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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended September 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from __________ to ____________
Commission File Number 1-10042
ATMOS ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS AND VIRGINIA 75-1743247
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas 75240
(Address of principal executive offices (Zip code)
Registrant's telephone number, including area code: (972) 934-9227
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common stock, No Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was $738,585,541 as of November 25, 1997. On November 25,
1997 the registrant had 29,770,088 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement filed for the
annual meeting of shareholders on February 11, 1998 are incorporated by
reference into Part III.
Cautionary Statement under the Private Securities Litigation Reform Act of 1995
The matters discussed or incorporated by reference in this Annual
Report on Form 10-K contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 or Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this Report including, but not limited to, those contained in the
following sections, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and Notes 2, 5, and 11 of notes to
consolidated financial statements, regarding the Company's financial position,
business strategy and plans and objectives of management of the Company for
future operations, are forward-looking statements made in good faith by the
Company. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Such forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the statements relating to the
Company's operations, markets, services, rates, recovery of costs, availability
of gas supply, and other factors. These risks and uncertainties include, but are
not limited to, economic, competitive, governmental, weather, technological and
other factors.
PART I
ITEM 1. BUSINESS
Atmos Energy Corporation (the "Company") was organized under the laws
of the State of Texas in 1983 as a subsidiary of Pioneer Corporation ("Pioneer")
for the purposes of owning and operating Pioneer's natural gas distribution
business in Texas. Immediate ly following the transfer of such business, which
had been opera ted by Pioneer and its predecessors since 1906, Pioneer distrib
uted the outstanding stock of the Company, then known as Energas Company, to
Pioneer shareholders. In September 1988, the Company changed its name from
Energas Company to Atmos Energy Corporation. As a result of its merger with
United Cities Gas Company in July 1997, the Company became incorporated in the
Commonwealth of Virginia as well as the State of Texas.
The Company distributes and sells natural gas and propane to
approximately 1.02 million residential, commercial, industrial, agricultural,
and other customers. The Company distributes and sells natural gas to
approximately 985,000 customers in 802 cities, towns, and communities in service
areas located in Texas, Louisiana, Kentucky, Colorado, Kansas, Illinois,
Tennessee, Iowa, Virginia, Georgia, South Carolina and Missouri. The Company
also transports gas for others through parts of its distribution system. It
also distributes propane to approximately 29,000 customers in Kentucky, North
Carolina, Tennessee and Virginia.
The Company's Texas distribution system is operated through its
Energas Company division (the "Energas Division") and covers an area having a
population of approximately 950,000 people. The economy of the area is based
primarily on oil and gas production and agriculture. The principal cities
served by the Energas Division include Amarillo, Lubbock, Midland, and Odessa.
At September 30, 1997, the Company served 311,571 customers in Texas.
The Company's Louisiana distribution system is operated through its
Trans Louisiana Gas Company division (the "Trans La Division") and covers an
area having a population of approximately 250,000 people. The economy of the
area is based primarily on oil and gas production, agriculture, and food
processing. The principal cities served by the Trans La Division are Lafayette,
Pineville, and Natchitoches. At September 30, 1997, the Company served 80,053
customers in Louisiana.
The Company's Kentucky distribution system is operated through its
Western Kentucky Gas Company division (the "Western Kentucky Division") and
covers an area having a population of approximately 680,000 people. The economy
of the area is based primarily on industry and agriculture. The principal
cities served by the Western Kentucky Division include Bowling Green, Owensboro,
and Paducah. At September 30, 1997, the Company served 173,958 customers in
Kentucky.
The Company's distribution systems in Colorado and parts of Kansas and
Missouri are operated through its Greeley Gas Company division (the "Greeley Gas
Division") and covers an area having a combined population of approximately
228,000 people. The economies of the areas served are based on oil and gas
production, agriculture and resort business. The principal cities served by the
Greeley Gas Division include Greeley, Durango and Lamar, Colorado and Bonner
Springs, Herington and Ulysses, Kansas. At September 30, 1997 the Greeley Gas
Division served 113,185 customers.
The Company operates natural gas distribution systems in Georgia,
Illinois, Iowa, South Carolina, Tennessee, Virginia, Kansas and Missouri through
its United Cities Gas Company division (the "United Cities Division") and covers
an area having a combined population of approximately 6,695,000 people. The
economies of the areas served include customers engaged in the manufacture of
asphalt, automobiles, auto parts, chemicals, electronics, food products, metals,
textiles and wire, among others. The division also serves several colleges and
a major army base. The principal cities and counties served by the United
Cities Division include Franklin and Murfreesboro, Tennessee; Wyandotte and
Johnson Counties in Kansas; Hannibal, Missouri; and Gainesville and Columbus,
Georgia. At September 30, 1997, the United Cities Division served 306,681
natural gas customers.
2
The Company also operates certain non-utility businesses through
various wholly-owned subsidiaries. One subsidiary, United Cities Gas Storage
Company ("UCG Storage"), provides natural gas storage services. It owns natural
gas storage fields in Kentucky and Kansas to supplement natural gas used by
customers in those states.
Another subsidiary, UCG Energy Corporation ("UCG Energy"), leases
appliances, real estate and equipment, and vehicles to the United Cities
Division and others, and owns a small interest in a partnership engaged in
exploration and production activities. UCG Energy also owns a 45% interest in
Woodward Marketing, L.L.C. ("WMLLC"), a gas marketing business incorporated in
Texas. WMLLC provides gas marketing services to industrial customers,
municipalities and local distribution companies, including the United Cities
Division. UCG Energy utilized equity accounting, effective January 1, 1995, for
this acquisition. The excess of the purchase price over the value of the net
tangible assets, amounting to approximately $5,400,000, was allocated to
intangible assets consisting of customer contracts and goodwill, which are being
amortized over ten and twenty years, respectively. In accordance with the
purchase agreement, if certain earnings targets are met, an additional payment
of up to $1,000,000 may be paid over a five-year period.
UCG Energy also owns United Cities Propane Gas of Tennessee, Inc. (the
"Propane Division"), which is engaged in the retail distribution of propane (LP)
gas, the wholesale supply and transportation of LP gas, the transportation of
certain products for other companies and the direct merchandising and repair of
propane gas appliances. Each of approximately 15 town operations has its own
storage facility with a total company storage capacity of 2,119,000 gallons. As
of September 30, 1997, the Propane Division served 29,097 customers in
Tennessee, Kentucky, North Carolina and Virginia. During the three-year period
ended September 30, 1997, the Propane Division added approximately 8,000
customers through acquisitions of four propane distribution companies and a
propane transport company.
The natural gas and propane distribution industries are subject to a
number of factors, many of which affect the Company from time to time. These
include (i) the ongoing need to obtain adequate and timely rate relief from
regulatory authorities to recover costs of service and earn a fair return on
invested capital; (ii) inherent seasonality of the business; (iii) competition
with alternate fuels; (iv) competition with other gas sources for industrial
customers, including the ability of some customers to bypass the Company's
facilities, which could result in loss of revenues and reduction in the
Company's net income; and (v) possible volatility in the supply and price of
natural gas and propane.
3
ACQUISITIONS AND MERGERS
Since its organization in 1983, the Company has sought to expand its
customer base and to diversify the weather patterns, local economic conditions,
and regulatory environments to which its operations are subject. As part of
this strategy, the Company acquired Trans Louisiana Gas Company, Inc. ("TLG") in
January 1986, Western Kentucky Gas Utility Corporation in December 1987, Greeley
Gas Company ("GGC") in December 1993, Oceana Heights Gas Company of Thibodaux,
Louisiana in November 1995 and United Cities Gas Company ("UCGC") in July 1997.
The Company continues to consider and pursue, where appropriate, additional
acquisitions of natural gas distribution properties and other business
opportunities. For further information regarding the UCGC merger, see Note 2 of
notes to consolidated financial statements.
UTILITY AND NON-UTILITY DATA
The following table summarizes certain information regarding the
operation of the utility and non-utility businesses of the Company for each of
the three years in the period ended September 30, 1997. Prior periods have been
restated to reflect the pooling of interests with UCGC on July 31, 1997.
Utility Non-utility Total
---------- ----------- ----------
(In thousands)
1997
Operating revenues $ 864,720 $42,115 $ 906,835
Net income 20,463 3,375 23,838
Identifiable assets 1,015,818 72,493 1,088,311
1996
Operating revenues $ 837,125 $49,566 $ 886,691
Net income 36,740 4,411 41,151
Identifiable assets 926,935 83,675 1,010,610
1995
Operating revenues $ 707,680 $41,875 $ 749,555
Net income 24,618 4,190 28,808
Identifiable assets 829,849 71,099 900,948
The utility business is comprised of the Company's five utility
divisions: Energas Division, Greeley Gas Division, Trans La Division, United
Cities Division and Western Kentucky Division. It includes regulated as well as
certain nonregulated utility businesses such as irrigation, transportation and
gas marketing activities in the utility divisions' respective service areas.
4
The non-utility business includes the operations of UCG Storage and
UCG Energy, which includes a 45% interest in WMLLC (a gas marketer), the propane
business and leasing of real estate, vehicles and appliances.
OPERATING STATISTICS
The table on the following page reflects the pooled operating
statistics of Atmos and the United Cities Division for fiscal 1997 and the
restated operating statistics for the previous four years on a pooled basis. It
is followed by two tables of utility sales and operating statistics by business
unit for 1997 and 1996, respectively. These two tables are followed by tables
of non-utility net income and propane statistics for 1997, 1996 and 1995.
5
ATMOS ENERGY CORPORATION
FIVE-YEAR OPERATING STATISTICS
Year ended September 30,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
NUMBER OF CUSTOMERS, at
end of year
Residential 870,747 860,229 834,376 825,310 789,360
Commercial 92,703 91,960 90,093 93,250 86,124
Industrial (including agricultural) 17,217 19,403 19,762 20,219 9,564
Public authority and other 4,781 4,716 4,982 4,949 3,267
---------- -------- -------- -------- ----------
Total natural gas customers 985,448 976,308 949,213 943,728 888,315
Propane 29,097 26,108 23,359 21,693 20,498
---------- --------- -------- -------- ----------
Total Customers 1,014,545 1,002,416 972,572 965,421 908,813
========== ========= ======== ======== ==========
HEATING DEGREE DAYS, (2)
Actual 3,909 4,043 3,706 3,855 4,080
Percent of normal 98% 101% 93% 97% 102%
SALES VOLUMES - MMcf (3)
Residential 75,214 77,001 69,666 72,561 74,818
Commercial 37,382 38,247 34,921 35,250 36,307
Industrial (including agricultural) 46,417 57,863 57,290 57,638 50,537
Public authority and other 5,195 5,182 4,779 5,242 4,403
---------- --------- -------- -------- ----------
Total 164,208 178,293 166,656 170,691 166,065
TRANSPORTATION VOLUMES - MMcf (3) 48,800 44,146 47,647 47,882 51,665
---------- --------- -------- -------- ----------
TOTAL VOLUMES DELIVERED - MMcf (3) 213,008 222,439 214,303 218,573 217,730
========== ========= ======== ======== ==========
PROPANE - Gallons (000's) 32,975 40,723 28,854 23,175 20,180
========== ========= ======== ======== ==========
OPERATING REVENUES (000's)
Gas Revenues
Residential $ 452,864 $ 409,039 $337,768 $375,450 $ 372,770
Commercial 193,302 186,032 150,949 165,883 165,611
Industrial (including agricultural) 168,386 187,693 171,591 188,791 160,410
Public authority and other 23,898 21,738 18,185 22,463 18,315
---------- --------- -------- -------- ----------
Total gas revenues 838,450 804,502 678,493 752,587 717,106
Transportation Revenues 19,885 18,872 19,813 21,325 21,937
Other Revenue 6,385 13,751 9,374 6,879 8,014
---------- --------- -------- -------- ----------
Total utility revenues 864,720 837,125 707,680 780,791 747,057
Non-utility revenues
Propane revenues 33,194 34,730 22,124 18,510 16,506
Other revenues 8,921 14,836 19,751 27,001 31,330
---------- --------- -------- -------- ----------
Total non-utility revenues 42,115 49,566 41,875 45,511 47,836
---------- --------- -------- -------- ----------
Total operating revenues $ 906,835 $ 886,691 $749,555 $826,302 $ 794,893
========== ========= ======== ======== ==========
AVERAGE SALES PRICE/Mcf
Residential $ 6.02 $ 5.31 $ 4.85 $ 5.17 $ 4.98
Commercial 5.17 4.86 4.32 4.71 4.56
Industrial (including agricultural) 3.63 3.24 3.00 3.28 3.17
Public authority and other 4.60 4.19 3.81 4.29 4.16
Total 5.11 4.51 4.07 4.41 4.32
AVERAGE COST OF GAS/Mcf SOLD 3.51 3.15 2.70 3.10 3.04
AVERAGE TRANSPORTATION REVENUES/Mcf .41 .43 .42 .45 .42
See footnotes on page 7.
6
UTILITY SALES AND STATISTICAL DATA BY BUSINESS UNIT - 1997(1)
Year ended September 30, 1997
--------------------------------------------------------------------
Western Greeley United Total
Energas Trans La Kentucky Gas Cities Utility
--------- --------- -------- -------- ------- ---------
UTILITY CUSTOMERS, at end of year
Residential 268,518 73,546 154,219 99,472 274,992 870,747
Commercial 25,234 5,409 17,706 13,328 31,026 92,703
Industrial (including agricultural) 15,589 120 460 385 663 17,217
Public authority and other 2,230 978 1,573 - - 4,781
-------- -------- -------- -------- -------- ----------
Total 311,571 80,053 173,958 113,185 306,681 985,448
======== ======== ======== ======== ======== ==========
HEATING DEGREE DAYS, (2)
Actual 3,553 1,523 4,178 6,195 3,980 3,909
Normal 3,531 1,771 4,333 6,274 4,070 3,990
Percent of normal 100% 86% 96% 99% 98% 98%
SALES VOLUMES - MMcf (3)
Residential 24,292 3,558 13,543 10,227 23,595 75,215
Commercial 7,912 1,383 6,070 6,731 15,286 37,382
Industrial (including agricultural) 19,084 1,872 6,128 1,907 17,425 46,416
Public authority and other 2,689 951 1,555 - - 5,195
-------- -------- -------- -------- -------- ----------
Total 53,977 7,764 27,296 18,865 56,306 164,208
TRANSPORTATION VOLUMES - MMcf (3) 4,479 624 22,398 3,275 18,024 48,800
-------- -------- -------- -------- -------- ----------
TOTAL VOLUMES HANDLED - MMcf (3) 58,456 8,388 49,694 22,140 74,330 213,008
======== ======== ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues (000's) $234,310 $ 51,866 $144,139 $ 91,341 $343,064 $ 864,720
Gross plant (000's) $322,774 $108,822 $175,793 $137,489 $501,972 $1,246,850
Net plant (000's) $208,289 $ 78,354 $105,393 $ 83,371 $314,591 $ 789,998
Miles of pipe 13,214 2,241 3,638 3,864 7,945 30,902
Employees (4) 534 154 330 250 1,031 2,299
Communities served 92 41 163 123 383 802
(1) Atmos' utility business is comprised of the five utility divisions listed in
the table above. Their operations include the regulated local distribution
companies and certain unregulated gas marketing subsidiaries located in their
respective service areas. The Energas plant balances include certain shared
services utilty amounts.
(2) A heating degree day is equivalent to each degree that the average of the
high and the low temperatures for a day is below 65 degrees. The greater the
number of heating degree days, the colder the climate. Heating degree days are
used in the natural gas industry to measure the relative coldness of weather
experienced and to compare relative temperatures between one geographic area and
another. Normal degree days is based on 30-year average National Weather
Service data for selected locations.
(3) Volumes are reported as metered in million cubic feet ("MMcf").
(4) This excludes 218 and 235 Atmos shared services employees and 162 and 143
non-utility employees in United Cities in 1997 and 1996, respectively.
7
UTILITY SALES AND STATISTICAL DATA BY BUSINESS UNIT - 1996 (1)
Year ended September 30, 1996
--------------------------------------------------------------------
Western Greeley United Total
Energas Trans La Kentucky Gas Cities Utility
--------- --------- -------- -------- ------- ---------
UTILITY CUSTOMERS, at end of year
Residential 266,805 73,414 151,798 97,653 270,559 860,229
Commercial 24,950 5,392 17,334 13,230 31,054 91,960
Industrial (including agricultural) 17,780 118 467 401 637 19,403
Public authority and other 2,219 956 1,541 - - 4,716
-------- -------- -------- -------- -------- ----------
Total 311,754 79,880 171,140 111,284 302,250 976,308
======== ======== ======== ======== ======== ==========
HEATING DEGREE DAYS, system average (2)
Actual 3,331 1,980 4,610 5,912 4,322 4,043
Normal 3,528 1,760 4,376 6,234 4,070 3,990
Percent of normal 94% 113% 105% 95% 106% 101%
SALES VOLUMES (2)
Residential 22,842 4,205 14,694 9,829 25,458 77,028
Commercial 7,426 1,490 6,351 6,252 16,706 38,225
Industrial (including agricultural) 24,978 1,707 10,726 1,028 18,207 56,646
Public authority and other 2,529 962 1,685 1,218 - 6,394
-------- -------- -------- -------- -------- ----------
Total 57,775 8,364 33,456 18,327 60,371 178,293
TRANSPORTATION VOLUMES (3) 5,694 562 16,936 3,342 17,612 44,146
-------- -------- -------- -------- -------- ----------
TOTAL VOLUMES HANDLED (3) 63,469 8,926 50,392 21,669 77,983 222,439
======== ======== ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues (000's) $203,409 $ 53,288 $153,203 $ 73,844 $353,381 $ 837,125
Gross plant (000's) $278,180 $103,809 $158,918 $125,531 $476,855 $1,143,293
Net plant (000's) $168,014 $ 74,816 $ 96,252 $ 74,485 $301,699 $ 715,266
Miles of pipe 13,163 2,090 3,570 3,817 7,523 30,163
Employees (4) 609 167 373 268 1,068 2,485
Communities served 92 41 163 123 383 802
See footnotes on page 7.
8
The non-utility business is comprised of the operations of UCG Storage and UCG
Energy. Their net income for 1997, 1996 and 1995 is recapped below:
1997 1996 1995
------- ------ ------
(In thousands)
Non-utility net income:
Propane $ (89) $1,276 $1,123
Rental 1,109 1,237 1,693
Interest in WMLLC and other 1,616 1,092 634
Storage 739 806 740
------ ------ ------
Total $3,375 $4,411 $4,190
====== ====== ======
The Company's Propane Division sells and transports propane to both
wholesale and retail customers. Propane statistics for 1997, 1996 and 1995 are
shown below. The division sold 33 million gallons of propane in 1997 as
compared with 41 million gallons in 1996. The decrease in volume was the result
of winter weather that was 7% warmer than normal in 1997.
PROPANE STATISTICS:
1997 1996 1995
------- ------- -------
(In thousands)
Sales
Retail $19,201 $21,434 $15,932
Wholesale 10,349 13,296 6,192
------- ------- -------
29,550 34,730 22,124
Cost of sales 20,084 23,832 13,038
------- ------- -------
Gross profit $ 9,466 $10,898 $ 9,086
======= ======= =======
Gross margin % of sales 32.0% 31.4% 41.1%
Gallons 32,975 40,723 28,854
GAS SALES
The Company's natural gas distribution business is seasonal and highly
dependent on weather conditions in the Company's service areas. Gas sales to
residential and commercial customers are greater during the winter months than
during the remainder of the year. The volumes of such sales during the winter
months will vary with the temperatures during such months. The seasonal nature
of the Company's sales to residential and commercial customers is offset
partially by the Company's sales in the
9
spring and summer months to its agricultural customers in Texas, Colorado and
Kansas who utilize natural gas to operate irrigation equipment. The Company
also has weather normalization adjustments in its rate jurisdictions in
Tennessee and Georgia, which serve approximately 170,000 customers. The
Company's management believes that the Company has lessened its sensitivity to
weather risk by diversifying its operations into geographic areas having
different weather patterns.
In addition to weather, the Company's revenues are affected by the
cost of natural gas and economic conditions in the areas that the Company
serves. Higher gas costs, which the Company is generally able to pass through
to its customers under purchased gas adjustment clauses, may cause customers to
conserve, or, in the case of industrial customers, to use alternative energy
sources.
In recent years, natural gas market conditions have changed. Natural
gas prices to distributors have become more volatile and the number of competing
marketers of natural gas has increased. The Company's gas marketing subsidiaries
purchase gas to address requirements for large volume customers in certain
highly competitive markets.
In certain instances, customers purchase gas directly from others
instead of from the Company and the Company transports such gas through its
distribution systems to the customers' facilities for a fee. Although
transportation of customer-owned gas reduces the Company's operating revenues
and corresponding purchased gas cost, the transportation revenues received by
the Company may offset the loss to gross profit.
The Company's distribution systems have experienced aggregate peak day
deliveries of approximately 1.5 billion cubic feet ("Bcf") per day. The Company
has the ability to curtail deliveries to certain customers under the terms of
interruptible contracts and applicable state statutes or regulations which
enables it to maintain its deliveries to high priority customers. The Company
has not imposed curtailment in its Energas Division since the Company began
independent operations in 1983 or in its Trans La Division since the Company
acquired TLG in 1986. The Western Kentucky Division curtailed deliveries to
certain interruptible customers during exceptionally cold periods in December
1989, January 1994 and during the winter of 1996. Neither the Greeley Gas
Division nor its predecessor, GGC, have curtailed deliveries to its sales
customers since prior to 1980. The United Cities Division curtails interruptible
service customers from time to time each year in accordance with the
interruptible contracts and tariffs.
10
GAS SUPPLY
The Western Kentucky Division's gas supply is delivered by the
following pipelines: Texas Gas, Tennessee Gas, Trunkline and ANR, except that a
small percentage of the requirements are being purchased directly from
intrastate producers that are connected directly to its distribution system.
During 1997, the Western Kentucky Division purchased its supply from various
producers and marketers including Texaco Gas Marketing, Union Pacific Fuels,
Vastar Gas Marketing, Duke Energy, LG&E Natural and Natural Gas Clearinghouse.
The United Cities Division is served by thirteen interstate pipelines.
The majority of the volumes are transported through East Tennessee Pipeline,
Southern Natural Gas and Williams Natural Gas. During 1997, the United Cities
Division purchased its supply from various producers and marketers including
TransCanada, Texaco Gas Marketing, Woodward Gas Marketing, and Williams Energy
Service Company.
Colorado Interstate Gas Company, Williams Natural Gas, Public Service
Company of Colorado, and Northwest Pipeline are the principal transporters of
the Greeley Gas Division's requirements. Additionally, the Greeley Gas Division
purchased substantial volumes from producers that are connected directly to its
distribution system. During 1997, the Greeley Gas Division's primary suppliers
were Union Pacific Fuels, Williams Energy Service Company, Duke Energy,
Interenergy and WESTAR.
The Energas Division receives sales and transportation service from
various KN affiliates. Also, the Company purchases a significant portion of its
supply from Pioneer Natural Resources (formerly Mesa) which is connected
directly to the Company's Amarillo, Texas distribution system. During 1997,
other major suppliers included Texaco Gas Marketing, Enron, and Natural Gas
Clearinghouse.
Louisiana Intrastate Gas Company ("LIG"), Acadian Pipeline, Koch
Gateway and Texas Gas Transmission Company pipelines delivered most of the Trans
La Division's requirements. The Trans La Division purchased its supply from
various producers and marketers including Acadiana Gas Marketing, Koch Gas
Marketing, LL&E and Engage Energy.
The Company owns and operates numerous natural gas storage facilities
in Kentucky and Kansas which are used to help meet customer requirements during
peak demand periods and to reduce the need to contract for additional pipeline
capacity to meet such peak demand periods. Additionally, the Company operates
various propane plants and a liquid natural gas ("LNG") plant for peak shaving
purposes. The Company also contracts for storage service in underground storage
facilities of many of the interstate pipelines serving it. See "Item 2.
Properties" for further information regarding the peak shaving facilities.
11
The United Cities Division normally injects gas into pipeline storage
systems and UCG Storage's storage system during the summer months and withdraws
it in the winter months. At the present time, the underground storage
facilities of UCG Storage have a maximum daily output capability of
approximately 45,000 Mcf.
The United Cities Division has the ability to serve approximately 60%
of its peak day load through the use of company owned storage facilities,
storage contracts with its suppliers and peaking facilities throughout the
system. This ability provides the operational flexibility and security of
supply required to meet the needs of the highly weather sensitive residential
and commercial market.
REGULATION AND RATES
Regulation. In the Energas Division, the governing body of each
municipality served by the Company has original jurisdiction over all utility
rates, operations, and services within its city limits except with respect to
sales of natural gas for vehicle fuel and agricultural use. The Company
operates pursuant to non-exclusive franchises granted by the municipalities it
serves, which franchises are subject to renewal from time to time. The
franchises granted to the Company permit it to conduct natural gas distribution
within the municipalities' incorporated limits. The Railroad Commission of Texas
("Railroad Commission") has exclusive appellate jurisdiction over all rate and
regulatory orders and ordinances of the municipalities and exclusive original
jurisdiction over rates and services to customers not located within the limits
of a municipality. In Texas, rates for large industrial customers are routinely
set by contract negotiation between the Company and its customers pursuant to
statutory standards and are filed with and subject to the governmental authority
of the municipalities or the Railroad Commission, depending on whether the
customer is located inside or outside the limits of a municipality.
Historically, the Company's rates for large industrial customers have been
accepted as filed. Agricultural sales in Texas are not regulated, except that
prices for agricultural sales cannot exceed the prices the Company charges the
majority of its commercial or other similar large-volume users in Texas.
The Trans La Division is regulated by the Louisiana Public Service
Commission ("Louisiana Commission"), which regulates utility services, rates,
and other matters. In most of the parishes and incorporated areas in which the
Company operates in Louisiana, it does so pursuant to a non-exclusive franchise
granted by the governing authority of each parish or incorporated area. The
franchise gives the Company the general privilege to operate its gas
distribution business in, as well as the right to install its distribution lines
along the roadways of, the parish or the incorporated area. Direct sales of
natural gas to industrial customers in Louisiana who utilize the gas for fuel or
12
in manufacturing processes and sales of natural gas for vehicle fuel are exempt
from regulation.
The Western Kentucky Division is regulated by the Kentucky Public
Service Commission ("Kentucky Commission"), which regulates utility services,
rates, issuances of securities, and other matters. The Company operates in the
various incorporated cities served by it in Kentucky pursuant to non-exclusive
franchises granted by such cities. The franchises grant to the Company the
right to operate its gas distribution business in the city and to install its
distribution lines and related equipment in and along the city's public rights-
of-way. Sales of natural gas for use as vehicle fuel in Kentucky are not
subject to regulation.
The Greeley Gas Division is regulated by the Colorado Public Utilities
Commission ("Colorado Commission"), the Kansas Corporation Commission, and the
Missouri Public Service Commis sion with respect to accounting, rates and
charges, operating matters, and the issuance of securities. The Company
operates in the various incorporated cities served by it in the states of
Colorado, Kansas and Missouri under terms of non-exclusive franchises granted by
the various cities. The franchises grant to the Company, among other things,
the right to install and operate its gas distribution system within the city
limits. Most of the Greeley Gas Division's wholesale gas suppliers are
regulated by various federal and state commissions.
In each state in which the United Cities Division operates, its rates,
services and operations as a natural gas distribution company are subject to
general regulation by the state public service commission. Its pipeline
suppliers, but not the United Cities Division or the other utility divisions,
are subject to regulation by the Federal Energy Regulatory Commission ("FERC").
The United Cities Division's rates, which vary in its different regulatory
jurisdictions, are determined by its cost of purchased gas, rate of return, type
of service and volume of use by the customer. In addition, the issuance of
securities by the Company is subject to approval by the state commissions,
except in South Carolina and Iowa. Missouri only regulates the issuance of
secured debt. The United Cities Division operates in each community, where
necessary, under a franchise granted by the municipality for a fixed term of
years. To date it has been able to renew franchises and expects to continue to
do so in the future.
The Company is also subject to regulation by the United States
Department of Transportation with respect to safety requirements in the
operation and maintenance of its gas distribution facilities. The Company's
distribution operations are also subject to various state and federal laws
regulating environmental matters. From time to time the Company receives
inquiries regarding various environmental matters. The Company believes that
its properties and operations substantially comply with and are operated in
substantial conformity with applicable
13
safety and environmental statutes and regulations. There are no administrative
or judicial proceedings arising under environmental quality statutes pending or
known to be contemplated by governmental agencies which, if adversely
determined, would have a material adverse effect on the Company.
Rates. Approximately 89% of the Company's revenues in fis cal 1997
was derived from sales at rates set by or subject to approval by local or state
authorities. The method of determin ing regulated rates varies among the
twelve states in which the Company has utility operations. As a general rule,
the regulatory authority reviews the Company's rate request and establishes a
rate structure intended to generate revenue sufficient to cover the Company's
costs of doing business and provide a reasonable return on invested capital.
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 automatic 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 Georgia Commission and Tennessee Regulatory Authority have
approved Weather Normalization Adjustments ("WNAs") that allow the United Cities
Division to increase the base rate portion of customers' bills when weather is
warmer than normal and decrease the base rate when weather is colder than
normal. The net effect of the WNAs was an increase (decrease) in revenues of
$2,643,000, $(2,612,000) and $1,030,000 in 1997, 1996 and 1995, respectively.
14
The following table sets forth the major rate requests made by the
Company during the most recent five years and the action taken on such requests:
Effective Amount Amount
Jurisdiction Date Requested Received
------------ ------------ ----------- ----------
Texas
West Texas System 11/18/94 $2,581,000 $1,702,000(a)
11/01/96 7,676,000 5,800,000(a)
Amarillo 11/25/92 4,398,000 2,130,000
Louisiana 03/01/93 (b) 730,000(b)
03/01/94 (b) 1,058,000(b)
03/01/95 (b) 1,071,000(b)
Kentucky 11/01/95 7,665,000 2,300,000(c)
03/01/96 1,000,000(c)
Colorado 05/01/94 4,527,000 3,246,000
Kansas 12/01/93 2,604,000 2,088,000(d)
09/01/95 4,230,000 2,700,000(e)
Missouri 10/14/95 1,100,000 903,000
South Carolina 02/07/95 341,000 253,000
Tennessee 11/15/95 3,951,000 2,227,000
Iowa 05/17/96 750,000 410,000
Georgia 12/02/96 5,003,000 3,160,000
Illinois 07/09/97 1,234,000 428,000
Virginia 09/29/95 810,000 103,000
(a) These increases include $200,000 and $500,000 applicable to areas outside
the city limits which became effective in January 1995 and April 1997,
respectively.
(b) A September 1992 rate order approved a Rate Stabilization Clause ("RSC") for
three years which provided for an annual adjustment of rates to reflect
changes in expenses and investment. The RSC provided the Company the
opportunity to earn a return on common equity between 11.75% and 12.25%.
(c) The Kentucky rate order provided an increase of $2,300,000, lowered
depreciation rates effective November 1, 1995 and provided an additional
$1,000,000 beginning March 1, 1996. The order also included a provision for
a pilot demand side management program which could cost up to $450,000
annually.
(d) This increase is applicable to the service area of the Greeley Gas Division.
(e) This increase is applicable to the service area of the United Cities
Division.
15
COMPETITION
The Company is not currently in significant direct competition with
any other distributors of natural gas to residential and commercial customers
within its service areas. However, the Company does compete with other natural
gas suppliers and suppliers of alternate fuels for sales to industrial and
agricultural customers.
The Company competes in all aspects of its business with alternative
energy sources, including, in particular, electrici ty. Competition for the
residential and commercial customers is increasing. Promotional incentives,
improved equipment efficien cies, and promotional rates all contribute to the
acceptability of electric equipment. In the United Cities Division, #2 and #6
fuel oil are the primary competition for industrial customers. In addition,
certain customers, primarily industrial, may have the ability to by-pass the
Company's distribution system by connecting directly with a pipeline.
Beginning in 1985, changes in the federal regulatory environment
through FERC orders and conditions related to markets and gas supply in the
United States have brought increased competition into the natural gas industry.
In 1993, FERC Order 636 was implemented by the interstate pipelines that serve
the United Cities and Western Kentucky Divisions, but FERC policies have not had
a direct impact upon the Company's Energas, Greeley Gas and Trans La Divisions
which are primarily supplied by intrastate pipelines. However, competition for
large volume customers in the United Cities and Western Kentucky Divisions and
other service areas has increased as a result of FERC Order 636. The Company has
sought regulatory approvals for competitive pricing on a case by case basis.
The Company participates in the operation of public refueling
facilities for the sale of compressed natural gas ("CNG") for vehicular use.
The most recent of these were opened in Greeley, Colorado in September 1996, at
West Texas A&M University in Canyon, Texas in August 1995, and in Owensboro,
Kentucky in April 1995. Prior to that time, the Company provided CNG for
vehicular use only in limited situations (such as for school buses in certain
school districts and for the fleet vehicles of certain businesses). With the
opening of these public refueling stations the Company began competing with
gasoline for vehicular fuel sales. All of these facilities, except those in
Greeley, Colorado and at West Texas A&M, are located at existing local gasoline
stations.
The United Cities Division has received approval from all the
regulatory authorities in the states in which it operates, except Iowa, to place
into effect a negotiated tariff rate which allows the United Cities Division to
maintain industrial loads at lower margin rates. Iowa has rules which allow for
flexible rates. These rates are competitive with the price of alternative
fuels. In addition, certain industrial customers have changed
16
from firm to interruptible rate schedules in order to obtain natural gas at a
lower cost. Additionally, the United Cities Division has received approval from
all state regulatory authorities to provide transportation service of customer-
owned gas.
UCG Energy's propane subsidiary is in competition with other suppliers
of propane, natural gas and electricity. Competition exists in the areas of
price and service. The wholesale cost of propane is subject to fluctuations
primarily based on demand, availability of supply and product transportation
costs.
UCG Energy, through its 45% interest in WMLLC, competes with other
natural gas brokers in obtaining natural gas supplies for customers. UCG Energy
also competes with other rental companies.
UCG Storage charges rates to the United Cities Division that are
subject to review by the various commissions in the states within which the
storage service is provided. Therefore, UCG Storage's rates must be competitive
with other storage facilities. UCG Storage also stores natural gas for WMLLC.
As a result, UCG Storage is in competition with other companies that store
natural gas as to rates charged and deliverability of natural gas. Storage
agreements between UCG Storage and the United Cities Division give it first
priority to any storage services.
Employees
At September 30, 1997, the Company employed 2,679 persons. See
"Utility Sales and Statistical Data by Business Unit - 1997" for the number of
employees by business unit. As discussed in Management's Discussion and
Analysis, the Company is in the process of downsizing and restructuring in
connection with the integration of UCGC and its Customer Service Initiative.
The projected complement at the end of fiscal 1998 is currently estimated at
2,223 persons.
ITEM 2. PROPERTIES
The Company owns an aggregate of 30,902 miles of underground
distribution and transmission mains throughout its gas distribution systems.
These mains are located on easements or right-of-ways granted to the Company,
which generally provide for perpetual use. The Company maintains its pipelines
through a program of continuous inspection and repair and believes that its
pipeline system is in good condition. The Company also owns and operates nine
peak shaving plants with a total capacity of approximately 1,050,000 gallons
that can produce an equivalent of 19,459 Mcf daily and an LNG storage facility
with a capacity of 500,000 Mcf which can inject a daily volume of 30,000 Mcf in
the system, as well as underground storage fields which are used to supplement
the supply of natural gas in periods of peak demand. It has seven underground
gas storage facilities in Kentucky and four in Kansas that have a total storage
capacity of
17
approximately 21.1 Bcf. However, approximately 10.0 Bcf of gas in the storage
facilities must be retained as cushion gas to maintain reservoir pressure. The
maximum daily delivery capability of the storage facilities is approximately 154
MMcf.
Substantially all of the Company's properties in its Greeley Gas
Division and United Cities Division with recorded values of approximately $83.4
million and $314.6 million, respectively, are subject to liens under First
Mortgage Bonds assumed by the Company in its mergers with GGC and UCGC. At
September 30, 1997, the liens secured $17.0 million of outstanding 9.4% Series J
First Mortgage Bonds due May 1, 2021, and $113.0 million of outstanding Series
N, P, Q, R, S, T, U and V First Mortgage Bonds due at various dates from 2004
through 2022.
In 1996 the Company consolidated its administrative offices in Dallas,
Texas under one lease. The Company also maintains field offices throughout its
distribution system, substantially all of which are located in leased premises.
Net non-utility property at September 30, 1997 amounted to
approximately $19.5 million for propane equipment, $17.4 million for underground
storage facilities, and $19.7 million for rental buildings and equipment.
The Company holds franchises granted by the incorporated cities and
towns that it serves. At September 30, 1997, the Company held 413 such
franchises having terms generally ranging from five to 25 years. The Company
believes that each of its franchises will be renewed.
ITEM 3. LEGAL PROCEEDINGS
See Note 5 of notes to consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of September 30,
1997, regarding the executive officers of the Company. It is followed by a
brief description of the business experience of each executive officer during
the past five years.
Years of
Name Age Service Office Currently Held
---- --- -------- ---------------------
Robert W. Best 50 - Chairman, President and Chief Executive Officer
Larry J. Dagley 49 - Executive Vice President and Chief Financial Officer
J. Charles Goodman 36 13 Executive Vice President of Operations
Donald E. James 50 16 Senior Vice President of Public Affairs
Mary S. Lovell 46 9 Senior Vice President of Utility Services
Glen A. Blanscet 40 12 Vice President, General Counsel and Corporate Secretary
Wynn D. McGregor 44 9 Vice President, Human Resources
Robert W. Best was named Chairman, President and Chief Executive
Officer and was appointed to the Board of Directors in March 1997. He
previously served as Senior Vice President -regulated businesses, for
Consolidated Natural Gas Company of Pittsburgh, Pennsylvania, since January
1996, responsible for its transmission and distribution companies. He
previously served as President of Texas Gas Transmission Company of Owensboro,
Kentucky, and Houston, Texas, from 1985 to 1995, and from 1992 to 1995 he was
President of Transco Gas Pipeline.
Larry J. Dagley was named Executive Vice President and Chief Financial
Officer effective May 1, 1997. From August 1995 to May 1997, he served as
Senior Vice President and Chief Financial Officer of Pacific Enterprises, a Los
Angeles, California based utility holding company whose principal subsidiary is
Southern California Gas Co., the nation's largest gas distribution utility.
From 1985 until joining Pacific Enterprises, he served as Senior Vice President
and Controller (1985-1993) and Senior Vice President and Chief Financial Officer
(1993-1995) of Transco Energy Company, a Houston, Texas based natural gas
pipeline company. Prior to joining Transco, Mr. Dagley was an audit partner
with Arthur Andersen & Co., where he supervised audits and financial consulting
engagements in the energy industry.
J. Charles Goodman was named Executive Vice President, Operations in
April 1995. He previously served as President of the Company's Trans La Gas
Division from February 1993 until April 1995 and as Chief Engineer from February
1989 until February 1993.
19
Donald E. James was named Senior Vice President - Public Affairs in
May 1995. He previously served as Senior Vice President and General Counsel
from January 1994 to May 1995, Senior Vice President - General Counsel and
Corporate Secretary from May 1993 until August 1993, and Senior Vice President
and General Counsel from May 1989 until May 1993.
Mary S. Lovell was named Senior Vice President, Utility Services in
May 1995. She previously served as Vice President, Rates and Regulatory Affairs
from August 1990 to May 1995.
Glen A. Blanscet was named Vice President, General Counsel and
Corporate Secretary in May 1995. He previously served as Assistant General
Counsel and Corporate Secretary from January 1994 to May 1995, and Assistant
General Counsel from July 1988 to December 1993.
Wynn D. McGregor was named Vice President, Human Resources in January
1994. He previously served the Company as Director of Human Resources from
February 1991 to December 1993 and as Manager, Compensation and Employment from
December 1987 to January 1991.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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 1997 and 1996 are listed below. Dividends
paid for 1997 and 1996 have been restated to reflect the merger of Atmos and
UCGC accounted for as a pooling of interests. Atmos' actual dividends paid in
fiscal 1997 were $.25 for each of the first three quarters and $.255 for the
fourth quarter, and $.24 per quarter for each quarter of fiscal 1996. The high
and low prices listed are the actual closing NYSE quotes for Atmos shares.
1997 1996
----------------------------- --------------------------
Dividends Dividends
High Low paid High Low paid
Quarter ended: -------- ----- ---- ------ ------ -----
December 31 $ 24 3/4 $ 22 5/8 $.251 $23 $18 $.245
March 31 26 1/4 22 1/8 .252 23 21 .245
June 30 25 1/2 22 1/2 .252 31 22 3/4 .245
September 30 27 7/8 24 1/2 .255 30 5/8 20 7/8 .245
----- -----
$1.01 $ .98
===== =====
See Note 7 of notes to consolidated financial statements for
restriction on payment of dividends. The number of record holders of the
Company's common stock on September 30, 1997 was 29,867.
20
ITEM 6. 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. Amounts for 1997 reflect the pooled operations of Atmos and
the United Cities Division. Prior year amounts have been restated for the
pooling.
Year ended September 30,
----------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- -------
(In thousands, except per share data)
Operating revenues $ 906,835 $ 886,691 $749,555 $826,302 $794,893
========== ========== ======== ======== ========
Net income $ 23,838 $ 41,151 $ 28,808 $ 26,772 $ 29,694
========== ========== ======== ======== ========
Net income per share $ .81 $ 1.42 $ 1.06 $ 1.05 $ 1.21
========== ========== ======== ======== ========
Cash dividends per share $ 1.01 $ .98 $ .96 $ .91 $ .82
========== ========== ======== ======== ========
Total assets at end of year $1,088,311 $1,010,610 $900,948 $829,385 $786,739
========== ========== ======== ======== ========
Long-term debt at end of year $ 302,981 $ 276,162 $294,463 $282,647 $257,696
========== ========== ======== ======== ========
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This section provides management's discussion of Atmos Energy
Corporation's ("the Company" or "Atmos") financial condition, cash flows and
results of operations with specific information on liquidity, capital resources
and results of operations. It includes management's interpretation of such
financial results, the major factors expected to affect future operating
results, and future investment and financing plans. This discussion should be
read in conjunction with the Company's consolidated financial statements and
notes thereto. For financial and operating statistics, please see the tables of
restated and pooled data included herein.
Cautionary Statement under the Private Securities Litigation Reform Act of 1995
The matters discussed or incorporated by reference in this Annual
Report on Form 10-K contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 or Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this Report including, but not limited to, those contained in this
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", 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. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Such forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those expressed or implied in the statements relating to the Company's
operations, markets, services, rates, recovery of costs, availability of gas
supply, and other factors. These risks and uncertainties include, but are not
limited to, economic, competitive, governmental, weather, technological and
other factors.
Organization
The Company distributes, sells and transports natural gas and propane
to residential, commercial, industrial and agricultural customers in thirteen
states. The natural gas distribution business is operated through its five
utility divisions, rather than as a holding company. Such utility business is
subject to regulation by state and/or local authorities in each of the states in
which the Company operates. In addition, the Company's business is affected by
seasonal weather patterns, competition within the energy industry, and economic
conditions in the areas that the Company serves.
22
With the completion of the merger with United Cities Gas Company this
year, Atmos is the 12th largest natural gas distribution utility company in
terms of total customers in the country, and the fifth largest pure natural gas
utility. Since its organization in 1983, the Company has sought to expand its
customer base and to diversify the weather patterns, local economic conditions,
and regulatory environments in which it operates. As part of this strategy, the
Company has completed major acquisitions in 1986, 1987, 1993 and 1997. In
addition to growing through acquisitions, the Company's strategy includes
building the Atmos team, running the utility operations exceptionally well,
increasing the size and market share of the non-utility operations (gas
marketing and propane), and developing plans to participate in retail energy
services behind the meter.
In connection with its merger with United Cities Gas Company, as
discussed in Note 2 of notes to consolidated financial statements, the Company
acquired certain non-utility subsidiaries which contributed approximately 14% of
1997 net income and offer potential growth opportunities.
One non-utility subsidiary, UCG Storage, was formed in 1989 to provide
natural gas storage services. In 1989, a natural gas storage field was
purchased in Kentucky to supplement natural gas used by customers in Tennessee.
In addition, natural gas storage fields located in Kansas were sold to UCG
Storage and are used to supplement natural gas requirements of Kansas customers.
The other non-utility subsidiary, UCG Energy, incorporated in 1965,
leases appliances, real estate and equipment, and vehicles to the United Cities
Division and others. UCG Energy also owns a 45% interest in WMLLC of Houston,
Texas, which provides natural gas services to industrial customers,
municipalities and local distribution companies in the Southeast and Midwest,
including the United Cities Division. Management services include contract
negotiation and administration, load forecasting, nominations and scheduling,
storage acquisition, capacity utilization and pricing/risk management. WMLLC
was formed in 1995.
UCG Energy has two wholly-owned subsidiaries, United Cities Propane
Gas of Tennessee, Inc. and UCG Leasing, Inc. United Cities Propane Gas of
Tennessee, Inc. is engaged in the retail and wholesale distribution and
transportation of propane (LP) gas. As of September 30, 1997, the propane
operation served 29,097 customers in Kentucky, North Carolina, Tennessee and
Virginia. UCG Leasing, Inc. was incorporated under the laws of Georgia in 1987
and leases vehicles, equipment and real estate to the United Cities Division. A
table of non-utility net income for 1997, 1996 and 1995 appears on page 9
herein.
23
Acquisitions and Mergers
The Company has expanded its customer base and sought to diversify the
regulations, weather patterns and local economic conditions to which it is
subject through acquisitions in fiscal years 1997, 1994, 1987, and 1986. The
Company plans to continue its acquisition strategy to add new customers and
service areas for both natural gas and propane. It has an excellent track record
of acquiring LDC operations that provide diversity in weather, regulatory
patterns, economies and markets. It has achieved synergies and benefits quickly,
while preserving brand equity.
Ratemaking Activity
Rates and regulatory initiatives are at the heart of Atmos' utility
operations and are important to both shareholders and customers. Atmos'
objective is to achieve rates that provide for fair returns for its shareholders
while having these rates at low, competitive levels for its customers. As the
energy environment and industry change, the process for setting rates in the
future may also need to change. In that regard, the Company is participating in
a performance-based rates experimental program in Tennessee, which is designed
to reward the Company for performing better than certain benchmarks relating to
purchased gas cost. A similar program is underway in Georgia. Atmos believes
that performance-based rate programs benefit customers and reward efficient
service providers like Atmos, and Atmos intends to seek gas cost incentive
arrangements and incentive rates in every jurisdiction possible.
The Company received rate increases totaling $9.4 million, $6.8 million,
and $5.8 million effective in fiscal 1997, 1996 and 1995, respectively. For
further information regarding these rate increases please see Note 3 "Rates" in
notes to consolidated financial statements.
Weather and Seasonality
The Company's natural gas and propane distribution businesses are seasonal
due to weather conditions in the Company's service areas. Sales are affected by
winter heating season requirements. Sales to agricultural customers (who use
natural gas as fuel in the operation of irrigation pumps) during the period from
April through September are affected by rainfall amounts. These factors
generally result in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues and either
net losses or lower net income during the period from April through September of
each year. For further seasonality information, please see the Supplementary
Quarterly Financial Data following the notes to consolidated financial
statements herein.
24
The Georgia Public Service Commission and the Tennessee Regulatory
Authority have approved Weather Normalization Adjustments ("WNAs"). The WNAs,
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 customers' bills when weather is warmer than normal and decrease
the base rate when weather is colder than normal. The net effect of the WNAs
was an increase/(decrease) in revenues of $2,643,000, ($2,612,000) and
$1,030,000 in 1997, 1996 and 1995, respectively.
The Company has not sought weather normalization clauses in its other rate
jurisdictions because of the effect of its geographical diversification strategy
and the potential for increased profits in unusually cold years.
Environmental Matters
The Company is involved in certain environmental matters as discussed in
Note 5 "Contingencies" of notes to consolidated financial statements.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
To assist in management's discussion of results of operations, the
following table presents the effects for fiscal years 1997, 1996 and 1995 of
certain non-recurring charges as well as weather which affected reported
results.
1997 1996 1995
-------------- --------------- --------------
Per Per Per
Amount Share Amount Share Amount Share
------ ----- ------ ----- ------ -----
(In thousands, except per share data)
Net income as
reported $23,838 $ .81 $41,151 $1.42 $28,808 $1.06
Non-recurring charges:
Management reorganization 2,800 .10 - - - -
Reserve for potential sharing of
merger and integration costs 12,630 .43 - - - -
------- ----- ------- ----- ------- -----
Normalized net income except for
effects of weather 39,268 1.34 41,151 1.42 28,808 1.06
Effects of weather 3,571 .12 (1,838) (.06) 5,000 .18
------- ----- ------- ----- ------- -----
Normalized net income $42,839 $1.46 $39,313 $1.36 $33,808 $1.24
======= ===== ======= ===== ======= =====
25
Net income as reported
The Company reported net income of $23.8 million, or $.81 per share,
on operating revenues of $906.8 million for the fiscal year ended September 30,
1997. The 1997 net income includes the effects of non-recurring after-tax
charges related to management reorganization ($2.8 million or $.10 per share)
and reserves related to the UCGC merger and integration ($12.6 million or $.43
per share). Excluding the effect of these charges, the Company's net income
would have been $39.3 million or $1.34 per share in 1997, compared with $41.2
million, or $1.42 per share for 1996. The 1997 results include United Cities Gas
Company, which merged with Atmos effective July 31, 1997, and prior year
operating results have been restated to reflect the pooling of interests
accounting which was used for the merger.
Non-recurring charges
The Company completed a management reorganization in 1997 and recorded
a charge of $4.4 million ($2.8 million after-tax) in related costs.
The cost of the UCGC merger and integration totaled approximately $17
million for the transaction costs and $32 million for the separation and other
costs. There are substantial longer term benefits to the Company's customers
and shareholders from the merger of the two companies, which the Company expects
to result in cost savings over the next 10 years totaling about $375 million.
The Company believes a significant amount of the costs to achieve these benefits
will be recovered through rates and future operating efficiencies of the
combined operations. Therefore, the Company recorded as regulatory assets the
costs of the merger and integration of UCGC. However, the Company has
established a reserve of approximately $20 million ($12.6 million after-tax), to
account for costs that may not be recovered. The Company recorded these costs
in the fourth quarter of fiscal year 1997 when the merger was completed,
separation plans were approved by the board of directors and announcements were
made to employees. For further information regarding the merger please see Note
2 of notes to consolidated financial statements.
Effects of weather
Annual sales volumes and revenues vary in relation to winter heating
degree days and summer irrigation demand. The Company has weather normalization
adjustments in its rates in Georgia and Tennessee, but not in the other 10
states in which it has natural gas distribution operations. The estimated
effect on net income of weather different from 30-year normals is included in
the previous table. The decline in net income, excluding the charges and
reserves, was the result of the effects of warmer than normal weather during the
winter months, which negatively impacted gas throughput and sales as well as
propane sales. In addition, the spring months were wetter than normal, which
adversely impacted
26
irrigation gas utilization. Normal weather conditions would have added $.12 per
share to net income.
Rates
The negative effects of weather were partially offset by rate
increases implemented in fiscal 1996 and 1997 in jurisdictions in Texas,
Kentucky, Illinois, Georgia, Iowa, Tennessee, Missouri and Virginia. Rate
increases contributed approximately $8 million to gross profit in 1997.
The following table summarizes heating degree days and
volumes delivered for 1997, 1996 and 1995.
Year ended September 30,
--------------------------
1997 1996 1995
---- ---- ----
HEATING DEGREE DAYS
Actual 3,909 4,043 3,706
Percent of normal 98% 101% 93%
SALES VOLUMES - MMcf
Residential 75,214 77,001 69,666
Commercial 37,382 38,247 34,921
Industrial (including agricultural) 46,417 57,863 57,290
Public authority and other 5,195 5,182 4,779
-------- -------- --------
Total 164,208 178,293 166,656
TRANSPORTATION VOLUMES - MMcf 48,800 44,146 47,647
-------- -------- --------
TOTAL VOLUMES DELIVERED - MMcf 213,008 222,439 214,303
======== ======== ========
PROPANE - Gallons (000's) 32,975 40,723 28,854
======== ======== ========
Total operating revenues (000's) $906,835 $886,691 $749,555
======== ======== ========
Operating revenues increased approximately 2% to $906.8 million in
1997 from $886.7 million in 1996 due to an increase of 13% in the average sales
price per thousand cubic feet ("Mcf") of gas sold, which more than offset a 4%
decrease in total volumes delivered. The increase in sales price reflects an
increase in the commodity cost of gas which is passed through to end users and
rate increases implemented in 1996 and 1997. Average gas sales revenues per Mcf
increased by $.60 to $5.11 in 1997, while the average cost of gas per Mcf sold
increased $.36 to $3.51 in 1997. The number of meters in service increased to
985,448 at September 30, 1997 compared with 976,308 at September 30, 1996. Sales
to weather sensitive residential, commercial and public authority customers
decreased approximately 2.6 billion cubic feet ("Bcf") in 1997 while sales and
transportation volumes delivered to industrial and agricultural customers
decreased approximately 6.8 Bcf. Total sales and transportation volumes
delivered decreased 4.2% to 213.0 Bcf in 1997, as compared with 222.4 Bcf in
1996. The decrease was primarily due to lower
27
irrigation demand as a result of cooler, wetter summer weather in West Texas.
Gross profit increased by approximately 2% to $329.7 million in 1997
from $324.4 million in 1996. The primary factor contributing to the higher
gross profit was annual rate increases totalling approximately $16.2 million
implemented in fiscal 1997 and 1996 in Texas, Kentucky, Tennessee, Iowa,
Missouri, Georgia, and Illinois. This was partially offset by a decrease of 9.4
Bcf or 4.2% due to the effect of warmer than normal weather and decreased
irrigation demand as a result of cooler, wetter summer weather in 1997.
Operating expenses, excluding income taxes, increased $31.2 million or 13% to
$263.0 million in 1997. The $25.5 million increase in operation expense was due
primarily to the non-recurring $20.0 million reserve for potential sharing of
merger and integration costs, and the $4.4 million charge for management
reorganization. The $3.6 million increase in depreciation was due to utility
plant additions placed in service in 1996 and 1997. Income taxes decreased to
$14.3 million for 1997 from $23.3 million for 1996. The primary reason for the
decrease was lower pre-tax profits. The effective tax rate increased slightly to
37.5% in 1997 from 36.2% in 1996. This was primarily due to increased state
income tax rates in 1997. Also, prior to the merger in 1997, UCGC's income was
subject to a slightly lower federal tax rate because of the graduated rate
structure. Operating income decreased in 1997 by approximately $17.0 million or
24% to $52.3 million. The decrease in operating income resulted primarily from
the non-recurring charges included in 1997 operating expenses as discussed
above.
Net income decreased in 1997 by approximately 42% to $23.8 million
from $41.2 million in the prior year. This $17.3 million decrease in net income
resulted from the $17.0 million decrease in operating income and a $1.9 million
increase in interest expense, which were partially offset by a $1.6 million
increase in other income. The increase in interest expense was due to higher
average debt outstanding in 1997 than in 1996. The $1.6 million increase in
other income for 1997 was primarily due to a $1.1 million increase in income
from the Company's investment in Woodward Marketing LLC, a Houston gas marketing
company. Net income per share decreased to $.81 for 1997 from $1.42 for 1996.
Average shares outstanding increased 1% to 29,409,000 shares in 1997 from 1996.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995
Operating revenues increased 18% to $886.7 million in 1996 from $749.6
million in 1995 due to weather that was 9% colder than in 1995 and an 11%
increase in the average sales price per Mcf sold. Average gas sales revenues
per Mcf increased from 1995 by $.44 to $4.51 in 1996, while the average cost of
gas per Mcf sold increased $.45 to $3.15 in 1996. The total number of natural
gas and propane customers increased to 1,002,416 at September 30, 1996 compared
with 972,572 at September 30, 1995.
28
Sales to weather sensitive residential, commercial and public authority
customers increased approximately 11.0 Bcf in 1996 while sales and
transportation volumes delivered to industrial and agricultural customers
decreased 2.9 Bcf. Total volumes delivered increased 4% to 222.4 Bcf in 1996,
as compared with 214.3 Bcf in 1995. Revenues from gas sales to weather
sensitive customers increased $109.9 million to $616.8 million in fiscal 1996
due to an 11% increase in average sales price and a 10% increase in volumes sold
in 1996. The increase in volumes sold was due to weather 1% colder than normal
in 1996, as compared with 7% warmer than normal weather in 1995. Revenues from
gas sold and transported to industrial and agricultural customers increased
$15.2 million due to a $.24 per Mcf or 8% increase in sales price, despite a
slight decrease in volumes delivered.
Gross profit increased by approximately 8% to $324.4 million in 1996
from $300.2 million in 1995. The primary factor contributing to the higher
gross profit in 1996 was higher volumes sold to weather-sensitive customers due
to colder weather. The companywide average margin (sales price per Mcf less
cost of gas per Mcf) did not change significantly in 1996. Operating expenses,
excluding income taxes, increased only slightly to $231.8 million in 1996 from
$228.2 million in 1995. Income taxes increased to $23.3 million in 1996 from
$16.5 million in 1995. The primary reason for the increase was higher pre-tax
profits. The effective tax rate decreased slightly to 36.2% in 1996 from 36.5%
in 1995. Operating income increased in 1996 by approximately 25% to $69.3
million from $55.4 million in 1995. The increase in operating income resulted
primarily from the increase in 1996 gross profit, partially offset by increases
in operating expenses, primarily income taxes, as discussed above.
Net income increased in 1996 from 1995 by approximately 43% to $41.2
million from $28.8 million in the prior year. This increase in net income
resulted primarily from the increase in operating income, which was partially
offset by a $1.5 million increase in interest expense. This increase in
interest expense was caused by an increase in weighted average short-term debt
outstanding in 1996. Net income per share increased to $1.42 for 1996 from
$1.06 for 1995. Average shares outstanding increased 7% to 28,978,000 in 1996.
CAPITAL RESOURCES AND LIQUIDITY (See "Consolidated Statements of Cash Flows")
Because of the pooling of interests of Atmos, which has a September 30
fiscal year end, with UCGC, which had a December 31 year end, the activities of
UCGC for the quarter ended December 31, 1996 are included in the restated 1996
consolidated statement of cash flows and not the 1997 consolidated statement of
cash flows. As a result, amounts in the 1997 consolidated statement of cash
flows as reported are different than they would have been, had they included a
full 12 month's activity for UCGC.
29
The following pro forma condensed consolidated statement of cash flows
reflects activities of both Atmos and UCGC for the full 12 months ended
September 30, 1997.
(In thousands)
Cash flows from operating activities:
Net income $ 23,838
Depreciation 47,494
Other (11,054)
---------
Net cash provided by operating
activities 60,278
Net cash used in investing activities (131,286)
Cash flows from financing activities:
Increase in notes payable, net 63,600
Issuance of long-term debt 40,000
Repayment of long-term debt (16,037)
Issuance of common stock 10,482
Cash dividends paid (29,778)
---------
Net cash provided by financing
activities 68,267
---------
Decrease in cash (2,741)
Cash at beginning of year 8,757
---------
Cash at end of year $ 6,016
=========
Cash Flows from Operating Activities
Cash flows from operating activities as reported in the consolidated
statement of cash flows totaled $68.7 million for 1997 compared with $91.7
million for 1996 and $79.1 million for 1995. Due to non-recurring charges
recorded in 1997 and deducting UCGC's net income for the quarter ended December
31, 1996, the Company reported lower net income for the 1997 Statement of Cash
Flows as compared with 1996 and 1995. Depreciation for the full 12 months of
fiscal 1997 was $2.2 million higher than for 1996 because of increasing utility
plant in service. Using 1997 beginning balances for UCGC as of December 31,
1996 resulted in large swings in certain seasonal asset and liability accounts
like accounts receivable and accounts payable. Gas stored underground increased
in 1996 because of higher gas cost, but was lower in 1997 and 1995 because of
substantially lower gas prices during the summers of 1997 and 1995 when the
storage reservoirs were being refilled. The changes in deferred charges and
other assets and other current liabilities in 1997 were related to merger and
integration costs accrued and the related regulatory assets recorded in the
fourth quarter of 1997. See "Consolidated
30
Statements of Cash Flows" for other changes in assets and liabilities.
Cash Flows from Investing Activities
A substantial portion of the Company's cash resources is used to fund its
ongoing construction program in order to provide natural gas services to a
growing customer base. Net cash used in investing activities totaled $121.1
million in 1997 compared with $111.9 million in 1996 and $101.4 million in 1995.
During 1995, UCGC completed construction of a twenty-eight mile main which
connects two of its fastest growing distribution systems located in Middle
Tennessee and is designed to provide the Company's current customers with the
lowest possible priced gas through increased gas supply flexibility. Included
in the 1995 capital expenditures stated above is $5.7 million related to this
project. Capital expenditures in fiscal 1997 amounted to $122.3 million
(including $26.0 million for the Customer Service Initiative ("CSI")) compared
with $117.6 million in 1996 and $103.9 million in 1995. Currently budgeted
capital expenditures for 1998 total $109.1 million and include approximately
$41.5 million for completing CSI, as well as funds for additional mains,
services, meters, and vehicles. The CSI project includes application software,
related technology infrastructure and business process changes. Benefits
related to the CSI project include enabling the Company's ability to deliver its
vision by positioning for the future, using best practices in the industry,
timely integration of new acquisitions and resolution of Year 2000 issues.
Capital expenditures for fiscal 1998 are planned to be financed from internally
generated funds and financing activities, as discussed below.
31
The following table reflects the Company's capitalization, including
short-term debt except for the portion related to current storage gas.
1997 1996
--------------- ---------------
(In thousands)
Working capital
Short-term debt(1) $ 48,122 $ 43,350
======== ========
Short-term debt 119,178 15.6% 85,138 12.0%
Long-term debt 318,182 41.6% 292,841 41.4%
Shareholders' equity 327,260 42.8% 329,582 46.6%
-------- ---- -------- ----
Total capitalization $764,620 100% $707,561 100%
======== ==== ======== ====
(1) Includes short-term borrowings associated with working gas inventories.
As of the end of fiscal 1997, the debt to capitalization ratio had
increased to 57.2% from 53.4% in 1996. The increase was primarily due to
increased cash requirements related to merger and integration costs and CSI
investments in 1997, as well as the effects of the charges and reserves
previously discussed. The Company plans to decrease the debt to capitalization
ratio to nearer its target of 50% over the next three years through cash flow
generated from operations, issuance of new common stock under its Direct Stock
Purchase Plan and ESOP, recovery of CSI and merger/integration costs and
possibly from the sale of certain real estate assets.
Future capital requirements
Short-term borrowings are expected to continue to increase somewhat in
fiscal 1998 due to budgeted capital expenditures discussed above and scheduled
maturities of long-term debt of $15.2 million. The Company has access to $35.0
million available under its committed lines of credit and $159.9 million
available under its uncommitted lines.
Forward looking cash requirements beyond fiscal 1998 include capital
expenditures and possible contingencies and environmental matters as discussed
in the notes to consolidated financial statements. The Company plans to fund
future requirements through internally generated cash flows, credit facilities
and its access to the public debt and equity capital markets.
Cash Flows from Financing Activities
Net cash provided by financing activities totaled $47.3 million for 1997
compared with $22.0 million for 1996 and $26.1 million for 1995. Financing
activities during these periods included issuance of common stock, dividend
payments, short-term
32
borrowings from banks under the Company's credit lines, and issuance and
repayments of long-term debt.
Cash dividends paid. The Company paid $26.4 million in cash dividends
during 1997 (excluding dividends of $3.4 million paid by UCGC in the quarter
ended December 31, 1996) compared with $28.5 million in 1996 and $26.2 million
in 1995. Prior to the UCGC merger in July 1997, Atmos increased its actual
annual dividend rate by $.04 in each of the 3 years presented. Including fiscal
1998, the Company has increased its dividend rate for ten consecutive years.
Short-term financing activities. At September 30, 1997, the Company had
committed lines of credit totaling $187.0 million, $35.0 million of which was
unused, in order to provide for short-term cash requirements. These credit
facilities are negotiated at least annually. At September 30, 1997, the Company
also had uncommitted short-term credit lines of $170.0 million, of which $159.9
million was unused. During 1997, notes payable increased $38.8 million, after
the application of $40.0 million proceeds from the issuance of long-term debt to
reduce notes payable, compared with an increase of $62.7 million during 1996 and
a decrease of $38.5 million in 1995. The decrease in fiscal 1995 was primarily
due to repayment of short-term debt with most of the proceeds from the issuance
of $67.0 million of long-term debt.
Long-term financing activities. In November 1996, the Company issued $40.0
million of 6.09% unsecured notes due in November 1998 to a bank. The proceeds
were used to refinance short-term debt. Long-term debt payments totaled $14.7
million, $20.7 million, and $10.3 million for the years ended September 30,
1997, 1996 and 1995, 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 1997 consisted of $9.0 million of installments on the Company's
various unsecured Senior Notes, a $2.0 million installment on the 8.69% Series N
First Mortgage Bonds, and installments on various term notes and other long-term
obligations totaling $3.7 million. Payments of long-term debt in 1996 and 1995
likewise consisted of annual installments under the various loan documents. No
long-term debt was issued in 1996. In the first quarter of 1995, the Company
entered into note purchase agreements totaling $40.0 million with two insurance
companies and issued $20.0 million of unsecured Senior Notes at 8.07% payable in
annual installments of $4.0 million beginning October 31, 2002 through October
31, 2006 with semiannual interest payments and $20.0 million of unsecured Senior
Notes at 8.26% payable in annual installments of $1,818,182 beginning October
31, 2004 through October 31, 2014 with semiannual interest payments. In 1995
UCGC issued $22.0 million of medium-term notes under a shelf registration
statement and a $5.0 million term note for its propane company. The $27.0
million proceeds of these notes were used by UCGC to repay short-term
borrowings, retire long-term debt, finance the Company's construction program
and for other corporate purposes.
33
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-equity ratios and cash flows, and
restrictions on the payment of dividends. Also see Note 7 of the accompanying
notes to consolidated financial statements.
UCG Energy and Woodward Marketing, Inc. ("WMI"), sole shareholders of
WMLLC, act as guarantors of a $12,500,000 credit facility for WMLLC with a bank.
No balance was outstanding on this credit facility at September 30, 1997. UCG
Energy and WMI also act as joint and several guarantors on certain purchases of
natural gas and transportation services from suppliers by WMLLC. These
outstanding obligations amounted to $12.2 million at September 30, 1997.
Issuance of common stock. The Company issued 400,578, 995,467 and
2,335,785 shares of common stock in 1997, 1996 and 1995, respectively, for its
Direct Stock Purchase Plan, Employee Stock Ownership Plans, Restricted Stock
Grant Plan, Outside Directors Stock-for-Fee Plan, a public offering in 1995,
acquisitions of Oceana Heights and Monarch Gas Company and an interest in
Woodward Marketing LLC. See the Consolidated Statements of Shareholders' Equity
for the number of shares issued under each of the plans and for other
transactions. Please see Note 9 of the accompanying notes to consolidated
financial statements for the number of shares registered and available for
future issuance under each of the Company's plans.
In November 1995 the Company exchanged 313,411 shares of its common
stock valued at approximately $6.4 million in exchange for privately held Oceana
Heights Gas Company of Thibodaux, Louisiana.
In June 1996, in connection with the acquisition of Monarch Gas
Company ("Monarch"), 207,366 shares of UCGC's common stock were exchanged for
the common stock of Monarch. The merger added approximately 2,900 natural gas
customers in the Vandalia, Illinois area. In May 1995, 320,512 shares of UCGC's
common stock valued at $5,000,000 were issued in connection with the purchase of
a 45% interest in Woodward Marketing, LLC ("WMLLC") by UCG Energy. In June 1995
UCGC issued 1,380,000 shares of common stock under a shelf registration
statement in an underwritten public offering with net proceeds from the sale
amounting to approximately $18.9 million.
The Company believes that internally generated funds, its credit facilities
and access to the public debt and equity capital markets will provide necessary
working capital and liquidity for capital expenditures and other cash needs for
1998.
34
Inflation
The Company believes that inflation has caused and will continue to cause
increases in certain operating expenses and has required and will continue to
require assets to be replaced at higher costs. The Company continually reviews
the adequacy of its gas rates in relation to the increasing cost of providing
service and the inherent regulatory lag in adjusting those gas rates.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page no.
Reports of independent auditors 37
Consolidated balance sheets 39
Consolidated statements of income 40
Consolidated statements of shareholders' equity 41
Consolidated statements of cash flows 43
Notes to consolidated financial statements 45
Supplementary data (unaudited) 74
36
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors
Atmos Energy Corporation
We have audited the accompanying consolidated balance sheets of Atmos
Energy Corporation at September 30, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended September 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the financial statements of United Cities Gas Company, wholly owned by
Atmos Energy Corporation (see Note 2), which statements reflect total assets of
$513,649,000 as of December 31, 1996 and total revenues of $402,947,000 and
$313,735,000 for the years ended December 31, 1996 and 1995. Those statements
were audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to data included for United Cities Gas Company is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Atmos Energy Corporation at September 30,
1997 and 1996, and its consolidated results of operations and its cash flows for
each of the three years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
November 11, 1997
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Cities Gas Company:
We have audited the accompanying consolidated balance sheet and
consolidated statements of capitalization of United Cities Gas Company (an
Illinois corporation) and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, retained earnings, capital surplus and common
stock and cash flows for each of the two years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of United
Cities Gas Company and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Nashville, Tennessee
February 14, 1997
38
ATMOS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30,
1997 1996
---------- ----------
ASSETS (In thousands, except share data)
Property, plant and equipment $1,301,004 $1,198,557
Construction in progress 31,668 21,217
---------- ----------
1,332,672 1,219,774
Less accumulated depreciation and amort. 483,545 449,563
---------- ----------
Net property, plant and equipment 849,127 770,211
Current assets
Cash and cash equivalents 6,016 11,134
Accounts receivable, less allowance for doubtful accounts
of $2,188 in 1997 and $2,462 in 1996 71,217 103,415
Inventories 12,333 13,895
Gas stored underground 48,122 43,350
Prepayments 6,017 2,809
---------- ----------
Total current assets 143,705 174,603
Deferred charges and other assets 95,479 65,796
---------- ----------
$1,088,311 $1,010,610
========== ==========
CAPITALIZATION AND LIABILITIES
Shareholders' equity
Common stock, no par value (stated at $.005 per share);
authorized 75,000,000 shares; issued and outstanding
1997 - 29,642,437 shares, 1996 - 29,241,859 shares $ 148 $ 146
Additional paid-in capital 251,174 241,658
Retained earnings 75,938 87,778
---------- ----------
Total shareholders' equity 327,260 329,582
Long-term debt 302,981 276,162
---------- ----------
Total capitalization 630,241 605,744
Current liabilities
Current maturities of long-term debt 15,201 16,679
Notes payable to banks 167,300 128,488
Accounts payable 62,626 80,321
Taxes payable 416 11,201
Customers' deposits 15,098 16,812
Other current liabilities 52,582 23,866
---------- ----------
Total current liabilities 313,223 277,367
Deferred income taxes 87,828 72,073
Deferred credits and other liabilities 57,019 55,426
---------- ----------
$1,088,311 $1,010,610
========== ==========
See accompanying notes to consolidated financial statements.
39
ATMOS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30,
---------------------------------
1997 1996 1995
----------- ---------- --------
(In thousands, except per share data)
Operating revenues $906,835 $886,691 $749,555
Purchased gas cost 577,181 562,279 449,397
-------- -------- --------
Gross profit 329,654 324,412 300,158
Operating expenses
Operation 173,683 148,196 146,624
Maintenance 11,974 11,719 11,350
Depreciation and amortization 45,257 41,666 40,597
Taxes, other than income 32,131 30,254 29,626
Income taxes 14,298 23,316 16,544
-------- -------- --------
Total operating expenses 277,343 255,151 244,741
-------- -------- --------
Operating income 52,311 69,261 55,417
Other income (expense)
Interest and
investment income 5,410 3,867 3,290
Other, net (288) (300) 287
-------- -------- --------
Total other income
(expense) 5,122 3,567 3,577
Interest charges 33,595 31,677 30,186
-------- -------- --------
Net income $ 23,838 $ 41,151 $ 28,808
======== ======== ========
Net income per share $.81 $1.42 $1.06
======== ======== ========
Cash dividends per share $1.01 $.98 $.96
======== ======== ========
Average shares outstanding 29,409 28,978 27,208
======== ======== ========
See accompanying notes to consolidated financial statements.
40
ATMOS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Common stock
------------------- Additional
Number of Stated paid-in Retained
shares value capital earnings
---------- ------- -------- --------
(In thousands, except share data)
Balance, September 30, 1994 25,910,607 $130 $196,487 $ 70,967
Net income - - - 28,808
Cash dividends ($.96 per share) - - - (26,197)
Common stock issued:
Restricted stock grant plan 13,000 - 202 -
Direct stock purchase plans 388,484 2 5,832 -
ESOP/401(k) plans 233,789 1 4,173 -
Woodward Marketing acq. 320,512 2 4,998 -
Public offering 1,380,000 6 18,893 -
Other - - 45 -
---------- ---- -------- --------
Balance, September 30, 1995 28,246,392 141 230,630 73,578
Net income - - - 41,151
Cash dividends ($.98 per share) - - - (28,478)
Common stock issued:
Restricted stock grant plan 41,700 1 733 -
Direct stock purchase plans 268,124 1 4,563 -
Outside directors stock-for-fee plan 3,389 - 76 -
ESOP 161,477 1 3,641 -
Monarch Gas Co acq. 207,366 1 1,499 933
Oceana Heights acq. 313,411 1 304 594
Other - - 212 -
---------- ---- -------- --------
Balance, September 30, 1996 29,241,859 146 241,658 87,778
(continued)
41
ATMOS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(continued)
Common stock
------------------- Additional
Number of Stated paid-in Retained
shares value capital earnings
---------- ------- -------- --------
(In thousands, except share data)
Balance, September 30, 1996 29,241,859 $146 $241,658 $ 87,778
Net income - - - 23,838
Cash dividends ($1.01 per share) - - - (26,415)
Common stock issued:
Restricted stock grant plan 100,000 1 2,443 -
Direct stock purchase plans 85,243 - 1,888 -
Outside directors stock-for-fee plan 3,008 - 72 -
ESOP/401(k) plans 212,327 1 5,113 -
Less: UCGC net income for the quarter
ended December 31, 1996 - - - (9,263)
---------- ------- -------- --------
Balance, September 30, 1997 29,642,437 $148 $251,174 $ 75,938
========== ======= ======== ========
See accompanying notes to consolidated financial statements.
42
ATMOS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
--------------------------------
1997 1996 1995
-------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,575 $ 41,151 $ 28,808
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Charged to depreciation and amortization 39,970 41,666 40,597
Charged to other accounts 2,237 3,580 3,601
Deferred income taxes 5,807 7,585 4,652
Other - (1,866) 293
Change in assets and liabilities:
(Increase) decrease in accounts receivable 32,198 (12,697) (9,199)
(Increase) decrease in inventories 1,562 (1,238) (827)
(Increase) decrease in gas stored underground (4,772) (15,949) 11,707
(Increase) decrease in prepayments (3,208) 1,966 (419)
Increase in deferred charges and other assets (29,683) (4,623) (10,832)
Increase (decrease) in accounts payable (17,695) 23,796 3,415
Increase (decrease) in taxes payable (837) 7,099 162
Increase (decrease) in customers' deposits (1,714) 592 1,235
Increase (decrease) in other current liabilities 28,716 (4,165) 5,096
Increase in deferred credits and other liabilities 1,593 4,836 854
--------- --------- ---------
Net cash provided by operating activities 68,749 91,733 79,143
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (122,312) (117,589) (103,904)
Retirements of property, plant and equipment 1,189 5,708 2,456
--------- --------- ---------
Net cash used in investing activities (121,123) (111,881) (101,448)
- Continued -
43
ATMOS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended September 30,
--------------------------------
1997 1996 1995
-------- ---------- ----------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in notes payable $ 38,812 $ 62,675 $(38,475)
Proceeds from issuance of long-term debt 40,000 - 67,000
Repayment of long-term debt (14,659) (20,734) (10,347)
Cash dividends paid (26,415) (28,478) (26,197)
Issuance of common stock 9,518 8,523 34,109
-------- -------- --------
Net cash provided by financing activities 47,256 21,986 26,090
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (5,118) 1,838 3,785
Cash and cash equivalents at beginning of year 11,134 9,296 5,511
-------- -------- --------
Cash and cash equivalents at end of year $ 6,016 $ 11,134 $ 9,296
======== ======== ========
See accompanying notes to consolidated financial statements.
44
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contents of Notes to Consolidated Financial Statements
1. Summary of significant accounting policies 45
2. Business combinations 48
3. Rates 50
4. Income taxes 52
5. Contingencies 54
6. Leases 59
7. Long-term debt and notes payable 60
8. Statement of cash flows supplemental disclosures 62
9. Common stock and stock options 62
10. Employee retirement and stock ownership plans 64
11. Other postretirement benefits 69
Supplementary Data - Quarterly Financial Data (Unaudited) 74
1. Summary of significant accounting policies
Description of business - Atmos Energy Corporation and its
subsidiaries ("Atmos" or the "Company") are in the business of distributing
natural gas to residential, commercial, industrial and agricultural customers
within service areas located in Texas, Louisiana, Kentucky, Colorado, Kansas,
Illinois, Tennessee, Iowa, Virginia, Georgia, South Carolina and Missouri. Such
business is subject to federal and state regulation and/or regulation by local
authorities in each of the twelve states in which the Company operates. In
connection with the acquisition of United Cities Gas Company (See Note 2), the
Company also acquired non-utility businesses operated through UCG Energy
Corporation ("UCG Energy") and United Cities Gas Storage Company ("UCG
Storage"). They are involved in propane sales and distribution, gas marketing,
rental of real estate, equipment and appliances, and natural gas storage
services. None of the non-utility operations constitute a material business
segment.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of Atmos Energy Corporation and its
subsidiaries. Each subsidiary is wholly-
45
owned and all material intercompany items have been eliminated. Investments in
50%-or-less owned joint ventures or partnerships are accounted for by the equity
method or the cost method, as appropriate.
Restatement for pooling of interests - The consolidated financial
statements for all prior periods presented have been restated for the pooling of
interests of the Company with United Cities Gas Company in July 1997. Certain
changes in account classifications have been made to conform United Cities Gas
Company's classifications to Atmos' presentation.
Regulation - The Company's utility operations are subject to
regulation with respect to rates, service, maintenance of accounting records and
various other matters by the respective regulatory authorities in the states in
which it operates. The consolidated financial statements are based on generally
accepted accounting principles. Atmos' accounting policies recognize the
financial effects of the ratemaking and accounting practices and policies of the
various regulatory commissions.
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 ac counting periods used for financial
reporting purposes. The Company follows the revenue accrual method of
accounting for natural gas revenues whereby revenues applicable to gas delivered
to customers but not yet billed under the cycle billing method are estimated and
accrued and the related costs are charged to expense. Estimated losses due to
credit risk are reserved at the time revenue is recognized.
Property, plant and equipment - Property, plant and equipment is
stated at original cost net of contributions in aid of construction. The cost
of additions includes an allowance for funds used during construction and
applicable overhead charges. Major renewals and betterments are capitalized,
while the costs of maintenance and repairs are charged to expense as incurred.
Property, plant and equipment is depreciated at various rates on a straight-line
basis over the estimated useful lives of the assets. The composite rates were
3.9% and 3.7% for the years ended September 30, 1997 and 1996, respectively. At
the time property, plant and equipment is retired, the cost, plus removal
expenses and less salvage, is charged to accumulated depreciation.
Inventories - Inventories consist of materials and supplies and
merchandise held for resale. Inventories are stated at the lower of average
cost or market.
Gas stored underground - Net additions of inventory gas to underground
storage and withdrawals of inventory gas from storage are priced using the
average cost method for Atmos, except for the United Cities Division, where it
is priced on the first-in first-out method. Propane is priced at average cost.
Gas stored
46
underground and owned by UCG Storage is priced on the last-in first-out ("LIFO")
method. In accordance with the United Cities Division's PGA clause, the
liquidation of a LIFO layer would be reflected in subsequent gas adjustments in
customer rates and does not affect the results of operations. Non-current gas in
storage is classified as property, plant and equipment and is priced at cost.
Income taxes - The Company provides deferred income taxes for
significant temporary differences in the recognition of revenues and expenses
for tax and financial reporting purposes.
Cash and cash equivalents - The Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
Deferred charges and other assets - Deferred charges and other assets
at September 30, 1997 and 1996 include assets of the Company's qualified defined
benefit retirement plans in excess of the plans' obligations in the amounts of
$11,557,000 and $11,810,000, respectively, and Company assets related to the
nonqualified retirement plans at September 30, 1997 and 1996 of $21,210,000 and
$17,808,000, respectively.
Deferred credits and other liabilities - Deferred credits and other
liabilities include customer advances for construction of $10,072,000 and
$9,753,000 at September 30, 1997 and 1996, respectively; obligations under
capital leases of $3,047,000 and $2,769,000 at September 30, 1997 and 1996,
respectively; and obligations under the Company's nonqualified retirement plans
of $22,167,000 and $20,313,000 at September 30, 1997 and 1996, respectively.
Earnings per share - The calculation of primary earnings per share is
based on reported net income divided by weighted average common shares
outstanding. The Company does not have other classes of stock or dilutive
common stock equivalents.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently Issued Accounting Standards Not Yet Adopted
The Company has not yet adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share." The Statement is effective for Atmos'
fiscal year 1998 and earlier adoption is not permitted. The Statement requires
restatement of all prior-period EPS data presented.
The Company has not yet adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." The Statement will be
effective for Atmos' fiscal year 1999. It establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
47
The Company has not yet adopted Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information." The Statement will be effective for Atmos' fiscal year 1999. It
establishes 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. In the initial year of
application, comparative information for earlier years is to be restated.
The Company believes that adoption of these Statements will not have a
material impact on its financial condition, results of operations, or 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 were issued in a one-for-one exchange for all outstanding shares of UCGC
common stock. UCGC was a natural gas utility company engaged in the
distribution and sale of natural gas to approximately 306,000 customers in
Georgia, Illinois, Iowa, Kansas, Missouri, South Carolina, Tennessee, and
Virginia, and in the sale of propane to approximately 29,000 customers in
Kentucky, North Carolina, Tennessee, and Virginia. Its assets consisted of the
property, plant and equipment used in its natural gas and propane sales and
distribution businesses. With the completion of the merger, Atmos serves over
1,000,000 customers in 13 states.
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, all historical financial statements and notes thereto have been
restated. UCGC prepared its financial statements on a December 31 fiscal year
end. UCGC's fiscal year has been changed to September 30 to conform to the
Company's year end. The restated September 30, 1996 balance sheet, as
presented, is the combined balance sheets of Atmos as of September 30, 1996 and
UCGC as of December 31, 1996. The restated consolidated statements of income
and cash flows for the years ended September 30, 1996 and 1995 include Atmos
operations for the years then ended and UCGC operations for the years ended
December 31, 1996 and 1995. The consolidated statement of income for the year
ended September 30, 1997 includes Atmos and UCGC operations for the twelve
months then ended. As a result, UCGC's operations for the three months ended
December 31, 1996 (operating revenues of $122,971,000 and net income of
$9,263,000) are included in both the 1997 and 1996 consolidated statements of
income, the UCGC net income for this period has been deducted in calculating the
shareholders' equity balances at September 30, 1997 and cash flows for the year
then ended. Certain account
48
reclassifications were made to conform UCGC's classifications to Atmos'
presentation.
Following the merger, UCGC's business has been operated as United
Cities Gas Company, a division of Atmos ("United Cities Division") and
integration of the companies has begun. The United Cities Division will be
structured like other divisions of Atmos. To achieve this structure,
approximately 560 utility positions in the United Cities Division will be
eliminated by September 1998. An additional 75 Atmos positions will be
eliminated as part of the integration, resulting in approximately 635 total
position reductions in the combined company by September 1998. Atmos also has
initiated plans to enhance its customer service in Texas, Louisiana, Kentucky,
Colorado, Kansas and Missouri through business process changes which will result
in a net reduction of approximately 240 positions. These changes include
restructuring business office operations, establishing a network of payment
centers and creating a customer support call center.
Atmos estimates the cost of the merger and integration will total
approximately $17,000,000 for the transaction costs and $32,000,000 for the
separation and other costs. The Company believes there are substantial longer
term benefits to its customers and shareholders from the merger of the two
companies, which are expected to result in operating cost savings over the next
10 years totaling approximately $375,000,000. 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.
The Company recorded as regulatory assets the costs of the merger and
integration of the United Cities Division as discussed above, along with the
costs of the customer service initiative, which are primarily separation costs
and are estimated to be approximately $12,000,000 through September 30, 1997.
However, the Company established a general reserve of approximately $20,340,000
($12,630,000 after-tax), to account for costs that may not be recovered through
rates. Since the substantial portion of the costs are related to position
eliminations between July 31, 1997 and July 31, 1998 and fees payable at the
close of the merger, the Company recorded these costs in the fourth quarter of
fiscal year 1997 when the merger was completed, separation plans were approved
by the Board of Directors, and announcements were made to employees.
49
Results of operations and net income for the previously separate
companies for the periods prior to the merger are as follows:
10 Months ended Year ended
July 31, September 30,
1997 1996 1995
---------------- -------------- --------
(Unaudited) (In thousands)
Operating revenues:
Atmos $474,069 $483,744 $435,820
UCGC 356,325 402,947 313,735
-------- -------- --------
$830,394 $886,691 $749,555
======== ======== ========
Net income:
Atmos $ 23,079 $ 23,949 $ 18,873
UCGC 19,434 17,202 9,935
-------- -------- --------
$ 42,513 $ 41,151 $ 28,808
======== ======== ========
Dividends per share:
Atmos $ .75 $ .96 $ .92
UCGC $ .76 $ 1.02 $ 1.02
3. Rates
As of September 30, 1997, the Company did not have any rate cases
currently pending except for a "show cause" hearing scheduled to review rates in
Colorado before the Colorado Public Utility Commission in December 1997. Rate
cases completed during the three years ended September 30, 1997 are summarized
below.
In November 1996, UCGC filed to increase rates on an annual basis by
$1,234,000 to approximately 23,000 customers in the state of Illinois.
Effective July 9, 1997, the Illinois Commerce Commission granted a rate increase
of $428,000 in annual revenues. The increase will be followed by a rate
moratorium until June 2000. Effective December 2, 1996, UCGC received an annual
rate increase of $3,160,000 for approximately 70,000 customers in the state of
Georgia. UCGC had filed in May 1996 to increase rates by $5,003,000 on an
annual basis. Effective May 17, 1996, UCGC received an annual rate increase of
$410,000 in the state of Iowa. UCGC had filed to increase rates by $750,000 on
an annual basis. Included in the rate increase in Iowa was the recovery of
$1,787,000 over a ten-year period related to UCGC's agreement with Union
Electric Company ("Union Electric") whereby Union Electric agreed to assume
responsibility for UCGC's continuing investigation and environmental response
action obligations as outlined in the feasibility study pertaining to a
manufactured gas plant site in Keokuk, Iowa.
Effective November 15, 1995, UCGC received an annual rate increase of
$2,227,000 in the state of Tennessee. UCGC had filed
50
to increase rates by $3,951,000 on an annual basis. Effective October 14, 1995,
UCGC received an annual rate increase of $903,000 in the state of Missouri.
UCGC had filed to increase rates by $1,100,000 on an annual basis. Effective
September 1, 1995, UCGC received an annual rate increase of $2,700,000 in the
state of Kansas. UCGC had filed to increase rates by $4,230,000 on an annual
basis. Effective February 7, 1995, UCGC received an annual rate increase of
$253,000 in the state of South Carolina. UCGC had filed to increase rates by
$341,000 on an annual basis.
The Georgia Public Service Commission and the Tennessee Regulatory
Authority have approved Weather Normalization Adjustments ("WNAs"). The WNAs,
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 customers' bills when weather is warmer than normal and decrease
the base rate when weather is colder than normal. The net effect of the WNAs
was an increase/(decrease) in revenues of $2,643,000, ($2,612,000) and
$1,030,000 in 1997, 1996 and 1995, respectively.
In April 1995, UCGC filed to increase rates on an annual basis by
$810,000 to approximately 18,000 customers in the state of Virginia. UCGC was
granted permission by the Virginia State Corporation Commission ("Virginia
Commission") to implement the proposed 3% rate increase, subject to refund,
effective September 29, 1995. In May 1997, the Virginia Commission issued an
order approving a rate increase of .4%, effective September 29, 1995, which is
expected to generate additional annual revenues of $103,000. Money over-
collected from customers under the interim rates was credited to customer
accounts with interest.
Effective April 1, 1995, and for an experimental two-year period, the
PGA clause in Tennessee was modified by an incentive rate program which compares
UCGC purchased gas prices to market prices. The gains or losses recognized by
UCGC as a result of the incentive program were limited to a maximum of $25,000
per month in the plan year ended March 31, 1996, and limited to a maximum of
$600,000 per year in the plan year ended March 31, 1997. UCGC recognized gains
related to the incentive programs in Tennessee of $675,000 and $213,000 for
fiscal 1996 and 1995, respectively. On March 5, 1997, the Tennessee Court of
Appeals (the "Court") issued a decision reversing and remanding the Tennessee
Regulatory Authority's order which approved the incentive rate program for the
plan year ending March 31, 1997. UCGC has filed to make the program permanent,
effective April 1, 1997 and a hearing has not been held as of this date. An
experimental incentive rate program similar to the Tennessee program has also
been approved in Georgia for a two-year period that began April 1, 1997.
In May 1996, the Company filed to increase revenues by approximately
$7.7 million for a portion of its Energas Division service area, which includes
approximately 200,000 customers inside the city limits of 67 cities in West
Texas. All cities
51
either approved, or took no action to reject, a settlement allowing a $5.3
million increase in annual revenues to be effective for bills rendered on or
after November 1, 1996. In October 1996, the Company filed a rate request with
the Railroad Commission of Texas to increase revenues by approximately $.5
million for the remaining 22,000 rural customers in West Texas. The rate request
was approved and became effective in April 1997.
In February 1995, the Company filed with the Kentucky Public Service
Commission (the "Kentucky Commission") for a rate increase for its Western
Kentucky Division, which includes approximately 171,000 customers. In October
1995, the Kentucky Commission issued an order authorizing the Company to
increase its rates by $2.3 million annually effective November 1, 1995, and by
an additional $1.0 million annually beginning in March 1996. The settlement
included a decrease in depreciation rates, recovery of expenses related to
adoption of Statement of Financial Accounting Standards No. 106 and included a
provision for the Company to begin a three-year demand-side management pilot
program for the 1996-97 heating season, which could cost up to $450,000
annually, resulting in a total annual operating in come increase of
approximately $4.0 million. In fiscal 1997 the Company incurred costs of
approximately $218,000 on the demand-side management pilot program.
4. Income taxes
The components of income tax expense for 1997, 1996 and 1995 are as
follows:
1997 1996 1995
-------- -------- --------
(In thousands)
Current $ 8,917 $16,156 $12,319
Deferred 5,807 7,585 4,652
Investment tax credits (426) (425) (427)
------- ------- -------
$14,298 $23,316 $16,544
======= ======= =======
Included in the provision for income taxes are state income taxes of
$2,000,000, $2,801,000, and $1,552,000 for 1997, 1996, and 1995, respectively.
Deferred income taxes reflect the tax effect of differences between
the basis of assets and liabilities for book and tax purposes. The tax effect
of temporary differences that give rise to significant components of the
deferred tax liabilities and deferred tax assets at September 30, 1997 and 1996
are presented below:
52
1997 1996
-------- --------
(In thousands)
Deferred tax assets
Costs expensed for book purposes and capitalized for
tax purposes $ 641 $ 1,087
Accruals not currently deductible for tax purposes 12,398 3,460
Customer advances 3,160 2,629
Nonqualified benefit plans 9,118 8,238
Postretirement benefits 5,757 3,819
Unamortized investment tax credit 1,723 1,593
Regulatory liabilities 3,117 3,035
Other, net 3,758 1,776
--------- --------
Total deferred tax assets 39,672 25,637
Deferred tax liabilities
Difference in net book value and net tax value
of assets (102,038) (87,604)
Pension funding (4,190) (4,734)
Gas cost adjustment (6,568) (655)
Regulatory assets (8,673) (1,529)
Other, net (6,031) (3,188)
--------- --------
Total deferred tax liabilities (127,500) (97,710)
--------- --------
Net deferred tax liabilities $ (87,828) $(72,073)
========= ========
SFAS No. 109 deferred accounts for rate regulated
entities (included in other deferred credits) $ 15,072 $ (3,904)
========= ========
Reconciliations of the provisions for income taxes computed at the
statutory rate to the reported provisions for income taxes for 1997, 1996 and
1995 are set forth below:
Liability Method
----------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Tax at statutory rate of 35% $13,348 $22,564 $15,873
Common stock dividends deductible for tax
reporting (706) (684) (619)
State taxes 1,300 2,000 951
Other, net 356 (564) 339
------- ------- -------
Provision for income taxes $14,298 $23,316 $16,544
======= ======= =======
53
5. Contingencies
Litigation
On March 15, 1991, suit was filed in the 15th Judicial District Court
of Lafayette Parish, Louisiana, by the "Lafayette Daily Advertiser" and others
against Trans Louisiana Gas Company ("Trans La Division"), Trans Louisiana
Industrial Gas Company, Inc. ("TLIG"), a wholly owned subsidiary of the Company,
and Louisiana Intrastate Gas Corporation and certain of its affiliates ("LIG").
LIG is the Company's primary supplier of natural gas in Louisiana and is not
otherwise affiliated with the Company.
The plaintiffs purported to represent a class consisting of all
residential and commercial gas customers in the Trans La Division's service
area. Among other things, the lawsuit alleged that the defendants violated
antitrust laws of the state of Louisiana by manipulating the cost-of-gas
component of the Trans La Division's gas rate to the purported customer class,
thereby causing such purported class members to pay a higher rate. The
plaintiffs made no specific allegation of an amount of damages.
On July 14, 1995, the Louisiana Commission entered an order approving
a settlement with the Company and TLIG in connection with its investigation of
the costs included in the Trans La Division's purchased gas adjustment component
in its rates. The order exonerated the Company of any wrongdoing with respect
to the manipulation of the cost of gas component of its gas rate to residential
and commercial customers. In the settlement, the Company agreed to refund
approximately $541,000 plus interest to the Trans La Division's customers over a
two-year period due to certain issues related to the calculation of the weighted
average cost of gas. The refund totaling approximately $1,016,000, which
includes interest calculated through October 1, 1995, began in September 1995
and was credited to customer bills along with interest that accrued after
October 1, 1995. The Company completed the refunds, refunding $533,000 under
the settlement for the twelve months ended September 30, 1997. Most of the
issues that generated the refunds arose before Trans Louisiana Gas Company was
acquired by the Company in 1986.
On April 18, 1997, the Louisiana Commission entered its Order
approving a settlement between LIG and the Louisiana Commission pursuant to
which LIG will make a payment of $10,275,000 to the Trans La Division for the
benefit of its ratepayers. This settlement resolves all remaining issues in the
Louisiana proceeding discussed above. Pursuant to the Order, the Trans La
Division has been ordered to flow through a total of $9,725,000 of the LIG
settlement, plus accrued interest, to its customers in the form of credits to
customers' bills for the months November 1997 through March 1998. The remaining
$550,000 will be credited one half to TLIG with the other half credited to the
Trans La Division for legal fees. The Order became final on June 2, 1997 when
no appeals had been filed during the appeal period which ended June 1, 1997.
54
As a result of the settlements reached in the Louisiana proceedings, a
Joint Motion was filed in the Court on July 29, 1997, requesting the Court to
lift the stay of the proceedings entered by the Court on January 19, 1993 to
permit the consummation of the proposed settlement, certify a class for purposes
of settlement and to preliminarily approve the settlement between the plaintiff
class and all defendants. On July 30, 1997, the Court entered its order lifting
the stay of the proceedings, certifying a class of current Trans La Division
ratepayers for purposes of settlement and receipt of proceeds of settlement,
preliminarily approving the proposed settlement between the plaintiff class and
the defendants, approving the form of notice to potential class members, and
setting a fairness hearing regarding the proposed settlement and disbursement of
proceeds. At the fairness hearing, which is set for December 15, 1997, final
approval of the settlement by the Court will be sought. If final approval of
the Court is granted, the suit will be dismissed.
In Colorado, Greeley Gas Company ("Greely Gas Division") is a
defendant in several lawsuits filed as a result of a fire in a building in
Steamboat Springs, Colorado on February 3, 1994. The plaintiffs claim that the
fire resulted from a leak in a severed gas service line owned by the Greeley Gas
Division. On January 12, 1996, the jury awarded the plaintiffs approximately
$2.5 million in compensatory damages and approximately $2.5 million in punitive
damages. The jury assessed the Company with liability for all of the damages
awarded. The Company has appealed the judgment to the Colorado Court of Appeals.
The Company believes it has meritorious issues for such appeal but cannot
assess, at this time, the likelihood of success in the appeal. The Company has
adequate insurance to cover the compensatory damages awarded. The Company's
insurance carrier has also recently informed the Company that any punitive
damages which may be awarded against the Company would be covered by the
Company's insurance policy.
In March 1997, Western Kentucky Gas Company ("Western Kentucky
Division") was named as a defendant in a lawsuit in the District Court in
Danville, Kentucky, as a result of an explosion and fire at a residence in
Danville, Kentucky on March 4, 1997. The plaintiffs, Lisa Benedict, et al, who
were leasing the residence, suffered serious burns in the accident and have
alleged that the Western Kentucky Division was negligent in installing and
servicing gas lines at the residence. The plaintiffs, who are also suing the
landlord/owner of the house, have asked for punitive damages and compensatory
damages in the case. Discovery has just begun; accordingly, the Company cannot
assess, at this time, the likelihood of success in this case. However, the
Company has adequate insurance and reserves to cover any damages that may be
awarded.
In November 1997, a jury in Plaquemine, Louisiana awarded Brian L.
Heard General Contractor, Inc. ("Heard"), a total of $177,929 in actual damages
and $15 million in punitive damages resulting from
55
a lawsuit by Heard against the Trans La Division, the successor in interest to
Oceana Heights Gas Company, which the Company acquired in November 1995. The
trial judge also awarded interest on the total judgment amount. The claims are
for events that occurred prior to the time Atmos acquired Oceana Heights Gas
Company. Heard claimed damages associated with delays he allegedly incurred in
constructing a sewer system in Iberville Parish, Louisiana. Heard filed the suit
against the Trans La Division and two other defendants, alleging that gas leaks
had caused delays in Heard's completion of a sewer project, resulting in lost
business opportunities for the contractor during 1994. The Company believes that
the gas leaks claimed in the lawsuit were minor leaks, common in normal
operations of gas systems, and were repaired in accordance with standard
industry practices and did not cause the damages claimed.
The jury awarded punitive damages under a prior Louisiana statute that
allowed punitive damages to be awarded in cases involving hazardous substances,
which, as defined in the statute, included natural gas. Although not
retroactive, the Louisiana legislature repealed the statute in 1996. The
Company does not believe that punitive damages are applicable in the case and
should not be awarded because there were no direct damages caused by natural
gas. The Company plans to immediately appeal the verdict and to aggressively
pursue obtaining reversal of the judgment. However, the Company cannot assess,
at this time, the likelihood of the judgment being reversed on appeal. The
Company is in the process of reviewing its insurance coverage with respect to
this case. Although Oceana Heights Gas Company was insured, it appears that a
claim of this nature will not be covered by such insurance. However, the
Company does not expect the final outcome of this case to have a material
adverse effect on the financial condition, the results of operations or the net
cash flows of the Company.
From time to time, other claims are made and lawsuits are filed
against the Company arising out of the ordinary business of the Company. In the
opinion of the Company's management, liabilities, if any, arising from these
other claims and lawsuits are either covered by insurance, adequately reserved
for by the Company or would not have a material adverse effect on the financial
condition, results of operations, or cash flows of the Company.
Environmental Matters
UCGC is the owner or previous owner of manufactured gas plant sites
which were used to supply gas prior to the availability of natural gas.
Manufactured gas was an inexpensive source of fuel for lighting and heating
nationwide. As a result of the gas manufacturing process, certain by-products
and residual materials, including coal-tar, were produced and may have been
accumulated at the plant sites. This was an acceptable and satisfactory process
at the time such operations were being
56
conducted. Under current environmental protection laws and regulations, the
Company may be responsible for response actions with respect to such materials,
if response actions are necessary.
In June 1995, UCGC entered into an agreement to pay $1,787,000 to
Union Electric whereby Union Electric agreed to assume responsibility for UCGC's
continuing investigation and environmental response action obligations as
outlined in the feasibility study related to a former manufactured gas plant
site in Keokuk, Iowa. At September 30, 1997, the Company had $714,600 accrued
for its remaining liability related to the agreement. This amount is to be paid
in equal annual payments over each of the next two years. UCGC deferred the
agreement amount of $1,787,000 and was granted recovery over a ten-year period
in the May 1996 Iowa rate increase.
The United Cities Division owns or owned former manufactured gas plant
sites in Johnson City and Bristol, Tennessee, Hannibal, Missouri and Americus,
Georgia. UCGC and the Tennessee Department of Environment and Conservation
entered into a consent order effective January 23, 1997, for the purpose of
facilitating the investigation, removal and remediation of the Johnson City
site. UCGC began the implementation of the consent order in the first quarter
of 1997. The Company is unaware of any information which suggests that the
Bristol site gives rise to a present health or environmental risk as a result of
the manufactured gas process or that any response action will be necessary. The
Missouri Department of Natural Resources ("MDNR") conducted a site
reconnaissance and sampling at the Hannibal site. In its most recent report the
MDNR concludes that hazardous substances and hazardous wastes are present on
site, and that a release of hazardous substances to soils has occurred; however,
the risk of human exposure appears to be minimal. Additional site work is
likely. As of September 30, 1997, the Company had incurred and deferred for
recovery $352,000, including $258,000 related to an insurance recoverability
study, and accrued and deferred for recovery an additional $750,000 associated
with the preliminary survey and invasive study of these three sites. The
Tennessee Regulatory Authority granted UCGC permission to defer, until its next
rate case, all costs incurred in Tennessee in connection with state and
federally mandated environmental control requirements. On May 14, 1997, the
Georgia Environmental Protection Division requested that UCGC enter into a
proposed voluntary consent order for the remediation of the Americus site.
Subsequently, the other responsible parties at the site advised UCGC that they
would be willing to enter into a "cashout" settlement for a one-time payment by
the Company of $250,000. The Company is willing to pay $250,000 for a "cashout"
settlement. The Company has provided its comments to the proposed settlement
agreement and expects to conclude those discussions shortly. As of September
30, 1997, the Company had accrued and deferred for recovery amounts related to
this site.
57
Pursuant to the Tennessee Petroleum Underground Storage Tank Act, the
Company is required to upgrade or remove certain underground storage tanks
("USTs") situated in Tennessee. As of September 30, 1997, the Company had
identified a small number of USTs in this category in Tennessee and had incurred
and deferred for recovery $98,000 and, based on available current information,
accrued and deferred for recovery an additional $70,000 for the upgrade or
removal of these USTs. The Tennessee Regulatory Authority granted UCGC
permission to defer, until its next rate case, all costs incurred in connection
with state and federally mandated environmental control requirements. In
addition, the Company may be able to recover a portion of any corrective action
costs from the Tennessee Underground Storage Tank Fund for certain of the UST
sites in Tennessee.
In October 1995, UCGC received two Notices of Violation ("NOVs") from
the Tennessee Department of Environment and Conservation ("TDEC") concerning
historic releases from a UST in Kingsport, Tennessee. This UST was formerly
owned by Holston Oil Co., Inc. ("Holston"), which at one time was a wholly-owned
subsidiary of Tennessee-Virginia Energy Corporation ("TVEC"). Prior to TVEC's
merger with UCGC in 1986, TVEC sold the common stock of Holston to an unrelated
party. UCGC responded to the NOVs advising the TDEC that UCGC was not a
responsible party for any environmental contamination at the site. The Company
does not anticipate incurring any response action costs at this site.
The Kansas Department of Health and Environment ("KDHE") identified
the need to investigate gas industry activities which utilize mercury equipment
in Kansas. The Company and KDHE have signed a Consent Order for the
investigation and possible response action for mercury contamination at any gas
pipeline site which is identified as exceeding the KDHE's established acceptable
concentration levels. As of September 30, 1997, the Company had identified
approximately 720 meter sites where mercury may have been used and had incurred
and deferred for recovery $100,000 and, based on available current information,
accrued and deferred for recovery an additional $280,000 for the investigation
of these sites. UCGC has received an order from the Kansas Corporation
Commission ("KCC") allowing UCGC to defer and seek recovery in future rate
proceedings the reasonable and prudent costs and expenses associated with the
Consent Order. In the order, the Commission approved a Stipulation and
Agreement which provides a cap of $1,500,000 on amounts deferred with the
ability to exceed this cap if reasonable costs of response action are incurred.
Based on a decision by the KCC concerning the recovery of environmental response
action costs incurred by another company, the Company expects recovery of the
costs involved in the investigation and response action associated with the
mercury meter sites in Kansas.
The Company addresses other environmental matters from time to time in
the regular and ordinary course of its business. Management expects that future
expenditures related to response action at any site will be recovered through
rates or insurance,
58
or shared among other potentially responsible parties. Therefore, the costs of
responding to these sites are not expected to materially affect the results of
operations, financial condition or cash flows of the Company.
6. Leases
The Company has entered into noncancelable leases involving office
space and warehouse space. The remaining lease terms range from one to 20 years
and generally provide for the payment of taxes, insurance and maintenance by the
lessee. Net property, plant and equipment included amounts for capital leases
of $2,327,000 and $2,511,000 at September 30, 1997 and 1996, respectively.
The related future minimum lease payments at September 30, 1997 were
as follows:
Capital Operating
leases leases
------- ---------
1998 $ 699 $ 9,841
1999 699 9,583
2000 760 9,187
2001 568 8,607
2002 568 8,344
Thereafter 2,279 61,044
------- --------
Total minimum lease payments 5,573 $106,606
======= ========
Less amount representing interest (2,526)
-------
Present value of net minimum
lease payments $ 3,047
=======
Consolidated rent expense amounted to $10,522,000, $9,710,000 and
$9,175,000 for fiscal 1997, 1996 and 1995, respectively. Rents for the
regulated business are expensed and the Company receives rate treatment as a
cost of service on a pay-as-you-go basis.
59
7. Long-term debt and notes payable
Long-term debt at September 30, 1997 and 1996 consisted of the
following:
1997 1996
-------- ---------
(In thousands)
Unsecured 7.95% Senior Notes, due 2006,
payable in annual installments of $1,000 $ 9,000 $ 10,000
Unsecured 9.57% Senior Notes, due 2006,
payable in annual installments of $2,000 18,000 20,000
Unsecured 9.76% Senior Notes, due 2004,
payable in annual installments of $3,000 24,000 27,000
Unsecured 11.2% Senior Notes, due 2002,
payable in annual installments of $2,000 12,000 14,000
Unsecured 10% Notes, due 2011 2,303 2,303
Unsecured 6.09% Note, due 1998 40,000 -
Unsecured 8.07% Senior Notes, due 2006,
payable in annual installments of $4,000
beginning 2002 20,000 20,000
Unsecured 8.26% Senior Notes, due 2014,
payable in annual installments of
$1,818 beginning 2004 20,000 20,000
Unsecured 9.75% Senior Notes, due 1996 - 1,000
First Mortgage Bonds
Series J, 9.40% due 2021 17,000 17,000
Series N, 8.69% due 2002 5,000 7,000
Series P, 10.43% due 2017 25,000 25,000
Series Q, 9.75% due 2020 20,000 20,000
Series R, 11.32% due 2004 15,000 15,000
Series T, 9.32% due 2021 18,000 18,000
Series U, 8.77% due 2022 20,000 20,000
Series V, 7.50% due 2007 10,000 10,000
Medium term notes
Series A, 1995-1, 6.67%, due 2025 10,000 10,000
Series A, 1995-2, 6.27%, due 2020 10,000 10,000
Series A, 1995-3, 6.20%, due 2000 2,000 2,000
Rental property, propane and other term notes
due in installments through 2013 20,879 24,538
-------- --------
Total long-term debt 318,182 292,841
Less current maturities (15,201) (16,679)
-------- --------
$302,981 $276,162
======== ========
The Company may prepay most of the Senior Notes or First Mortgage
Bonds in whole at any time, subject to a prepayment
60
premium. The note agreements provide for certain cash flow requirements and
restrictions on additional indebtedness, sale of assets and payment of
dividends. Under the 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 $15,038,000. At September 30,
1997, approximately $37,489,000 of retained earnings was not so restricted.
As of September 30, 1997, all of the Greeley Gas Division utility
plant assets with a net book value of approximately $83,371,000 are subject to a
lien under the 9.4% Series J First Mortgage Bonds assumed by the Company in the
acquisition of GGC. Also, substantially all of the United Cities Division
utility plant assets, totaling approximately $314,591,000 are subject to a lien
under the Indenture of Mortgage of the Series N through V First Mortgage Bonds.
UCG Energy and Woodward Marketing, Inc. ("WMI"), sole shareholders of
WMLLC, act as guarantors of a $12,500,000 credit facility for WMLLC with a bank.
No balance was outstanding on this credit facility at September 30, 1997. UCG
Energy and WMI also act as joint and several guarantors on certain purchases of
natural gas and transportation services from suppliers by WMLLC. These
outstanding obligations amounted to $12,200,000 at September 30, 1997.
Based on the borrowing rates currently available to the Company for
debt with similar terms and remaining average maturities, the fair value of
long-term debt at September 30, 1997 and 1996 is estimated using discounted cash
flow analysis to be $348,261,000 and $329,811,000, respectively. It is not
currently advantageous for the Company to refinance its long-term debt because
of prepayment costs set forth in the various debt agreements.
Maturities of long-term debt are as follows (in thousands):
1998 $ 15,201
1999 56,578
2000 14,790
2001 14,141
2002 14,205
Thereafter 203,267
--------
$318,182
========
Notes payable to banks
The Company has committed short-term, unsecured bank credit facilities
totaling $187,000,000, $35,000,000 of which was unused at September 30, 1997.
One facility of $175,000,000 requires a commitment fee of .06% on the unused
portion. A second facility for $12,000,000 requires a commitment fee of 5/32 of
1% on the
61
unused portion. The committed lines are renewed or renegotiated at least
annually.
The Company also had aggregate uncommitted credit lines of
$170,000,000, of which $159,900,000 was unused as of September 30, 1997. The
uncommitted lines 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.
The weighted average interest rates on short-term borrowings
outstanding at September 30, 1997 and 1996 were 6.1% and 6.3%, respectively.
8. Statement of cash flows supplemental disclosures
Supplemental disclosures of cash flow information for 1997, 1996 and
1995 are presented below:
1997 1996 1995
------- ------- -------
(In thousands)
Cash paid for
Interest $25,216 $32,778 $27,667
Income taxes 9,736 14,562 18,746
9. Common stock and stock options
The Company issued 100,000 shares of its common stock in fiscal 1997
in connection with its Restricted Stock Grant Plan.
Atmos has an Employee Stock Ownership Plan ("ESOP") and the United
Cities Division has a 401(k) savings plan, as discussed in Note 10. Atmos
issued 200,482 shares under its ESOP in 1997. The Company has registered
1,600,000 shares for issuance under the ESOP, of which 512,871 shares were
available for future issuance on September 30, 1997.
The Company also has a Direct Stock Purchase Plan ("DSPP").
Participants in the DSPP may have all or part of their dividends reinvested at a
3% discount from market prices. DSPP participants may purchase additional shares
of Company common stock as often as weekly with voluntary cash payments of at
least $25, up to an annual maximum of $100,000. At September 30, 1997, 712,596
shares were available for future issuance under the plan.
On April 27, 1988, the Company adopted a Shareholders' Rights Plan and
declared a dividend of one right (a "Right") for each outstanding pre-split
share of common stock of the Company, payable to shareholders of record as of
May 10, 1988. Each Right will entitle the holder thereof, until the earlier of
May 10, 1998 or the date of redemption of the Rights, to buy one share of common
stock of the Company at an exercise price of $30 per share, subject to
adjustment by the Board of Directors upon the
62
occurrence of certain events. The Rights will be represented by the common
stock certificates and are not exercisable or transferable apart from the common
stock until a "Distribution Date" (which is defined in the Rights Agreement
between the Company and the Rights Agent as the date upon which the Rights
become separate from the common stock).
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. Until 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 a 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 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 the Rights become exercisable
or transferable, the Rights may be redeemed by the Company at $.05 per Right.
In November 1997, the Board of Directors approved the adoption of new
shareholders' rights plan that will go into effect upon the expiration of the
existing shareholders' rights plan on May 10, 1998. The provisions of the new
rights plan are similar to those of the existing rights plan. However, the new
rights plan does differ from the existing plan in certain respects, including,
but not limited to the following: (i) the exercise price under the new plan will
be $80 per share vs. $30 per share under the existing plan; (ii) the rights
under the new plan may be redeemed by the Company prior to the time they become
exercisable or transferable at $.01 per right vs. $.05 per right under the
existing plan; and (iii) the nature of the events that will make the rights
exercisable has been modified to reflect new developments in the securities
markets since 1988.
The Company's Restricted Stock Grant Plan for management and key
employees of the Company, which became effective October 1, 1987 and was amended
and restated in November 1997, provides for awards of common stock that are
subject to certain restrictions. The plan is administered by the Board of
Directors. The members of the Board who are not employees of the Company make
the final determinations regarding participation in the plan, awards under the
plan, and restrictions on the restricted stock awarded. The restricted stock
may consist of previously issued shares purchased on the open market or shares
issued directly from the Company. The Company has registered 900,000 shares for
issuance under the plan. Compensation expense of $437,000, $795,000 and
63
$1,015,000 was recognized in 1997, 1996 and 1995, respectively, in connection
with the issuance of shares under the plan. At September 30, 1997, 252,500
shares were available for future award under the plan.
In November 1994, the Board adopted the Outside Directors Stock-for-
Fee Plan, which plan was 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 meeting
fees in stock rather than in cash. The Company has registered 50,000 shares,
44,685 of which were available for future issuance under the plan as of
September 30, 1997.
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." 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 compensation cost for employee stock
options or similar equity instruments using the intrinsic value method of
accounting described in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has elected to remain with this
method. Because of the limited nature of the Company's stock-based compensation
plans, the adoption of SFAS 123 was immaterial.
10. Employee retirement and stock ownership plans
At September 30, 1997, the Company had four defined benefit pension
plans, covering the Western Kentucky Division employees, the Greeley Gas
Division employees, and the United Cities Division employees, while the fourth
covers all other Atmos employees. The plans provide essentially the same
benefits to all employees. Except for the United Cities Division, the plans'
benefits are based on years of service and the employee's compensation during
the highest paid five consecutive calendar years within the last 10 years of
employment. The United Cities Division plan provides benefits based on years of
service and final average salary. 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.
64
The following table sets forth the Atmos plan's funded status at
September 30, 1997 and 1996:
1997 1996
--------- --------
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$75,027 and $77,089 in 1997 and 1996, respectively $ (78,591) $(77,513)
========= ========
Projected benefit obligation $ (87,999) $(86,571)
Plan assets at fair value 102,865 90,157
--------- --------
Funded status 14,866 3,586
Unrecognized net asset being recognized over 15 years - (198)
Unrecognized prior service cost (1,217) (1,359)
Unrecognized net (gain) loss (15,273) (3,086)
--------- --------
Accrued pension cost $ (1,624) $ (1,057)
========= ========
Net periodic pension cost for the Atmos plan for 1997, 1996 and 1995
included the following components:
1997 1996 1995
-------- -------- --------
(In thousands)
Service cost $ 2,263 $ 2,235 $ 1,862
Interest cost on projected
benefit obligation 6,356 6,434 6,060
Actual return on plan assets (16,588) (11,342) (12,200)
Net amortization and deferral 8,322 3,298 5,007
-------- -------- --------
Net periodic pension cost $ 353 $ 625 $ 729
======== ======== ========
65
The following table sets forth the Western Kentucky Division
plan's funded status at September 30, 1997 and 1996:
1997 1996
-------- --------
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$31,877 and $30,984 in 1997 and 1996, respectively $(32,752) $(30,983)
======== ========
Projected benefit obligation $(36,293) $(35,673)
Plan assets at fair value 53,289 46,478
-------- --------
Funded status 16,996 10,805
Unrecognized prior service cost 3,976 4,829
Unrecognized net (gain) loss (10,065) (4,361)
-------- --------
Prepaid pension cost $ 10,907 $ 11,273
======== ========
Net periodic pension cost for 1997, 1996 and 1995 included the
following components:
1997 1996 1995
------ ------ ------
(In thousands)
Service cost $ 734 $ 672 $ 706
Interest cost 2,619 2,431 2,306
Actual return on plan assets (8,456) (5,771) (6,355)
Net amortization and deferral 5,081 2,356 3,399
------- -------- --------
Net periodic pension cost (benefit) $ (22) $ (312) $ 56
======== ======== ========
The weighted-average discount rates used in determining the actuarial
present value of the projected benefit obligations of the Atmos and Western
Kentucky Division retirement plans was 7.5% at June 30, 1997 and 1996. The rate
of increase in future compensation levels reflected in such determination was
4.0% for the years ended September 30, 1997 and 1996. The expected long-term
rate of return on plan assets was 9.0%, 9.5% and 10.0% for the years ended
September 30, 1997, 1996 and 1995, respectively. The plan assets consist
primarily of investments in common stocks, interest bearing securities and
interests in commingled pension trust funds. Prepaid pension cost is included in
deferred charges and other assets.
66
The following table sets forth the Greeley Gas Division plan's funded
status at September 30, 1997 and 1996:
1997 1996
--------- ---------
(In thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$15,361 and $15,110 in 1997
and 1996, respectively $(16,033) $(15,252)
======== ========
Projected benefit obligation $(17,700) $(17,666)
Plan assets at fair value 17,535 16,086
-------- --------
Funded status (165) (1,580)
Unrecognized net asset being
recognized over 15 years (1,231) (1,521)
Unrecognized prior service cost 1,344 1,480
Unrecognized net (gain) loss (372) 1,375
-------- --------
Accrued pension cost $ (424) $ (246)
======== ========
Net periodic pension cost (credit) for the Greeley Gas Division plan
for 1997, 1996 and 1995 included the following components:
1997 1996 1995
-------- -------- --------
(In thousands)
Service cost $ 485 $ 453 $ 328
Interest cost on projected
benefit obligation 1,277 1,185 1,208
Actual return on plan assets (2,724) (2,390) (2,530)
Net amortization and deferral 1,167 810 1,217
------- ------- -------
Net periodic pension cost $ 205 $ 58 $ 223
======= ======= =======
Accumulated plan benefits were computed using the Projected Unit
Credit funding method. The discount rate and rate of in crease in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were 7.5% and 4.0% in both 1997 and 1996. The
expected long-term rate of return on plan assets was 9.0%, 9.5% and 10.0% in
1997, 1996 and 1995, respectively. Plan assets consist primarily of corporate
bonds, equity securities, mutual funds, partnership interests, and other
miscellaneous investments.
67
The following table sets forth the United Cities Division plan's
funded status at September 30, 1997 and 1996:
1997 1996
--------- ---------
(In thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$60,086 and $45,528 in 1997
and 1996, respectively $(66,873) $(54,130)
======== ========
Projected benefit obligation (75,159) (69,652)
Plan assets at fair value 86,162 71,978
-------- --------
Funded status 11,003 2,326
Unrecognized net asset being
recognized over 15 years 142 191
Unrecognized prior service cost 1,750 1,143
Unrecognized net (gain) loss (15,785) (1,819)
-------- --------
Prepaid (accrued) pension cost $ (2,890) $ 1,841
======== ========
Net periodic pension cost (credit) for the United Cities Division plan
for 1997, 1996 and 1995 included the following components:
1997 1996 1995
--------- -------- ---------
(In thousands)
Service cost $ 3,157 $ 3,116 $ 3,451
Interest cost on projected
benefit obligation 5,050 4,720 4,296
Actual return on plan assets (17,461) (7,936) (10,365)
Net amortization and deferral 11,420 2,372 5,772
-------- ------- --------
Net periodic pension cost $ 2,166 $ 2,272 $ 3,154
======== ======= ========
The weighted-average discount rates used in determining the actuarial
present value of the projected benefit obligations of the United Cities Division
retirement plan was 7.5% at September 30, 1997 and December 31, 1996. The rate
of increase in future compensation levels reflected in such determination was
5.5% for the years ended September 30, 1997 and December 31, 1996. The expected
long-term rate of return on plan assets was 9.0% for the years ended September
30, 1997, and December 31, 1996 and 1995. The plan assets consist primarily of
marketable equity securities, corporate and government debt securities, and
deposits with insurance companies. Prepaid pension cost is included in deferred
charges and other assets.
68
Effective October 1, 1987, the Company adopted a nonquali fied
Supplemental Executive Benefits Plan ("Supplemental Plan") which provides
additional pension, disability and death benefits to the officers and certain
other employees of the Company. Expense recognized in connection with the
Supplemental Plan during fiscal 1997, 1996, and 1995 was $3,491,000, $2,708,000
and $2,158,000, respectively. The Supplemental Plan was amended and restated in
May 1997 and amended again in August 1997 and November 1997.
Atmos sponsors an Employee Stock Ownership Plan ("ESOP") for employees
other than those in the United Cities Division. Full time employees who have
completed one year of service, as defined in the plan, are eligible to
participate. Each participant enters into a salary reduction agreement with the
Company pursuant to which the participant's salary is reduced by an amount not
less than 2% nor more than 10%. Taxes on the amount by which the participant's
salary is reduced are deferred pursuant to Section 401(k) of the Internal
Revenue Code. The amount of the salary reduction is contributed by the Company
to the ESOP for the account of the participant. The Company may make a matching
contribution for the account of the participant in an amount determined each
year by the Board of Directors, which amount must be at least equal to 25% of
all or a portion of the participant's salary reduction. For the 1997 plan year,
the Board of Directors elected to match 100% of each participant's salary
reduction contribution up to 4% of the participant's salary. Matching
contributions to the ESOP amounted to $2,077,000, $1,944,000, and $1,977,000 for
1997, 1996 and 1995, respectively. The Directors may also approve discretionary
contributions, subject to the provisions of the Internal Revenue Code of 1986
and applicable regulations of the Internal Revenue Service. The Company recorded
a charge of $1,500,000 for a discretionary contribution in the year ended
September 30, 1996. Company contributions to the plan are expensed as incurred.
The Company sponsors a 401(k) savings plan for the United Cities
Division employees. The plan allows participants to make contributions toward
retirement savings. Each participant may contribute up to 15% of qualified
compensation. For employee contributions up to 6% of the participant's
qualified compensation, the Company will contribute 30% of the employee's
contribution. The Company may also contribute up to an additional 20% of the
employee's contribution based on certain criteria specified in the plan.
Effective January 1, 1995, any additional contribution made by the Company will
be through the issuance of the Company's common stock. The Company contributed
$694,000 for the nine months ended September 30, 1997, and $826,000 and $478,000
for the years ended December 31, 1996 and 1995, respectively.
11. Other postretirement benefits
Atmos sponsors two defined benefit postretirement plans other than
pensions. Each provides health care benefits to
69
retired employees. One provides benefits to the United Cities Division. The
other Atmos plan offers medical benefits to all other retired Atmos employees.
Effective October 1, 1993, the Company adopted Financial Accounting
Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for Postretirement
Benefits Other Than Pensions". SFAS No. 106 focuses principally on
postretirement health care benefits and significantly changed the practice of
accounting for postretirement benefits on a pay-as-you-go basis by requiring
accrual of such benefit costs on an actuarial basis from the date each employee
reaches age 45 until the date of full eligibility for such benefits. The
Company is amortizing on a straight line basis its initial transition
obligations over 20 years. The initial transition obligation of the United
Cities Division was $8,894,000. The initial transition obligation for all other
Divisions was $33,354,000.
Substantially all of the Company's employees other than the United
Cities Division become eligible for these benefits if they reach retirement age
while working for the Company and attain 10 consecutive years of service after
age 45. Participant contributions are required under these plans. Prior to
June 1994, the plans were not funded. In June 1994, the Company made its first
quarterly payment to the external trust set up to fund SFAS No. 106 costs in
excess of the pay-as-you-go cost in Kansas in accordance with an order of the
Kansas Corporation Commission. In April, 1995 it began external funding in
Colorado in accordance with an order of the Colorado Public Utility Commission.
The amount of funding will ultimately depend upon the ratemaking treatment
allowed in the Company's various rate jurisdictions.
The components of net periodic postretirement benefits cost for the
Atmos plans for each of the years ended September 30, 1997, 1996 and 1995 are as
follows:
1997 1996 1995
------- ------- -------
(In thousands)
Service cost $1,599 $1,469 $1,497
Interest cost 2,371 2,224 2,322
Actual return on plan assets (28) (39) (18)
Amortization of transition
obligation 1,550 1,550 1,549
Prior service cost 202 - -
Net amortization and deferral (217) (80) (150)
------ ------ ------
Net periodic postretirement
benefits cost $5,477 $5,124 $5,200
====== ====== ======
70
The following is a reconciliation of the funded status of the Atmos
plans to the net postretirement benefits liability on the balance sheet as of
September 30, 1997 and 1996:
1997 1996
--------- ---------
(In thousands)
Accumulated postretirement
benefits obligation
Retirees $(22,575) $(19,849)
Fully eligible employees (721) (6,426)
Other employees (10,328) (4,644)
-------- --------
(33,624) (30,919)
Plan assets 1,278 927
-------- --------
Accumulated postretirement benefits
obligation in excess of plan assets (32,346) (29,992)
Unrecognized net gain (6,602) (4,775)
Unrecognized transition obligation 25,802 26,342
-------- --------
Accrued postretirement benefits liability $(13,146) $ (8,425)
======== ========
In the latest actuarial calculation of the accrued postre tirement
benefits liability, the assumed health care cost trend rate used to estimate the
cost of postretirement benefits was 7.5% for 1997 and 1998 and is assumed to
decrease gradually to 5.0% by 2001 and remain at that level thereafter. The
trend for vision benefits is assumed to remain level for all years at 4.5%. The
effect of a 1% increase in the assumed health care cost trend rate for each
future year is $376,000 and $344,000 on the annual aggregate of the service and
interest cost components of net periodic postretirement benefit costs and
$2,760,000 and $2,377,000 on the accumulated postretirement benefits obligation
as of September 30, 1998 and 1997, respectively. The assumed discount rate, the
rate at which liabilities could be settled, was 7.5% as of September 30, 1997
and 1996. The expected long-term rate of return on plan assets was 5.3% for
1997 and 1996.
71
The Company maintains a separate postretirement health care benefits
plan for the United Cities Division. Substantially all of its employees will
become eligible for these benefits if they reach the normal retirement age while
working for the Company.
The components of net periodic postretirement benefits cost for the
United Cities Division for each of the years ended September 30, 1997, 1996 and
1995 are as follows:
1997 1996 1995
------- ------- -------
(In thousands)
Service cost $ 86 $ 89 $ 120
Interest cost 926 897 1,051
Actual return on plan assets (274) (212) (107)
Amortization of transition
obligation 364 364 445
Net amortization and deferral 298 232 182
------ ------ ------
Net periodic postretirement
benefits cost $1,400 $1,370 $1,691
====== ====== ======
The following is a reconciliation of the funded status of the United
Cities Division plan to the net postretirement benefits liability on the balance
sheet as of September 30, 1997 and 1996:
1997 1996
--------- ---------
(In thousands)
Accumulated postretirement
benefits obligation
Retirees $(16,331) $(11,546)
Fully eligible employees (213) (1,007)
Other employees (750) (816)
-------- --------
(17,294) (13,369)
Plan assets 4,336 3,715
-------- --------
Accumulated postretirement benefits
obligation in excess of plan assets (12,958) (9,654)
Unrecognized net gain 7,837 5,186
Unrecognized transition obligation 5,280 5,821
-------- --------
Accrued postretirement benefits liability $ 159 $ 1,353
======== ========
In the latest actuarial calculation of the accrued postre tirement
benefits liability for the United Cities Division, the assumed health care cost
trend rate used to estimate the cost of postretirement benefits was 7.5% for
1997 and 1998, and is
72
assumed to decrease gradually to 5.0% by 2001 and remain at that level
thereafter. The effect of a 1% increase in the assumed health care cost trend
rate for each future year is $88,000 and $79,000 on the annual aggregate of the
service and interest cost components of net periodic postretirement benefit
costs and $1,732,000 and $1,099,000 on the accumulated postretirement benefits
obligation as of September 30, 1997 and December 31, 1996, respectively. The
assumed discount rate, the rate at which liabilities could be settled, was 7.5%
as of September 30, 1997 and December 31, 1996, respectively. The expected
long-term rate of return on plan assets was 4.3% for 1997 and 1996.
The Company is currently recovering other postretirement benefits
("OPEB") costs through its regulated rates under SFAS No. 106 accrual accounting
in Colorado, Kansas, the majority of its Texas service area and in Kentucky
(effective November 1, 1995). It receives rate treatment as a cost of service
item for OPEB costs on the pay-as-you-go basis in Louisiana. OPEB costs have
been specifically addressed in rate orders in each jurisdiction served by the
United Cities Division or have been included in a rate case and not disallowed.
However, the Company was required to recover the portion of the UCGC transition
obligation applicable to Virginia operations over 40 years, rather than 20
years, as in other states. Management believes that accrual accounting in
accordance with SFAS No. 106 is appropriate and will continue to seek rate
recovery of accrual-based expenses in its ratemaking jurisdictions that have not
yet approved the recovery of these expenses.
73
SUPPLEMENTARY DATA
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 weighted average shares outstanding used in
computing such amounts. The Company's natural gas and propane distribution
businesses are seasonal due to weather conditions in the Company's service
areas. For further information on its effects on quarterly results, please see
the "Seasonality" discussion included in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section herein.
Quarter ended
-------------------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
-------------------- -------------------- -------------------- -------------------
1996 1995 1997 1996 1997 1996 1997 1996
--------- -------- -------- -------- ------- --------- ------- --------
(In thousands, except per share data)
Operating revenues $280,624 $253,439 $362,636 $341,867 $143,714 $175,240 $119,861 $116,145
Gross profit 97,269 89,707 124,249 120,231 59,546 68,220 48,590 46,254
Operating income (loss) 25,968 24,365 37,075 41,216 4,599 6,853 (15,331) (3,173)
Net income (loss) 18,155 18,496 30,625 35,906 (3,018) (2,795) (21,924) (10,456)
Net income (loss) per share .62 .64 1.04 1.26 (.10) (.10) (.74) (.36)
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
Information regarding directors is incorporated herein by reference
from the Company's definitive proxy statement for the annual meeting of
shareholders on February 11, 1998.
Information regarding executive officers is included in Part I.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of shareholders on February 11, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of shareholders on February 11, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of shareholders on February 11, 1998.
75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial statements and financial statement schedules.
The financial statements listed in the accompanying Index to Financial
Statements are filed as part of this annual report. No financial statement
schedules are required in this filing.
3. Exhibits
The exhibits listed in the accompanying Exhibits Index are filed as
part of this annual report. The exhibits numbered 10.21(a) through 10.31(a) are
management contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K
The Company filed a Form 8-K Current Report dated June 10, 1997 reporting
under Item 5, Other Events the following:
(1) On June 10, 1997, Atmos, United Cities and the staff of the Illinois
Commerce Commission jointly filed a proposed order, which if granted,
would approve the merger of United Cities and Atmos.
(2) The Illinois Commerce Commission issued an order dated June 25, 1997,
approving the merger of United Cities and Atmos.
The Company also filed a Form 8-K Current Report dated July 29, 1997
reporting under Item 2, Acquisition or Disposition of Assets, that the merger of
United Cities Gas Company with and into Atmos had closed effective July 31,
1997. It also incorporated by reference the Financial Statements of the
Business Acquired and the required Pro Forma Financial Information under Item 7
Financial Statements and Exhibits.
76
INDEX TO FINANCIAL STATEMENTS
(Item 8, 14(a) 1 and 2)
Page
Number
Independent auditors' reports 37
Financial statements:
Consolidated balance sheets at September 30,
1997 and 1996 39
Consolidated statements of income for the
years ended September 30, 1997, 1996 and 1995 40
Consolidated statements of shareholders'
equity for the years ended September 30,
1997, 1996 and 1995 41
Consolidated statements of cash flows for the years
ended September 30, 1997, 1996 and 1995 43
Notes to consolidated financial statements 45-73
All financial statement schedules are omitted because the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the financial statements and accompanying notes thereto.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ATMOS ENERGY CORPORATION
(Registrant)
By /s/ David L. Bickerstaff
------------------------
David L. Bickerstaff
Vice President and Controller
Date: December 12, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Robert W. Best and Larry J.
Dagley, or either of them acting alone or together, as his true and lawful
attorney-in-fact and agent with full power to act alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K, and to
file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
/s/ Robert W. Best Chairman, December 12, 1997
- ------------------------- President and
Robert W. Best Chief Executive
Officer
78
/s/ Larry J. Dagley Executive Vice December 12, 1997
- ------------------------- President and
Larry J. Dagley Chief Financial
Officer
/s/ David L. Bickerstaff Vice President December 12, 1997
- ------------------------- and Controller
David L. Bickerstaff (Principal
accounting officer)
/s/ Travis W. Bain, II Director December 12, 1997
- -------------------------
Travis W. Bain, II
/s/ Dan Busbee Director December 12, 1997
- -------------------------
Dan Busbee
/s/ Richard W. Cardin Director December 12, 1997
- -------------------------
Richard W. Cardin
/s/ Thomas J. Garland Director December 12, 1997
- -------------------------
Thomas J. Garland
/s/ Gene C. Koonce Director December 12, 1997
- -------------------------
Gene C. Koonce
/s/ Vincent J. Lewis Director December 12, 1997
- -------------------------
Vincent J. Lewis
79
/s/ Thomas C. Meredith Director December 12, 1997
- -------------------------
Thomas C. Meredith
/s/ Phillip E. Nichol Director December 12, 1997
-------------------------
Phillip E. Nichol
/s/ Carl S. Quinn Director December 12, 1997
-------------------------
Carl S. Quinn
/s/ Lee E. Schlessman Director December 12, 1997
-------------------------
Lee E. Schlessman
/s/ Charles K. Vaughan Director December 12, 1997
- -------------------------
Charles K. Vaughan
/s/ Richard Ware II Director December 12, 1997
-------------------------
Richard Ware II
80
EXHIBITS INDEX
Item 14. (a) (3)
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
Plan of Reorganization
----------------------
2.1 Agreement and Plan of Reorganization Exhibit 2.1 of Form S-4
dated July 19, 1996, by and between filed October 4, 1996
the Registrant and United Cities Gas
Company
2.2 Amendment No. 1 to Agreement and Exhibit 2.1(a) of Form S-
Plan of Reorganization dated October 4 filed October 4, 1996
3, 1996
Articles of Incorporation and Bylaws
3.1 Restated Articles of Incorporation
of the Company, as Amended (as of
July 31, 1997)
3.2 Bylaws of the Company (Amended and
Restated as of November 12, 1997)
Instruments Defining Rights of
Security Holders
4.1 Specimen Common Stock Certificate Exhibit (4)(b) of Form
(Atmos Energy Corporation) 10-K for fiscal year
ended September 30, 1988
(File No. 1-10042)
4.2(a) Rights Agreement, dated as of April Exhibit (1) of Form 8-K
27, 1988, between the Company and filed May 10, 1988 (File
Morgan Shareholder Services Trust No. 0-11249)
Company
4.2(b) Amendment No. 1 to Rights Agreement, Exhibit 4.3(b) of Form
dated August 10, 1994 10-K for fiscal year
ended September 30, 1994
(File No. 1-10042)
4.2(c) Certificate of Adjusted Price, dated Exhibit 4.3(c) of Form
August 15, 1994 10-K for fiscal year
ended September 30, 1994
(File No. 1-10042)
4.3 Rights Agreement, dated as of Exhibit 4.1 of Form 8-K
November 12, 1997, between the dated November 12, 1997
Company and BankBoston, N.A.
81
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
9 Not applicable
Material Contracts
------------------
10.1(a) Note Purchase Agreement, dated as of Exhibit 10(c) of Form 8-K
December 21, 1987, by and between filed January 7, 1988
the Company and John Hancock Mutual (File No. 0-11249)
Life Insurance Company
Note Purchase Agreement, dated as of
December 21, 1987, by and between
the Company and John Hancock
Charitable Trust I (Agreement is
identical to Hancock Agreement
listed above except as to the
parties thereto.)
Note Purchase Agreement dated as of
December 21, 1987, by and between
the Company and Mellon Bank, N.A.,
Trustee under Master Trust Agreement
of AT&T Corporation, dated January
1, 1984, for Employee Pension Plans
- AT&T - John Hancock - Private
Placement (Agreement is identical to
Hancock Agreement listed above
except as to the parties thereto.)
10.1(b) Amendment to Note Purchase Exhibit (10)(b)(ii) of
Agreement, dated October 11, 1989, Form 10-K for fiscal year
by and between the Company and John ended September 30, 1989
Hancock Mutual Life Insurance (File No. 1-10042)
Company revising Note Purchase
Agreement dated December 21, 1987
Amendment to Note Purchase
Agreement, dated October 11, 1989,
by and between the Company and John
Hancock Charitable Trust I revising
Note Purchase Agreement dated
December 21, 1987. (Amendment is
identical to Hancock amendment
listed above except as to the
parties thereto.)
82
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
Amendment to Note Purchase
Agreement, dated October 11, 1989,
by and between the Company and
Mellon Bank, N.A., Trustee under
Master Trust Agreement of AT&T
Corporation, dated January 1, 1984,
for Employee Pension Plans - AT&T -
John Hancock - Private Placement
revising Note Purchase Agreement
dated December 21, 1987 (Amendment
is identical to Hancock amendment
listed above except as to the
parties thereto.)
10.1(c) Amendment to Note Purchase Exhibit 10(b)(iii) of
Agreement, dated November 12, 1991, Form 10-K for fiscal year
by and between the Company and John ended September 30, 1991
Hancock Mutual Life Insurance (File No. 1-10042)
Company revising Note Purchase
Agreement dated December 21, 1987
Amendment to Note Purchase
Agreement, dated November 12, 1991,
by and between the Company and John
Hancock Charitable Trust I revising
Note Purchase Agreement dated
December 21, 1987. (Amendment is
identical to Hancock amendment
listed above except as to the
parties thereto.)
Amendment to Note Purchase
Agreement, dated November 12, 1991,
by and between the Company and
Mellon Bank, N.A., Trustee under
Master Trust Agreement of AT&T
Corporation, dated January 1, 1984,
for Employee Pension Plans - AT&T -
John Hancock - Private Placement
revising Note Purchase Agreement
dated December 21, 1987. (Amendment
is identical to Hancock amendment
above except as to the parties
thereto.)
10.2(a) Note Purchase Agreement, dated as of Exhibit 10(c) of Form 10-
October 11, 1989, by and between the K for fiscal year ended
Company and John Hancock Mutual Life September 30, 1989 (File
Insurance Company No. 1-10042)
83
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
10.2(b) Amendment to Note Purchase Exhibit 10(c)(ii) of Form
Agreement, dated as of November 12, 10-K for fiscal year
1991, by and between the Company and ended September 30, 1991
John Hancock Mutual Life Insurance (File No. 1-10042)
Company revising Note Purchase
Agreement dated October 11, 1989
10.3(a) Note Purchase Agreement, dated as of Exhibit 10(f)(i) of Form
August 29, 1991, by and between the 10-K for fiscal year
Company and The Variable Annuity ended September 30, 1991
Life Insurance Company (File No. 1-10042)
10.3(b) Amendment to Note Purchase Exhibit 10(f)(ii) of Form
Agreement, dated November 26, 1991, 10-K for fiscal year
by and between the Company and The ended September 30, 1991
Variable Annuity Life Insurance (File No. 1-10042)
Company revising Note Purchase
Agreement dated August 29, 1991
10.4 Note Purchase Agreement, dated as of Exhibit (10)(f) of Form
August 31, 1992, by and between the 10-K for fiscal year
Company and The Variable Annuity ended September 30, 1992
Life Insurance Company (File No. 1-10042)
10.5 Note Purchase Agreement, dated Exhibit 10.1 of Form 10-Q
November 14, 1994, by and among the for quarter ended
Company and New York Life Insurance December 31, 1994 (File
Company, New York Life Insurance and No. 1-10042)
Annuity Corporation, The Variable
Annuity Life Insurance Company,
American General Life Insurance
Company, and Merit Life Insurance
Company
10.6 Loan Agreement by and between the Exhibit 10.1 of Form 10-Q
Company and NationsBank of Texas, for quarter ended
N.A. dated as of November 26, 1996 December 31, 1996 (File
No. 1-10042)
10.7 Indenture of Mortgage, dated as of Exhibit to Registration
July 15, 1959, from United Cities Statement of United
Gas Company to First Trust of Cities Gas Company on
Illinois, National Association, and Form S-3 (File No. 33-
M.J. Kruger, as Trustees, as amended 56983).
and supplemented through December 1,
1992 (the Indenture of Mortgage
through the 20th Supplemental
Indenture)
84
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
10.7(a) Twenty-First Supplemental Indenture
dated as of February 5, 1997 by and
among United Cities Gas Company and
Bank of America Illinois and First
Trust National Association and
Russell C. Bergman supplementing
Indenture of Mortgage dated as of
July 15, 1959
10.7(b) Twenty-Second Supplemental Indenture
dated as of July 29, 1997 by and
among the Company and First Trust
National Association and Russell C.
Bergman supplementing Indenture of
Mortgage dated as of July 15, 1959
10.8 Form of Indenture between United Exhibit to Registration
Cities Gas Company and First Trust Statement of United
of Illinois, National Association, Cities Gas Company on
as Trustee dated as of November 15, Form S-3 (File No. 33-
1995 56983)
10.8(a) First Supplemental Indenture between
the Company and First Trust of
Illinois, National Association, as
Trustee dated as of July 29, 1997
10.9(a) Seventh Supplemental Indenture, Exhibit 10.1 of Form 10-Q
dated as of October 1, 1983 between for quarter ended June
Greeley Gas Company ("the Greeley 30, 1994 (File No. 1-
Gas Division") and the Central Bank 10042)
of Denver, N.A. ("Central Bank")
10.9(b) Ninth Supplemental Indenture, dated Exhibit 10.2 of Form 10-Q
as of April 1, 1991, between the for quarter ended June
Greeley Gas Division and Central 30, 1994 (File No. 1-
Bank 10042)
10.9(c) Bond Purchase Agreement, dated as of Exhibit 10.3 of Form 10-Q
April 1, 1991, between the Greeley for quarter ended June
Gas Division and Central Bank 30, 1994 (File No. 1-
10042)
10.9(d) Tenth Supplemental Indenture, dated Exhibit 10.4 of Form 10-Q
as of December 1, 1993, between the for quarter ended June
Company and Colorado National Bank, 30, 1994 (File No. 1-
formerly Central Bank 10042)
85
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
Gas Supply Contracts
10.10(a) Firm Gas Transportation Agreement
No. 123535 dated November 1, 1995
between Greeley Gas Company and
Public Service Company of Colorado
10.10(b) Transportation Storage Service Exhibit 10.6(b) of Form
Agreement No. TA-0544 between 10-K for fiscal year
Greeley Gas Company and Williams ended September 30, 1994
Natural Gas Company dated October 1, (File No. 1-10042)
1993
10.10(c) No-Notice Transportation Service Exhibit 10.6(c) of Form
Agreement No. 31013, Rate Schedule 10-K for fiscal year
NNT-1, between Greeley Gas Company ended September 30, 1994
and Colorado Interstate Gas Company, (File No. 1-10042)
as amended, dated October 1, 1993
(term extended to April 30, 2000 by
letter dated January 2, 1996)
10.10(d) Firm Transportation Service Exhibit 10.6(d) of Form
Agreement No. 35009, Rate Schedule 10-K for fiscal year
TF-2, between Greeley Gas Company ended September 30, 1994
and Colorado Interstate Gas Company, (File No. 1-10042)
as amended, dated October 1, 1993
(term extended to April 30, 2000 by
letter dated January 2, 1996)
10.11 Amarillo Supply Agreement dated Exhibit 10.7(a) of Form
January 2, 1993 between Energas and 10-K for fiscal year
Pioneer Natural Resources , USA, ended September 30, 1994
Inc. (formerly Mesa Operating (File No. 1-10042)
Company)
10.12(a) Agreement for Natural Gas Service Exhibit 10(o)(ii) of Form
for Distribution and Resale between 10-K for fiscal year
Trans La and LIG dated October 28, ended September 30, 1991
1991 (File No. 1-10042)
10.12(b) Agreement for Intrastate Exhibit 10(o)(iii) of
Transportation of Natural Gas Form 10-K for fiscal year
between Trans La and LIG dated ended September 30, 1991
October 28, 1991 (File No. 1-10042)
10.13(a) Gas Transportation Agreement between Exhibit 10.3 of Form 10-Q
Texas Gas and Western Kentucky Gas for quarter ended
dated November 1, 1993 (Contract no. December 31, 1993 (File
T3355, zone 3) No. 1-10042)
86
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
10.13(b) Gas Transportation Agreement between Exhibit 10.4 of Form 10-Q
Texas Gas and Western Kentucky Gas for quarter ended
dated November 1, 1993 (Contract no. December 31, 1993 (File
T3819, zone 4) No. 1-10042)
10.13(c) Gas Transportation Agreement between Exhibit 10.5 of Form 10-Q
Texas Gas and Western Kentucky Gas for quarter ended
dated November 1, 1993 (Contract no. December 31, 1993 (File
N0210, zone 2, Contract no. N0340, No. 1-10042)
zone 3, Contract no. N0435, zone 4)
10.14(a) Gas Transportation Agreement, Exhibit 10.17(a) of Form
Contract No. 2550, dated September 10-K for fiscal year
1, 1993, between Tennessee Gas ended September 30, 1993
Pipeline Company, a division of (File No. 1-10042)
Tenneco, Inc. ("Tennessee Gas"), and
Western Kentucky, Campbellsville
Service Area
10.14(b) Gas Transportation Agreement, Exhibit 10.17(b) of Form
Contract No. 2546, dated September 10-K for fiscal year
1, 1993, between Tennessee Gas and ended September 30, 1993
Western Kentucky, Danville Service (File No. 1-10042)
Area
10.14(c) Gas Transportation Agreement, Exhibit 10.17(c) of Form
Contract No. 2385, dated September 10-K for fiscal year
1, 1993, between Tennessee Gas and ended September 30, 1993
Western Kentucky, Greensburg et al (File No. 1-10042)
Service Area
10.14(d) Gas Transportation Agreement, Exhibit 10.17(d) of Form
Contract No. 2551, dated September 10-K for fiscal year
1, 1993, between Tennessee Gas and ended September 30, 1993
Western Kentucky, Harrodsburg (File No. 1-10042)
Service Area
10.14(e) Gas Transportation Agreement, Exhibit 10.17(e) of Form
Contract No. 2548, dated September 10-K for fiscal year
1, 1993, between Tennessee Gas and ended September 30, 1993
Western Kentucky, Lebanon Service (File No. 1-10042)
Area
10.15 Gas Service Agreement (Service for Exhibit 10.5 of Form 10-Q
Firm Transportation) between Energas for quarter ended
and Westar Transmission Company December 31, 1996 (File
dated January 1, 1996. No. 1-10042)
87
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
10.16 Gas Service Agreement (Service for Exhibit 10.7 of Form 10-Q
Firm Transportation) between Westar for quarter ended
Transmission Company and EnerMart December 31, 1996 (File
dated January 1, 1996 No. 1-10042)
10.17 Gas Service Agreement (Service for Exhibit 10.8 of Form 10-Q
Firm Transportation) between KN for quarter ended
Westex and EnerMart Trust dated December 31, 1996 (File
January 1, 1996 No. 1-10042)
10.18 Gas Sales Agreement (Irrigation) Exhibit 10.11 of Form 10-
between KN Marketing and EnerMart Q for quarter ended
Trust dated March 1, 1996. December 31, 1996 (File
No. 1-10042)
10.19 Gas Sales Agreement (Swing) between Exhibit 10.13 of Form 10-
Energas and KN Marketing, dated Q for quarter ended
January 1, 1996. December 31, 1996 (File
No. 1-10042)
10.20 Operating Agreement between Energas Exhibit 10.15 of Form 10-
and Westar Transmission Company, Q for quarter ended
effective December 1, 1996. December 31, 1996 (File
No. 1-10042)
Executive Compensation Plans and
Arrangements
10.21(a) *Severance Agreement dated April 1, Exhibit 10.3 of Form 10-Q
1995 between the Company and J. for quarter ended June
Charles Goodman 30, 1995 (File No. 1-
10042)
10.21(b) *Severance Agreement amended and Exhibit 10(r)(iii) of
restated as of August 8, 1991, Form 10-K for fiscal year
between the Company and Don E. James ended September 30, 1991
(File No. 1-10042)
10.21(c) *Severance Agreement dated May 3, Exhibit 10.2 of Form 10-Q
1995 between the Company and Mary S. for quarter ended June
Lovell 30, 1995 (File No. 1-
10042)
10.21(d) *Severance Agreement dated August Exhibit 10.18(g) of Form
14, 1996, between the Company and 10-K for fiscal year
Glen A. Blanscet ended September 30, 1996
(File No. 1-10042)
88
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
10.21(e) *Severance Agreement dated March 10, Exhibit 10.1 of Form 10-Q
1997, between the Company and Robert for quarter ended March
W. Best 31, 1997 (File No. 1-
10042)
10.21(f) *Severance Agreement dated May 10,
1997, between the Company and Larry
J. Dagley
10.22 *Atmos Energy Corporation Mini-Med Exhibit 10.22 of Form 10-
Plan, as restated effective July 1, K for fiscal year ended
1996 September 30, 1996 (File
No. 1-10042)
10.23 *Atmos Energy Corporation Deferred Exhibit 10(x) of Form 10-
Compensation Plan for Outside K for fiscal year ended
Directors September 30, 1992 (File
No. 1-10042)
10.24 *Atmos Energy Corporation Retirement Exhibit 10(y) of Form 10-
Plan for Outside Directors K for fiscal year ended
September 30, 1992 (File
No. 1-10042)
10.24(a) *Amendment No. 1 to the Atmos Energy Exhibit 10.2 of Form 10-Q
Corporation Retirement Plan for for quarter ended
Outside Directors December 31, 1996 (File
No. 1-10042)
10.25(a) *Description of Car Allowance Exhibit 10.26(a) of Form
Payments 10-K for fiscal year
ended September 30, 1993
(File No. 1-10042)
10.25(b) *Description of Financial and Estate
Planning Program
10.25(c) *Description of Sporting Events Exhibit 10.26(c) of Form
Program 10-K for fiscal year
ended September 30, 1993
(File No. 1-10042)
10.26 *Atmos Energy Corporation Exhibit 10.1 of Form 10-Q
Supplemental Executive Benefits Plan for quarter ended June
(Amended and Restated May 14, 1997) 30, 1997 (File No. 1-
10042)
10.26(a) *Amendment No. 1 to the Atmos Energy
Corporation Supplemental Executive
Benefits Plan
89
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
10.26(b) *Amendment No. 2 to the Atmos Energy
Corporation Supplemental Executive
Benefits Plan
10.27 *Atmos Energy Corporation Restricted
Stock Grant Plan (Amended and
Restated as of November 12, 1997)
10.28 *Atmos Energy Corporation Outside
Directors Stock-for-Fee Plan
(Amended and Restated as of November
12, 1997)
10.29 *Atmos Energy Corporation Executive Exhibit 10.4 of Form 10-Q
Annual Performance Bonus Plan for quarter ended
(Amended and Restated as of November December 31, 1996 (File
13, 1996) No. 1-10042)
10.30 *Consulting Agreement between the Exhibit 10.2 of Form 10-Q
Company and Charles K. Vaughan, for quarter ended June
effective October 1, 1994 30, 1997 (File No. 1-
10042)
10.30(a) *Amendment No. 1 to Consulting Exhibit 10.3 of Form 10-Q
Agreement between the Company and for quarter ended June
Charles K. Vaughan, dated May 14, 30, 1997 (File No. 1-
1997 10042)
10.31 *The Atmos Energy Corporation
Executive Retiree Life Plan
10.31(a) *Amendment No. 1 to The Atmos Energy
Corporation Executive Retiree Life
Plan
11 Not applicable
12 Not applicable
13 Not applicable
16 Not applicable
18 Not applicable
90
Page Number or
Exhibit Incorporation by
Number Description Reference to
-------- ------------------------------------ -------------------------
Other Exhibits, as indicated
21 Subsidiaries of the registrant
22 Not applicable
23.1 Consent of independent auditors,
Ernst & Young LLP
23.2 Consent of independent auditors,
Arthur Andersen LLP
24 Power of Attorney Signature page of Form
10-K for fiscal year
ended September 30, 1997
27 Financial Data Schedule for Atmos
for year ended September 30, 1997
28 Not applicable
- --------------------------
* This exhibit constitutes a "management contract or compensatory plan,
contract, or arrangement."
91