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)
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common stock, No Par Value New York Stock Exchange
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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 $637,447,560 as of October 26, 2000. On October 26, 2000 the registrant had 31,996,398 shares of common stock outstanding.
Portions of the registrant's Definitive Proxy Statement to be filed for the Annual Meeting of Shareholders on February 14, 2001 are incorporated by reference into Part III of this report.
ITEM 1. BUSINESS
OPERATIONS
Atmos Energy Corporation (the "Company" or "Atmos") distributes and sells natural gas to over one million residential, commercial, industrial, agricultural and other customers. Atmos operates through five divisions in over 800 cities, towns and communities in service areas located in Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Missouri, South Carolina, Tennessee, Texas and Virginia. As discussed below, the Company has entered into an agreement to sell all of its natural gas utility operations in South Carolina. The Company also transports natural gas for others through its distribution system.
Atmos provides natural gas storage services and owns natural gas storage fields in Kansas and Kentucky to supplement natural gas used by customers in Kansas, Kentucky, Tennessee and other states. The Company also owns a 45 percent equity interest, and has agreed to acquire the remaining equity interest, in Woodward Marketing, LLC ("WMLLC"), a privately held company that provides gas marketing and energy management services to industrial customers, municipalities and local distribution companies, including the Company's Trans Louisiana Gas Company, Greeley Gas Company, Western Kentucky Gas Company and United Cities Gas Company divisions. In addition, the Company markets natural gas to industrial and agricultural customers primarily in West Texas and to industrial customers in Louisiana.
FORMATION AND STRATEGY
Atmos was organized under the laws of Texas in 1983 as Energas Company, a subsidiary of Pioneer Corporation ("Pioneer") for the purposes of owning and operating Pioneer's natural gas distribution business in Texas. Immediately following the transfer by Pioneer to the Company of its gas distribution business, which Pioneer and its predecessors operated since 1906, Pioneer distributed the Company's outstanding stock to its shareholders. In September 1988, the Company changed its name from Energas Company to Atmos Energy Corporation. As a result of the merger with United Cities Gas Company in July 1997, the Company also became incorporated in Virginia.
Through the recent transactions outlined below, Atmos has begun implementing a strategy intended to increase its presence in larger service areas, sell smaller, non-strategic natural gas utility operations and restructure other operations.
RECENT DEVELOPMENTS
In April 2000, the Company entered into an agreement with Citizens Communications Company to acquire the Louisiana natural gas operations of its Louisiana Gas Service Company division ("LGS") and its LGS Natural Gas Company subsidiary for $375.0 million. LGS provides natural gas distribution service through approximately 279,000 residential and commercial meters in approximately 190 communities in southeastern and northern Louisiana, which is an area with a combined population of more than 600,000. Its service territory includes the suburban areas of metropolitan New Orleans (excluding Orleans Parish), the north shore of Lake Pontchartrain and the Monroe/West Monroe metropolitan area. LGS Natural Gas Company provides gas transportation services to industrial customers in Louisiana. Upon closing, Atmos will become the largest natural gas distributor in Louisiana and its national customer base will increase to approximately 1.4 million customers, making Atmos the fifth largest pure natural gas local distribution company in the United States. The acquisition is subject to state and federal regulatory approval.
In May 2000, the Company completed the acquisition of the Missouri natural gas distribution assets of Associated Natural Gas from a subsidiary of Southwestern Energy Corporation for $32.0 million. The acquisition increased the Company's presence in Missouri by more than 48,000 customers.
As a part of the Company's strategy to restructure its non-natural gas utility operations, in August 2000, Atmos formed US Propane, L.P. ("US Propane"), a joint venture combining the Company's propane operations with the propane operations of three other companies. US Propane then sold its propane business to
In August 2000, the Company entered into an agreement with Woodward Marketing, Inc. ("WMI") to acquire the 55 percent interest in WMLLC that it does not own in exchange for 1,423,193 restricted shares of Atmos common stock. The consideration is subject to an upward adjustment if the Company's average share price does not equal $25 per share during a period immediately prior to the fifth anniversary of the completion of the acquisition or an earlier change in control, unless during the period beginning on the first anniversary of the completion of the acquisition and ending on the fifth anniversary or an earlier change in control the Company's share price reaches $25 per share for any 30 consecutive trading-day period. The maximum additional shares that could be issued under the adjustment provision is 232,547 plus an amount to compensate for dividends paid after the completion of the acquisition. Upon the completion of the acquisition, the Company's subsidiary's guaranty of WMLLC's short-term working capital and letter of credit facility of up to $100.0 million, of which $75.0 million was available at September 30, 2000, will increase from 45 percent to 100 percent of any amounts outstanding under this facility. The Company's subsidiary and WMI also act as joint and several guarantors on payables of WMLLC up to $40.0 million of natural gas purchases and transportation services from certain suppliers. Upon the completion of the acquisition, the Company's subsidiary will be the sole guarantor of all of WMLLC's accounts payable. This transaction is subject to state and federal regulatory approval.
In October 2000, the Company entered into an agreement to sell all of its natural gas utility operations in South Carolina for approximately $5.8 million, which approximates net book value. This transaction is subject to state regulatory approval.
OPERATING STATISTICS
The table on the following page reflects the operating statistics of Atmos including the United Cities Gas Company division (the "United Cities Division")for fiscal 2000, 1999 and 1998 and the restated operating statistics for 1997 and 1996 on a pooled basis with United Cities Gas Company ("UCGC"). It is followed by two tables of utility only sales and operating statistics by business unit for 2000 and 1999. Certain prior year amounts have been reclassified to conform with the current year presentation.
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
METERS IN SERVICE, end of year
Residential.............................. 970,873 919,012 889,074 870,747 860,229
Commercial............................... 104,019 98,268 94,302 92,703 91,960
Industrial (including agricultural)...... 14,259 14,329 16,322 17,217 19,403
Public authority and other............... 7,448 6,386 4,834 4,781 4,716
---------- ---------- ---------- ---------- ----------
Total meters...................... 1,096,599 1,037,995 1,004,532 985,448 976,308
Propane customers........................ -- 39,539 37,400 29,097 26,108
---------- ---------- ---------- ---------- ----------
Total............................. 1,096,599 1,077,534 1,041,932 1,014,545 1,002,416
========== ========== ========== ========== ==========
HEATING DEGREE DAYS(1)
Actual (weighted average)................ 3,302 3,374 3,799 3,909 4,043
Percent of normal........................ 82% 85% 95% 98% 101%
SALES VOLUMES -- MMcf(2)
Residential.............................. 63,285 67,128 73,472 75,215 77,001
Commercial............................... 30,707 31,457 36,083 37,382 38,247
Industrial(including agricultural)....... 38,687 35,741 44,881 46,416 57,863
Public authority and other............... 5,520 5,793 4,937 5,195 5,182
---------- ---------- ---------- ---------- ----------
Total sales volumes............... 138,199 140,119 159,373 164,208 178,293
Transportation volumes -- MMcf(2).......... 59,365 55,468 56,224 48,800 44,146
---------- ---------- ---------- ---------- ----------
TOTAL THROUGHPUT -- MMcf(2)................ 197,564 195,587 215,597 213,008 222,439
========== ========== ========== ========== ==========
PROPANE -- Gallons (000's)................. 19,329 22,291 23,412 25,204 33,637
========== ========== ========== ========== ==========
OPERATING REVENUES (000's)
Gas sales revenues
Residential.............................. $ 405,552 $ 349,691 $ 410,538 $ 452,864 $ 409,039
Commercial............................... 176,712 144,836 184,046 193,302 186,032
Industrial (including agricultural)...... 171,447 117,382 161,382 168,386 187,693
Public authority and other............... 27,198 22,330 20,504 23,898 21,738
---------- ---------- ---------- ---------- ----------
Total gas sales revenues.......... 780,909 634,239 776,470 838,450 804,502
Transportation revenues.................... 23,610 23,101 23,971 19,885 18,872
Other gas revenues......................... 4,674 4,500 8,121 6,385 13,751
---------- ---------- ---------- ---------- ----------
Total gas revenues................ 809,193 661,840 808,562 864,720 837,125
Propane revenues........................... 22,550 22,944 29,091 33,194 38,372
Other revenues............................. 18,409 5,412 10,555 8,921 11,194
---------- ---------- ---------- ---------- ----------
Total operating revenues.......... $ 850,152 $ 690,196 $ 848,208 $ 906,835 $ 886,691
========== ========== ========== ========== ==========
AVERAGE SALES PRICE/Mcf(3)................. $ 5.65 $ 4.53 $ 4.87 $ 5.11 $ 4.51
AVERAGE COST OF GAS/Mcf SOLD............... 3.79 2.79 3.24 3.51 3.15
AVERAGE TRANSPORTATION REVENUES/Mcf........ .40 .42 .43 .41 .43
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See footnotes on page 6.
YEAR ENDED SEPTEMBER 30, 2000
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WESTERN UNITED TOTAL
ENERGAS TRANS LA KENTUCKY GREELEY CITIES UTILITY
-------- -------- -------- -------- -------- ---------
METERS IN SERVICE, at end of
year
Residential................. 273,664 74,943 160,565 187,121 274,580 970,873
Commercial.................. 26,231 5,568 18,466 17,946 35,808 104,019
Industrial.................. 513 -- 407 406 660 1,986
Public authority and
other.................... 2,254 908 1,628 1,688 970 7,448
-------- ------- -------- -------- -------- ---------
Total............... 302,662 81,419 181,066 207,161 312,018 1,084,326
======== ======= ======== ======== ======== =========
HEATING DEGREE DAYS(1)
Actual...................... 2,875 1,237 3,702 4,678 3,198 3,302
Percent of normal........... 81% 69% 85% 82% 85% 82%
SALES VOLUMES -- MMcf(2)
Residential................. 19,201 3,070 11,584 14,727 14,703 63,285
Commercial.................. 6,365 1,379 5,032 5,829 12,102 30,707
Industrial.................. 1,651 -- 3,189 1,927 13,191 19,958
Public authority and
other.................... 2,026 751 1,299 1,216 228 5,520
-------- ------- -------- -------- -------- ---------
Total............... 29,243 5,200 21,104 23,699 40,224 119,470
TRANSPORTATION
VOLUMES -- MMcf(2).......... 24,679 2,248 26,025 10,756 16,474 80,182
-------- ------- -------- -------- -------- ---------
TOTAL THROUGHPUT -- MMcf(2)... 53,922 7,448 47,129 34,455 56,698 199,652
======== ======= ======== ======== ======== =========
OTHER STATISTICS
Operating revenues
(000's).................. $146,100 $45,469 $121,237 $147,116 $280,029 $739,951
Miles of pipe............... 13,169 2,283 3,437 6,000 5,140 30,029
Employees(5)................ 350 123 249 271 495 1,488
Communities served.......... 92 41 163 123 383 802
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See footnotes on page 6.
YEAR ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------
WESTERN UNITED
ENERGAS TRANS LA KENTUCKY GREELEY CITIES TOTAL UTILITY
-------- -------- -------- -------- -------- -------------
METERS IN SERVICE, at end of
year
Residential................ 274,452 74,890 159,449 181,859 228,362 919,012
Commercial................. 26,300 5,567 18,371 17,736 30,294 98,268
Industrial................. 431 -- 238 339 610 1,618
Public authority and
other................... 2,230 893 1,559 1,704 -- 6,386
-------- ------- -------- -------- -------- ----------
Total.............. 303,413 81,350 179,617 201,638 259,266 1,025,284
======== ======= ======== ======== ======== ==========
HEATING DEGREE DAYS(1)
Actual..................... 3,083 1,265 3,472 4,992 3,168 3,374
Percent of normal.......... 87% 71% 80% 88% 84% 85%
SALES VOLUMES -- MMcf(2)
Residential................ 20,871 3,111 11,822 16,748 14,576 67,128
Commercial................. 6,825 1,334 5,122 6,642 11,534 31,457
Industrial................. 1,514 -- 2,973 1,462 14,952 20,901
Public authority and
other................... 2,234 769 1,371 1,419 -- 5,793
-------- ------- -------- -------- -------- ----------
Total.............. 31,444 5,214 21,288 26,271 41,062 125,279
TRANSPORTATION
VOLUMES -- MMcf(2)......... 17,580 2,162 25,814 10,021 14,300 69,877
-------- ------- -------- -------- -------- ----------
TOTAL THROUGHPUT --MMcf(2)... 49,024 7,376 47,102 36,292 55,362 195,156
======== ======= ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues
(000's)................. $127,234 $36,964 $100,165 $132,093 $224,755 $ 621,211
Miles of pipe.............. 13,244 2,276 3,668 5,676 5,806 30,670
Employees(5)............... 372 128 258 286 427 1,471
Communities served......... 92 41 163 123 383 802
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See footnotes on page 6.
(1) 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 are based on 30-year average National Weather Service data for selected locations.
(2) Volumes are reported as metered in million cubic feet ("MMcf"). Utility sales volumes and revenues reflect utility segment operations, including intercompany sales and transportation amounts.
(3) Mcf means thousand cubic feet.
(4) These tables present data for Atmos' five utility business units. Their operations include the regulated local distribution companies located in their respective service areas.
(5) The number of employees excludes 369 and 427 Atmos shared services and customer support center employees and 28 and 164 non-utility employees in 2000 and 1999.
The following table summarizes certain information regarding the operation of the utility, non-regulated and propane segments of the Company for each of the three years as of and for the period ended September 30, 2000. Amounts for the propane segment for 2000 reflect operations for 10 months until its sale to Heritage, effective August 10, 2000. Subsequently, the Company's share of propane results are reflected on an equity basis.
NON-
UTILITY REGULATED PROPANE TOTAL
---------- --------- ------- ----------
(IN THOUSANDS)
2000
Operating revenues(1).......................... $ 734,835 $ 92,767 $22,550 $ 850,152
Operating income (loss)(1)..................... 77,207 8,717 (608) 85,316
Net income..................................... 22,459 10,857 2,602 35,918
Identifiable assets(1)......................... 1,246,782 101,277 699 1,348,758
1999
Operating revenues(1).......................... $ 617,313 $ 49,939 $22,944 $ 690,196
Operating income (loss)........................ 49,000 5,782 (543) 54,239
Net income (loss).............................. 10,800 7,813 (869) 17,744
Identifiable assets(1)......................... 1,125,691 71,115 33,731 1,230,537
1998
Operating revenues(1).......................... $ 738,445 $ 80,672 $29,091 $ 848,208
Operating income............................... 100,665 11,595 619 112,879
Net income (loss).............................. 43,332 11,999 (66) 55,265
Identifiable assets(1)......................... 1,052,225 52,616 36,549 1,141,390
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(1) Net of intersegment eliminations
The utility segment is composed of the Company's five regulated utility divisions: the Energas Company division which operates in Texas ("Energas Division"), the Greeley Gas Company division which operates in Colorado, Kansas and Missouri ("Greeley Division"), the Trans Louisiana Gas Company division which operates in Louisiana ("Trans La Division"), the United Cities Division which operates in Georgia, Illinois, Iowa, Kansas, Missouri, South Carolina, Tennessee and Virginia and the Western Kentucky Gas Company division which operates in Kentucky ("Western Kentucky Division").
The non-regulated segment is currently composed of four parts. Atmos Storage Inc. owns underground storage fields in Kansas and Kentucky and provides storage services to the United Cities Division and Greeley Division and other non-regulated customers. Atmos Energy Services, Inc. markets gas to irrigation and industrial customers in West Texas through Enermart Energy Services Trust and to industrial customers in Louisiana and is developing plans for marketing various non-regulated services and products. Atmos Energy Marketing, LLC owns the Company's 45 percent investment in WMLLC, a gas marketing and energy management services business. Atmos Leasing, Inc. leases buildings and vehicles to the United Cities Division.
WMLLC, which commenced operations on May 1, 1995, is owned by Woodward Marketing, Inc. (55 percent) and Atmos Energy Marketing, LLC (45 percent). With its headquarters in Houston, Texas, WMLLC provides a variety of natural gas management services to natural gas utility systems and industrial natural gas consumers in several states. Such services include natural gas supply acquisition and provision of gas supplies at fixed and market-based prices, load forecasting and management, gas storage and transportation services, peaking sales and balancing services and gas hedging through the use of certain derivative products.
The propane segment includes United Cities Propane Gas, Inc., which was primarily engaged in the retail and wholesale distribution of propane gas in Tennessee, Kentucky, North Carolina and Virginia. See the
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 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 ("WNAs") in its rate jurisdictions in Tennessee, Georgia and Kentucky. See "Weather and seasonality" in Management's Discussion and Analysis of Operations.
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 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.
Certain industrial 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 generally offset the loss to gross profit.
The Company's distribution systems have experienced aggregate peak day deliveries of approximately 1.6 billion cubic feet per day ("Bcf"). The Company has the ability to curtail deliveries to certain customers under the terms of interruptible contracts and applicable state statutes or regulations which enable 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 Trans Louisiana Gas Company 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 Division nor its predecessor, Greeley Gas Company, has 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.
GAS SUPPLY
The Company receives gas deliveries through 28 pipeline transportation companies, both interstate and intrastate, to satisfy its firm sales market requirements. The transportation agreements are firm and many of them have pipeline no-notice storage service which provide for daily balancing between system requirements and nominated flowing supplies. These agreements have been negotiated with the shortest term available to maintain the Company's right to roll over the term. The agreements reduce the risk of paying fixed fees to reserve pipeline capacity on a long-term basis which would be unneeded in the event of unbundling or other changes in demand.
The Western Kentucky Division's gas supply is delivered primarily by the following pipelines: Williams Pipeline-Texas Gas, Tennessee Gas, Trunkline, Midwestern Pipeline and ANR. During 1998, the Western Kentucky Division sought and was granted approval by the Kentucky Public Service Commission for a performance-based rate program which commenced in July 1998. Under performance-based programs,
The United Cities Division is served by 13 interstate pipelines. The majority of the volumes are transported through East Tennessee Pipeline, Southern Natural Gas, Tennessee Gas Pipeline and Columbia Gulf.
Colorado Interstate Gas Company, Williams Pipeline-Central, Public Service Company of Colorado and Northwest Pipeline are the principal transporters of the Greeley Division's requirements. Additionally, the Greeley Division purchases substantial volumes from producers that are connected directly to its distribution system.
The Energas Division receives sales and transportation service from various Oneok pipeline affiliates. Also, the Energas Division purchases a significant portion of its supply from Pioneer Natural Resources which is connected directly to the Company's Amarillo, Texas distribution system.
Louisiana Intrastate Gas Company, Acadian Pipeline, Koch Gateway and Williams Pipeline-Texas Gas pipelines deliver most of the Trans La Division's requirements.
The Company also 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 two propane plants and a liquified natural gas ("LNG") plant for peak shaving purposes. The Company also contracts for storage service in underground storage facilities on many of the interstate pipelines serving it. See "Item 2. Properties" below for further information regarding the peak shaving facilities.
The United Cities and Western Kentucky Gas Divisions normally inject gas into pipeline storage systems and company owned storage facilities during the summer months and withdraw it in the winter months. At the present time, the underground storage facilities of the Company have a maximum daily output capability of approximately 135,000 Mcf.
The United Cities Division has the ability to serve approximately 60 percent of its peak day requirements through the use of company-owned storage facilities, storage contracts with its suppliers and peaking facilities throughout the system. The Western Kentucky Gas Division has the ability to serve approximately 50 percent of its peak day requirements 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 markets.
During 2000, the Company purchased its gas supply from various producers and marketers. Supply arrangements were contracted on a firm basis with terms generally of one year or less at an index-based price. The firm supply consisted of both base load and swing supply quantities. Base load quantities are those that flow at a constant level throughout the month and swing supply quantities provide the flexibility to change daily quantities to match increases or decreases in requirements related to weather conditions. The suppliers were selected through a bidding process (except for local production purchases) by sending out a request for proposal to suppliers that have demonstrated that they can provide reliable service. These suppliers were selected based on their ability to deliver gas supply to our designated firm pipeline receipt points and the best cost. Major suppliers during 2000 were Reliant Energy, Sonat Marketing, Cinergy, Pioneer Natural Resources, CIG Merchant Company, WMLLC, Oneok Gas Marketing, Barrett Resources, Anadarko and Tenaska Marketing.
There is a surplus of natural gas available to the Company's utility systems and the Company does not anticipate problems with securing additional gas supply as needed for its customers.
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 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 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 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 which regulates utility services, rates, issuance 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 Division is regulated by the Colorado Public Utilities Commission, the Kansas Corporation Commission and the Missouri Public Service Commission 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 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 applicable state public service commission. 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.
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 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 would have a material adverse effect on the Company.
RATES
The Company's five utility divisions are regulated by various state or local public utility authorities. The method of determining regulated rates varies among the 12 states in which the Company has utility operations. It is the responsibility of the regulators to determine that utilities under their jurisdiction operate in the best interests of customers while providing the utilities the opportunity to earn a reasonable return on investment.
In a general rate case, the applicable regulatory authority, which is typically the state public utility commission, establishes a base margin, which is the amount of revenue authorized to be collected from customers to recover authorized operating expense (other than the cost of gas), depreciation, interest, taxes and return on rate base. The Company's utility divisions perform annual deficiency studies for each rate jurisdiction to determine when to file rate cases, which are typically filed every two to five years.
Substantially all of the sales rates charged by the Company to its customers fluctuate with the cost of gas purchased by the Company. Rates established by regulatory authorities are adjusted for increases and decreases in the Company's purchased gas cost through automatic purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide gas utilities a method of recovering purchased gas costs on an ongoing basis without the necessity of a rate case addressing all of the utilities' non-gas costs. These mechanisms are commonly utilized when regulatory authorities recognize a particular type of expense, such as purchased gas costs, that (i) is subject to significant price fluctuations compared to the utility's other costs, (ii) represents a large component of the utility's cost of service and (iii) is generally outside the control of the gas utility. Such purchased gas adjustment mechanisms are not designed to allow the utility to earn a profit but are designed to allow a dollar-for-dollar recovery of fuel costs. 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.
Approximately 87 percent of the Company's revenues in fiscal 2000 were derived from sales at rates set by or subject to approval by local or state authorities. 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.
EFFECTIVE AMOUNT AMOUNT
JURISDICTION DATE REQUESTED RECEIVED
------------ --------- --------- ----------
(IN THOUSANDS)
Texas
West Texas System................................ 11/01/96 $7,676 $ 5,800(a)
Pending 9,827 Pending(b)
Amarillo System.................................. 01/01/00 4,354 2,200
Louisiana.......................................... 11/01/99 (c) --(c)
Kentucky........................................... 11/01/95 7,665 2,300(d)
03/01/96 1,000(d)
12/21/99 14,127 9,900(e)
Colorado........................................... 01/21/98 -- (1,600)(f)
Pending 4,200 Pending
Missouri........................................... 10/14/95 1,100 903
Tennessee.......................................... 11/15/95 3,951 2,227
Iowa............................................... 05/17/96 750 410
Georgia............................................ 12/02/96 5,003 3,160
Illinois........................................... 07/09/97 1,234 428
10/23/00 2,100 1,367
Virginia........................................... 10/01/98 -- (248)(g)
Pending 2,100 Pending(h)
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(a) This increase includes $500,000 applicable to areas outside the city limits which became effective in April 1997.
(b) The Energas Division applied for rate increases in August 1999. The West Texas cities rejected the request and in March 2000, the Energas Division appealed to the Texas Railroad Commission. The requested increase includes $1.0 million for customers outside the city limits of the West Texas cities. Final resolution is expected in December 2000.
(c) The Louisiana Public Service Commission approved a Rate Stabilization Clause for three years with an allowed return on common equity between 10.5 percent and 11.5 percent. This decision increased the service charge amounts from about 20 percent to about 70 percent of actual costs and increased the monthly customer charges from $6 to $9, both effective November 1, 1999.
(d) The Kentucky rate order provided an increase of $2.3 million, lowered depreciation rates effective November 1, 1995 and provided an additional $1.0 million beginning March 1, 1996. The order also included a provision for a pilot demand side management program which could cost up to $.4 million annually.
(e) The Kentucky rate order also included a provision for a five-year pilot program for weather normalization beginning in November 2000.
(f) Rate reduction as a result of settlement in a case initiated by the Colorado Consumer Counsel.
(g) Rate reduction as a result of a settlement with the Virginia State Corporation Commission staff regarding investigation of earnings.
(h) The United Cities Division applied for a rate increase in March 2000. The new rates are expected to be effective in December 2000.
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, electricity. Competition for residential and commercial customers is increasing. Promotional incentives, improved equipment efficiencies and promotional rates all contribute to the acceptability of electric equipment. Electric utilities offer electricity as a rival energy source and compete for the space heating, water heating and cooking markets. The principal means to compete against alternative fuels is lower prices, and natural gas historically has maintained its price advantage in the residential, commercial and industrial markets. In residential markets, generally the average cost of gas is less for the Company's customers than the average cost of gas nationwide and less than the cost of an equivalent amount of electricity. In the United Cities Division, number 2 and number 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 Federal Energy Regulatory Commission ("FERC") orders and conditions related to markets and gas supply in the United States have brought increased competition into the natural gas industry. Certain large commercial or industrial customers located in proximity to the interstate pipeline delivering gas to the Company could attempt to bypass the Company and take delivery of gas directly from the pipeline or from a third party connecting with the pipeline. To date, only minimal bypass activity has been experienced in part because of the Company's ability to negotiate competitive rates and service terms. However, the future level of bypass activity cannot be predicted. FERC policies have not had a direct impact upon the Company's Energas, Greeley 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 policies. The Company has sought regulatory approvals for competitive pricing on a case by case basis.
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 which are competitive with the price of alternative fuels. In addition, certain industrial customers have changed 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.
Propane operations are in competition with other suppliers of propane, natural gas and electricity with respect to price and service. The wholesale cost of propane is subject to fluctuations primarily based on demand, availability of supply and product transportation costs.
Through its 45 percent interest in WMLLC, Atmos Energy Marketing, LLC competes with other natural gas brokers in obtaining natural gas supplies for customers.
Atmos Leasing, Inc. also competes with other companies in the leasing of real estate, vehicles and appliances.
Atmos Storage, Inc. ("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, Storage's rates must be competitive with other storage facilities. Storage also stores natural gas for WMLLC. As a result, Storage is in competition with other companies that store natural gas as to rates charged and deliverability of natural gas. Agreements between Storage and the United Cities Division give the United Cities Division first priority to any storage services.
At September 30, 2000, the Company employed 1,885 persons. See "Utility Sales and Statistical Data by Business Unit" for the number of employees by business unit.
ITEM 2. PROPERTIES
The Company owns an aggregate of 30,029 miles of underground distribution and transmission mains throughout its gas distribution systems. These mains are located on easements or rights-of-way granted to the Company which generally provide for perpetual use. The Company maintains its mains through a program of continuous inspection and repair and believes that its system of mains is in good condition. The Company also owns and operates two propane peak shaving plants with a total capacity of approximately 330,000 gallons that can produce an equivalent of approximately 4,500 Mcf daily. The Company also owns 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 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 135,000 Mcf.
Substantially all of the Company's properties in its Greeley Division and United Cities Division with net values of approximately $176.0 million and $319.7 million are subject to liens under First Mortgage Bonds assumed by the Company in its mergers with Greeley Gas Company and United Cities Gas Company. At September 30, 2000, the liens collateralized $17.0 million of outstanding 9.4 percent Series J First Mortgage Bonds due May 1, 2021, and $97.8 million of outstanding Series P, Q, R, T, U and V First Mortgage Bonds due at various dates from 2004 through 2022.
The Company's administrative offices are consolidated in Dallas, Texas under one lease. The Company also maintains field offices throughout its distribution system, the majority of which are located in leased premises.
Net property, plant and equipment at September 30, 2000 included approximately $958.4 million for utility, $23.2 million for non-regulated, and $.7 million for propane.
The Company holds franchises granted by the incorporated cities and towns that it serves. At September 30, 2000, the Company held 460 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 2000.
The following table sets forth certain information as of September 30, 2000, regarding the executive officers of the Company. It is followed by a brief description of the business experience of each executive officer.
YEARS OF
NAME AGE SERVICE OFFICE CURRENTLY HELD
---- --- -------- ---------------------
Robert W. Best............................ 53 3 Chairman, President and Chief Executive
Officer
John P. Reddy............................. 47 2 Senior Vice President and Chief Financial
Officer
R. Earl Fischer........................... 61 38 Senior Vice President, Utility Operations
Wynn D. McGregor.......................... 47 12 Vice President, Human Resources
Louis P. Gregory.......................... 45 -- Senior Vice President and General Counsel
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Robert W. Best was named Chairman of the Board, President and Chief Executive Officer in March 1997. He previously served as Senior Vice President -- Regulated Businesses of Consolidated Natural Gas Company (1996-March 1997) and was responsible for its transmission and distribution companies. Prior to that, he served as Senior Vice President of Transco Energy Company and President of Transcontinental Gas Pipe Line Corporation (1992-1995); and President of Texas Gas Transmission Corporation (1985-1995).
John P. Reddy was named Senior Vice President and Chief Financial Officer in September 2000. From April 2000 to September 2000, he was Senior Vice President, Chief Financial Officer and Treasurer. Mr. Reddy previously served the Company as Vice President, Corporate Development and Treasurer from December 1998 to March 2000. He joined the Company in August 1998 from Pacific Enterprises, a Los Angeles, California based utility holding company whose principal subsidiary was Southern California Gas Co. where he was Vice President of Planning and Advisory Services responsible for corporate development and merger and acquisition activities. Mr. Reddy was with Pacific Enterprises from 1980 to 1998 in various management and financial positions.
R. Earl Fischer was named Senior Vice President, Utility Operations in May 2000. He previously served the Company as President of the Energas Division from January 1999 to April 2000 and as President of the Western Kentucky Division from February 1989 to December 1998.
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.
Louis P. Gregory joined the Company as Senior Vice President and General Counsel in September 2000. Prior to joining the Company, he practiced law from April 1999 to August 2000 with the law firm of McManemin & Smith. Prior to that, he served as a consultant and independent contractor from August 1996 to December 1998 for Nomas Corp. (formerly known as Lomas Mortgage USA, Inc.) and Siena Holdings, Inc. (formerly known as Lomas Financial Corporation). He served in various legal positions with Lomas Financial Corporation, a diversified financial services company, and its affiliates, from August 1988 to June 1996, ultimately as Senior Vice President and General Counsel.
ITEM 5. MARKET FOR 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 2000 and 1999 are listed below. The high and low prices listed are the actual closing NYSE quotes for Atmos shares.
FISCAL YEAR 2000
--------------------------------
DIVIDENDS
HIGH LOW PAID
------ ----- ---------
Quarter ended:
December 31............................................... $25 $20 $.285
March 31.................................................. 20 3/16 15 9/16 .285
June 30................................................... 20 9/16 14 3/4 .285
September 30.............................................. 23 1/4 18 1/2 .285
-----
$1.14
=====
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FISCAL YEAR 1999
--------------------------------
DIVIDENDS
HIGH LOW PAID
------ ----- ---------
Quarter ended:
December 31............................................... $32 1/4 $28 3/8 $.275
March 31.................................................. 32 11/16 23 1/16 .275
June 30................................................... 26 5/16 24 .275
September 30.............................................. 26 3/8 23 7/8 .275
-----
$1.10
=====
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See Note 3 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, 2000 was 32,394.
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.
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues....... $ 850,152 $ 690,196 $ 848,208 $ 906,835 $ 886,691
========== ========== ========== ========== ==========
Net income............... $ 35,918 $ 17,744 $ 55,265 $ 23,838 $ 41,151
========== ========== ========== ========== ==========
Diluted net income per
share.................. $ 1.14 $ .58 $ 1.84 $ .81 $ 1.42
========== ========== ========== ========== ==========
Cash dividends per
share.................. $ 1.14 $ 1.10 $ 1.06 $ 1.01 $ .98
========== ========== ========== ========== ==========
Total assets at end of
year................... $1,348,758 $1,230,537 $1,141,390 $1,088,311 $1,010,610
========== ========== ========== ========== ==========
Long-term debt at end of
year................... $ 363,198 $ 377,483 $ 398,548 $ 302,981 $ 276,162
========== ========== ========== ========== ==========
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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 factors affecting these 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.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Annual Report on Form 10-K may contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts included in this Report are forward-looking statements made in good faith by the Company and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, any other of the Company's documents or oral presentations, the words "anticipate," "expect," "estimate," "plans," "believes," "objective," "forecast," "goal" or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to the Company's strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: national, regional and local economic conditions, including competition from other energy suppliers as well as alternative forms of energy; regulatory and business trends and decisions, including the impact of pending rate proceedings before various state regulatory commissions; successful implementation of new technologies and systems, including any technologies and systems related to the Company's customer support center and billing operations; weather conditions that would be adverse to its business such as the continuation of warmer than normal weather in the Company's service territories; successful completion and integration of pending acquisitions; inflation rates, including their effect on commodity prices for natural gas; hedging and market risk activities; further deregulation or "unbundling" of the natural gas distribution industry and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. Accordingly, while the Company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, the Company undertakes no obligation to update or revise any of its forward-looking statements whether as a result of new information, future events or otherwise.
RATEMAKING ACTIVITY
The following is a discussion of the Company's ratemaking activity for rate cases that are currently pending as of September 30, 2000 or rate proceedings completed during the three years ended September 30, 2000.
Results of the Company's rate activity for the three years ended September 30, 2000 can be summarized as follows: rate increases totaling $12.1 million implemented in 2000, no rate changes in 1999 and rate reductions of $1.8 million in 1998. In addition, the Illinois Commerce Commission granted the Company an increase of $1.4 million in Illinois effective October 23, 2000.
In August 1999, the Energas Division filed rate cases in its West Texas System cities and Amarillo, Texas, requesting rate increases of approximately $9.8 million and $4.4 million. The Energas Division received an increase in annual revenues of approximately $2.1 million in base rates plus an increase of $.1 million in service charges in Amarillo, Texas, effective for bills rendered on or after January 1, 2000. The agreement with Amarillo also provided for changes in the rate structure to reduce the impact of warmer than normal weather and to improve the recovery of the actual cost of service calls. The Energas Division's requests for an annual increase of approximately $9.8 million from the 67 cities served by its West Texas System were denied. In
In June 1999, the Trans La Division appeared before the Louisiana Public Service Commission for a rate investigation and to redesign rates to mitigate the effects of warm winter weather. A decision was rendered by the Louisiana Commission in October 1999 that increased service charges associated with customer service calls and increased the monthly customer charges from $6 to $9, both effective November 1, 1999. While these changes are revenue neutral, they will mitigate the impact of warmer than normal winter weather on earnings. The decision also included a three-year rate stabilization clause which will allow the Trans La Division's rates to be adjusted annually to allow the Company to earn a minimum return on equity of 10.5 percent.
In May 1999, the Western Kentucky Division requested from the Kentucky Public Service Commission ("KPSC") an increase in revenues, a weather normalization adjustment ("WNA") and changes in rate design to shift a portion of revenues from commodity charges to fixed rates. In December 1999, the KPSC granted an increase in annual revenues of approximately $9.9 million. The new rates were effective for services rendered on or after December 21, 1999. In addition, the KPSC approved a five-year pilot program for weather normalization beginning in November 2000.
On June 9, 1998, the KPSC issued an Order approving an Experimental Performance-based Ratemaking ("PBR") mechanism related to gas procurement and gas transportation activities filed by the Western Kentucky Division. The PBR mechanism is incorporated into the Western Kentucky Division's gas cost adjustment clause. As discussed above, it provides for sharing of purchased gas cost savings between the consumers and the Company. The Company recognized other income of $2.1 million and $2.0 million under the Kentucky PBR in fiscal 2000 and fiscal 1999.
On November 3, 2000, the Greeley Division filed a rate case with the Colorado Public Utilities Commission for approximately $4.2 million annually. A decision is expected in the case by July 2001.
Effective April 1, 1999, the Tennessee Regulatory Authority approved the United Cities Division's request to continue its PBR mechanism related to gas procurement and gas transportation activities for a three-year period. The Authority revised the mechanism from the original two-year experimental period, by increasing the cap for incentive gains and/or losses to $1.25 million per year. Similar to Tennessee, the Georgia Public Service Commission renewed the Company's PBR program for an additional three years effective May 1, 1999. The gas purchase and capacity release mechanisms of the PBRs are designed to provide the Company incentives to find innovative methods to lower gas costs to its customers. The Company recognized other income of $179,000 and $176,000 in fiscal years 2000 and 1999 for the Georgia and Tennessee PBRs.
In February 2000, the United Cities Division filed a rate case in Illinois with the Illinois Commerce Commission requesting an increase in annual revenues of approximately $3.1 million. After review by the Illinois Commerce Commission, the amount requested was revised to approximately $2.1 million. The United Cities Gas Division received an increase in annual revenues of approximately $1.4 million. The new rates went into effect on October 23, 2000 and will be collected primarily through an increase in customer charges.
In March 2000, the United Cities Division filed a rate case in Virginia with the State Corporation Commission of the Commonwealth of Virginia requesting an increase in annual revenues of approximately $2.3 million. The State Corporation Commission of Virginia reviewed the filing to determine if it met the appropriate rules and regulations. In July 2000, the Company refiled the case requesting an increase in revenues of approximately $2.1 million. The Commission accepted the revised filing. The Company expects
WEATHER AND SEASONALITY
The Company's natural gas distribution business and irrigation sales business are seasonal and dependent upon weather conditions in the Company's service areas. Natural gas sales to residential, commercial and public authority customers are affected by winter heating season requirements. This generally results in higher operating revenues and net income during the period from October through March of each year and lower operating revenues and either net losses or lower net income during the period from April through September of each year. Sales to industrial customers are much less weather sensitive. Sales to agricultural customers, who typically use natural gas to power irrigation pumps during the period from March through September, are affected by rainfall amounts. The effects of significantly warmer than normal winter weather in 2000, 1999 and 1998 on the Company's consolidated volumes delivered are illustrated by the following degree day information.
YEAR ENDED SEPTEMBER 30,
-------------------------
2000 1999 1998
----- ----- -----
Sales volumes -- Bcf...................................... 138.2 140.1 159.4
Transportation volumes -- Bcf............................. 59.4 55.5 56.2
----- ----- -----
Total........................................... 197.6 195.6 215.6
===== ===== =====
Degree days:
Actual.................................................. 3,302 3,374 3,799
% of normal............................................. 82% 85% 95%
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The effects of weather that is above or below normal are offset in the Tennessee and Georgia jurisdictions served by the United Cities Division through WNAs. The Georgia Public Service Commission and the Tennessee Regulatory Authority have approved 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 in revenues of $4.1 million, $4.4 million and $.7 million in 2000, 1999 and 1998. Approximately 190,000 or 17 percent of the Company's meters in service are located in Georgia and Tennessee. The Company did not have WNAs in its other service areas during the year ended September 30, 2000. In both its rate cases settled in 2000, the Company received approvals to mitigate the effects of weather. The Kentucky Public Service Commission approved a five-year pilot program for weather normalization beginning in November 2000. Also, the Company received approval to change its rate structure in Amarillo, Texas, beginning in January 2000 to help offset some of the negative effects of weather.
In July 2000, the Company entered into an agreement to purchase weather hedges for its Texas and Louisiana operations effective for the 2000-2001 heating season. The hedges should mitigate the effects of weather that is at least seven percent warmer than normal in both Texas and Louisiana while preserving any upside. The hedges also allow for an adjustment in weighting between Louisiana and Texas related to the timing of the closing of the Louisiana acquisition.
For further information regarding the impact of weather and seasonality on operating results, see Note 16, "Selected Quarterly Financial Data (unaudited)" in notes to consolidated financial statements herein.
Fiscal 2000 was a year in which total cash outflows exceeded total cash inflows. This was generally the result of the combination of lower than normal cash flows from operating activities as a result of warmer than normal weather and higher than normal capital expenditures, primarily due to acquisitions. This cash shortfall was financed with short-term debt and sales of common stock through the Company's Employee Stock Ownership Plan ("ESOP") and its Direct Stock Purchase Plan ("DSPP").
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operating activities as reported in the consolidated statement of cash flows totaled $54.2 million for 2000 compared with $84.7 million for 1999 and $91.7 million for 1998. The decrease in net cash provided by operating activities from 1999 to 2000 was primarily the result of increases in accounts receivable and gas storage inventories primarily due to higher gas prices, partially offset by higher net income. The increase in net income was primarily due to higher gross profit, reduced operating expenses and increased other income, partially offset by higher interest charges.
CASH FLOWS FROM INVESTING ACTIVITIES
During the last three years, a substantial portion of the Company's cash resources was used to fund technology improvements, acquisitions and its ongoing construction program to provide natural gas services to a growing customer base. Net cash used in investing activities totaled $100.1 million in 2000 compared with $109.6 million in 1999 and $118.8 million in 1998. Capital expenditures in fiscal 2000 amounted to $75.6 million, compared with $110.4 million in 1999 and $135.0 million in 1998. Completion of technology infrastructure and business process changes, implementation of Oracle enterprise resource planning system and Year 2000 readiness projects in 1999 allowed the Company to significantly reduce its capital expenditures for fiscal 2000. Included in investing activities in 2000 is $32.0 million used to acquire the Missouri natural gas distribution assets of Associated Natural Gas ("ANG") as discussed in Note 2 of notes to consolidated financial statements. Currently budgeted capital expenditures for fiscal 2001 total approximately $81.0 million and include funds for additional mains, services, meters and equipment. In fiscal 2001, the Company also plans to complete the LGS acquisition for $375.0 million and the acquisition of the remaining 55 percent of WMLLC for 1,423,193 restricted shares of Atmos common stock, subject to adjustment, as discussed in Note 2 of the notes to consolidated financial statements. Capital expenditures and acquisitions for fiscal 2001 are planned to be financed from internally generated funds and financing activities as discussed below. In 2000, the Company received net proceeds of $6.5 million in connection with the sale of certain propane assets to Heritage Propane Partners, L.P. as discussed in Note 1 of notes to consolidated financial statements. In 1998, the Company received $16.0 million from the sale of office buildings and an airplane.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities totaled $44.7 million for 2000 compared with $28.7 million for 1999 and $25.9 million for 1998. Financing activities during these periods included issuance of common stock, dividend payments, short-term borrowings from banks under the Company's credit lines and issuance and repayment of long-term debt. The increase in cash provided in 2000 as compared to 1999 is due to lower repayments of long-term debt. Long-term debt payments totaled $14.6 million, $61.0 million and $16.3 million for 2000, 1999 and 1998. Payments of long-term debt in 2000, 1999 and 1998 consisted of annual installments under the various loan documents. During 2000, short-term debt increased $81.7 million due to the effect of warmer weather on net income for 2000, the acquisition of ANG for $32.0 million and increases in accounts receivable, cost of gas stored underground and deferred charges. During 1999, short-term debt increased $101.9 million due largely to lower net income and cash requirements of $61.0 million for repayments of long-term debt and capital expenditures of $110.4 million primarily for technology improvements. In 1998, short-term debt decreased $100.9 million due to the application of a portion of the $150.0 million proceeds from the issuance of 6.75 percent debentures. In July 1998, the Company issued
Issuance of common stock. The Company issued 704,540, 849,481 and 755,882 shares of common stock in 2000, 1999 and 1998 under its various plans. See the Consolidated Statements of Shareholders' Equity and Note 6 of the accompanying notes to consolidated financial statements for the number of shares previously issued and available for future issuance under each of the Company's plans.
Cash dividends paid. The Company paid $36.0 million in cash dividends during 2000 compared with $33.9 million in 1999 and $31.8 million in 1998. Atmos raised the dividend $.04 per share during 2000 and 1999 and $.05 per share in 1998.
LIQUIDITY
The excess of cash outflows over inflows has resulted in an increase in debt as a percentage of total capitalization, including short-term debt, as shown in the table below.
SEPTEMBER 30,
-------------------------------------
2000 1999
------------------ ----------------
(IN THOUSANDS)
Short-term debt................................ $ 250,047 24.4% $168,304 17.9%
Long-term debt................................. 380,764 37.2% 395,331 42.0%
Shareholders' equity........................... 392,466 38.4% 377,663 40.1%
---------- ----- -------- -----
Total capitalization, including short-term
debt......................................... $1,023,277 100.0% $941,298 100.0%
========== ===== ======== =====
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The debt as a percentage of total capitalization, including short-term debt, was 61.6 percent and 59.9 percent at September 30, 2000 and 1999. The Company's long-term plans are to decrease the debt to capitalization ratio to nearer its target range of 50-52 percent through cash flow generated from operations, continued issuance of new common stock under its DSPP and ESOP, access to the debt and equity capital markets through its $500.0 million shelf registration statement and reduction of annual capital expenditures to the range of $75.0 million to $85.0 million. However, as discussed above, due to the pending acquisitions of LGS and WMLLC, as well as the effects of higher purchased gas costs, it is likely that the debt to capitalization ratio will be substantially higher in the near term.
At September 30, 2000, the Company had short-term committed credit facilities totaling $800.0 million. One short-term unsecured credit facility, which serves as a backup liquidity facility for the Company's commercial paper program, is for $300.0 million. A second facility is for $15.0 million. These credit facilities are negotiated at least annually. In addition, on August 3, 2000, the Company entered into a $485.0 million short-term unsecured credit facility with interest starting at LIBOR plus 75 basis points which will provide $385.0 million of bridge financing for the LGS acquisition including related costs and $100.0 million for refinancing certain existing debt. No amounts were outstanding under these facilities at September 30, 2000.
At September 30, 2000, the Company also had uncommitted short-term credit lines of $90.0 million, all of which were unused. In October 1998, the Company began a $250.0 million commercial paper program which was increased to $300.0 million in August 2000. The commercial paper program is supported by the $300.0 million committed line of credit discussed above. At September 30, 2000, the Company had $250.0 million of commercial paper outstanding.
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. See Note 3 of the accompanying notes to consolidated financial statements for more information on these covenants.
See Note 5 "Contingencies" for information regarding guarantees of certain accounts payable and short-term borrowings of WMLLC.
The Company believes that internally generated funds, its credit facilities, commercial paper program and access to the public debt and equity capital markets will provide necessary working capital and liquidity for capital expenditures and other cash needs for fiscal 2001. As discussed above, the Company has access to $315.0 million under its committed lines of credit and $90.0 million under its uncommitted lines. The Company also has a $485.0 million short-term unsecured credit facility to provide $385.0 million for bridge financing for the LGS acquisition and $100.0 million for refinancing certain existing debt.
In December 1999, the Company filed a universal shelf registration statement with the Securities and Exchange Commission ("SEC") to issue, from time to time, up to $500.0 million in new common stock and/or debt. In connection with this filing, the Company also filed applications for approval to issue securities with six state utility commissions. The Company has received approvals from all six required states and the registration statement has been declared effective. No further state or federal regulatory approvals will be required before any debt or equity securities may be issued under the shelf registration statement by the Company from time to time. The universal shelf should provide the Company with greater flexibility in its financing options.
YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1999
To assist in understanding the results of operations, Item 6, "Selected Financial Data" summarizes trends in major financial statement captions and the following table presents the negative effects of weather on reported consolidated net income for the last three years. Earnings per share amounts presented in this discussion are on a diluted basis.
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- ----- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported............ $35,918 $1.14 $17,744 $ .58 $55,265 $1.84
Effects of weather................ 27,900 28,224 3,485
------- ------- -------
Estimated net income with normal
weather......................... $63,818 $2.02 $45,968 $1.49 $58,750 $1.96
======= ======= =======
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NET INCOME AS REPORTED
The Company reported net income of $35.9 million, or $1.14 per diluted share, on operating revenues of $850.2 million for the fiscal year ended September 30, 2000. Net income for 1999 was $17.7 million, or $.58 per diluted share, on operating revenues of $690.2 million.
Revenues and purchased gas cost increased in 2000 as compared to 1999 due to higher gas costs which are passed through to customers. Gas costs averaged $3.79 per Mcf in 2000 compared to $2.79 per Mcf in 1999.
Gross profit increased $25.9 million in 2000 compared to 1999 primarily due to the partial year impact of rate increases in Kentucky and Amarillo, Texas, the addition of approximately 48,000 Missouri customers due to an acquisition and increased volumes associated with the irrigation business.
Operation and maintenance expenses decreased $9.3 million in 2000 compared with 1999 primarily due to cost reduction initiatives implemented due to the warm winter weather. However, an increase of $8.8 million in the provision for doubtful accounts in 2000 as compared with 1999 caused a substantial decrease in net cost reductions. The increase in bad debt expense occurred during the transition from local offices to a centralized customer service center and the implementation of a new company-wide customer
Other income for 2000 includes a gain of $5.8 million ($3.7 million after tax) from the sale of non-utility assets. In addition, the Company acquired a 6.5 percent indirect interest in Heritage Propane Partners, L.P., the fifth largest retail propane distributor in the United States.
Results for three consecutive years have been negatively impacted by warmer than normal weather. Atmos experienced its warmest winter ever in fiscal 2000. Across the Atmos system, weather was approximately 18 percent warmer than normal and approximately two percent warmer than last year. In response to this trend, the Company has purchased weather hedges to mitigate the effects of warmer than normal weather in fiscal 2001, as previously discussed under "Weather and seasonality". Had the weather hedges been in effect in fiscal 2000, they would have increased net income by approximately $.25 per diluted share.
For fiscal year 1999, the Company reported net income of $17.7 million, or $.58 per diluted share, on operating revenues of $690.2 million. The results of operations for 1999 were negatively impacted by weather that was warmer than normal, as well as warmer than 1998. Across the Atmos system, weather was more than 15 percent warmer than normal and more than 11 percent warmer than 1998. Rainfall in West Texas exceeded average rainfall levels for the region by more than 32 percent during the 1999 irrigation season, resulting in a 43 percent decrease in irrigation sales compared to 1998. In addition, increased depreciation and interest expense related to assets placed in service in advance of recognition in rates adversely affected financial results. Earnings were also reduced by a charge of $3.25 million ($2.07 million after tax) in the second quarter for settlement of litigation in Louisiana.
Net income for 1999 was also negatively impacted by operating and maintenance expenses that were higher than 1998 as a result of the first full year of operation of the Company's customer support center in Amarillo, process improvement initiatives related to the new customer information and billing system and the accounting and human resource systems placed in service during the year and Year 2000 readiness initiatives. Operation and maintenance expenses also included increased reserves of $6.8 million for the possible write-off of accounts receivable resulting from a temporary suspension in service cutoffs and normal efforts to collect past due receivables in connection with the Company's conversion to the new customer information and billing system. In addition to lower gross profit resulting from adverse weather conditions, gross profit for the year was reduced $4.3 million by reserves established for deferred gas costs that are not expected to be recoverable.
Finally, 1999 results were positively impacted by a change in accounting principle adopted by WMLLC, a gas marketing and services company in which Atmos owns a 45 percent interest. WMLLC adopted Emerging Issues Task Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" ("EITF 98-10"), the effect of which added $2.4 million to other income.
For fiscal year 1998, the Company reported net income of $55.3 million, or $1.84 per diluted share, on operating revenues of $848.2 million. Although revenues for 1998 were lower as a result of winter weather that was five percent warmer than normal, as well as warmer than 1997, earnings improved due to gains on asset sales totaling $3.3 million ($2.2 million after tax), lower operation and maintenance expenses and increased irrigation sales. Operation and maintenance expenses were lower for 1998 due to a company-wide restructuring of the organization and Atmos' integration of the United Cities Division. Sales of gas in West Texas to farmers for fueling irrigation pumps increased due to hot and dry summer weather in 1998. Irrigation volumes increased 34 percent in 1998 compared with 1997.
Other income
Other, net was $7.4 million, $3.0 million and $5.9 million for 2000, 1999 and 1998. The increase in 2000 as compared to 1999 was primarily due to the $5.8 million ($3.7 million after tax) gain resulting from the sale of non-utility assets. The $3.0 million in 1999 was primarily due to income from performance-based rates which were implemented in Kentucky in 1998. The $5.9 million in 1998 was primarily due to the $3.3 million gain from sale of certain assets obtained in the merger with UCGC.
Interest charges
Interest charges totaled $43.8 million, $37.1 million and $35.6 million in 2000, 1999 and 1998. The increase in 2000 was primarily due to $3.7 million of interest being capitalized in 1999 in connection with the significant technology projects that were placed in service as well as higher average debt outstanding and higher interest rates in 2000. The increases in total debt outstanding in 2000, 1999 and 1998 were related to funding infrastructure, technology, process changes and customer support investments. Also in 2000, total debt increased due to the $32.0 million acquisition of ANG and increased gas costs.
Income taxes
The provision for income taxes was $20.3 million, $9.6 million and $31.8 million for 2000, 1999 and 1998. Changes in income taxes are primarily related to changes in pre-tax income. For further information regarding income taxes, see Note 4 of notes to consolidated financial statements.
Net income by segment
The Company operated three business segments in 2000: utility operations, propane operations, which were sold August 10, 2000, and non-regulated operations which include the Company's 45 percent interest in WMLLC. The following table sets forth the net income (loss) of each of these segments for 2000, 1999 and 1998.
YEAR ENDED SEPTEMBER 30,
---------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Utility................................................. $22,459 $10,800 $43,332
Propane................................................. 2,602 (869) (66)
Non-regulated........................................... 10,857 7,813 11,999
------- ------- -------
Consolidated net income................................. $35,918 $17,744 $55,265
======= ======= =======
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For additional financial information regarding the Company's segments, see Note 11 of notes to consolidated financial statements and the following discussion of the "Results of Operations" for each segment.
Key financial and operating data for the Company's utility operations before intercompany eliminations are highlighted in the following table.
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER MCF DATA)
FINANCIAL
Operating revenues............................. $ 739,951 $ 621,211 $ 739,930
Purchased gas cost............................. 438,587 343,338 438,920
---------- ---------- ----------
Gross profit........................... 301,364 277,873 301,010
Operating expenses............................. 225,703 228,873 200,345
---------- ---------- ----------
Operating income....................... 75,661 49,000 100,665
Other income................................... 3,351 2,763 843
Interest charges............................... 44,156 35,799 33,181
Income taxes................................... 12,397 5,164 24,995
---------- ---------- ----------
Net income............................. $ 22,459 $ 10,800 $ 43,332
========== ========== ==========
OPERATING
Sales volumes (MMcf)........................... 119,470 125,279 136,748
Transportation (MMcf).......................... 80,182 69,877 70,217
---------- ---------- ----------
Total volumes (MMcf)................... 199,652 195,156 206,965
========== ========== ==========
Meters in service, end of year(1)................ 1,096,599 1,037,995 1,004,532
Average gas sales price/Mcf...................... $ 5.91 $ 4.71 $ 5.17
Average cost of gas/Mcf.......................... $ 3.67 $ 2.74 $ 3.21
Average margin per Mcf sold...................... $ 2.24 $ 1.97 $ 1.96
Average transportation revenue/Mcf............... $ .33 $ .35 $ .37
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(1) Includes 12,273, 12,711, and 14,257 non-regulated irrigation meters for 2000, 1999, and 1998.
YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1999
Operating revenues increased approximately 19 percent to $740.0 million in 2000 from $621.2 million in 1999 due primarily to an increase of 25 percent in sales price per thousand cubic feet ("Mcf") of gas sold. 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 2000. Sales volumes to all classes of customers decreased approximately 5.8 billion cubic feet ("Bcf") in 2000 while transportation volumes delivered to industrial and agricultural customers increased approximately 10.3 Bcf. Total sales and transportation volumes delivered increased two percent to 199.7 Bcf in 2000, as compared with 195.2 Bcf in 1999.
Gross profit increased by approximately eight percent to $301.4 million in 2000 from $277.9 million in 1999. Factors contributing to the increase in gross profit were primarily rate increases totaling approximately $12.1 million implemented in fiscal 2000 and an increase in transportation volumes of 10.3 Bcf.
Operating expenses decreased $3.2 million or one percent to $225.7 million in 2000. The decrease in operating expenses was due to cost reduction efforts in response to the warm winter. The cost reductions more than offset increased reserves for the possible write-off of accounts receivable resulting from a temporary suspension in service cutoffs and normal efforts to collect past due receivables in connection with the Company's conversion to the new customer information and billing system.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998
Operating revenues decreased approximately 16 percent to $621.2 million in 1999 from $739.9 million in 1998 due to a decrease of eight percent in sales volumes and a decrease of nine percent in the average sales
Gross profit decreased by approximately eight percent to $277.9 million in 1999 from $301.0 million in 1998. Factors contributing to the lower gross profit were a decrease in sales volumes of 11.5 Bcf or eight percent due to the effect of 11 percent warmer weather than in 1998, rate decreases totaling approximately $1.8 million implemented in fiscal 1998 in Colorado and Virginia and a reserve of $4.3 million established for deferred gas costs that are not expected to be recoverable.
Operating expenses increased $28.5 million or 14 percent to $228.9 million in 1999. The increase in operating expenses was due to the first full year of operation of the Company's Customer Support Center in Amarillo, process improvement initiatives related to the new customer information and billing system and the accounting and human resource systems placed in service during the year and Year 2000 readiness initiatives. Operation expenses also included increased reserves of $6.8 million for the possible write-off of accounts receivable resulting from a temporary suspension in service cutoffs and normal efforts to collect past due receivables in connection with the Company's conversion to the new customer information and billing system.
Key financial and operating data for the propane operations are presented in the following table.
YEAR ENDED SEPTEMBER 30,
---------------------------
2000(1) 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER GALLON DATA)
FINANCIAL
Operating revenues.................................... $22,550 $22,944 $29,091
Purchased gas cost.................................... 13,028 11,155 17,709
------- ------- -------
Gross profit.................................. 9,522 11,789 11,382
Operating expenses.................................... 10,130 12,332 10,763
------- ------- -------
Operating income (loss)....................... (608) (543) 619
Other income.......................................... 6,090 482 174
Interest charges...................................... 1,319 1,231 897
Income tax expense (benefit).......................... 1,561 (423) (38)
------- ------- -------
Net income (loss)............................. $ 2,602 $ (869) $ (66)
======= ======= =======
OPERATING
Propane heating degree days:
Actual............................................. 3,518 3,440 3,799
% of normal........................................ 87% 85% 94%
Sales volumes (000 gallons):
Retail............................................. 17,349 19,700 17,229
Wholesale.......................................... 1,980 2,591 6,183
------- ------- -------
Total......................................... 19,329 22,291 23,412
======= ======= =======
Average selling price/gallon............................ $ 1.03 $ .88 $ .88
Average cost/gallon..................................... $ .62 $ .44 $ .53
Customers, end of year(1)............................... -- 39,539 37,400
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(1) The amounts for United Cities Propane, Inc. for 2000 represent only 10 months of operations because it was combined with Heritage as discussed in Note 1 of notes to consolidated financial statements, effective August 10, 2000. At that time it had 40,515 customers.
YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1999
Propane revenues decreased $.3 million from $22.9 million in 1999 to $22.6 million in 2000 primarily due to including only 10 months of operations. The propane business was combined with Heritage as discussed in Note 1 of notes to consolidated financial statements, effective August 10, 2000. Subsequently, the Company's share of propane results are reflected on an equity basis.
Purchased gas cost increased $1.8 million from $11.2 million in 1999 to $13.0 million in 2000 due primarily to generally higher fuel costs. Additionally, the average cost per gallon increased $.18 per gallon from $.44 per gallon in 1999 to $.62 per gallon in 2000.
Operating expenses decreased $2.2 million from $12.3 million in 1999 to $10.1 million in 2000 due primarily to the shorter operating period in 2000.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998
Propane revenues decreased $6.2 million from $29.1 million in 1998 to $22.9 million in 1999 primarily due to decreased wholesale volumes sold as a result of the implementation of the Company's plan to exit the wholesale propane supply and transportation business. Partially offsetting this decrease was an increase in the retail gallons sold as a result of the acquisitions of Ingas, Inc. in May, 1998; Harris Propane Gas Company, Inc. in July 1998; Massey Propane Gas Company and E-Con Gas, Inc. in August 1998 and Shaw LP Gas, Inc. in September 1998. The Company exited the less profitable propane transportation, cylinder exchange and appliance sales and service businesses in 1999.
Purchased gas cost decreased $6.5 million from $17.7 million in 1998 to $11.2 million in 1999 due primarily to decreased wholesale volumes sold. Additionally, the average cost per gallon decreased $.09 per gallon from $.53 per gallon in 1998 to $.44 per gallon in 1999. This decrease was partially offset by the cost of increased retail gallons sold due to the acquisitions made during fiscal 1998.
Operating expenses increased $1.5 million from $10.8 million in 1998 to $12.3 million in 1999 due primarily to the acquisitions made during fiscal 1998.
Interest expense increased $.3 million due to increased debt related to the acquisitions in 1998 and slightly higher interest rates in 1999.
This segment is currently composed of four parts. Atmos Storage, Inc. owns underground storage fields in Kansas and Kentucky and provides storage services to the United Cities Division and the Greeley Division and other non-regulated customers. Atmos Energy Services, Inc. ("AESI") markets gas to irrigation and industrial customers in West Texas through Enermart Energy Services Trust ("Enermart") and to industrial customers in Louisiana and is developing plans for marketing various non-regulated services and products. Atmos Energy Marketing, LLC, owns the Company's 45 percent investment in WMLLC, a gas marketing and energy management services business. Atmos Leasing, Inc., leases buildings and vehicles to the United Cities Division and gas appliances to residential customers.
Key financial data for the non-regulated segment are set forth below.
YEAR ENDED SEPTEMBER 30,
---------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Operating revenues...................................... $96,305 $53,416 $80,672
Purchased gas cost...................................... 81,485 43,284 61,228
------- ------- -------
Gross profit.................................. 14,820 10,132 19,444
Operating expenses...................................... 6,103 4,350 7,849
------- ------- -------
Operating income.............................. 8,717 5,782 11,595
Other income (loss)..................................... 2,565 (96) 4,834
Equity in earnings of unconsolidated investment......... 7,307 7,156 3,920
Interest charges........................................ 1,371 215 1,501
Income taxes............................................ 6,361 4,814 6,849
------- ------- -------
Net income.................................... $10,857 $ 7,813 $11,999
======= ======= =======
Gas Sales (MMcf)
Irrigation............................................ 13,174 9,655 17,018
Industrial............................................ 5,555 5,185 5,607
------- ------- -------
Total......................................... 18,729 14,840 22,625
======= ======= =======
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YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1999
Operating revenues increased 80 percent from $53.4 million in 1999 to $96.3 million in 2000 due primarily to increased West Texas non-regulated irrigation and industrial sales volumes related to irrigation demand, and secondly, to higher sales prices reflecting higher gas costs. The increase in irrigation revenues was due to decreased rainfall during the growing season in West Texas in 2000.
Operating expenses increased $1.8 million in 2000 primarily due to increased irrigation volumes and related activity in West Texas.
Other income increased $2.7 million in 2000 from 1999 primarily due to increased intercompany interest income of $2.2 million in 2000. Equity in earnings of unconsolidated investment increased $.2 million in 2000 from 1999, reflecting the Company's 45 percent interest in the earnings of WMLLC. Interest charges increased $1.2 million due primarily to increased short-term debt in 2000 as compared with 1999.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998
Operating revenues decreased 34 percent from $80.7 million in 1998 to $53.4 million in 1999 due primarily to decreased West Texas non-regulated irrigation and industrial revenues. The decrease in irrigation revenues was due to increased rainfall and cooler summer temperatures in West Texas. Storage revenues also decreased due to decreased volumes withdrawn from underground storage as a result of warmer than normal winter weather in Kansas and Tennessee.
Other income decreased $4.9 million in 1999 from 1998 primarily due to a $3.3 million gain on sale of assets in 1998. Equity in earnings of unconsolidated investment increased $3.2 million in 1999 from 1998 primarily because of the $2.4 million of income resulting from WMLLC's adoption of EITF 98-10 in 1999. Interest charges decreased $1.3 million due primarily to decreased short-term debt in 1999 as compared with 1998.
EQUITY IN EARNINGS OF WMLLC
The Company accounts for its 45 percent investment in WMLLC using the equity method of accounting. Against the 45 percent of WMLLC's net income before tax, the Company records the amortization of the excess of the purchase price over the value of the net tangible assets, amounting to approximately $5.4 million which was allocated to intangible assets consisting of customer contracts and goodwill, and is being amortized over ten and twenty years, as well as the provision for income taxes. Upon the closing of the acquisition of the remaining 55 percent of WMLLC, intangible assets and the related amortization will increase.
The following table presents the WMLLC financial results recorded by Atmos for the years ended September 30, 2000, 1999 and 1998. WMLLC has adopted the calendar year for financial reporting purposes.
YEAR ENDED
SEPTEMBER 30,
--------------------------
2000 1999 1998
------- ------- ------
(IN THOUSANDS)
WMLLC net income before taxes............................ $16,238 $15,902 $8,711
======= ======= ======
Atmos equity in WMLLC earnings at 45%.................... 7,307 7,156 3,920
Less:
Amortization of excess purchase price.................. 416 407 400
Provision for taxes.................................... 2,490 2,362 1,337
------- ------- ------
Net............................................ $ 4,401 $ 4,387 $2,183
======= ======= ======
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The net income before taxes of WMLLC increased from $8.7 million for 1998, to $15.9 million for 1999, to $16.2 million for 2000 due to growth in the number of customers and gas marketing volumes and revenues each year. Additionally, WMLLC adopted EITF 98-10 in 1999, the effect of which added $2.4 million to the Company's equity in earnings of unconsolidated investment. As discussed in the accompanying notes to consolidated financial statements, in fiscal 2001 the Company plans to adopt SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" and to complete the purchase of the remaining 55 percent of WMLLC. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk -- Gas Prices below.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE OF THE COMPANY
The performance of the Company in the future will primarily depend on the results of its utility operations since utility operations are expected to continue to be the substantial contributor to the Company's consolidated net income. Because of the ever changing nature of the energy marketplace, several factors exist that could influence Atmos' future financial performance. Some of the most significant factors are described below. They should be considered in connection with evaluating forward-looking statements contained in this report and otherwise made by or on behalf of the Company since these factors could cause actual results and conditions to differ materially from those projected in these forward-looking statements.
The Company's operations will always be affected by the conditions of the national, regional and local economy, including the recent effects of substantially higher commodity costs of natural gas. Such higher costs could lead many customers to conserve in the use of the Company's gas services. In the case of industrial customers, such as manufacturing plants and agricultural customers, adverse economic conditions, including higher gas costs, could cause