attempts to acquire the Company on terms not approved by the Board of Directors except pursuant to an offer conditioned upon a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors because, prior to the time that the Rights become exercisable or transferable, the Rights may be redeemed by the Company at $.01 per Right. Atmos Energy Corporation 51 Shares Issued Under Various Plans The following table presents Direct Stock Purchase Plan The Company also has a Direct Stock the number of shares issued under various plans in 1999 and 1998, Purchase Plan (“DSPP”). Participants in the DSPP may have all or part as well as the number of shares available for future issuance at of their dividends reinvested at a 3% discount from market prices. September 30, 1999. Shares available for issuance at DSPP participants may purchase additional shares of Company com- mon stock as often as weekly with voluntary cash payments of at least $25, up to an annual maximum of $100,000. Shares issued September 30, Outside Directors Stock-for-Fee Plan In November 1994, the Board 1999 1998 1999 adopted the Outside Directors Stock-for-Fee Plan, which was Restricted Stock Grant Plan 56,850 114,250 Employee Stock Ownership Plan 89,435 52,473 Direct Stock Purchase Plan 694,905 531,353 731,400 370,963 273,312 approved by the shareholders of the Company in February 1995 and was amended and restated in November 1997. The plan permits non- employee directors to receive all or part of their annual retainer and Outside Directors Stock-For-Fee Plan 1,841 2,306 40,538 United Cities Long-Term Stock Plan 6,450 55,500 188,050 meeting fees in stock rather than in cash. Stock-Based Compensation Plans The Company has two stock- based compensation plans that provide for the granting of stock Long-Term Incentive Plan — — 1,175,000 options to officers, key employees and non-employee directors. The 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 employ- ees of the Company make the final determinations regarding partici- pation in the Plan, awards under the Plan, and restrictions on the restricted stock awarded. The restricted stock may consist of previous- ly 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 $1,595,000, $1,238,000 and $437,000 was recognized in 1999, 1998 and 1997, respectively, in connection with the vesting of shares awarded under the Plan. Employee Stock Ownership Plan Prior to January 1, 1999, Atmos had an Employee Stock Ownership Plan (“ESOP”) and the United Cities Division had a 401(k) savings plan. The ESOP was amended effective January 1, 1999, as is more fully discussed in Note 8. objectives of these plans include attracting and retaining the best per- sonnel, providing for additional performance incentives, and promot- ing the success of the Company by providing employees the opportu- nity to acquire common stock. United Cities Long-Term Stock Plan Prior to the merger with Atmos, certain United Cities Gas Company officers and key employ- ees participated in the United Cities Long-Term Stock Plan implement- ed in 1989. At the time of the merger on July 31, 1997, Atmos adopted this plan 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 combi- nation thereof may be granted to officers and key employees of the United Cities Division. Options granted under the plan become exer- cisable at a rate of 20% per year and expire 10 years after the date of grant. During 1999, 6,450 options were exercised under the plan. At September 30, 1999, there were 80,150 options outstanding, of which 56,850 options had vested. No incentive stock options, non- qualified stock options, stock appreciation rights, or restricted stock have been granted under the plan since 1996. 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. The LTIP represents a part of the Company’s Total Rewards strategy, which the Company developed 52 Atmos Energy Corporation as a result of a study it conducted of all employee, executive and non- 8) EMPLOYEE RETIREMENT AND STOCK OWNERSHIP PLANS employee director compensation and benefits. The LTIP is a comprehen- sive, long-term incentive compensation plan, providing for discretionary awards of incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, restricted stock and performance-based stock to help attract, retain, and reward employees and non-employee directors of the Company and its subsidiaries. The Company is authorized to grant awards for up to a maximum of 1,500,000 shares of common stock under the LTIP, subject to certain adjustment provisions. The option price is equal to the market price of the Company’s stock at the date of grant. The stock options expire in 10 years from the date of the grant, and options vest annually over a serv- ice period ranging from one to three years. During 1999, no options were exercised under the plan. At September 30, 1999, the Company had 325,000 options outstanding under the LTIP at an exercise price ranging from $24.41 to $25.66. In October 1995, Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” was issued. This statement establishes a fair value-based method of accounting for employee stock options or similar equity instruments and encourages, 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 compensa- tion 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” (“APB 25”). The Company has elected to con- tinue using the intrinsic value method as prescribed by APB 25. Under this method no compensation cost for stock options is recognized for stock option awards granted at or above fair market value. Because of the limited nature of the Company’s stock-based com- pensation plans, the pro forma effects of applying SFAS 123 would have less than a $.01 per diluted share effect on earnings per share or approxi- mately $84,000 for 1999. Defined Benefit Plans Prior to January 1, 1999, 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 employ- ees. The plans provided similar benefits to all employees, which were based upon years of service and the highest paid five consecutive cal- endar years of compensation within the last 10 years of employment. Effective January 1, 1999, the plans were merged into the Western Kentucky Gas plan, which was amended and restated as the Atmos Pension Account Plan which covers all employees of the Company. Opening account balances were established for participants 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 credits an allocation to each participant’s account at the end of each year according to a formula based on the participant’s age, service and total pay (excluding incentive pay). The Pension Account Plan provides for an additional annual alloca- tion based upon a participant’s age as of January 1, 1999 for those participants who were participants in the prior pension plans. The plan will credit this additional allocation each year 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 benefit also applies through December 31, 2008, for participants who were at least age 50 as of January 1, 1999, and who were participants in one of the prior plans on December 31, 1998. Participants are fully vested in their account balances after five years of service and may choose to receive their account balances as a lump sum or an annuity. The obligations shown herein reflect the changes which were effective January 1, 1999. The Company’s funding policy is to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. In the 1998 annual report the defined benefit plans were grouped with the Supplemental Executive Benefits Plans. In the 1999 annual report they are presented separately. Atmos Energy Corporation 53 The Company records the accrued pension asset in deferred Net periodic pension cost for the Pension Account Plan for 1999, charges and other assets. The following table sets forth the total for 1998 and 1997 included the following components: the Pension Account Plan’s funded status for 1999 and 1998: 1999 1998 (In thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 218,245 $ 217,152 Service cost Interest cost Curtailments/special termination benefits Plan amendments Actuarial (gain) loss Benefits paid 4,232 14,696 — — (21,390) (15,318) 5,256 15,655 (2,645) (14,605) 10,638 (13,206) Benefit obligation at end of year 200,465 218,245 Change in plan assets: Fair value of plan assets at 1999 1998 1997 (In thousands) $ 4,232 $ 5,256 $ 6,640 14,696 15,655 15,301 Components of net periodic pension cost: Service cost Interest cost Expected return on assets (27,846) (23,249) (19,730) Amortization of: Transition obligation (asset) Prior service cost Actuarial (gain) Net periodic pension (248) (703) (241) 851 (1,487) (1,225) (431) 921 — beginning of year 286,708 259,851 cost (11,356) (2,953) 2,701 Actual return on plan assets Benefits paid Fair value of plan assets at end of year Funded status Unrecognized transition asset Unrecognized prior service cost Unrecognized net gain Accrued pension asset 11,108 (15,318) 282,498 82,033 (625) (9,680) (48,780) 40,063 (13,206) 286,708 68,463 (873) (10,382) (45,616) Curtailment (gain) loss and special termination benefits Total pension cost — (1,840) 4,758 accruals $ (11,356) $ (4,793) $ 7,459 Supplemental Executive Benefits Plans The Company has a non- $ 22,948 $ 11,592 qualified Supplemental Executive Benefits Plan (“Supplemental Plan”) which provides additional pension, disability and death benefits to the officers and certain other employees of the Company. The Supplemental Plan was amended and restated in August 1998. In addition, in August 1998, the Company adopted the Performance-Based Supplemental Executive Benefits Plan, which will cover all employees who become offi- cers or business unit presidents after August 12, 1998. 1999 1998 1997 Weighted average assumptions for end of year disclosure: Discount rate 7.5% 7.0% 7.5% Rate of compensation increase 4.0% 4.0% 4.0% Expected return on plan assets 10.0% 9.0% 9.0% The plan assets consist primarily of investments in common stocks, interest bearing securities and interests in commingled pen- sion trust funds. 54 Atmos Energy Corporation The Company records accrued pension cost in deferred credits Assets for the Supplemental Plans are held in the Company’s and other liabilities. The following table sets forth the total for the rabbi trusts (see Note 13) and consist primarily of investments in equi- Supplemental Plans’ funded status for 1999 and 1998: ty mutual funds. The market value of the rabbi trusts amounted to 1999 1998 (In thousands) $26.1 million at September 30, 1999. The assets in the rabbi trusts are included on the Company’s balance sheet under deferred charges and other assets and not presented above as plan assets. Change in benefit obligation: The projected benefit obligation, accumulated benefit obligation, Benefit obligation at beginning of year $ 36,770 $ 30,796 and fair value of plan assets for the Supplemental Plans with accumulat- Service cost Interest cost Plan amendments Actuarial (gain) loss Benefits paid Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Employer contribution Benefits paid Fair value of plan assets at end of year 1,151 2,488 — 331 (1,915) 38,825 — 1,915 (1,915) — 505 2,246 565 4,389 (1,731) 36,770 — 1,731 (1,731) — Funded status (38,825) (36,770) Unrecognized transition asset Unrecognized prior service cost Unrecognized net loss Accrued pension cost 484 8,837 6,886 580 9,858 6,772 $ (22,618) $ (19,560) ed benefit obligations in excess of plan assets were $38.8 million, $32.8 million, and none, respectively, as of September 30, 1999, and $36.8 million, $31.4 million, and none, respectively, as of September 30, 1998. Net periodic pension cost for the Supplemental Plans for 1999, 1998 and 1997 included the following components: 1999 1998 1997 (In thousands) Components of net periodic pension cost: Service cost Interest cost $ 1,151 2,488 Expected return on assets — $ 505 2,246 — $ 263 1,932 — Amortization of: Transition obligation (asset) Prior service cost Actuarial (gain) loss 96 1,022 216 96 810 133 96 810 390 1999 1998 1997 Net periodic pension cost $ 4,973 $ 3,790 $ 3,491 Weighted average assumptions for end of year disclosure: Employee Stock Ownership Plan Atmos sponsors an ESOP for all employees of the Company. Effective January 1, 1999, the ESOP was Discount rate 7.5% 7.0% 7.5% amended to provide for deferral of a portion of a participant’s salary Rate of compensation increase 4.0% 4.0% 4.0% Expected return on plan assets 10.0% 9.0% 9.0% of up to 21%. In addition, among other changes to the ESOP, partici- pants are provided with automatic matching contributions of 100% of each participant’s salary reduction up to 4% of the participant’s salary, and are provided the option of taking out loans against their ESOP accounts, subject to certain restrictions. Each participant enters into a Atmos Energy Corporation 55 salary reduction agreement with the Company pursuant to which the The Company records the accrued postretirement cost primarily participant’s salary is reduced by an amount not more than 21%. in deferred credits and other liabilities. The following table sets forth Taxes on the amount by which the participant’s salary is reduced are the total liability currently recognized for the postretirement plan deferred pursuant to Section 401(k) of the Internal Revenue Code. The other than pensions: amount of the salary reduction is contributed by the Company to the ESOP for the account of the participant. Matching contributions to the ESOP were expensed as incurred and amounted to $2.4 million, $1.8 1999 1998 (In thousands) million, and $2.1 million for 1999, 1998 and 1997, respectively. The Change in benefit obligation: directors may also approve discretionary contributions, subject to the Benefit obligation at beginning of year $ 64,494 $ 53,295 provisions of the Internal Revenue Code of 1986 and applicable regu- lations of the Internal Revenue Service. No discretionary contributions Service cost Interest cost were made for 1999 and 1998. Plan participants’ contributions Curtailments/special termination benefits 401(k) Savings Plan Prior to January 1, 1999, the Company spon- sored a 401(k) savings plan for the United Cities Division employees. Plan amendments Actuarial (gain) loss The Company made fixed matching contributions of $102,000 for Benefits paid the three months ended December 31, 1998, $648,000 for the nine Benefit obligation at end of year months ended September 30, 1998, and $694,000 for the year ended December 31, 1997. In addition, a discretionary matching contribution of $227,000 was made for 1998. The 401(k) savings plan was merged into the ESOP effective January 1, 1999, and the United Cities Division employees subsequently receive the same benefits as other Atmos employees. 9) OTHER POSTRETIREMENT BENEFITS Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Plan participants’ contribution Benefits paid Fair value of plan assets at end of year Funded status Prior to January 1, 1999, Atmos sponsored two postretirement Unrecognized transition obligation plans other than pensions. Each provided health care benefits to Unrecognized prior service cost retired employees. One provided benefits to the United Cities Division Unrecognized net (gain) loss 2,150 4,360 763 — — (10,195) (4,740) 56,832 6,380 377 7,184 763 (4,740) 9,964 (46,868) 21,732 3,094 (2,300) 1,659 3,809 382 2,125 1,888 6,210 (4,874) 64,494 5,614 295 4,963 382 (4,874) 6,380 (58,114) 23,243 3,614 8,571 retirees and the other provided medical benefits to all other retired Accrued postretirement cost $ (24,342) $ (22,686) Atmos employees. Effective January 1, 1999, the United Cities plan was merged into the Atmos plan and began providing benefits to future retirees that are essentially the same as provided to other Atmos employees. The obliga- tions as of September 30, 1999 and 1998 reflect this plan change. Substantially all of the Company’s employees become eligible for these benefits if they reach retirement age while working for the Company and attain certain specified years of service. In addition, participant contributions are required under the plan. 1999 1998 1997 Weighted average assumptions for end of year disclosure: Discount rate 7.5% 7.0% 7.5% Expected return on plan assets Initial trend rate Ultimate trend rate Number of years from 5.3% 9.0% 5.0% 5.3% 9.0% 4.5% 5.3% 7.5% 5.0% initial to ultimate trend 5 6 3 56 Atmos Energy Corporation Net periodic postretirement cost for the combined postretire- rate case and not disallowed. However, the Company was required to ment benefit plans for 1999, 1998 and 1997 included the following recover the portion of the UCGC transition obligation applicable to components: Components of net periodic postretirement cost: Service cost Interest cost Expected return on assets Amortization of: Transition obligation (asset) Prior service cost Actuarial (gain) loss Net periodic 1999 1998 1997 (In thousands) 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. 10) EARNINGS PER SHARE $ 2,150 $ 1,659 $ 1,772 Basic earnings per share has been computed by dividing net 4,360 (349) 1,511 520 648 3,809 (235) 1,862 269 (58) 3,467 (225) 1,994 202 4 income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share has been computed by dividing net income for the period by the weight- ed average number of common shares outstanding during the period adjusted for restricted stock and other contingently issuable shares of common stock. Net income for the years ended September 30, 1999, 1998 and 1997 for basic and diluted earnings per share are the postretirement cost 8,840 7,306 7,214 same, as there were no contingently issuable shares of stock whose Curtailment (gain) loss and special termination issuance would have impacted net income. A reconciliation between basic and diluted weighted average common shares outstanding at benefits — 5,915 3,043 September 30 follows: Total postretirement cost accruals $ 8,840 $ 13,221 $ 10,257 1999 1998 1997 (In thousands) Assumed health care cost trend rates have a significant effect on the amounts reported for the plans. A one-percentage point change in assumed health care cost trend rates would have the following effects on the latest actuarial calculations: Weighted average common shares – basic 30,566 29,822 29,409 Effect of dilutive securities: Restricted stock Stock options 238 15 199 10 13 — 1-Percentage Point Increase 1-Percentage Point Decrease Weighted average common (In thousands) shares – diluted 30,819 30,031 29,422 Effect on total of service and interest cost components $ 603 $ (591) Effect on postretirement 11) STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES Supplemental disclosures of cash flow information for 1999, benefit obligation $ 6,361 $ (5,378) 1998 and 1997 are presented below. The Company is currently recovering other postretirement bene- fits (“OPEB”) costs through its regulated rates under SFAS No. 106 1999 1998 1997 (In thousands) accrual accounting in Colorado, Kansas, the majority of its Texas serv- Cash paid (received) for ice area and Kentucky. It receives rate treatment as a cost of service Interest item for OPEB costs on the pay-as-you-go basis in Louisiana. OPEB Income taxes $ 40,446 $ (7,184) $ 29,980 $ 25,598 $ 25,216 $ 9,736 costs have been specifically addressed in rate orders in each jurisdic- tion served by the United Cities Division or have been included in a Atmos Energy Corporation 57 12) SEGMENT INFORMATION In fiscal 1999, the Company adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). SFAS No. 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. The determination of reportable seg- ments under SFAS No. 131 differs from that required in previous years; therefore, business segment information for 1998 and 1997 has been restated to comply with the provisions of SFAS No. 131. The Company’s determination of reportable segments considers the strategic operating units under which the Company manages sales of various products and services to customers in differing regulatory environ- ments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All interseg- ment sales prices are market based. The Company evaluates perform- ance based on net income or loss of the respective operating units. In accordance with SFAS No. 131, the Company has identified the Utility, Propane and Energy Services segments, as described in Note 1. Summarized financial information concerning the Company’s reportable segments is shown in the following table: As of and for the year ended September 30, 1999: Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 621,211 $ 22,944 $ 53,416 $ 697,571 Utility Propane Energy Services Total (In thousands) Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of unconsolidated investment . . . . . . . . . . . . . . Interest charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,898 52,503 49,000 — 35,799 10,800 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,152,469 Equity investment in unconsolidated investee . . . . . . . . . . . . . . . . Expenditures for additions to long-lived assets . . . . . . . . . . . . . . . . As of and for the year ended September 30, 1998: Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of unconsolidated investment . . . . . . . . . . . . . . Interest charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 108,454 739,930 1,485 43,324 100,665 — 33,181 43,332 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,061,496 Equity investment in unconsolidated investee . . . . . . . . . . . . . . . . Expenditures for additions to long-lived assets . . . . . . . . . . . . . . . . — 125,741 As of and for the year ended September 30, 1997: Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807,428 Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of unconsolidated investment . . . . . . . . . . . . . . Interest charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,176 40,750 61,213 — 30,882 19,739 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,014,263 Equity investment in unconsolidated investee . . . . . . . . . . . . . . . . Expenditures for additions to long-lived assets . . . . . . . . . . . . . . . . — 117,496 58 Atmos Energy Corporation — 2,954 (543) — 1,231 (869) 16,694 — 1,550 29,091 — 2,324 619 — 897 (66) 36,549 — 8,408 33,194 — 2,117 405 — 744 (90) 23,110 — 3,271 3,477 1,417 5,782 7,156 33 7,813 77,933 15,973 349 80,672 — 1,907 11,595 3,920 1,501 11,999 68,252 11,914 840 7,375 56,874 54,239 7,156 37,063 17,744 1,247,096 15,973 110,353 849,693 1,485 47,555 112,879 3,920 35,579 55,265 1,166,297 11,914 134,989 68,389 909,011 — 2,390 4,991 3,254 1,969 4,189 69,083 9,962 1,545 2,176 45,257 66,609 3,254 33,595 23,838 1,106,456 9,962 122,312 The following table presents a reconciliation of the operating rev- holding gains (losses).” All marketable securities are held in rabbi enues to total consolidated revenues for the years ended September trusts for the Supplemental Executive Benefit Plan (“SEBP”). 30, 1999, 1998 and 1997. The cost, unrealized holding gain (loss), and the market value of 1999 1998 1997 the marketable securities are: (In thousands) Total revenues for reportable segments $697,571 $849,693 $909,011 Elimination of intersegment revenues (7,375) (1,485) (2,176) Total operating revenues $690,196 $848,208 $906,835 A reconciliation of total assets for the reportable segments to total consolidated assets for September 30, 1999, 1998 and 1997 is presented below. Unrealized Holding Market Cost Gain (Loss) Value (In thousands) $ 22,265 $ 1,041 $ 23,306 2,359 $ 24,624 399 2,758 $ 1,440 $ 26,064 As of September 30, 1999 Available-for-sale securities: Domestic equity mutual funds Foreign equity mutual funds 1999 1998 1997 (In thousands) 14) LEASES Total assets for reportable segments $1,247,096 $1,166,297 $1,106,456 Elimination of intercompany receivables (16,559) (24,907) (18,145) Total consolidated assets $1,230,537 $1,141,390 $1,088,311 The Company has entered into non-cancelable operating leases for office and warehouse space used in its operations. The remaining lease terms range from one to 20 years and generally provide for the payment of taxes, insurance and maintenance by the lessee. The Company has also entered into capital leases for division offices and operating facilities. Property, plant and equipment included amounts The following table summarizes the Company’s revenues by prod- for capital leases of $4.6 million and $4.1 million at September 30, ucts and services for the year ended September 30. 1999 and 1998, respectively. Accumulated depreciation for these 1999 1998 1997 capital leases totaled $1.2 million and $.9 million at September 30, (In thousands) 1999 and 1998, respectively. The related future minimum lease payments at September 30, $349,691 $410,538 $452,864 1999 were as follows: Gas sales revenues: Residential Commercial Public authority and other Industrial 144,836 184,046 22,330 73,194 20,504 91,972 Total gas sales revenues 590,051 707,060 Transportation revenues Other gas revenues 23,035 4,227 23,883 7,502 Total utility revenues 617,313 738,445 805,252 Propane revenues Energy services revenues 22,944 49,939 29,091 80,672 33,194 68,389 Total operating revenues $690,196 $848,208 $906,835 13) MARKETABLE SECURITIES 193,302 23,898 109,241 779,305 19,804 6,143 2000 2001 2002 2003 2004 Thereafter Total minimum lease payments Less amount representing interest Present value of net Capital Leases Operating Leases (In thousands) $ 10,413 10,010 9,811 9,262 9,091 48,211 $ 96,798 $ 735 735 735 735 735 3,384 7,059 (3,671) $ 3,388 In accordance with Statement of Financial Accounting Standards minimum lease payments No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” all marketable securities are classified as available-for-sale and are reported at market value with unrealized gains and losses shown as a component of shareholders’ equity labeled “unrealized Consolidated lease and rental expense amounted to $10.6 million, $9.2 million and $10.5 million for fiscal 1999, 1998 and 1997, respec- tively. 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. Atmos Energy Corporation 59 15) RELATED PARTY TRANSACTIONS system for $32.0 million in cash plus working capital adjustments. Included in purchased gas cost were purchases from WMLLC of $117.4 million, $124.7 million and $103.0 million in 1999, 1998 and 1997, respectively. Volumes purchased were 50.9 billion cubic feet (“Bcf”), 53.4 Bcf and 38.6 Bcf in 1999, 1998 and 1997, respectively. These purchases were made in a competitive open bidding process and reflect market prices. Average prices per thousand cubic feet (“Mcf”) for gas purchased from WMLLC were $2.31, $2.33 and $2.67 in 1999, 1998 and 1997, respectively. 16) SUBSEQUENT EVENT Subsequent to September 30, 1999, the Company entered into a definitive agreement with Southwestern Energy Company (“Southwestern”) to acquire the Missouri natural gas distribution assets of Associated Natural Gas, a division of Arkansas Western Gas, which is a wholly-owned subsidiary of Southwestern. Under the This transaction, which will add approximately 48,000 customers, is expected to be completed by mid-year 2000, subject to approvals by the Missouri Public Service Commission and the Federal Energy Regulatory Commission. 17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 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 weight- ed average shares outstanding used in computing such amounts. The Company’s natural gas and propane distribution businesses are sea- sonal 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” sec- terms of the agreement, the Company will purchase the Missouri gas tion herein. December 31 March 31 June 30 September 30 Quarter ended (In thousands, except per share data) Fiscal year 1999 Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210,227 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,208 31,688 15,380 .50 Fiscal year 1998 Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 295,331 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,601 40,952 20,122 .68 $ 261,426 112,395 50,843 28,795 .94 $ 288,550 123,971 67,203 37,398 1.25 $ 109,590 $ 108,953 53,376 412 (5,295) (.17) $ 137,311 57,366 7,882 1,676 .06 42,815 (28,704) (21,136) (.68) $ 127,016 50,898 (3,158) (3,931) (.13) 60 Atmos Energy Corporation Consolidated Five-Year Financial and Statistical Summary Balance Sheet Data at September 30 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . Net property, plant and equipment . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, excluding current maturities . . . . Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . Income Statement Data Operating revenues . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per share – diluted . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . Degree days as a % 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 meter . . . . . . . . . . . . . . . . . . . . . Customers per employee . . . . . . . . . . . . . . . . . . . Times interest earned before income taxes . . . . . . 1999 1998 Year ended September 30, 1997 (1) (In thousands) 1996 (1) 1995 (1) $ $ $ $ $ $ $ $ $ $ $ $ 110,353 965,782 (151,622) 1,230,537 377,663 377,483 755,146 690,196 299,794 17,744 0.58 31,248 30,819 1.10 35,179 3211⁄16 231⁄16 241⁄8 12.09 41.59 2.00 4.6% 140,119 55,468 195,587 1,037,995 1,077,534 3,374 85% 4.53 2.79 .42 4.7% 2,062 930 146 523 1.56 $ $ $ $ $ $ $ $ $ $ $ $ 134,989 917,860 (116,679) 1,141,390 371,158 398,548 769,706 $ 122,312 849,127 (169,518) 1,088,311 327,260 302,981 630,241 $ 117,589 770,211 (102,764) 1,010,610 329,582 276,162 605,744 $ 103,904 697,287 (41,980) 900,948 304,349 294,463 598,812 (In thousands, except per share data) 848,208 331,836 55,265 1.84 30,398 30,031 1.06 36,949 311⁄16 245⁄8 289⁄16 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 $ $ $ $ $ $ $ $ $ $ $ 906,835 329,654 23,838 0.81 29,642 29,422 1.01 29,867 277⁄8 221⁄8 247⁄8 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 $ $ $ $ $ $ $ $ $ $ $ 886,691 324,412 41,151 1.42 $ 749,555 300,158 28,808 1.06 29,242 28,994 .98 36,472 31 18 233⁄8 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 $ $ $ $ $ $ $ $ $ $ 28,246 27,208 .96 31,782 205⁄8 157⁄8 193⁄8 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 a pooling of interests with United Cities in July 1997. Atmos Energy Corporation 61 62 Atmos Energy Corporation Atmos Officers Senior Management Team Non-Utility Business Units Robert W. Best Jack L. Mars Chairman, President and Chief Executive President, Enermart Energy Trust Officer Larry J. Dagley Robert E. Mattingly Vice President, New Business Ventures – Retail Executive Vice President and Chief Financial Services Officer Ron W. McDowell J. Charles Goodman Vice President, New Business Ventures Executive Vice President, Utility Operations Wynn D. McGregor Vice President, Human Resources Anthony W. Slayden President, United Cities Propane Gas, Inc. Utility Business Units Thomas R. Blose, Jr. President, United Cities Gas Company R. Earl Fischer President, Energas Company Conrad E. Gruber Shared Services Donald P. Burman Assistant Controller Cleaburne H. Fritz Vice President, Information Technology Tom S. Hawkins, Jr. Vice President, Budget and Planning President, Western Kentucky Gas Company and Interim Controller B.J. Hackler Lynn L. Hord President, Trans Louisiana Gas Company Vice President, Investor Relations and Gary L. Schlessman President, Greeley Gas Company Corporate Communications J. Patrick Reddy Vice President, Corporate Development and Treasurer Gordon J. Roy Vice President, Gas Supply Atmos Energy Corporation 63 Board of Directors Top: Front, from left Dan Busbee, Vincent Lewis Rear, from left Travis Bain, Robert Best, Gene Koonce, Charles Vaughan, Thomas Garland Bottom: Front Lee Schlessman (Honorary Director) Rear, from left Thomas Meredith, Carl Quinn, Richard Cardin, Phillip Nichol, Richard Ware 64 Atmos Energy Corporation Travis W. Bain II Dr. Thomas C. Meredith President, Bain Enterprises, Inc. Chancellor of the University Plano, Texas Board member since 1988 of Alabama System Tuscaloosa, Alabama Committees: Work Session/Annual Board member since 1995 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 Independent Business Consultant Dallas, Texas Board Member since 1988 Committees: Audit (Chairman), Human Resources Phillip E. Nichol Senior Vice President and Branch Manager PaineWebber Incorporated Dallas, 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 Committees: Human Resources (Chairman), Richard W. Cardin Executive Charles K. Vaughan Formerly Chairman of the Board Atmos Energy Corporation Dallas, Texas Board member since 1983 Committee: Executive (Chairman) Richard Ware II President, Amarillo National Bank Amarillo, Texas Board member since 1994 Committees: Audit, Work Session/ Annual Meeting Honorary Director Lee E. Schlessman President, Dolo Investment Company Denver, Colorado Retired from Board in 1998 Consultant and retired partner of Arthur Andersen LLP Nashville, Tennessee Board Member since 1997 Committees: Audit, Nominating Thomas J. Garland Interim President of Tusculum College and Chairman of the Tusculum Institute for Public Leadership and Policy 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 Vincent J. Lewis Senior Vice President Legg Mason Wood Walker Inc. Rutherford, New Jersey Board member since 1997 Committees: Audit, Nominating Corporate Information Page Common Stock Listing New York Stock Exchange Trading Symbol ATO Stock Transfer Agent and Registrar Shareholder inquiries on stock transfers may be directed to Bank Boston, N.A., c/o EquiServe, P.O. Box 8040, Boston, MA 02266-8040. You may also 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. You may also send an e-mail through our agent’s website at http://www.equiserve.com and reference Atmos in your e-mail. 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 Hotel Crescent Court, 400 Crescent Court, Dallas, Texas, at 11 a.m. CST on February 9, 2000. Direct Stock Purchase Plan Atmos Energy Corporation has a Direct Stock Purchase Plan that is available to all investors. 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 EquiServe 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. 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 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 finan- cial reports and other investor information, management biogra- phies, employment opportunities and information about the com- pany’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.unitedcitiespropanegas.com Please visit us on the worldwide web. Atmos Energy Corporation Contacts: Shareholder and Direct Stock Purchase Plan Information: 1-800-38-ATMOS (382-8667), 7:30 a.m. – 4:30 p.m. CST Financial Information for Securities Analysts, Investment Managers and General Information: Lynn Hord Vice President, Investor Relations and Corporate Communications (972) 855-3729 (office) (972) 855-3040 (fax) lynn.hord@atmosenergy.com Atmos Energy Corporation P.O. Box 650205 Dallas, Texas 75265-0205 (972) 934-9227 3100-AR-2000