(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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TEXAS AND VIRGINIA 75-1743247
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
THREE LINCOLN CENTRE, SUITE 1800 75240
5430 LBJ FREEWAY, DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common stock, No Par Value New York Stock Exchange |
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 $816,053,202 as of October 31, 2001. On October 31, 2001 the registrant had 40,841,501 shares of common stock outstanding.
Portions of the registrant's Definitive Proxy Statement to be filed for the
Annual Meeting of Shareholders on February 13, 2002 are incorporated by
reference into Part III of this report.
The terms "we," "our," "us" and "Atmos" refer to Atmos Energy Corporation and its subsidiaries, unless the context suggests otherwise. The abbreviations "Mcf," "MMcf" and "Bcf" mean thousand cubic feet, million cubic feet and billion cubic feet.
ITEM 1. BUSINESS
OPERATIONS
We distribute and sell natural gas to approximately 1.4 million residential, commercial, industrial, agricultural and other customers. We operate through five divisions in service areas located in Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Missouri, Tennessee, Texas and Virginia. In addition, we transport natural gas for others through our distribution system.
We provide natural gas storage services and own or hold an interest in natural gas storage fields in Kansas, Kentucky and Louisiana to supplement natural gas used by customers in Kansas, Kentucky, Tennessee, Louisiana and other states. We also provide energy management and gas marketing services to industrial customers, municipalities and other local distribution companies. We also provide electrical power generation to meet peak load demands for a municipality regulated by the Tennessee Valley Authority. In addition, we market natural gas to industrial and agricultural customers primarily in West Texas and to industrial customers in Louisiana.
FORMATION
We were organized under the laws of Texas in 1983 as Energas Company, a subsidiary of Pioneer Corporation, for the purposes of owning and operating Pioneer's natural gas distribution business in Texas. Immediately following the transfer by Pioneer to Atmos of its gas distribution business, which Pioneer and its predecessors had operated since 1906, Pioneer distributed our outstanding stock to its shareholders. In September 1988, we changed our name from Energas Company to Atmos Energy Corporation. As a result of the merger with United Cities Gas Company in July 1997, we also became incorporated in Virginia.
RECENT DEVELOPMENTS
Completion of acquisition of remaining equity interest in Woodward Marketing. We acquired a 45 percent interest in Woodward Marketing, L.L.C. in 1997 as a result of the merger of Atmos and United Cities Gas Company, which had acquired that interest in 1995. In April 2001, we acquired the 55 percent interest in Woodward Marketing, L.L.C. that we did not already own in exchange for 1,423,193 restricted shares of our common stock. The consideration is subject to an upward adjustment, based on our share price, of up to 232,547 shares plus an amount of shares to compensate for dividends paid after the completion of the acquisition. As a result of the completion of the acquisition, the guaranty by one of our subsidiaries of Woodward Marketing's $140.0 million short-term working capital and letter of credit facility increased from 45 percent to 100 percent of any amounts outstanding. Under the facility, as of September 30, 2001, $28.0 million was outstanding, and letters of credit totaling $38.8 million had been issued. Since April 1, 2001, our subsidiary has been the sole guarantor of all payables, up to $40.0 million, of Woodward Marketing for natural gas purchases and transportation services.
Completion of acquisition of natural gas operations in Louisiana. In July 2001, we acquired from Citizens Communications Company the natural gas operations of its Louisiana Gas Service Company division and its subsidiary LGS Natural Gas Company for $363.4 million in cash. Upon completion of the acquisition, we became the largest natural gas distributor in Louisiana, and our national customer base increased to about 1.4 million customers, making us the fifth largest pure natural gas local distribution company in the United States.
The acquired operations provide natural gas distribution service to approximately 279,000 residential and commercial meters in communities in southeastern and northern Louisiana. The service territory includes the suburban areas of metropolitan New Orleans (excluding Orleans Parish), the north shore of Lake Pontchar- train and the Monroe/West Monroe metropolitan area. The unregulated operations, which include an intrastate pipeline company, provides gas transportation service to industrial customers and to the acquired operations.
Pending acquisition of Mississippi Valley Gas Company. In September 2001, we entered into a definitive agreement to acquire Mississippi Valley Gas Company, a privately held natural gas utility, for $75.0 million cash, $75.0 million of Atmos common stock and the assumption of approximately $45.0 million of long-term debt. Mississippi Valley Gas provides natural gas distribution service to more than 261,500 residential, commercial, industrial and other customers located primarily in the northern and central regions of Mississippi. Mississippi Valley Gas has a 5,500 mile distribution system and 335 miles of intrastate pipeline. It also has two underground storage facilities with 2.05 Bcf of working gas capacity. The acquisition is subject to state and federal regulatory approval. It is anticipated that the acquisition will be completed in fiscal 2002.
Atmos Power Systems, Inc. constructs power plant. In May 2001, our subsidiary, Atmos Power Systems, Inc., entered into a definitive agreement with the City of Bolivar, Tennessee Electric Department to construct a 20-megawatt electric generating plant and associated facilities. Atmos Power Systems leased the peaking plant to the Electric Department of the City of Bolivar for 10 years, with an option for Bolivar to purchase the plant beginning in the fifth year of the lease. Because of the success of this first project, Atmos is considering other opportunities to build and lease power plants. Although results to date have not been material, we anticipate growth in this type of business.
Acquisition of Southern Resources, IGS and Kentucky storage assets. Woodward Marketing completed the purchases of Southern Resources, Inc. and certain assets of Innovative Gas Services, Incorporated in the fourth quarter of fiscal year 2001 thereby expanding our gas marketing operations. We expect to complete the acquisition of certain storage assets in Kentucky in the first quarter of fiscal year 2002. The acquisition will enable us to provide additional gas storage capacity. Total cost of the acquisitions is approximately $16.0 million in cash.
STRATEGY
Our overall strategy is to:
- deliver superior shareholder value,
- continue to manage our utility operations efficiently,
- profitably grow our non-utility operations to complement our utility operations, and
- profitably grow our business through acquisitions.
We are running our operations efficiently by:
- managing our operating and maintenance expenses,
- leveraging our technology, such as our 24 hour call center, to achieve more efficient operations,
- focusing on regulatory rate proceedings to increase revenue,
- mitigating weather-related risks through weather normalized rates in some jurisdictions and purchasing weather insurance in others, and
- disposing of non-growth assets.
We are growing our non-utility operations by:
- completing the purchase of the remaining interest in Woodward Marketing,
- increasing our non-regulated gas sales, and
- entering into new non-utility businesses, such as distributed electrical power generation.
Our operations are divided into two segments, a utility operations segment, which includes our natural gas distribution and sales operations, and our non-regulated segment, which includes all of our other operations.
UTILITY OPERATIONS SEGMENT OVERVIEW
Our utility operations segment is operated through our five regulated natural gas divisions:
- Atmos Energy Louisiana Gas Company,
- Energas Company,
- Greeley Gas Company,
- United Cities Gas Company, and
- Western Kentucky Gas Company
Atmos Energy Louisiana. Our Atmos Energy Louisiana Gas division includes the operations of the assets of Louisiana Gas Service Company acquired in July 2001 and our previously existing Trans Louisiana Gas division. Our Atmos Energy Louisiana Gas division operates in Louisiana and is regulated by the Louisiana Public Service Commission, which regulates utility services, rates and other matters. In most of the areas in which we operate in Louisiana, we do so pursuant to a non-exclusive franchise granted by the governing authority of each area. Direct sales of natural gas to industrial customers in Louisiana, who use gas for fuel or in manufacturing processes, and sales of natural gas for vehicle fuel are exempt from regulation.
In connection with its review of our acquisition of Louisiana Gas Service, the Louisiana Public Service Commission has approved a rate structure that requires us to share any cost savings that result from the acquisition with the customers of Louisiana Gas Service. The shared cost savings will be the difference between operation and maintenance expense in any future year and the 1998 normalized expense for Louisiana Gas Service, indexed for inflation, annual changes in labor costs and customer growth. The customers are not assured any savings in 2001. In 2002 and in future years, the customers are assured annual savings, which will be indexed for inflation, annual changes in labor costs and customer growth. The sharing mechanism will remain in place for 20 years subject to established modification procedures.
The rates of Louisiana Gas Service are subject to a purchased gas adjustment clause that allows it to pass changes in gas costs on to its customers. In addition, on January 29, 2001, the Louisiana Public Service Commission approved a rate stabilization clause for Louisiana Gas Service for a three-year period beginning January 1, 2001. Under the rate stabilization clause, Louisiana Gas Service will be allowed to earn a return on equity within certain ranges that will be monitored on an annual basis. After the completion of the acquisition of Louisiana Gas Service, our Atmos Energy Louisiana division also became subject to the adjustment and stabilization clause.
Louisiana Gas Service is currently involved in a proceeding with the Louisiana Public Service Commission relating to past costs associated with the purchase of gas that it charged to its customers. Although, after completion of the acquisition, we took over the defense of this proceeding and will have responsibility for any finding of liability on the part of Louisiana Gas Service, we believe the outcome of this proceeding will not have a material adverse impact on our operations as Citizens has agreed to fully indemnify us for any liability as a result of this proceeding.
The Louisiana Public Service Commission approved a Rate Stabilization Clause for three years for our former Trans La Division 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.
Energas. Our Energas division operates in Texas. The governing body of each municipality we serve 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. We operate pursuant to non-exclusive franchises granted by the municipalities we serve, which are subject to renewal from time to time. 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. The Railroad Commission is currently conducting a gas cost audit of all local distribution companies in Texas, including Energas, in response to the high gas costs this past winter. At and for the year ended September 30, 2001, we had 314,734 utility meters in service and total throughput of 53,586 MMcf. At and for the year ended September 30, 2000, we had 302,662 utility meters in service and total throughput of 53,922 MMcf.
Greeley Gas. Our Greeley Gas division operates in Colorado, Kansas and Missouri and is regulated by the respective states' public service commission with respect to accounting, rates and charges, operating matters and the issuance of securities. We operate under terms of non-exclusive franchises granted by the various cities. At and for the year ended September 30, 2001, Greeley had 212,484 utility meters in service and total throughput of 37,797 MMcf. At and for the year ended September 30, 2000, Greeley had 207,161 meters in service and total throughput of 34,455 MMcf.
United Cities. Our United Cities Gas division operates in Georgia, Illinois, Iowa, Missouri, Tennessee and Virginia. In each of these states, our rates, services and operations as a natural gas distribution company are subject to general regulation by each state's public service commission. We operate in each community, where necessary, under a franchise granted by the municipality for a fixed term of years. In Tennessee and Georgia, we have performance based rates, which provide incentives for us to find ways to lower costs. Any cost savings are then shared with our customers. We also have weather normalization adjustments to our rates in Tennessee and Georgia. At and for the year ended September 30, 2001, United Cities had 308,394 utility meters in service and total throughput of 64,924 MMcf. At and for the year ended September 30, 2000, United Cities had 312,018 meters in service and total throughput of 56,698 MMcf.
Western Kentucky Gas. Our Western Kentucky Gas division operates in Kentucky and is regulated by the Kentucky Public Service Commission, which regulates utility services, rates, issuance of securities and other matters. We operate in the various incorporated cities pursuant to non-exclusive franchises granted to us by these cities. Sales of natural gas for use as vehicle fuel in Kentucky are unregulated. We have been operating under a performance based rate program since July 1998. We also have weather normalization adjustments to our rates in Kentucky. At and for the year ended September 30, 2001, Western Kentucky Gas had 182,275 utility meters in service and total throughput of 46,530 MMcf. At and for the year ended September 30, 2000, Western Kentucky Gas had 181,066 meters in service and total throughput of 47,129 MMcf.
NON-REGULATED SEGMENT OVERVIEW
Our non-regulated segment is primarily composed of the following three parts:
- Atmos Energy Marketing, LLC. Atmos Energy Marketing provides a variety of natural gas management services to natural gas utility systems and industrial natural gas consumers in several states and to our Atmos Energy Louisiana Gas, Greeley Gas, United Cities Gas and Western Kentucky Gas divisions. These services consist primarily of acquisition and provision of natural gas supplies at fixed and market-based prices, load forecasting and management, gas storage and transportation services, peaking sales and balancing services and gas price hedging through the use of derivative products. Woodward Marketing, L.L.C. is a wholly owned subsidiary of Atmos Energy Marketing.
- Atmos Power Systems, Inc. Atmos Power Systems constructs and operates electrical power generating plants and associated facilities. Atmos Power Systems may also enter into agreements to either lease or sell such plants.
WOODWARD MARKETING ACTIVITIES
We acquired a 45 percent interest in Woodward Marketing, L.L.C. in 1997 as a result of the merger of Atmos and United Cities Gas Company, which had acquired that interest in 1995. In April 2001, we acquired the 55 percent interest that we did not own from J.D. Woodward and others for 1,423,193 restricted shares of our common stock. Immediately following the acquisition, Mr. Woodward was elected as a Senior Vice President of Atmos in charge of all non-regulated business activities, a position he has held since April 2001. Prior to that time, Mr. Woodward had not been an officer or employee of Atmos.
The principal business of Woodward Marketing, including the activities of Trans Louisiana Industrial Gas Company, Inc., is the overall management of natural gas requirements for municipalities, local gas utility companies and industrial customers located primarily in the Southwestern and Midwestern United States. This business involves the sale of natural gas by Woodward Marketing to its customers and the management of storage and transportation contracts for its customers under contracts generally having one to two-year terms. At September 30, 2001, Woodward Marketing had a total of 78 municipal and local gas utility customers and 195 industrial customers. Woodward Marketing also sells natural gas to certain of its industrial customers on a delivered burner tip basis under contract terms from 30 days to two years. In addition, Woodward Marketing supplies us with a portion of our natural gas requirements on a competitive bid basis.
In the management of natural gas requirements for municipal and other local utilities, Woodward Marketing sells physical natural gas for future delivery and hedges the associated price risk through the use of gas futures, including forwards, over-the-counter and exchange-traded options, and swap contracts with counterparties. These financial contracts are marked-to-market at the daily close of business. Woodward Marketing links gas futures to physical delivery of natural gas and balances its futures positions at the end of each trading day. Over-the-counter swap agreements require Woodward Marketing to receive or make payments based on the difference between a fixed price and the market price of natural gas on the settlement date. Woodward Marketing uses these futures and swaps to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of natural gas, which are also carried on a mark to market basis. Options held to hedge price risk provide the right, but not the requirement, to buy or sell energy commodities at a fixed price. Woodward Marketing uses options to manage margins and to limit overall price risk exposure.
Energy related services provided by Woodward Marketing include the sale of natural gas to its various customer classes and management of transportation and storage assets and inventories. More specifically, energy services include contract negotiation and administration, load forecasting, storage acquisition, natural gas purchase and delivery and capacity utilization strategies. In providing these services, Woodward Marketing generates income from its utility, municipal and industrial customers through negotiated prices based on the volume of gas supplied to the customer. Woodward Marketing also generates income by taking advantage of the difference between near-term gas prices and prices for future delivery as well as the daily movement of gas prices by utilizing storage and transportation capacity that it controls.
Woodward Marketing also engages in limited speculative natural gas trading
for its own account, subject to a risk management policy established by us which
limits the level of trading loss in any fiscal year to a maximum of 25 percent
of the budgeted annual operating income of Woodward Marketing. Compliance with
such risk management policy is monitored on a daily basis. In addition, Woodward
Marketing's bank credit facility limits trading positions that are not closed at
the end of the day (open positions) to 2.5 Bcf of natural gas. At September 30,
2001, Woodward Marketing's open positions in its trading operations totaled 2.3
Bcf. In its speculative trading, Woodward Marketing's open trading positions are
monitored on a daily basis but are
Financial instruments, which subject Woodward Marketing to counterparty risk, consist primarily of financial instruments arising from trading and risk management activities and overnight repurchase agreements that are not insured. Counterparty risk is the risk of loss from nonperformance by financial counterparties to a contract. Exchange-traded future and option contracts are generally guaranteed by the exchanges.
Woodward Marketing's operations are concentrated in the natural gas industry, and its customers and suppliers may be subject to economic risks affecting that industry.
OPERATING STATISTICS
The following table shows the operating statistics of Atmos for each of the five fiscal years from 1997 through 2001. It is followed by two additional tables that show utility only sales and operating statistics by business unit for 2001 and 2000. Certain prior year amounts have been reclassified to conform with the current year presentation.
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
METERS IN SERVICE, end of year
Residential......................... 1,243,625 970,873 919,012 889,074 870,747
Commercial.......................... 122,274 104,019 98,268 94,302 92,703
Industrial (including
agricultural)..................... 13,020 14,259 14,329 16,322 17,217
Public authority and other.......... 7,404 7,448 6,386 4,834 4,781
---------- ---------- ---------- ---------- ----------
Total meters...................... 1,386,323 1,096,599 1,037,995 1,004,532 985,448
Propane customers(1)................ -- -- 39,539 37,400 29,097
---------- ---------- ---------- ---------- ----------
Total............................. 1,386,323 1,096,599 1,077,534 1,041,932 1,014,545
========== ========== ========== ========== ==========
HEATING DEGREE DAYS(2)
Actual (weighted average)........... 2,753 2,096 3,374 3,799 3,909
Percent of normal................... 107% 82% 85% 95% 98%
SALES VOLUMES -- MMcf
Residential......................... 79,000 63,285 67,128 73,472 75,215
Commercial.......................... 36,922 30,707 31,457 36,083 37,382
Industrial(including
agricultural)..................... 33,730 38,687 35,741 44,881 46,416
Public authority and other.......... 6,892 5,520 5,793 4,937 5,195
---------- ---------- ---------- ---------- ----------
Total sales volumes............... 156,544 138,199 140,119 159,373 164,208
Transportation volumes -- MMcf........ 61,230 59,365 55,468 56,224 48,800
---------- ---------- ---------- ---------- ----------
TOTAL THROUGHPUT -- MMcf.............. 217,774 197,564 195,587 215,597 213,008
========== ========== ========== ========== ==========
PROPANE -- Gallons (000's)(1)......... -- 19,329 22,291 23,412 25,204
========== ========== ========== ========== ==========
OPERATING REVENUES (000's)
Gas sales revenues
Residential......................... $ 788,902 $ 405,552 $ 349,691 $ 410,538 $ 452,864
Commercial.......................... 342,945 176,712 144,836 184,046 193,302
Industrial (including
agricultural)..................... 208,168 171,447 117,382 161,382 168,386
Public authority and other.......... 58,539 27,198 22,330 20,504 23,898
---------- ---------- ---------- ---------- ----------
Total gas sales revenues.......... 1,398,554 780,909 634,239 776,470 838,450
Transportation revenues............... 28,668 23,610 23,101 23,971 19,885
Other gas revenues.................... 10,925 4,674 4,500 8,121 6,385
---------- ---------- ---------- ---------- ----------
Total gas revenues................ 1,438,147 809,193 661,840 808,562 864,720
Propane revenues(1)................... -- 22,550 22,944 29,091 33,194
Other revenues........................ 4,128 18,409 5,412 10,555 8,921
---------- ---------- ---------- ---------- ----------
Total operating revenues.......... $1,442,275 $ 850,152 $ 690,196 $ 848,208 $ 906,835
========== ========== ========== ========== ==========
AVERAGE SALES PRICE/Mcf............... $ 8.93 $ 5.65 $ 4.53 $ 4.87 $ 5.11
AVERAGE COST OF GAS/Mcf SOLD.......... 6.83 3.79 2.79 3.24 3.51
AVERAGE TRANSPORTATION
REVENUES/Mcf...................... .47 .40 .42 .43 .41
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See footnotes following these tables.
YEAR ENDED SEPTEMBER 30, 2001
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ATMOS
ENERGY UNITED WESTERN TOTAL
LOUISIANA ENERGAS GREELEY CITIES KENTUCKY UTILITY
--------- -------- -------- -------- -------- ----------
METERS IN SERVICE, at end of
year
Residential............... 344,870 273,850 192,056 271,233 161,616 1,243,625
Commercial................ 22,650 27,128 18,376 35,518 18,602 122,274
Industrial................ -- 11,498 414 711 397 13,020
Public authority and
other.................. 916 2,258 1,638 932 1,660 7,404
-------- -------- -------- -------- -------- ----------
Total.................. 368,436 314,734 212,484 308,394 182,275 1,386,323
======== ======== ======== ======== ======== ==========
HEATING DEGREE DAYS(2)
Actual.................... 2,076 3,782 6,041 1,315 4,534 2,753
Percent of normal......... 117% 107% 106% 104% 104% 107%
SALES VOLUMES -- MMcf(4)
Residential............... 5,257 22,905 18,027 19,978 12,833 79,000
Commercial................ 2,448 7,992 6,845 13,968 5,669 36,922
Industrial................ -- 8,395 1,224 10,473 3,018 23,110
Public authority and
other.................. 919 2,618 1,497 339 1,519 6,892
-------- -------- -------- -------- -------- ----------
Total.................. 8,624 41,910 27,593 44,758 23,039 145,924
TRANSPORTATION
VOLUMES -- MMcf(4)........ 3,954 11,676 10,204 20,166 23,491 69,491
-------- -------- -------- -------- -------- ----------
TOTAL THROUGHPUT --
MMcf(4)................... 12,578 53,586 37,797 64,924 46,530 215,415
======== ======== ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues
(000's)................ $ 96,511 $311,414 $270,678 $464,498 $237,047 $1,380,148
Miles of pipe............. 7,934 13,345 6,344 7,536 3,779 38,938
Employees(5).............. 488 342 272 470 247 1,819
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See footnotes following these tables.
YEAR ENDED SEPTEMBER 30, 2000
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ATMOS
ENERGY UNITED WESTERN TOTAL
LOUISIANA ENERGAS GREELEY CITIES KENTUCKY UTILITY
--------- -------- -------- -------- -------- ----------
METERS IN SERVICE, at end of
year
Residential................ 74,943 273,664 187,121 274,580 160,565 970,873
Commercial................. 5,568 26,231 17,946 35,808 18,466 104,019
Industrial................. -- 513 406 660 407 1,986
Public authority and
other................... 908 2,254 1,688 970 1,628 7,448
------- -------- -------- -------- -------- ----------
Total................... 81,419 302,662 207,161 312,018 181,066 1,084,326
======= ======== ======== ======== ======== ==========
HEATING DEGREE DAYS(2)
Actual..................... 1,237 2,875 4,678 1,130 3,702 2,096
Percent of normal.......... 69% 81% 82% 89% 85% 81%
SALES VOLUMES -- MMcf(4)
Residential................ 3,070 19,201 14,727 14,703 11,584 63,285
Commercial................. 1,379 6,365 5,829 12,102 5,032 30,707
Industrial................. -- 1,651 1,927 13,191 3,189 19,958
Public authority and
other................... 751 2,026 1,216 228 1,299 5,520
------- -------- -------- -------- -------- ----------
Total................... 5,200 29,243 23,699 40,224 21,104 119,470
TRANSPORTATION
VOLUMES -- MMcf(4)......... 2,248 24,679 10,756 16,474 26,025 80,182
------- -------- -------- -------- -------- ----------
TOTAL THROUGHPUT
-- MMcf(4)................ 7,448 53,922 34,455 56,698 47,129 199,652
======= ======== ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues
(000's)................. $45,469 $146,100 $147,116 $280,029 $121,237 $ 739,951
Miles of pipe.............. 2,283 13,169 6,000 5,140 3,437 30,029
Employees(5)............... 123 350 271 495 249 1,488
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See footnotes following these tables.
Notes to preceding tables:
(1) Prior to August 2000, propane revenues and expenses were fully consolidated. Subsequent to August 2000, the results of propane are shown on the equity basis.
(2) A heating degree day is equivalent to each degree that the average of the high and the low temperatures for a day is below 65 degrees. The colder the climate, the greater the number of heating degree days. 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. Degree day information for 2001 and 2000 are presented excluding service areas with weather normalized operations. Degree day information for 1999, 1998 and 1997 does not exclude service areas with weather normalized operations as that information was not available.
(3) These tables present data for our five utility business units. Their operations include the regulated local distribution companies located in their respective service areas. The operations of Louisiana Gas are included in Atmos Energy Louisiana since July 1, 2001, the date of acquisition.
(4) Utility sales volumes and revenues reflect utility segment operations, including intercompany sales and transportation amounts.
(5) The number of employees excludes 480 and 369 Atmos shared services and customer support center employees and 62 and 28 non-utility employees in 2001 and 2000.
SEGMENT OVERVIEW
We consider each business unit within our utility segment to be a reporting unit of the utility segment and not a reportable segment. Our chief executive officer makes decisions about allocating resources to the utility segment as a whole and not to individual reporting units.
The following table summarizes certain information regarding the operations of the utility and non-regulated segments of Atmos as of and for each of the three years ended September 30, 2001. The information is net of intersegment eliminations.
NON-
UTILITY REGULATED TOTAL
---------- --------- ----------
(IN THOUSANDS)
2001
Operating revenues.............................. $1,378,159 $ 64,116 $1,442,275
Operating income................................ 127,980 2,301 130,281
Net income...................................... 49,881 6,209 56,090
Identifiable assets............................. 1,732,296 303,884 2,036,180
2000
Operating revenues.............................. $ 734,835 $115,317 $ 850,152
Operating income................................ 77,207 8,109 85,316
Net income...................................... 22,459 13,459 35,918
Identifiable assets............................. 1,246,782 101,976 1,348,758
1999
Operating revenues.............................. $ 617,313 $ 72,883 $ 690,196
Operating income................................ 49,000 5,239 54,239
Net income...................................... 10,800 6,944 17,744
Identifiable assets............................. 1,125,691 104,846 1,230,537
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The utility segment is composed of our five regulated utility divisions:
the Atmos Energy Louisiana Gas Division which operates in Louisiana, the Energas
Division which operates in Texas, the Greeley Gas Division which operates in
Colorado, Kansas and Missouri, the United Cities Gas Division which operates in
Georgia, Illinois, Iowa, Missouri, Tennessee and Virginia and the Western
Kentucky Gas Division which operates in Kentucky. For further discussion on the
utility segment operations, see "Utility Operations Segment Overview".
For a further discussion of our non-regulated segment operations see "Non-Regulated Segment Overview".
GAS SALES
Our natural gas distribution business is seasonal and highly dependent on weather conditions in our 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 gas sales during the winter months will vary with the temperatures during these months. The seasonal nature of our sales to residential and commercial customers is partially offset by our sales in the spring and summer months to our agricultural customers in Texas, Colorado and Kansas who use natural gas to operate irrigation equipment.
In addition to weather, our revenues are affected by the cost of natural gas and economic conditions in the areas that we serve. Higher gas costs, which we are generally able to pass through to our customers under purchased gas adjustment clauses, may cause customers to conserve, or, in the case of industrial customers, to use alternative energy sources.
To protect against volatility in gas prices, we are hedging gas costs for the 2001-2002 heating season by utilizing a combination of financial tools and fixed forward physical contracts to stabilize gas prices. For the 2001-2002 heating season, we plan to cover approximately 64 percent of our anticipated requirements through storage and hedging instruments. The gas hedges should help moderate the effects of higher customer accounts receivable caused by higher gas prices.
We also have weather normalization adjustments in our rate jurisdictions in Tennessee, Georgia and Kentucky. We purchased weather hedges for our Texas and Louisiana operations effective for the 2000-2001 heating season. We also purchased a three-year weather insurance policy for our Texas and Louisiana operations commencing with the 2001-2002 heating season, with an option to cancel in the third year. The policy covers the entire heating season of October to March. See "Weather and seasonality" in Management's Discussion and Analysis of Operations.
Our distribution systems have experienced aggregate peak day deliveries of approximately 2.0 Bcf per day. We have the ability to curtail deliveries to certain customers under the terms of interruptible contracts and applicable state statutes or regulations which enable us to maintain our deliveries to high priority customers. We have not imposed curtailment in our Energas Division since we began independent operations in 1983 or in our Atmos Energy Louisiana Gas Division since we acquired Trans Louisiana Gas Company in 1986 and Louisiana Gas Service in 2001. The Western Kentucky Gas Division curtailed deliveries to certain interruptible customers during exceptionally cold periods in December 1989, January 1994 and during the winter of 1996. Neither the Greeley Gas Division nor its predecessor, Greeley Gas Company, has curtailed deliveries to its sales customers since prior to 1980. The United Cities Gas Division curtails interruptible service customers from time to time each year in accordance with the interruptible contracts and tariffs.
GAS SUPPLY
We receive gas deliveries through 35 pipeline transportation companies, both interstate and intrastate, to satisfy our sales market requirements. The pipeline transportation agreements are firm and many of them have pipeline no-notice storage service which provides for daily balancing between system requirements and nominated flowing supplies. These agreements have been negotiated with the shortest term necessary while still maintaining our right of first refusal.
The Western Kentucky Gas 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 Gas Division sought and was granted approval by the Kentucky Public Service Commission for a performance-based rate program which commenced in July 1998. Under the performance-based program, we and our customers jointly share in any actual gas cost savings achieved when compared to pre-determined benchmarks. We also have similar gas cost performance-based rate mechanisms in Georgia and Tennessee.
The United Cities Gas 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 Gas Division's requirements. Additionally, the Greeley Gas Division purchases substantial volumes from producers that are connected directly to its distribution system.
Louisiana Intrastate Gas Company, Acadian Pipeline, Gulf South and Williams Pipeline-Texas Gas pipelines deliver most of the Atmos Energy Louisiana Gas Division's requirements.
We also own or hold an interest in and operate numerous natural gas storage facilities in Kentucky, Kansas and Louisiana 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, we operate one propane plant and a liquified natural gas plant for peak shaving purposes. We also contract for storage service in underground storage facilities on many of the interstate pipelines serving us. See "Item 2. Properties" below for further information regarding the peak shaving facilities.
We normally inject gas into pipeline storage systems and company owned storage facilities during the summer months and withdraw it in the winter months. Our underground storage facilities in Kansas, Kentucky and Louisiana have a combined maximum daily output capability of approximately 226,000 Mcf.
We purchase our gas supply from various producers and marketers. Supply arrangements are contracted on a firm basis with various terms at market prices. The firm supply consists 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. Except for local production purchases, we select suppliers through a competitive bidding process by sending out a request for proposal to suppliers that have demonstrated that they can provide reliable service. We select these suppliers based on their ability to deliver gas supply to our designated firm pipeline receipt points and the best cost. Major suppliers during fiscal 2001 were Reliant Energy, Sonat Marketing, Cinergy, Pioneer Natural Resources, Texaco, Woodward Marketing, ONEOK Gas Marketing, Aquila, BP Energy, Enron, Enbridge, Anadarko and Tenaska Marketing. We do not anticipate problems with securing additional gas supply as needed for our customers.
REGULATION
Each of our utility divisions is regulated by various state or local public utility authorities. We are also subject to regulation by the United States Department of Transportation with respect to safety requirements in the operation and maintenance of our gas distribution facilities. Our distribution operations are also subject to various state and federal laws regulating environmental matters. From time to time we receive inquiries regarding various environmental matters. We believe that our 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 us or our operations.
RATES
The method of determining regulated rates varies among the states in which we operate. The regulators have the responsibility of ensuring 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 divisions in our utility operations segment 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 charged by us to our customers fluctuate with the cost of gas purchased by us. Rates established by regulatory authorities are adjusted for increases and decreases in our purchased gas cost through 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 our 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 96 percent of our revenues in the fiscal year ended September 30, 2001, and approximately 87 percent of our revenues in fiscal 2000 were derived from sales at rates set by or subject to approval by local or state authorities. Generally, the regulatory authority reviews our rate request and establishes a rate structure intended to generate revenue sufficient to cover our costs of doing business and provide a reasonable return on invested capital.
The following table sets forth major rate requests made by us or other parties during the most recent five years and the action taken on such requests:
AMOUNT
EFFECTIVE AMOUNT RECEIVED
JURISDICTION DATE REQUESTED (REDUCED)
------------ --------- --------- ---------
(IN THOUSANDS)
Texas
West Texas System.................................. 11/01/96 $ 7,676 $ 5,800 (a)
12/01/00 9,827 3,011
Amarillo System.................................... 01/01/00 4,354 2,200
Louisiana............................................ 11/01/99 (b) -- (b)
Kentucky............................................. 12/21/99 14,127 9,900 (c)
Colorado............................................. 01/21/98 -- (1,600)(d)
05/04/01 4,200 2,750
Iowa................................................. 03/05/01 (e) (326)(e)
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)(f)
04/01/01 2,100 (534)
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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 Louisiana Public Service Commission approved a Rate Stabilization Clause for three years for our former Trans La Division 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.
(c) The Kentucky rate order also included a provision for a five-year pilot program for weather normalization which began in November 2000.
(d) Rate reduction as a result of settlement in a case initiated by the Colorado Consumer Council.
(e) Rate reduction as a result of an agreement initiated by the Iowa Consumer Advocate Division of the Department of Justice.
(f) Rate reduction as a result of a settlement with the Virginia State Corporation Commission staff.
We are not currently in significant direct competition with any other distributors of natural gas to residential and commercial customers within our service areas. However, we do compete with other natural gas suppliers and suppliers of alternate fuels for sales to industrial and agricultural customers. We compete in all aspects of our 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 electrical 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 addition, through Atmos Energy Marketing, we compete with other natural gas brokers in obtaining natural gas supplies for customers.
EMPLOYEES
At September 30, 2001, we had 2,361 employees. See "Utility Sales and Statistical Data by Business Unit" for the number of employees by business unit.
ITEM 2. PROPERTIES
We own an aggregate of 38,938 miles of underground distribution and transmission mains throughout our gas distribution systems. These mains are located on easements or rights-of-way which generally provide for perpetual use. We maintain our mains through a program of continuous inspection and repair and believe that our system of mains is in good condition. We also own and operate one propane peak shaving plant with a total capacity of approximately 180,000 gallons that can produce an equivalent of approximately 3,300 Mcf daily. We also own a liquefied natural gas storage facility with a capacity of 500,000 Mcf which can inject a daily volume of 30,000 Mcf into the system, as well as underground storage fields, as discussed below, that are used to supplement the supply of natural gas in periods of peak demand.
We have six underground gas storage facilities in Kentucky and four in Kansas. We own a 25 percent interest in a gas storage facility in Napoleonville, Louisiana. This gas storage facility is operated by Acadian Gas Pipeline System who also owns the remaining 75 percent interest. Our 25 percent usable capacity is 364,782 Mcf. In addition to the usable capacity we maintain 332,917 Mcf of cushion gas to maintain reservoir pressure. The Napoleonville facility has a maximum daily delivery capability of approximately 56,000 Mcf. We also have a contract through March 2003 with Bridgeline Gas Distribution LLC for 250,000 Mcf of usable storage capacity in a storage facility in Sorrento, Louisiana. The Sorrento facility has a maximum daily delivery capability of approximately 25,000 Mcf.
Our total storage capacity is approximately 21.9 Bcf. However, approximately 10.3 Bcf of gas in the storage facilities must be retained as cushion gas to maintain reservoir pressure. The maximum daily delivery capability of these storage facilities is approximately 226,000 Mcf.
Substantially all of our properties in our Greeley Gas Division and United Cities Gas Division with net book values of approximately $174.4 million and $314.1 million are subject to liens under First Mortgage Bonds assumed in our mergers with Greeley Gas Company and United Cities Gas Company. At September 30, 2001, the liens collateralized $17.0 million of outstanding 9.4 percent Series J First Mortgage Bonds due May 1, 2021, and $92.2 million of outstanding Series P, Q, R, T, U and V First Mortgage Bonds due at various dates from 2004 through 2022.
Our administrative offices are consolidated in Dallas, Texas under one lease. We also maintain field offices throughout our distribution system, the majority of which are located in leased premises.
Net property, plant and equipment at September 30, 2001 included approximately $1,280.6 million for utility and $54.8 million for non-regulated.
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 2001.
The following table sets forth certain information as of September 30, 2001, 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................ 54 4 Chairman, President and Chief Executive
Officer
John P. Reddy................. 48 3 Senior Vice President and Chief Financial
Officer
R. Earl Fischer............... 62 39 Senior Vice President, Utility Operations
J. D. Woodward III............ 51 -- Senior Vice President, Non-Utility
Operations
Louis P. Gregory.............. 46 1 Senior Vice President and General Counsel
Wynn D. McGregor.............. 48 13 Vice President, Human Resources
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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.
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.
J. D. Woodward was named Senior Vice President, Non-Utility Operations in April 2001. Prior to joining the Company, Mr. Woodward was President of Woodward Marketing, LLC from January 1995 to March 2001.
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).
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 our common stock for fiscal 2001 and 2000 are listed below. The high and low prices listed are the actual closing NYSE quotes for shares of our common stock.
DIVIDENDS
HIGH LOW PAID
------ ------ ---------
FISCAL YEAR 2001
Quarter ended:
December 31............................................. $26.25 $19.31 $.290
March 31................................................ 25.25 21.50 .290
June 30................................................. 24.46 21.45 .290
September 30............................................ 23.64 19.79 .290
-----
$1.16
=====
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DIVIDENDS
HIGH LOW PAID
------ ------ ---------
FISCAL YEAR 2000
Quarter ended:
December 31............................................. $25.00 $20.00 $.285
March 31................................................ 20.19 15.56 .285
June 30................................................. 20.56 14.75 .285
September 30............................................ 23.25 18.50 .285
-----
$1.14
=====
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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 our common stock on September 30, 2001 was 30,524.
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
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues....... $1,442,275 $ 850,152 $ 690,196 $ 848,208 $ 906,835
========== ========== ========== ========== ==========
Net income............... $ 56,090 $ 35,918 $ 17,744 $ 55,265 $ 23,838
========== ========== ========== ========== ==========
Diluted net income per
share.................. $ 1.47 $ 1.14 $ .58 $ 1.84 $ .81
========== ========== ========== ========== ==========
Cash dividends declared
per share.............. $ 1.16 $ 1.14 $ 1.10 $ 1.06 $ 1.01
========== ========== ========== ========== ==========
Total assets at end of
year................... $2,036,180 $1,348,758 $1,230,537 $1,141,390 $1,088,311
========== ========== ========== ========== ==========
Long-term debt at end of
year................... $ 692,399 $ 363,198 $ 377,483 $ 398,548 $ 302,981
========== ========== ========== ========== ==========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
This section provides management's discussion of the financial condition, cash flows and results of operations of Atmos Energy Corporation 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 fact included in this Report are forward-looking statements made in good faith by the Company and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of the Company's documents or oral presentations, the words "anticipate," "expect," "estimate," "plans," "believes," "objective," "forecast," "goal" or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to the Company's strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: adverse weather conditions such as warmer than normal weather in the Company's service territories; national, regional and local economic conditions, including competition from other energy suppliers as well as alternative forms of energy; recent national events; regulatory approvals, including the impact of rate proceedings before various state regulatory commissions; successful completion and integration of pending acquisition; inflation and increased gas costs, including their effect on commodity prices for natural gas; increased competition; further deregulation or "unbundling" of the natural gas distribution industry; hedging and market risk activities and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. 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 our ratemaking activity for rate cases that are currently pending as of September 30, 2001 or rate proceedings completed during the three years ended September 30, 2001.
Results of our rate activity for the three years ended September 30, 2001 can be summarized as follows: net annual rate increases totaling $6.4 million implemented in 2001, annual rate increases totaling $12.1 million implemented in 2000 and no rate changes in 1999.
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 request for an annual increase of approximately $9.8 million from the 67 cities served by its West Texas System was denied. In March 2000, this decision was appealed to the Railroad Commission of Texas. Subsequently, 59 cities representing approximately 58 percent of Energas' customers ratified a non-binding Settlement Agreement. The Settlement Agreement capped the rate increase at $3.0 million and entitled the ratifying cities to accept a rate increase below $3.0 million in the event the Railroad Commission adopted a lesser increase for the non-ratifying cities. Eight cities declined to participate in the settlement and a hearing with the Railroad Commission was held in August 2000. In December 2000, the Railroad Commission approved an increase in annual revenues of approximately $3.0 million effective December 1, 2000. In addition, the Railroad Commission approved a new rate design providing more protection from warmer than normal weather for our West Texas System.
In June 1999, the Trans La operations of the Atmos Energy Louisiana Gas 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 have mitigated 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 operations of Atmos Energy Louisiana Gas Division's rates to be adjusted annually to allow us to earn a minimum return on equity of 10.5 percent.
In connection with its review of our acquisition of Louisiana Gas Service, the Louisiana Public Service Commission approved a rate structure that requires us to share any cost savings that result from the acquisition with the customers of Louisiana Gas Service. The shared cost savings will be the difference between operation and maintenance expense in any future year and the 1998 normalized expense for Louisiana Gas Service, indexed for inflation, annual changes in labor costs and customer growth. The customers are not assured any savings in 2001. In 2002 and in future years, the customers are assured annual savings, which will be indexed for inflation, annual changes in labor costs and customer growth. The sharing mechanism will remain in place for 20 years subject to established modification procedures.
In May 1999, the Western Kentucky Gas Division requested from the Kentucky Public Service Commission an increase in revenues, a weather normalization adjustment and changes in rate design to shift a portion of revenues from commodity charges to fixed rates. In December 1999, the Kentucky Commission 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 Kentucky Commission approved a five-year pilot program for weather normalization beginning in November 2000.
On June 9, 1998, the Kentucky Commission issued an Order approving a three year experimental Performance-based Ratemaking mechanism related to gas procurement and gas transportation activities filed by the Western Kentucky Gas Division. The Performance-based Ratemaking mechanism is incorporated into the Western Kentucky Gas Division's gas cost adjustment clause. As discussed above, it provides for sharing of purchased gas cost savings between the consumers and us. We recognized other income of $0.2 million and $2.1 million under the Kentucky Performance-based Ratemaking mechanism in fiscal 2001 and fiscal 2000. The experimental Performance-based Ratemaking mechanism expired on June 30, 2001 and the Kentucky Commission has extended it while it considers the Western Kentucky Gas Division's request for another mechanism.
In November 2000, the Greeley Gas Division filed a rate case with the Colorado Public Utilities Commission for approximately $4.2 million in additional annual revenues. In May 2001, we received an increase in annual revenues of approximately $2.8 million from the Colorado Public Utilities Commission. The new rates went into effect on May 4, 2001.
Effective April 1, 1999, the Tennessee Regulatory Authority approved the United Cities Gas Division's request to continue its Performance-based Ratemaking mechanism related to gas procurement and gas transportation activities for a three-year period. The Tennessee Regulatory 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 our Performance-based Ratemaking program for an additional three years effective May 1, 1999. The gas purchase and capacity release mechanisms of the Performance-based Ratemaking mechanism are designed to provide us incentives to find innovative methods to lower gas costs to our customers. We recognized other income of $1.0 million and $0.2 million in fiscal years 2001 and 2000 for the Georgia and Tennessee Performance-based Ratemaking mechanisms.
In February 2000, the United Cities Gas 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 are collected primarily through an increase in monthly customer charges.
In March 2000, the United Cities Gas 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, we refiled the case requesting an increase in revenues of approximately $2.1 million. The Commission accepted the revised filing. In April 2001, the United Cities Gas Division agreed to an annual rate reduction of $0.5 million effective beginning with the April 2001 billing cycle.
In March 2001, the United Cities Gas Division and the Iowa Consumer Advocate Division of the Department of Justice reached an agreement for an annual rate reduction of $0.3 million relating to our Iowa operations. The rate reduction was effective in March 2001.
We continue to monitor rates in all of our service areas to ensure that they are adequate for the recovery of service costs and return on investment.
On September 10, 2001, the United Cities Gas Division filed a request for accounting order related to uncollectable delinquencies associated with Moratorium Order of Georgia Public Service Commission dated January 17, 2001. In our request, we asked the Georgia Commission to issue an accounting authority order authorizing us to defer as a regulatory asset all costs incurred in connection with the Moratorium on disconnects ordered by the Georgia Commission which lasted from January 17, 2001 through April 1, 2001. On September 28, 2001, the Georgia Commission issued an order authorizing us to create a mechanism for the recovery of uncollectable delinquencies with an effective date of November 1, 2001. The United Cities Gas Division is authorized to recover through the recovery mechanism up to $500,000.
Our natural gas distribution business and irrigation sales business is seasonal and dependent upon weather conditions in our service areas. Natural gas sales to residential, commercial and public authority customers are affected by winter heating season requirements. This generally results in higher operating revenues and net income during the period from October through March of each year and lower operating revenues and either net losses or lower net income during the period from April through September of each year. Sales to industrial customers are much less weather sensitive. Sales to agricultural customers, who typically use natural gas to power irrigation pumps during the period from March through September, are affected by rainfall amounts. The effects of colder than normal winter weather in 2001 and the effects of significantly warmer than normal winter weather in 2000 and 1999 on our consolidated volumes delivered are illustrated by the following degree day information. The degree day information for 2001 and 2000 presented below excludes service areas with weather normalized operations. Information concerning service areas with weather normalized operations for 1999 was not available; thus, degree day information presented for 1999 includes service areas having weather normalized operations.
YEAR ENDED SEPTEMBER 30,
------------------------
2001 2000 1999
------ ------ ------
Sales volumes -- Bcf........................................ 156.6 138.2 140.1
Transportation volumes -- Bcf............................... 61.2 59.4 55.5
----- ----- -----
Total.................................................. 217.8 197.6 195.6
===== ===== =====
Degree days:
Actual.................................................... 2,753 2,096 3,374
Percent of normal......................................... 107% 81% 85%
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The effects of weather that is above or below normal are partially offset in the Tennessee and Georgia jurisdictions served by the United Cities Gas Division and in the Kentucky jurisdiction served by the Western Kentucky Gas Division through weather normalization adjustments. The Georgia Public Service Commission, the Tennessee Regulatory Authority and the Kentucky Public Service Commission have approved weather normalization adjustments. The weather normalization adjustments, effective October through May each year in Georgia, and November through April each year in Tennessee and Kentucky, allow the United Cities Gas Division and the Western Kentucky Gas Division to increase the base rate portion of customers' bills when weather is warmer than normal and decrease the base rate when weather is colder than normal. The net effect of the weather normalization adjustments was a decrease in revenues of approximately $3.3 million for 2001 compared to an increase in revenues of $4.1 million and $4.4 million in 2000 and 1999. Approximately 375,000 or 26 percent of our meters in service are located in Georgia, Tennessee and Kentucky. We did not have weather normalization adjustments in our other service areas during the year ended September 30, 2001. We also received approval to change our rate structure in our West Texas System of the Energas Division beginning in December 2000 to help offset some of the negative effects of weather.
In July 2000, we entered into an agreement to purchase weather hedges for our Texas and Louisiana operations effective for the 2000 - 2001 heating season. The hedges were designed to help mitigate the effects of weather that was at least seven percent warmer than normal in both Texas and Louisiana while preserving any upside. The cost of the weather hedges was approximately $4.9 million which was amortized over the 2000 - 2001 heating season. The cost of the weather hedges was more than offset by the positive effects of colder weather on our gross profit.
In June 2001, we purchased a three year weather insurance policy with an option to cancel in the third year if we obtain weather protection in our rate structures. The policy is for our Texas and Louisiana operations and covers the entire heating season of October to March beginning with the 2001 - 2002 heating season. The cost of the three year policy was approximately $13.2 million which was prepaid and will be amortized over the appropriate heating seasons based on degree days. The insurance is designed to protect against weather that is at least seven percent warmer than normal.
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 2001 was a year in which total cash inflows exceeded total cash outflows. This was generally the result of increased cash flows from operating activities as a result of colder than normal weather partially offset by increased capital expenditures. Net proceeds from the issuance of long-term debt were used to finance the Louisiana Gas Service Company and LGS Natural Gas Company acquisition in 2001. Net proceeds from our equity offering were used to reduce commercial paper debt. Common stock issued primarily through our Employee Stock Ownership Plan and our Direct Stock Purchase Plan was also used to finance operations.
CASH FLOWS FROM OPERATING ACTIVITIES
Items on the Consolidated Statement of Cash Flows for the year ended September 30, 2001 reflect changes in balances for the year, net of assets acquired and liabilities assumed in the acquisition of the additional interest in Woodward Marketing, L.L.C. and the assets of Louisiana Gas Service Company and LGS Natural Gas Company. See Note 10 of the accompanying notes to consolidated financial statements.
Cash flows from operating activities as reported in the consolidated statement of cash flows totaled $83.0 million for 2001 compared to $54.2 million for 2000 and $84.7 million for 1999. The increase in net cash provided by operating activities from 2000 to 2001 was primarily the result of increases in net income and other current liabilities and a decrease in accounts receivable and deferred gas costs partially offset by an increase in cash held on deposit in margin accounts and a decrease in accounts payable. Also, the net change in our assets/liabilities from risk management activities added to the increase in net cash provided by operating activities in 2001. The increase in net income was primarily due to higher gross profits due to increased volumes and rate increases. The increase in gross profits was partially offset by an increase in operating expenses and an increase in interest expense. Also reducing gross profit was a decrease in miscellaneous income (expense) as a result of charges incurred related to our performance based-ratemaking mechanisms and the cost of weather hedges purchased for our Louisiana and Texas operations. In addition, miscellaneous income (expense) was reduced in 2001 as the result of a gain recognized on the sale of certain non-regulated assets in 2000 which did not occur in 2001.
CASH FLOWS FROM INVESTING ACTIVITIES
During the last three years, a substantial portion of our cash resources was used to fund technology improvements, acquisitions and our ongoing construction program to provide natural gas services to a growing customer base. Net cash used in investing activities totaled $468.1 million in 2001 compared with $100.1 million in 2000 and $109.6 million in 1999. Capital expenditures in fiscal 2001 amounted to $113.1 million, compared with $75.6 million in 2000 and $110.4 million in 1999. The increase in capital expenditures from 2000 to 2001 was primarily the result of additional capital requirements needed due to our growing customer base. Included in investing activities for 2001 is $363.4 million used to acquire the assets of Louisiana Gas Service Company and LGS Natural Gas Company as discussed in Note 2 of the notes to consolidated financial statements. Included in investing activities in 2000 was $32.0 million used to acquire the Missouri natural gas distribution assets of Associated Natural Gas. Currently budgeted capital expenditures for fiscal 2002 total approximately $122.0 million and include funds for additional mains, services, meters and equipment. In fiscal 2002, we also plan to complete the Mississippi Valley Gas Company acquisition for $150.0 million plus the assumption of approximately $45.0 million of long-term debt as discussed in Note 2 of the notes to consolidated financial statements. Capital expenditures and acquisitions for fiscal 2002 are planned to be financed from internally generated funds and financing activities as discussed below. In 2001, we had $5.4 million in expenditures for assets to be used in leasing activities. In connection with our acquisition of Woodward Marketing, we received $8.6 million in cash. In 2001, we received net proceeds of $6.6 million in connection with the sale of certain utility assets. In 2000, we received net proceeds of $6.5 million in connection with the sale of certain propane assets to Heritage Propane Partners, L.P.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities totaled $393.0 million for 2001 compared with $44.7 million for 2000 and $28.7 million for 1999. Financing activities during these periods included issuance of common stock, dividend payments, short-term borrowings from banks under our credit facilities and issuance and repayment of long-term debt. The increase in cash provided by financing activities in 2001 as compared to 2000 was due primarily to the issuance of long-term debt and the issuance of common stock during 2001. In 2001 we received $347.1 million in net proceeds from our $350.0 million debt offering in May 2001. The net proceeds were used to help finance the completion of the Louisiana Gas Service Company and LGS Natural Gas Company acquisition in July 2001. Long-term debt repayments totaled $17.7 million, $14.6 million and $61.0 million for 2001, 2000 and 1999. Repayments of long-term debt in 2001, 2000 and 1999 consisted of annual installments under the various loan documents. During 2001, short-term debt decreased $48.8 million due primarily to the use of the net proceeds from our equity offering in December 2000 to reduce commercial paper debt. During 2000, short-term debt increased $81.7 million due to the effect of warmer weather on net income for 2000, the acquisition of the Missouri natural gas distribution assets of Associated Natural Gas 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.
Issuance of common stock. We issued 674,468, 704,540 and 849,481 shares of common stock in 2001, 2000 and 1999 under our 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 our plans. In addition to the shares issued under our various plans, we also issued 6,741,500 shares through our equity offering in December 2000 and 1,423,193 shares of restricted common stock for the acquisition of the remaining 55 percent of Woodward Marketing in April 2001. The net proceeds from the equity offering were used to reduce commercial paper debt as discussed above.
Cash dividends paid. We paid $44.1 million in cash dividends during 2001 compared with $36.0 million in 2000 and $33.9 million in 1999. We raised the dividend $.02 per share during 2001 and $.04 per share during each of 2000 and 1999. The increase in cash dividends in 2001 over 2000 was also due to the increase in the number of shares outstanding as discussed above.
LIQUIDITY
The excess of cash inflows over outflows has resulted in a slight decrease in debt as a percentage of total capitalization, including short-term debt, as shown in the table below.
SEPTEMBER 30
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2001 2000
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(IN THOUSANDS, EXCEPT PERCENTAGES)
Short-term debt............................... $ 201,247 13.4% $ 250,047 24.4%
Long-term debt................................ 713,094 47.6% 380,764 37.2%
Shareholders' equity.......................... 583,864 39.0% 392,466 38.4%
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Total capitalization, including short-term
debt........................................ $1,498,205 100.0% $1,023,277 100.0%
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The debt as a percentage of total capitalization, including short-term debt, was 61.0 percent and 61.6 percent at September 30, 2001 and 2000. Our 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 our Direct Stock Purchase Plan and Employee Stock Ownership Plan, access to the debt and equity capital markets and limiting annual maintenance capital expenditures. It is likely that the debt to capitalization ratio will remain in its current range in the near term.
At September 30, 2001, we had short-term committed credit facilities totaling $318.0 million. One short-term unsecured credit facility is for $300.0 million and serves as a backup liquidity facility for our commercial paper program. At September 30, 2001, $171.0 million of commercial paper was outstanding. On August 2, 2001, this facility was renewed for $300.0 million with an option to increase the amount by $100.0 million. We have a second facility in place for $18.0 million. At September 30, 2001, $2.2 million was outstanding under this credit facility. These credit facilities are negotiated at least annually and are used for working capital purposes.
At September 30, 2001, our Woodward Marketing subsidiary has an uncommitted credit facility for $140.0 million which is used for its non-regulated business. Atmos Energy Marketing, LLC, our wholly owned subsidiary, is the sole guarantor of all amounts outstanding under this facility. At September 30, 2001, $28.0 million was outstanding under this credit facility. Related letters of credit totaling $38.8 million further reduced the amount available under this facility. Woodward Marketing also has up to $100.0 million available from Atmos for its non-regulated business. At September 30, 2001, $100.0 million was outstanding.
At September 30, 2001, we also had uncommitted short-term credit lines of $40.0 million, all of which were unused. The uncommitted lines are renewed or renegotiated at least annually with varying terms and we pay no fee for the availability of the lines. Borrowings under these lines are made on a when-and as-available basis at the discretion of the banks.
The loan agreements pursuant to which our Senior Notes and First Mortgage Bonds have been issued contain covenants by us 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.
FUTURE CAPITAL REQUIREMENTS
We believe that internally generated funds, our credit facilities, commercial paper program and access to the public debt and equity capital markets will provide necessary working capital and liquidity for capital expenditures and other cash needs for fiscal 2002.
YEAR ENDED SEPTEMBER 30, 2001 COMPARED WITH YEAR ENDED SEPTEMBER 30, 2000
Operating revenues increased by 70 percent to $1.4 billion for 2001 from $850.2 million for 2000. The most significant factors contributing to the increase in operating revenues were a 58 percent increase in average sales price due to the increased cost of gas and a 10 percent increase in sales and transportation volumes due to colder weather. During 2001, excluding service areas with weather normalized operations, temperatures were 31 percent colder than in the corresponding period of the prior year and were seven percent colder than the 30-year normal. The total volume of gas sold and transported for 2001 was 217.8 Bcf compared with 197.6 Bcf for 2000. The average sales price per Mcf sold increased $3.28 to $8.93 primarily due to an increase in the average cost of gas. During the early part of our 2001 fiscal year, natural gas prices throughout the country began to increase significantly. The average cost of gas per Mcf sold increased to $6.83 for 2001 from $3.79 for 2000. Although we expect to recover our purchased gas costs from customers through purchased gas adjustment mechanisms, generally there is a lag between the time we pay for gas purchases and the time when regulators allow us to place higher rates in service and recover those gas costs. As a result, we have from time to time used short-term borrowings to temporarily finance unrecovered purchased gas costs. Where permitted, we have increased our purchased gas adjustments to help mitigate the increased cost of gas.
Subsequent to September 30, 2001, gas prices had declined to approximately $2 to $3 per Mcf. In addition, as a result of the increased gas costs, our accounts receivable balances during fiscal 2001 increased significantly and, consequently, we also increased our allowance for doubtful accounts, which we consider to be adequate. We do not, however, expect this rise in natural gas prices to have a material adverse effect on our financial condition, results of operations or net cash flows.
In addition, operating revenues increased due to the impact of rate increases in Kentucky, Illinois, Colorado, Amarillo, Texas, and West Texas. Also contributing to the increase in operating revenues was the addition of approximately 48,000 customers in Missouri due to the Associated Natural Gas acquisition completed in fiscal 2000 and the addition of approximately 279,000 residential and commercial meters in Louisiana due to the completion of the Louisiana Gas Service Company acquisition in July 2001. However, operating revenues were partially offset by a reduction related to our former propane assets which were placed into a joint venture partnership in August 2000.
Gross profit increased by 15 percent to $374.7 million for 2001 from $325.7 million for 2000. The increase in gross profit was due primarily to the increase in volumes sold to weather sensitive customers, an increase of $5.1 million in transportation revenues due to higher average transportation revenue per Mcf and increased volumes and a $6.7 million non-recurring adjustment to purchased gas cost to reflect state filings. In addition, gross profit increased due to the impact of rate increases and additional customers, partially offset by a reduction related to our former propane operations, as discussed previously. Changes in the cost of gas do not directly affect gross profit because the fluctuations in gas prices are passed through to our customers.
On April 1, 2001, we completed our acquisition of the remaining 55 percent interest in Woodward Marketing, L.L.C. As a result of this acquisition, the revenues and expenses of Woodward Marketing are now shown on a consolidated basis.
Operating expenses increased to $244.9 million for 2001 from $240.4 million for 2000. Operation and maintenance expense decreased due to savings resulting from the continued cost control initiatives started during fiscal 2000 and reduced operation and maintenance expenses associated with our former propane operations which were placed into a joint venture partnership in fiscal 2000. An increase in the provision for doubtful accounts of $8.5 million and pension costs of $4.5 million partially offset this decrease. Pension costs will increase by $4.4 million in fiscal 2002 over fiscal 2001. Depreciation and amortization expense increased due to the completion of the Louisiana Gas Service Company and LGS Natural Gas Company acquisition in July 2001. Taxes other than income increased as a result of increased city franchise taxes and state gross receipts taxes, which are revenue based. However, these taxes are paid by our customers; thus, these amounts are offset in revenues through customer billings and have no effect on net income.
Operating income increased 53 percent for 2001 to $130.3 million from $85.3 million for 2000. The increase in operating income resulted primarily from increased gross profit described above.
Equity in earnings of Woodward Marketing, L.L.C. was $8.1 million for the six months ended March 31, 2001 compared with $7.3 million for the year 2000.
Miscellaneous income (expense) decreased $9.3 million to $(1.9) million for 2001 compared to $7.4 million for 2000. This decrease was due primarily to charges incurred related to our Performance-based Ratemaking mechanisms and the amortization of $4.9 million related to weather hedges purchased for our Louisiana and Texas operations. In addition, we recognized a gain of $5.8 million in 2000 resulting from the sale of certain non-utility assets. No such gain occurred in 2001. Partially offsetting the decrease in miscellaneous income (expense) during 2001 was an increase of $3.0 million in interest income due primarily to interest income earned on the proceeds from our $350.0 million debt offering in May 2001. We invested these proceeds in short-term investments until the completion of the Louisiana Gas Service Company and LGS Natural Gas Company acquisition in July 2001.
Interest expense increased $3.2 million to $47.0 million for 2001 compared to $43.8 million for 2000. This increase was due primarily to interest expense on the $350.0 million debt offering in May 2001.
YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1999
Operating revenues increased by 23 percent to $850.2 million in 2000 from $690.2 million in 1999. The most significant factors contributing to the increase in operating revenues were a 25 percent increase in average sales price due to the increased cost of gas and the impact of rate increases in Amarillo, Texas and Kentucky. The average sales price per Mcf sold increased $1.12 or 25 percent to $5.65 in 2000 primarily due to an increase in the average cost of gas. The average cost of gas per Mcf sold increased 36 percent to $3.79 for 2000 from $2.79 for 1999. Also contributing to the increase in operating revenues was an increase in our non-regulated West Texas irrigation sales volumes related to irrigation demand and, secondly, to higher average 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. Partially offsetting the increase in operating revenues was a one percent decrease in sales volumes due to warmer weather. For 2000, excluding service areas with weather normalized operations, temperatures were five percent warmer than in 1999 and were 18 percent warmer than the 30-year normal. The total volume of gas sold for 2000 was 138.2 Bcf compared with 140.1 Bcf for 1999.
Gross profit increased by nine percent to $325.7 million for 2000 from $299.8 million for 1999. The increase in gross profit was due primarily to the impact of rate increases discussed previously. The increase in gross profit was also due to the addition of approximately 48,000 Missouri customers due to the acquisition of the Missouri natural gas distribution assets of Associated Natural Gas and increased volumes associated with the irrigation business. The increase in gross profit was slightly offset by a decrease in volumes sold to weather sensitive customers. Changes in the cost of gas do not directly affect gross profit because the fluctuations in gas prices are passed through to our customers.
Operating expenses decreased to $240.4 million for 2000 from $245.6 million for 1999. Operation and maintenance expense decreased due to savings resulting from the cost control initiatives implemented during 2000 due to the warm winter weather. However, this decrease was partially offset by an increase in the provision for doubtful accounts of $8.8 million. The increase in the provision for doubtful accounts occurred during the transition from local offices to a centralized customer service center and the implementation of a new company-wide customer billing system. During this transition, we temporarily suspended service cutoffs and our normal efforts to collect past due receivables. Actions to address those issues were initiated in 2000. Depreciation and amortization expense also increased during 2000 as a result of the first full year of depreciation being recognized on our process improvement initiatives related to the new customer information and billing system and the accounting and human resource systems placed into service during 1999, as well as the acquisition of the Missouri natural gas distribution assets of Associated Natural Gas in May of 2000.
Operating income increased 57 percent for 2000 to $85.3 million from $54.2 million in 1999. The increase in operating income resulted primarily from increased gross profit and decreased operating expenses described above.
Miscellaneous income (expense), net increased $4.4 million to $7.4 million in 2000 compared to $3.0 million in 1999. The increase was primarily due the $5.8 million ($3.7 million after tax) gain resulting from the sale of certain non-utility assets.
Interest charges increased $6.7 million to $43.8 million in 2000 from $37.1 million in 1999. The increase in 2000 was primarily due to $3.7 million of interest being capitalized in 1999 in connection with the significant technology projects being completed in 1999 and higher average debt outstanding and higher interest rates for 2000. The increase in average debt outstanding was related to funding infrastructure, technology, process changes and customer support investments, as well as additional working capital needed for the increasing gas costs.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE OF THE COMPANY
Our performance in the future will primarily depend on the results of our utility operations. Several factors exist that could influence Atmos' future financial performance, some of which are described below. They should be considered in connection with evaluating forward-looking statements contained in this report or otherwise made by or on behalf of us since these factors could cause actual results and conditions to differ materially from those projected in these forward-looking statements.
Our natural gas sales volumes and related revenues are directly correlated with heating requirements that result from cold winter weather. Our agricultural sales volumes are associated with the rainfall levels during the growing season in our West Texas irrigation market. Weather is one of the most significant factors influencing our performance. However, as was more fully discussed above, we have purchased weather insurance to mitigate the effect of warmer than historically normal weather in our Texas and Louisiana service areas. In addition, weather normalized rates are in effect in several of our jurisdictions, which should mitigate the adverse effects of warmer or drier than normal weather on our operating results.
Our operations will always be affected by the conditions and overall strength of the national, regional and local economies, including interest rates, changes in the capital markets and increases in the costs of our primary commodity, natural gas. These factors impact the amount of residential, industrial and commercial growth in our service territories. Higher costs of natural gas in recent years have already lead many of our customers to conserve in the use of our gas services and could lead to even more customers utilizing such conservation methods.
Our company and our operations have already been indirectly impacted by the tragic events of September 11, 2001. The terrorist activities on that day have heightened our awareness of safety and security concerns and have prompted a company-wide review and assessment of the adequacy of our safety and security procedures relating to the protection of our customers, employees and our physical assets. We will continue to monitor and assess our safety and security procedures and will take all precautions necessary to minimize any adverse effects on us or our operations. Accordingly, through taking these added precautions, we believe that we have minimized any potential adverse effects that any future terrorist activities could have on us or our operations.
Our utility business is subject to various regulated returns on its rate base in each of the 11 states in which we operate. We monitor the allowed rates of return, our effectiveness in earning such rates and initiate rate proceedings or operating changes as needed. In addition, in the normal course of the regulatory environment, assets are placed in service and historical test periods are established before rate cases can be filed. Once rate cases are filed, regulatory bodies have the authority to suspend implementation of the new rates while studying the cases. Because of this process, we must temporarily suffer the negative financial effects of having placed assets in service without the benefit of rate relief, which is commonly referred to as "regulatory lag". In addition, our debt and equity financing programs are also subject to approval by regulatory bodies in five states, which could limit our ability to take advantage of favorable market conditions.
Our acquisition strategy depends on our ability to successfully acquire and integrate the operations of companies such as Mississippi Valley Gas Company, which acquisition is currently pending. Acquisitions such as Mississippi Valley should help us achieve greater economies of scale by spreading the fixed costs of the utility business over a larger customer base. Completion of this acquisition is subject to state and federal regulatory approval. In addition, the integration of this acquisition into our operations during the next fiscal year will require a substantial commitment of financial resources and management time.
We believe that inflation has caused, and will continue to cause, increases in certain operating expenses, and has required, and will continue to require, assets to be replaced at higher costs. We have a process in place to continually review the adequacy of our gas rates in relation to the increasing cost of providing service and the inherent regulatory lag in adjusting those gas rates. Historically, we have been able to budget and control operating expenses and investment within the amounts authorized to be collected in rates and intend to continue to do so. The ability to control expenses is an important factor that will influence future results.
In addition, the rapid increases in the price of purchased gas during the past year caused us to experience a significant increase in short-term debt because we must pay suppliers for such gas when it is purchased long before such costs may be recovered through the collection of monthly customer bills for gas delivered. Also, the increases in purchased gas costs caused more customers to be slow to pay their gas bills, leading to accounts receivable that were higher than normal which in turn lead to higher short-term debt levels and increased bad debts in fiscal 2001. Should the price of purchased gas increase significantly in the upcoming heating season, we would expect similar increases in our short-term debt and accounts receivable during fiscal 2002.
We are facing increased competition from other energy suppliers as well as electric companies and from energy marketing and trading companies. In the case of industrial customers, such as manufacturing plants, and agricultural customers, adverse economic conditions, including higher gas costs, could cause such customers to use alternative sources of energy such as electricity or to bypass our systems in favor of special competitive contracts with lower per-unit costs.
We are closely monitoring the development of unbundling initiatives in the natural gas industry. Unbundling is the separation of the provision and pricing of local distribution gas services into discrete components. It typically focuses on the separation of the distribution and gas supply components and the resulting opening of the regulated components of sales services to alternative unregulated suppliers of those services. Because of brand loyalty in our service areas, and our enhanced technology and distribution system infrastructures, we believe that we are now positively positioned as unbundling evolves. Consequently, we do not expect there would be a significant adverse effect on our business should unbundling or further deregulation of the natural gas distribution service business occur.
To protect against volatility in gas prices, we are hedging gas costs for the 2001-2002 heating season by utilizing a combination of financial tools and fixed forward physical contracts to stabilize gas prices. For the 2001-2002 heating season, we plan to cover approximately 64 percent of our anticipated requirements through storage and hedging instruments. The gas hedges should help moderate the effects of higher customer accounts receivable caused by higher gas prices.
We acquired a 45 percent interest in Woodward Marketing, L.L.C. in 1997 as a result of the merger of Atmos and United Cities Gas Company, which had acquired that interest in 1995. In April 2001, we acquired the 55 percent interest that we did not own from J.D. Woodward and others for 1,423,193 restricted shares of our common stock. Immediately following the acquisition, Mr. Woodward was elected as a Senior Vice President of Atmos in charge of all non-regulated business activities, a position he has held since April 2001. Prior to that time, Mr. Woodward had not been an officer or employee of Atmos.
The principal business of Woodward Marketing, including the activities of Trans Louisiana Industrial Gas Company, Inc., is the overall management of natural gas requirements for municipalities, local gas utility companies and industrial customers located primarily in the Southwestern and Midwestern United States. This business involves the sale of natural gas by Woodward Marketing to its customers and the management of storage and transportation contracts for its customers under contracts generally having one to two-year terms. At September 30, 2001, Woodward Marketing had a total of 78 municipal and local gas utility customers and 195 industrial customers. Woodward Marketing also sells natural gas to certain of its industrial customers on a delivered burner tip basis under contract terms from 30 days to two years. In addition, Woodward Marketing supplies us with a portion of our natural gas requirements on a competitive bid basis.
In the management of natural gas requirements for municipal and other local utilities, Woodward Marketing sells physical natural gas for future delivery and hedges the associated price risk through the use of gas futures, including forwards, over-the-counter and exchange-traded options, and swap contracts with counterparties. These financial contracts are marked-to-market at the daily close of business. Woodward Marketing links gas futures to physical delivery of natural gas and balances its futures positions at the end of each trading day. Over-the-counter swap agreements require Woodward Marketing to receive or make payments based on the difference between a fixed price and the market price of natural gas on the settlement date. Woodward Marketing uses these futures and swaps to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of natural gas, which are also carried on a mark to market basis. Options held to hedge price risk provide the right, but not the requirement, to buy or sell energy commodities at a fixed price. Woodward Marketing uses options to manage margins and to limit overall price risk exposure.
Energy related services provided by Woodward Marketing include the sale of natural gas to its various customer classes and management of transportation and storage assets and inventories. More specifically, energy services include contract negotiation and administration, load forecasting, storage acquisition, natural gas purchase and delivery and capacity utilization strategies. In providing these services, Woodward Marketing generates income from its utility, municipal and industrial customers through negotiated prices based on the volume of gas supplied to the customer. Woodward Marketing also generates income by taking advantage of the difference between near-term gas prices and prices for future delivery as well as the daily movement of gas prices by utilizing storage and transportation capacity that it controls.
Woodward Marketing also engages in limited speculative natural gas trading for its own account, subject to a risk management policy established by us which limits the level of trading loss in any fiscal year to a maximum of 25 percent of the budgeted annual operating income of Woodward Marketing. Compliance with such risk management policy is monitored on a daily basis. In addition, Woodward Marketing's bank credit facility limits trading positions that are not closed at the end of the day (open positions) to 2.5 Bcf of natural gas. At September 30, 2001, Woodward Marketing's open positions in its trading operations totaled 2.3 Bcf. In its speculative trading, Woodward Marketing's open trading positions are monitored on a daily basis but are not required to be closed if they remain within the limits set by the bank loan agreement. Woodward Marketing had an unrealized trading gain of $4.5 million for the fiscal year ended September 30, 2001, but there can be no assurance that Woodward Marketing will have any speculative trading gain in the future. In some prior years, Woodward Marketing has experienced losses in its speculative trading business. The financial exposure that results from the daily fluctuations of gas prices and the potential for daily price movements constitutes a risk of loss since the price of natural gas purchased for future delivery at the beginning of the day may not be hedged until later in the day.
Woodward Marketing's operations are concentrated in the natural gas industry, and its customers and suppliers may be subject to economic risks affecting that industry.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in our market risk sensitive instruments is the potential loss arising from adverse changes in natural gas commodity prices and interest rates as discussed below. The sensitivity analysis does not, however, consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions we may take to mitigate exposure to such changes. Actual results may differ.
GAS PRICES
We purchase natural gas for our regulated and non-regulated natural gas operations. Substantially all of the cost of gas purchased for regulated operations is recovered through purchased gas adjustment mechanisms. We have a limited market risk in gas prices related to gas purchases in the open market at spot prices for sale to non-regulated energy services customers at fixed prices. As a result, our earnings could be affected by changes in the price and availability of such gas. To protect against volatility in gas prices, we from time to time hedge our gas costs by purchasing futures contracts. Our utility segment does not use such financial instruments for trading purposes and we are not a party to any leveraged derivatives. Market risk is estimated as a hypothetical 10 percent increase in the portion of our gas cost related to fixed-price non-regulated sales. Based on projected fiscal 2002 non-regulated gas sales at fixed prices, such an increase would result in an increase to cost of gas of approximately $2.7 million in fiscal 2002, before considering the effect of swap agreements outstanding as of September 30, 2001. As of September 30, 2001, we had entered into swap agreements to lock in gas costs for certain outstanding fixed-price sales agreements. We plan to mitigate the risk of increased gas purchase costs for fixed-price customers by entering into swap agreements to lock in purchased gas cost for estimated sales volumes in fiscal 2002.
In April 2001, we acquired the 55 percent interest in Woodward Marketing that we did not already own. Woodward Marketing's principal business is the management of natural gas requirements for municipalities, local gas utility companies and industrial customers located primarily in the Southwestern and Midwestern United States. This business involves the sale of natural gas and the management of storage and transportation contracts for customers under contracts generally having one to two-year terms. Woodward Marketing also sells natural gas to industrial customers on a delivered burner tip basis under contract terms from 30 days to two years. In the management of natural gas requirements for municipal and other local utilities, Woodward Marketing sells natural gas for future delivery and hedges price risk through the use of gas futures including forwards, over-the-counter and exchange-traded options, futures and swap contracts. Financial contracts are marked-to-market at the daily close of business.
Woodward Marketing also engages in limited speculative natural gas trading for its own account, subject to a risk management policy established by us which limits the level of trading loss in any fiscal year to a maximum of 25 percent of the budgeted operating income of Woodward Marketing. Compliance with such risk management policy is monitored on a daily basis. In addition, Woodward Marketing's bank credit facility limits open trading positions to 2.5 Bcf of natural gas. At September 30, 2001, Woodward Marketing's open positions in its trading operations totaled 2.3 Bcf. In its trading, Woodward Marketing's open trading positions are monitored on a daily basis but are not required to be closed if within the limits set by the bank credit facility. The financial exposure that results from the daily fluctuations of gas prices and the potential for daily price movements have an impact on the net open position. Based on its open positions at September 30, 2001, a $.50 increase in market strip would result in a $1.2 million decrease in the speculative trading gain. A $.50 decrease in market strip would result in a $1.2 million increase in the speculative trading gain.
Counterparty risk is the risk of loss from nonperformance by financial counterparties to a contract. Financial instruments, which subject Woodward Marketing to counterparty risk, consist primarily of financial instruments arising from trading and risk management activities and overnight repurchase agreements that are not insured. Exchange traded future and option contracts are generally guaranteed by the exchanges.
Woodward Marketing's operations are concentrated in the natural gas industry, and its customers and suppliers may be subject to economic risks affecting that industry. Therefore, an economic downturn in the industry could have an adverse affect on the creditworthiness of Woodward Marketing's customers. Woodward Marketing manages credit risk to attempt to minimize its exposure to uncollectible receivables. In compliance with Woodward Marketing's existing credit policy, prospective and existing customers are reviewed for creditworthiness and customers not meeting minimum standards, at the discretion of management, provide security deposits and are subject to various requisite secured payment terms.
INTEREST RATES
Our earnings are affected by changes in short-term interest rates as a result of our issuance of short-term commercial paper and our other short-term borrowings. If market interest rates for short-term borrowings average two percent more in fiscal 2002 than they did during fiscal 2001, our interest expense would increase by approximately $4.0 million.
Market risk for fixed-rate long-term obligations is estimated as the potential increase in fair value resulting from a hypothetical one percent decrease in interest rates and amounts to approximately $57.5 million based on discounted cash flow analyses.
As of September 30, 2001, we were not engaged in other activities which would cause exposure to the risk of material earnings or cash flow loss due to changes in interest rates, foreign currency exchange rates or market commodity prices.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, presentation and integrity of the financial statements and other financial information in this report. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles and include estimates and judgments made by management that were necessary to prepare the statements in accordance with such accounting principles.
The Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded from loss and that transactions are executed and recorded in accordance with established procedures. The concept of reasonable assurance is based on the recognition that the cost of maintaining a system of internal accounting controls should not exceed related benefits. The system of internal accounting controls is supported by written policies and guidelines, internal auditing and the careful selection and training of qualified personnel.
The financial statements have been audited by the Company's independent auditors. Their audit was made in accordance with auditing standards generally accepted in the United States, as indicated in the Report of Independent Auditors and included a review of the system of internal accounting controls and tests of transactions to the extent they considered necessary to carry out their responsibilities for the audit.
Management has considered the internal auditors' and the independent auditors' recommendations concerning the Company's system of internal accounting controls and has taken actions that are believed to be cost-effective in the circumstances to respond appropriately to these recommendations. The Audit Committee of the Board of Directors meets periodically with the internal auditors and the independent auditors to discuss the Company's internal accounting controls, auditing and financial reporting matters.
Board of Directors
Atmos Energy Corporation
We have audited the accompanying consolidated balance sheets of Atmos Energy Corporation as of September 30, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atmos Energy Corporation at September 30, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Dallas, Texas
November 2, 2001
SEPTEMBER 30
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2001 2000
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(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Property, plant and equipment............................... $2,055,986 $1,546,569
Construction in progress.................................... 53,881 33,234
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2,109,867 1,579,803
Less accumulated depreciation and amortization.............. 774,469 597,457
---------- ----------
Net property, plant and equipment......................... 1,335,398 982,346
Current assets
Cash and cash equivalents................................. 15,263 7,379
Cash held on deposit in margin account.................... 66,666 --
Accounts receivable, less allowance for doubtful accounts
of $16,151 in 2001 and $10,589 in 2000................. 124,046 77,264
Inventories............................................... 6,041 6,456
Gas stored underground.................................... 89,555 64,222
Assets from risk management activities.................... 95,968 --
Deferred gas cost......................................... 10,999 37,184
Other current assets and prepayments...................... 15,713 8,101
---------- ----------
Total current assets................................... 424,251 200,606
Intangible assets........................................... 12,125 878
Goodwill.................................................... 64,745 3,110
Noncurrent assets from risk management activities........... 29,771 --
Deferred charges and other assets........................... 169,890 161,818
---------- ----------
$2,036,180 $1,348,758
========== ==========
CAPITALIZATION AND LIABILITIES
Shareholders' equity
Common stock, no par value (stated at $.005 per share);
100,000,000 shares authorized; issued and outstanding:
2001 -- 40,791,501 shares, 2000 -- 31,952,340 shares... $ 204 $ 160
Additional paid-in capital................................ 489,948 306,887
Retained earnings......................................... 95,132 83,154
Accumulated other comprehensive income (loss)............. (1,420) 2,265
---------- ----------
Shareholders' equity................................... 583,864 392,466
Long-term debt.............................................. 692,399 363,198
---------- ----------
Total capitalization................................... 1,276,263 755,664
Current liabilities
Current maturities of long-term debt...................... 20,695 17,566
Short-term debt........................................... 201,247 250,047
Accounts payable and accrued liabilities.................. 84,471 73,031
Taxes payable............................................. 11,620 10,844
Customers' deposits....................................... 32,351 9,923
Liabilities from risk management activities............... 119,484 --
Other current liabilities................................. 41,161 21,085
---------- ----------
Total current liabilities.............................. 511,029 382,496
Deferred income taxes....................................... 138,934 131,619
Noncurrent liabilities from risk management activities...... 7,412 --
Deferred credits and other liabilities...................... 102,542 78,979
---------- ----------
$2,036,180 $1,348,758
========== ==========
|
See accompanying notes to consolidated financial statements
YEAR ENDED SEPTEMBER 30
--------------------------------------
2001 2000 1999
------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues.......................................... $1,442,275 $850,152 $690,196
Purchased gas cost.......................................... 1,067,555 524,446 390,402
---------- -------- --------
Gross profit................................................ 374,720 325,706 299,794
Gas trading margin.......................................... 488 -- --
Operating expenses
Operation................................................. 133,240 140,249 148,065
Maintenance............................................... 6,368 7,648 9,141
Depreciation and amortization............................. 67,664 63,855 56,874
Taxes, other than income.................................. 37,655 28,638 31,475
---------- -------- --------
Total operating expenses............................... 244,927 240,390 245,555
---------- -------- --------
Operating income............................................ 130,281 85,316 54,239
Other income
Equity in earnings of Woodward Marketing, L.L.C. ......... 8,062 7,307 7,156
Miscellaneous income (expense), net....................... (1,874) 7,437 2,967
---------- -------- --------
Total other income..................................... 6,188 14,744 10,123
Interest charges, net....................................... 47,011 43,823 37,063
---------- -------- --------
Income before income taxes.................................. 89,458 56,237 27,299
Income taxes................................................ 33,368 20,319 9,555
---------- -------- --------
Net income............................................. $ 56,090 $ 35,918 $ 17,744
========== ======== ========
Basic net income per share.................................. $ 1.47 $ 1.14 $ .58
========== ======== ========
Diluted net income per share................................ $ 1.47 $ 1.14 $ .58
========== ======== ========
Cash dividends per share.................................... $ 1.16 $ 1.14 $ 1.10
========== ======== ========
Weighted average shares outstanding:
Basic..................................................... 38,156 31,461 30,566
========== ======== ========
Diluted................................................... 38,247 31,594 30,819
========== ======== ========
|
See accompanying notes to consolidated financial statements
ACCUMULATED
COMMON STOCK OTHER
------------------- ADDITIONAL COMPREHENSIVE
NUMBER OF STATED PAID-IN INCOME RETAINED
SHARES VALUE CAPITAL (LOSS) EARNINGS TOTAL
---------- ------ ---------- ------------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, September 30, 1998................. 30,398,319 $152 $271,637 $ -- $ 99,369 $371,158
Comprehensive income:
Net income................................ -- -- -- -- 17,744 17,744
Unrealized holding gains on investments,
net..................................... -- -- -- 917 -- 917
--------
Total comprehensive income.............. 18,661
Cash dividends ($1.10 per share)............ -- -- -- -- (33,882) (33,882)
Common stock issued:
Restricted stock grant plan............... 56,850 -- 1,732 -- -- 1,732
Direct stock purchase plan................ 694,905 4 17,429 -- -- 17,433
ESOP...................................... 89,435 -- 2,362 -- -- 2,362
Long-term stock plan for United Cities
Division................................ 6,450 -- 150 -- -- 150
Outside directors stock-for-fee plan...... 1,841 -- 49 -- -- 49
---------- ---- -------- ------- -------- --------
Balance, September 30, 1999................. 31,247,800 156 293,359 917 83,231 377,663
Comprehensive income:
Net income................................ -- -- -- -- 35,918 35,918
Unrealized holding gains on investments,
net..................................... -- -- -- 1,348 -- 1,348
--------
Total comprehensive income.............. 37,266
Cash dividends ($1.14 per share)............ -- -- -- -- (35,995) (35,995)
Common stock:
Direct stock purchase plan................ 440,990 2 8,588 -- -- 8,590
ESOP...................................... 258,049 1 4,842 -- -- 4,843
Long-term stock plan for United Cities
Division................................ 4,200 -- 66 -- -- 66
Outside directors stock-for-fee plan...... 2,601 1 50 -- -- 51
Cancellation of restricted stock.......... (1,300) -- (18) -- -- (18)
---------- ---- -------- ------- -------- --------
Balance, September 30, 2000................. 31,952,340 160 306,887 2,265 83,154 392,466
Comprehensive income:
Net income................................ -- -- -- -- 56,090 56,090
Unrealized holding losses on investments,
net..................................... -- -- -- (3,685) -- (3,685)
--------
Total comprehensive income.............. 52,405
Cash dividends ($1.16 per share)............ -- -- -- -- (44,112) (44,112)
Common stock issued:
Direct stock purchase plan................ 411,159 2 8,682 -- -- 8,684
ESOP...................................... 225,945 1 5,098 -- -- 5,099
Long-term stock plan for United Cities
Division................................ 15,300 -- 240 -- -- 240
Long-term incentive plan.................. 17,172 -- 272 -- -- 272
Directors equity incentive compensation
plan.................................... 2,740 -- 60 -- -- 60
Outside directors stock-for-fee plan...... 2,152 -- 50 -- -- 50
Woodward Marketing, L.L.C. acquisition.... 1,423,193 7 26,650 -- -- 26,657
Public offering........................... 6,741,500 34 142,009 -- -- 142,043
---------- ---- -------- ------- -------- --------
Balance, September 30, 2001................. 40,791,501 $204 $489,948 $(1,420) $ 95,132 $583,864
========== ==== ======== ======= ======== ========
|
See accompanying notes to consolidated financial statements
YEAR ENDED SEPTEMBER 30,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 56,090 $ 35,918 $ 17,744
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization:
Charged to depreciation and amortization.............. 67,664 63,855 56,874
Charged to other accounts............................. 2,806 3,065 4,800
Deferred income taxes................................... 18,501 18,251 31,874
Deferred lease income................................... (979) -- --
Net assets/liabilities from risk management
activities............................................. 13,881 -- --
Gain on sale of non-regulated assets.................... -- (5,831) --
Changes in assets and liabilities:
Increase in cash held on deposit in margin account...... (62,181) -- --
(Increase) decrease in accounts receivable.............. 65,032 (11,260) (29,576)
Decrease in inventories................................. 374 2,037 7,010
(Increase) decrease in gas stored underground........... (3,376) (17,518) 4,256
(Increase) decrease in deferred gas cost................ 15,440 (31,353) (6,101)
(Increase) decrease in other current assets and
prepayments............................................ (6,646) (4,930) 488
Increase in deferred charges and other assets........... (12,143) (13,053) (12,012)
Increase (decrease) in accounts payable................. (94,769) 8,643 19,425
Increase (decrease) in taxes payable.................... 791 9,607 (11,888)
Increase (decrease) in customers' deposits.............. 6,078 (909) (2,372)
Increase (decrease) in other current liabilities........ 9,019 (4,866) (4,418)
Increase in deferred credits and other liabilities...... 7,413 2,540 8,594
--------- --------- ---------
Net cash provided by operating activities.......... 82,995 54,196 84,698
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures...................................... (113,109) (75,557) (110,353)
Acquisitions.............................................. (363,399) (32,000) --
Retirements of property, plant and equipment, net......... (1,460) 957 757
Assets for leasing activities............................. (5,377) -- --
Increase in cash from acquisition......................... 8,644 -- --
Proceeds from sale of assets, net......................... 6,625 6,467 --
--------- --------- ---------
Net cash used in investing activities.............. (468,076) (100,133) (109,596)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term debt................ (48,800) 81,743 101,904
Net proceeds from issuance of long-term debt.............. 347,099 -- --
Repayment of long-term debt............................... (17,670) (14,567) (61,000)
Cash dividends paid....................................... (44,112) (35,995) (33,882)
Issuance of common stock.................................. 14,405 13,550 21,726
Net proceeds from equity offering......................... 142,043 -- --
--------- --------- ---------
Net cash provided by financing activities.......... 392,965 44,731 28,748
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 7,884 (1,206) 3,850
Cash and cash equivalents at beginning of year.............. 7,379 8,585 4,735
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 15,263 $ 7,379 $ 8,585
========= ========= =========
|
See accompanying notes to consolidated financial statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business -- Atmos Energy Corporation and its subsidiaries are engaged primarily in the natural gas utility business as well as certain non-regulated businesses. We distribute through sales and transportation arrangements natural gas to approximately 1.4 million residential, commercial, public authority and industrial customers through our five regulated utility divisions: Atmos Energy Louisiana Gas Division in Louisiana; Energas Division in Texas; Greeley Gas Division in Colorado, Kansas and Missouri; United Cities Gas Division in Illinois, Tennessee, Iowa, Virginia, Georgia and Missouri; and Western Kentucky Gas Division in Kentucky. Such business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which the utility divisions operate. Our shared services unit is located in Dallas, Texas and our customer support centers are located in Amarillo, Texas and Metairie, Louisiana. Our non-regulated businesses include various energy service businesses as described below.
Through Atmos Energy Marketing, LLC, we are engaged in gas marketing and energy management services. Atmos Energy Marketing provides gas supply management services to industrial customers, municipalities and local distribution companies including our five regulated utility divisions. Woodward Marketing, L.L.C. is a wholly owned subsidiary of Atmos Energy Marketing.
Through Atmos Pipeline and Storage, L.L.C., we own and operate natural gas storage fields in Kansas, Kentucky and Louisiana to supplement natural gas used by customers of the regulated utility divisions in Kansas, Kentucky, Tennessee and Louisiana and to provide storage services to other customers including customers in other states.
Through Atmos Power Systems, Inc., we construct and operate electrical power generating plants and associated facilities. Atmos Power Systems may also enter into agreements to either lease or sell such plants.
In addition, our non-regulated businesses market gas to industrial customers in West Texas, provide various retail services and own an indirect interest in Heritage Propane Partners as described below.
We were formerly engaged in the retail and wholesale distribution of propane gas through United Cities Propane Gas, Inc. On February 15, 2000, we entered into an agreement to form a joint venture which combined our propane operations with the propane operations of three other unrelated companies. The combined joint venture was named U.S. Propane, L.P. On June 15, 2000, U.S. Propane, in which we are a 19 percent partner, entered into an agreement to combine its operations with Heritage Holdings, Inc. Upon closing of this transaction, which occurred in August 2000, U.S. Propane owns all of the general partnership interest and approximately 30 percent of the limited partnership interest in Heritage Propane Partners, a publicly traded master limited partnership. Through our ownership in U.S. Propane, we own an approximate 6 percent interest in Heritage Propane Partners.
Principles of consolidation -- The accompanying consolidated financial statements include the accounts of Atmos Energy Corporation and its subsidiaries. Each subsidiary is wholly-owned and all material intercompany transactions have been eliminated.
Prior to April 1, 2001, we owned a 45 percent interest in Woodward Marketing and accounted for that ownership using the equity method of accounting for investments. Subsequent to April 1, 2001, we own 100 percent of Woodward Marketing and account for that ownership on a consolidated basis. See Note 2, "Acquisitions".
Subsequent to August 10, 2000 we account for our interest in U.S. Propane using the equity method of accounting.
Intangible assets -- Intangible assets consist of customer contracts. The weighted average amortization period is 10 years.
Goodwill -- Total goodwill was $64.7 million and $3.1 million at September 30, 2001 and 2000. Goodwill applicable to the utility segment was $49.8 million and zero at September 30, 2001 and 2000. Goodwill applicable to the non-regulated segment was $14.9 million and $3.1 million at September 30, 2001 and 2000. Goodwill applicable to the utility segment resulted from the acquisition of the Louisiana Gas Service Company assets on July 1, 2001 and is not subject to amortization under the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Goodwill applicable to the non-regulated segment was amortized over 20 years through September 30, 2001. Effective October 1, 2001, goodwill applicable to the non-regulated segment will not be amortized under the provisions of Statement of Financial Accounting Standards No. 142.
Impairment of Long-Lived Assets -- We periodically evaluate whether events or circumstances have occurred that indicate that excess of cost over net assets acquired and other long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected future cash flows. In the event the sum of the expected future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. To date, no such impairment has been recognized.
Regulation -- Our utility operations are subject to regulation with respect to rates, service, maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which we operate. Our accounting policies recognize the financial effects of the ratemaking and accounting practices and policies of the various regulatory commissions. Regulated utility operations are accounted for in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement requires cost-based rate regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements.
We record regulatory assets which represent assets that are being recovered through customer rates or are probable of being recovered through customer rates. Significant regulatory assets as of September 30, 2001 included the following: merger and integration costs of $24.2 million, net of related reserves and accumulated amortization and environmental costs of $3.7 million. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. As of September 30, 2001, we had recorded a regulatory liability of $3.8 million for deferred income taxes.
Revenue recognition -- Sales of natural gas are billed on a monthly cycle basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. We follow the revenue accrual method of accounting for natural gas revenues whereby revenues applicable to gas delivered to customers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense. Estimated losses due to credit risk are reserved at the time revenue is recognized.
Accounts receivable and allowance for doubtful accounts -- Accounts receivable consists of natural gas sales to residential, commercial, industrial, agricultural and other customers. The allowance for doubtful accounts is computed based on the aging of outstanding accounts receivable and historical collections experience and represents in management's opinion, an adequate allowance to provide for probable uncollectable accounts.
Utility property, plant and equipment -- Utility property, plant and equipment is stated at original cost net of contributions in aid of construction. The cost of additions includes direct construction costs, payroll related costs (taxes, pensions and other fringe benefits), administrative and general costs and an allowance for funds used during construction. (See allowance for funds used during construction below). Major renewals
and betterments are capitalized while the costs of maintenance and repairs are charged to expense as incurred. The costs of large projects are accumulated in construction in progress until the project is completed. When the project is completed, tested and placed in service, the balance is transferred to the utility plant in service account included in the rate base and depreciation begins. Property, plant and equipment is depreciated at various rates on a straight-line basis over the estimated useful lives of the assets. The composite rates were 3.7 percent for 2001, 4.1 percent for 2000 and 4.0 percent for 1999. At the time property, plant and equipment is retired, the cost, plus removal expenses less salvage, is charged to accumulated depreciation.
Allowance for funds used during construction -- Allowance for funds used during construction represents the estimated cost of funds used to finance the construction of major projects. Under regulatory practices, the costs are capitalized and included in rate base for ratemaking purposes when the completed projects are placed in service. Interest expense of $1.2 million and $3.7 million were capitalized in 2001 and 1999. No interest expense was capitalized during 2000.
Non-utility property, plant and equipment -- Balances are stated at cost and depreciation is generally computed on the straight-line method for financial reporting purposes.
Inventories -- Inventories consist primarily of materials and supplies and merchandise held for resale. These inventories are stated at the lower of average cost or market.
Gas stored underground -- Net additions of inventory gas to storage and withdrawals of inventory gas from storage are priced using the average cost method for all our utility divisions, except for the United Cities Gas Division, where it is priced on the first-in first-out method. Gas stored underground and owned by Atmos Pipeline and Storage is priced on the last-in first-out method. Pursuant to the United Cities Gas Division's purchased gas adjustment clause, the liquidation of a LIFO layer would be reflected in subsequent gas adjustments in customer rates and does not affect the results of operations. Gas in storage that is retained as cushion gas to maintain reservoir pressure is classified as property, plant and equipment and is priced at cost.
Risk management assets, non-regulated segment -- We use storage, transportation and requirements contracts, forwards, over-the-counter and exchange-traded options, futures and swap contracts to conduct our risk management activities. We use the mark-to-market method to account for these activities in accordance with Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." Under this method, the aforementioned contracts are reflected at fair value, inclusive of future servicing costs and valuation adjustments, with resulting unrealized gains and losses recorded as assets or liabilities from risk management activities on the consolidated balance sheet. Current period changes in the assets and liabilities from risk management activities are recognized as net gains or losses on the consolidated statement of income. Changes in the assets and liabilities from risk management activity result primarily from changes in the valuation of the portfolio of contracts, maturity and settlement of contracts and newly originated transactions. Market prices and models used to value these transactions reflect our best estimate considering various factors including closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts. Values are adjusted to reflect the potential impact of liquidating our positions in an orderly manner over a reasonable period of time under present market conditions. Changes in market prices directly affect our estimate of the fair value of these transactions.
At September 30, 2001, we had 3,800 open contracts, representing 2.3 Bcf notional volumes, that were marked to market with average contract maturities of less than two years. The $4.5 million mark-to-market gain associated with these positions was recorded as unrealized trading margin on the consolidated statement of income.
Effective April 1, 2001, natural gas sales from our natural gas trading
operations are netted against purchased gas costs and shown as gas trading
margin on the consolidated statements of income. For the six months ended
September 30, 2001, our gas trading margin consisted of a $4.0 million realized
trading loss and a $4.5 million unrealized trading gain.
Risk management assets, utility segment -- Our business units have entered into financial instruments for the 2001-2002 heating season. The purpose of entering into these financial instruments is to protect us and our customers from unusually large winter period gas price increases. We use the mark-to-market method to account for these activities as described above. In accordance with Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation", current period changes in the assets and liabilities from risk management activities are recorded as deferred gas costs on the consolidated balance sheet. Accordingly, there is no earnings impact as a result of the use of these financial instruments. See Note 14. Upon maturity, the contracts are recognized in purchased gas cost.
Income taxes -- Income taxes are provided based on the liability method, resulting in income tax assets and liabilities due to temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The liability method requires the effect of tax rate changes on current and accumulated deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.
Cash and cash equivalents -- We consider all highly liquid investments with an initial or remaining maturity of three months or less to be cash equivalents.
Deferred charges and other assets -- Deferred charges and other assets at September 30, 2001 and 2000 include merger and integration costs of $24.2 million and $30.0 million, net of the related reserve for possible non-recovery and accumulated amortization; the investment in Woodward Marketing of $17.4 million at September 30, 2000; and the indirect investment in Heritage Propane Partners of $23.8 million and $25.0 million in 2001 and 2000. Also included in deferred charges and other assets are assets of our qualified defined benefit retirement plans in excess of the plans' obligations of $44.4 million and $36.1 million, assets related to the nonqualified retirement plans of $25.1 million and $28.6 million, unamortized debt expense of $9.7 million and $5.4 million and deferred asset projects of $12.6 million and $10.9 million in 2001 and 2000.
Deferred credits and other liabilities -- Deferred credits and other liabilities at September 30, 2001 and 2000 include customer advances for construction of $11.7 million and $10.9 million; obligations under other postretirement benefits of $38.1 million and $25.2 million in 2001 and 2000; and obligations under our nonqualified retirement plans of $34.2 million and $31.0 million in 2001 and 2000.
Earnings per share -- The calculation of basic earnings per share is based on net income divided by the weighted average number of common shares outstanding. The calculation of diluted earnings per share is based on net income divided by the weighted average number of shares outstanding plus the dilutive shares related to the United Cities Gas Division's Long-term Stock Plan, the Long-Term Incentive Plan and Atmos' Restricted Stock Grant Plan.
Comprehensive income -- In 1999, we adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement requires reporting of comprehensive income and its components (revenues, expenses, gains and losses) in any complete presentation of general purpose financial statements. Comprehensive income describes all changes, except those resulting from investments by owners and distributions to owners, in the equity of a business enterprise from transactions and other events including, as applicable, foreign-currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. While the primary component of comprehensive income is our reported net income, the other components of comprehensive income relate to unrealized gains and losses associated with certain investments held as available for sale.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial
statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Weather insurance and hedges -- In June 2001, we purchased a three year weather insurance policy with an option to cancel in the third year if we obtain weather protection in our rate structures. The policy is for our Texas and Louisiana operations and covers the entire heating season of October to March beginning with the 2001 - 2002 heating season. The cost of the three year policy was approximately $13.2 million which was prepaid and will be amortized over the appropriate heating seasons. The insurance is designed to protect against weather that is warmer than normal.
In July 2000, we entered into an agreement to purchase weather hedges for our Texas and Louisiana operations effective for the 2000 - 2001 heating season. The hedges were designed to help mitigate the effects of weather that was at least seven percent warmer than normal in both Texas and Louisiana while preserving any upside. The cost of the weather hedges was approximately $4.9 million which was amortized over the 2000 - 2001 heating season. The cost of the weather hedges was more than offset by the positive effects of colder weather on our gross profit.
Recently issued accounting standards not yet adopted -- In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations." This statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and Statement of Financial Accounting Standards No. 38, "Accounting for Pre-acquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using the purchase method. The provisions of this Statement were applied to the acquisition of Louisiana Gas Service Company and LGS Natural Gas Company effective July 1, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This Statement addresses the accounting for goodwill and other intangible assets after they have been initially recognized in the financial statements. This Statement requires that goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment tests. This Statement was adopted effective July 1, 2001 with respect to goodwill or other intangible assets acquired in connection with the Louisiana Gas Service Company and LGS Natural Gas Company acquisition. See Note 2 "Acquisitions". With respect to our other intangible assets and goodwill, this Statement was adopted effective October 1, 2001. The proforma effect on goodwill amortization of adopting Statement of Financial Accounting Standards No. 142 is not material.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. We are currently in the process of evaluating the impact the adoption of this Statement will have on our financial condition, results of operations or net cash flows.
Reclassifications -- Certain prior year amounts have been reclassified to conform with the current year presentation.
2. ACQUISITIONS
In April 2001, we acquired from Woodward Marketing, Inc. the 55 percent interest in Woodward Marketing, L.L.C. that we did not already own in exchange for 1,423,193 restricted shares of our common stock. The consideration is subject to an upward adjustment, based on our share price, of up to 232,547 shares plus an amount of shares to compensate for dividends paid after the completion of the acquisition. The pro forma effects for the fiscal year ended September 30, 2001 of combining 100 percent of Woodward Marketing's results of operations with Atmos' consolidated results of operations are a $17.9 million increase in gas trading margin to $18.4 million, elimination of the $8.1 million equity in earnings of Woodward Marketing, a $6.2 million increase in net income to $62.3 million and a $.13 increase in diluted earnings per share to $1.60.
Such pro forma effects for the fiscal year ended September 30, 2000 are a $16.2 million increase in gas trading margin to $16.2 million, elimination of the $7.3 million equity in earnings of Woodward Marketing, a $5.7 million increase in net income to $41.2 million and a $.12 increase in diluted earnings per share to $1.26.
The acquisition enabled us to control Woodward Marketing's future direction and strategies. Results of 100 percent of Woodward Marketing's operations are consolidated with our results of operations for the third and fourth quarter of fiscal year 2001.
The following table summarizes the fair market value of the 55 percent of Woodward Marketing's assets acquired and liabilities assumed as of April 1, 2001, in thousands:
Net property, plant and equipment........................... $ 1,649
Total current assets........................................ 128,386
Other intangible assets..................................... 250
Goodwill.................................................... 12,310
Deferred charges and other assets........................... (12,085)
---------
Total assets acquired.................................. 130,510
Current liabilities......................................... (102,997)
Noncurrent liabilities...................................... (856)
---------
Net assets acquired.................................... $ 26,657
=========
|
Other intangible assets represent the fair market value of non-compete contracts. The cost assigned to these contracts is being amortized over 10 years. The value assigned to goodwill was based on our belief that ownership of 100 percent of Woodward Marketing would enable us to exercise greater control over Woodward Marketing's operation, thereby increasing its value. We expect that the goodwill amount will not be deductible for tax purposes.
Effective July 1, 2001, we acquired the assets of Louisiana Gas Service Company and LGS Natural Gas Company for $363.4 million. The acquired assets provide natural gas distribution service through approximately 279,000 residential and commercial meters in southeastern and northern Louisiana. The 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. The non-regulated operations, which includes an intrastate pipeline company, provide gas transportation service to industrial customers in Louisiana and to the acquired assets.
The acquisition increased the size of our operations in Louisiana and allowed us to achieve certain synergies and cost savings by combining the acquired operations with our existing Louisiana operations. Results of operations of the Louisiana Gas Service assets are consolidated with our results of operations for the fourth quarter of fiscal year 2001.
The following table summarizes the fair market values of the assets acquired and liabilities assumed as of July 1, 2001, in thousands:
Net property, plant and equipment........................... $313,251
Total current assets........................................ 31,423
Other intangible assets..................................... 11,200
Goodwill.................................................... 49,793
Noncurrent assets from risk management activities........... 5,355
Deferred charges and other assets........................... 958
--------
Total assets acquired.................................. 411,980
Current liabilities......................................... (45,972)
Noncurrent liabilities...................................... (2,609)
--------
Net assets acquired.................................... $363,399
========
|
Other intangible assets represent the fair market value of industrial customer contracts and are being amortized over 10 years. The value assigned to goodwill was based on our belief that the acquisition of the Louisiana Gas assets will enable us to realize cost savings in the state of Louisiana when combined with our existing Louisiana operations. We expect that the entire goodwill amount will be deductible for tax purposes.
The pro forma effects for the fiscal year ended September 30, 2001 of combining the results of operations of the Louisiana Gas assets with our consolidated results of operations are a $306.2 million increase in operating revenues to $1.7 billion, a $24.2 million decrease in net income to $31.9 million and a $.64 decrease in diluted earnings per share to $.83.
Such pro forma effects for the fiscal year ended September 30, 2000 are a $186.1 million increase in operating revenues to $1.0 billion, a $6.9 million decrease in net income to $29.0 million and a $.22 decrease in diluted earnings per share to $.92.
In September 2001, we entered into a definitive agreement to acquire Mississippi Valley Gas Company, a privately held natural gas utility. This acquisition will be accounted for as a purchase and will be acquired using $75.0 million in cash and the issuance of $75.0 million in our common stock. We will also assume Mississippi Valley Gas' outstanding debt, net of working capital, of approximately $45.0 million. Mississippi Valley Gas provides natural gas distribution service to more than 261,500 residential, commercial, industrial and other customers located primarily in the northern and central regions of Mississippi. Mississippi Valley Gas has two underground storage facilities with 2.05 Bcf of working gas capacity. The acquisition must be approved by the Mississippi Public Service Commission, the issuance of our stock must be approved by five of the states in which we operate and the transaction must comply with the provisions of the Hart-Scott-Rodino Antitrust Improvements Act. It is anticipated that the acquisition will be completed in fiscal 2002.
3. DEBT
Long-term debt at September 30, 2001 and 2000 consists of the following:
2001 2000
-------- --------
(IN THOUSANDS)
Unsecured 11.2% Senior Notes, due 2002, payable in annual
installments of $2,000.................................... $ 4,000 $ 6,000
Unsecured 9.76% Senior Notes, due 2004, payable in annual
installments of $3,000.................................... 12,000 15,000
Unsecured 9.57% Senior Notes, due 2006, payable in annual
installments of $2,000.................................... 10,000 12,000
Unsecured 7.95% Senior Notes, due 2006, payable in annual
installments of $1,000.................................... 5,000 6,000
Unsecured 10% Notes, due 2011............................... 2,303 2,303
Unsecured 7.375% Senior Notes, due 2011..................... 350,000 --
Unsecured 8.07% Senior Notes, due 2006, payable in annual
installments of $4,000 beginning 2002..................... 20,000 20,000
Unsecured 8.26% Senior Notes, due 2014, payable in annual
installments of $1,818 beginning 2004..................... 20,000 20,000
Medium term notes
Series A, 1995-1, 6.67%, due 2025......................... 10,000 10,000
Series A, 1995-2, 6.27%, due 2010......................... 10,000 10,000
Series A, 1995-3, 6.20%, due 2000......................... -- 2,000
Unsecured 6.75% Debentures, due 2028........................ 150,000 150,000
First Mortgage Bonds
Series J, 9.40% due 2021.................................. 17,000 17,000
Series P, 10.43% due 2017................................. 18,750 21,250
Series Q, 9.75% due 2020.................................. 19,000 20,000
Series R, 11.32% due 2004................................. 6,440 8,580
Series T, 9.32% due 2021.................................. 18,000 18,000
Series U, 8.77% due 2022.................................. 20,000 20,000
Series V, 7.50% due 2007.................................. 10,000 10,000
Rental property, propane and other term notes due in
installments through 2013................................. 10,601 12,631
-------- --------
Total long-term debt................................... 713,094 380,764
Less current maturities..................................... (20,695) (17,566)
-------- --------
$692,399 $363,198
======== ========
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Most of the Senior Notes and First Mortgage Bonds contain provisions that allow us to prepay the outstanding balance in whole at any time, subject to a prepayment premium. The Senior Note agreements and First Mortgage Bond indentures provide for certain cash flow requirements and restrictions on additional indebtedness, sale of assets and payment of dividends. Under the most restrictive of such covenants, cumulative cash dividends paid after December 31, 1988 may not exceed the sum of accumulated net income for periods after December 31, 1988 plus $15.0 million. At September 30, 2001, approximately $56.7 million of retained earnings was unrestricted.
As of September 30, 2001, all of the Greeley Gas Division utility plant assets with a net book value of approximately $174.4 million are subject to a lien under the 9.4 percent Series J First Mortgage Bonds assumed by us in the acquisition of Greeley Gas Company. Also, substantially all of the United Cities Gas Division utility plant assets, totaling approximately $314.1 million, are subject to a lien under the Indenture of Mortgage of the Series P through V First Mortgage Bonds.
Based on the borrowing rates currently available to us for debt with similar terms and remaining average maturities, the fair value of long-term debt at September 30, 2001 and 2000 is estimated, using discounted cash flow analysis, to be $709.9 million and $368.8 million.
Maturities of long-term debt at September 30, 2001 are as follows (in thousands):
2002........................................................ $ 20,695
2003........................................................ 20,380
2004........................................................ 17,866
2005........................................................ 16,196
2006........................................................ 14,259
Thereafter.................................................. 623,698
--------
$713,094
========
|
At September 30, 2001, short-term debt was composed of $171.0 million of commercial paper and $30.2 million outstanding under two bank credit facilities. At September 30, 2000, it was composed of $250.0 million of commercial paper. The weighted average interest rate on short-term borrowings outstanding was 4.0 percent and 7.0 percent at September 30, 2001 and 2000.
Committed credit facilities
We have short-term committed credit facilities totaling $318.0 million. One short-term unsecured credit facility is for $300.0 million and serves as a backup liquidity facility for our commercial paper program. Our commercial paper is rated A-2 by Standard and Poor's and P-2 by Moody's. At September 30, 2001, $171.0 million of commercial paper was outstanding. On August 2, 2001, this facility was renewed for $300.0 million with an option to increase the amount by $100.0 million. We have a second facility in place for $18.0 million. At September 30, 2001, $2.2 million was outstanding under this credit facility. No amounts were outstanding under this credit facility at September 30, 2000. These credit facilities are negotiated at least annually and are used for working capital purposes.
Uncommitted credit facilities
Our Woodward Marketing subsidiary has an uncommitted credit facility for $140.0 million which is used for its non-regulated business. Atmos Energy Marketing, LLC, our wholly-owned subsidiary, is the sole guarantor of all amounts outstanding under this facility. At September 30, 2001, $28.0 million was outstanding under this credit facility. Related letters of credit totaling $38.8 million further reduced the amount available under this facility.
We also have unsecured short-term uncommitted credit lines from two banks totaling $40.0 million. There were no borrowings under these uncommitted credit facilities at September 30, 2001 and 2000. The uncommitted lines are renewed or renegotiated at least annually with varying terms and we pay no fee for the availability of the lines. Borrowings under these lines are made on a when- and as-available basis at the discretion of the banks.
In addition, Woodward Marketing has up to $100.0 million available from Atmos for its non-regulated business. At September 30, 2001, $100.0 million was outstanding.
4. INCOME TAXES
The components of income tax expense for 2001, 2000 and 1999 are as follows:
2001 2000 1999
------- ------- --------
(IN THOUSANDS)
Current
Federal.............................................. $13,624 $ -- $(18,761)
State................................................ 2,189 2,500 (4,081)
Deferred
Federal.............................................. 14,971 18,611 27,370
State................................................ 3,013 (345) 5,321
Investment tax credits................................. (429) (447) (294)
------- ------- --------
$33,368 $20,319 $ 9,555
======= ======= ========
|
Deferred income taxes reflect the tax effect of differences between the basis of assets and liabilities for book and tax purposes. The tax effect of temporary differences that give rise to significant components of the deferred tax liabilities and deferred tax assets at September 30, 2001 and 2000 are presented below:
2001 2000
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Costs expensed for book purposes and capitalized for tax
purposes............................................... $ 1,269 $ 382
Accruals not currently deductible for tax purposes........ 4,527 2,403
Customer advances......................................... 4,443 4,159
Nonqualified benefit plans................................ 11,098 5,595
Postretirement benefits................................... 21,638 11,907
Unamortized investment tax credit......................... 1,049 1,303
Regulatory liabilities.................................... 1,396 3,159
Tax net operating loss and credit carryforwards........... 13,154 34,255
Other, net................................................ 9,801 6,356
--------- ---------
Total deferred tax assets.............................. 68,375 69,519
Deferred tax liabilities:
Difference in net book value and net tax value of
assets................................................. (171,734) (161,290)
Pension funding........................................... (16,010) (6,708)
Gas cost adjustments...................................... 4,670 (14,130)
Regulatory assets......................................... (3,153) (4,462)
Cost capitalized for book purposes and expensed for tax
purposes............................................... (8,387) (8,864)
Other, net................................................ (12,695) (5,684)
--------- ---------
Total deferred tax liabilities......................... (207,309) (201,138)
--------- ---------
Net deferred tax liabilities................................ $(138,934) $(131,619)
========= =========
SFAS No. 109 deferred accounts for rate regulated
entities.................................................. $ 1,327 $ 1,085
========= =========
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Reconciliations of the provisions for income taxes computed at the statutory rate to the reported provisions for income taxes for 2001, 2000 and 1999 are set forth below:
2001 2000 1999
------- ------- ------
(IN THOUSANDS)
Tax at statutory rate of 35%............................. $31,310 $19,683 $9,555
Common stock dividends deductible for tax reporting...... (857) (774) (701)
State taxes.............................................. 3,652 1,677 841
Other, net............................................... (737) (267) (140)
------- ------- ------
Provision for income taxes............................... $33,368 $20,319 $9,555
======= ======= ======
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We have tax credit carryforwards amounting to $12.4 million, the majority of which represent alternative minimum tax credits which do not expire. We also have net operating loss carryforwards for state income tax purposes amounting to $0.8 million which expire at varying times depending on the jurisdiction in which the net operating loss was generated.
5. CONTINGENCIES
On September 23, 1999, a suit was filed in the District Court of Stevens County, Kansas, by Quinque Operating Company, Tom Boles and Robert Ditto, against more than 200 companies in the natural gas industry including us and our Greeley Gas Division. The plaintiffs, who purport to represent a class consisting of gas producers, royalty owners, overriding royalty owners, working interest owners and state taxing authorities, accuse the defendants of underpaying royalties on gas taken from wells situated on non-federal and non-Indian lands throughout the United States and offshore waters predicated upon allegations that the defendants' gas measurements are simply inaccurate and that the defendants failed to comply with applicable regulations and industry standards over the last 25 years. Although the plaintiffs do not specifically allege an amount of damages, they contend that this suit is brought to recover billions of dollars in revenues that the defendants have allegedly unlawfully diverted from the plaintiffs to themselves. On April 10, 2000, this case was consolidated for pre-trial proceedings with other similar pending litigation in federal court in Wyoming in which we are also a defendant along with over 200 other defendants in the case of In Re Natural Gas Royalties Quitam Litigation. In January 2001, the federal court elected to remand this case back to the Kansas state court. A reconsideration of remand was filed, but it was denied. The state court now has jurisdiction over this proceeding and has issued a preliminary case management order. We believe that the plaintiffs' claims are lacking in merit, and we intend to vigorously defend this action. While the results of this litigation cannot be predicted with certainty, we believe the final outcome of such litigation will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that we have adequate insurance and/or reserves to cover any damages that may ultimately be awarded.
On May 18, 2001, a suit was filed in the 99th District Court of Lubbock County, Texas, by the City of Lubbock, Texas, and the West Texas Municipal Agency against Stewart & Stevenson Energy Products, Inc., a division of GE Packaged Power, Inc. ("GE") and our Energas Division. The action arises out of (i) the construction and installation of a gas-fired electric generating facility designed and installed by GE and (ii) the natural gas pipeline, which provides natural gas to the facility, that was designed and installed by our Energas Division. The plaintiffs allege that they incurred damages as a result of certain corrosive products that were introduced into the facility's turbine that damaged the turbine and necessitated repair costs of
approximately $0.9 million and consequential damages of approximately $4.7 million comprised of electric power purchases made by the plaintiffs from other sources while the facility was inoperative or operating below specifications. The causes of action asserted by the plaintiffs against the Energas Division include breach of contract, breach of warranty and negligence. We have denied any liability and intend to vigorously defend against the plaintiffs' claims. While the results of this litigation cannot be predicted with certainty, we believe the final outcome of such litigation will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that we have adequate insurance and/or reserves to cover any damages that may ultimately be awarded.
Prior to our acquisition of the assets of Louisiana Gas Service Company, a division of Citizens Communications Company on July 1, 2001, Louisiana Gas Service Company was involved in a proceeding with the Louisiana Public Service Commission relating to past costs associated with the purchase of gas that it charged to its customers. Subsequent to our acquisition of the Louisiana Gas assets on July 1, 2001, we have taken over the defense of this proceeding and will have responsibility for administering and assuring the payment of refunds and/or credits to ratepayers that may arise from Citizens Communications' past activities with respect to the purchased gas costs. However, we believe the outcome of this proceeding will not have a material adverse impact on our financial condition, results of operations or net cash flows as Citizens Communications has agreed to fully indemnify us for any liability that may arise out of this proceeding.
United Cities Propane Gas, Inc., one of our wholly-owned subsidiaries, is a party to an action filed in June 2000 which is pending in the Circuit Court of Sevier County, Tennessee. The plaintiffs' claims arise out of injuries alleged to have been caused by a low-level propane explosion. The plaintiffs seek to recover damages of $13.0 million. Discovery activities have begun in this case. We have denied any liability, and we intend to vigorously defend against the plaintiffs' claims. While the results of this litigation cannot be predicted with certainty, we believe the final outcome of such litigation will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that we have adequate insurance and/or reserves to cover any damages that may ultimately be awarded.
We are a party to other litigation and claims that arise out of our ordinary business. While the results of such litigation and claims cannot be predicted with certainty, we believe the final outcome of such litigation and claims will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that we have adequate insurance and reserves to cover any damages that may ultimately be awarded.
The United Cities Gas Division is the owner or previous owner of manufactured gas plant sites in Johnson City and Bristol, Tennessee and Hannibal, Missouri which were used to supply gas prior to availability of natural gas. The gas manufacturing process resulted in certain by-products and residual materials including coal tar. The manufacturing process used by our predecessors was an acceptable and satisfactory process at the time such operations were being conducted. Under current environmental protection laws and regulations, we may be responsible for response actions with respect to such materials if response actions are necessary.
United Cities Gas Company and the Tennessee Department of Environment and Conservation entered into a consent order effective January 23, 1997, to facilitate the investigation, removal and remediation of the Johnson City site. United Cities Gas Company began the implementation of the consent order in the first
quarter of 1997 which continued through September 30, 2001. The investigative phase of the work at the site has been completed. An interim removal action was completed in June 2001. The Tennessee Regulatory Authority granted United Cities Gas Company permission to defer, until its next rate case, all costs incurred in Tennessee in connection with state and federally mandated environmental control requirements.
On July 22, 1998, we entered into an Abatement Order on Consent with the Missouri Department of Natural Resources addressing the former manufactured gas plant located in Hannibal, Missouri. Through our United Cities Gas Division, we agreed to perform a removal action, a subsequent site evaluation and to reimburse the response costs incurred by the state of Missouri in connection with the property. The removal action was conducted and completed in August 1998, and the site evaluation field work was conducted in August 1999. A risk assessment for the site is currently being performed. On March 9, 1999, the Missouri Public Service Commission issued an Order authorizing us to defer the costs associated with this site until March 9, 2001. A renewal of the Order has been requested. The matter is still pending before the Commission.
As of September 30, 2001, we had incurred costs of approximately $0.9 million for the investigations of the Johnson City and Bristol, Tennessee and Hannibal, Missouri sites and had a remaining accrual relating to these sites of $0.8 million.
We have completed investigation and remediation activities pursuant to Consent Orders between the Kansas Department of Health and Environment and United Cities Gas Company. The Orders provided for the investigation and remediation of mercury contamination at gas pipeline sites which utilize or formerly utilized mercury meter equipment in Kansas. The Final Interim Characterization and Remediation Report has been submitted to the Kansas Department of Health. We are currently in the process of amending the Orders with the Kansas Department of Health to include all mercury meters that belonged to our Greeley Gas Division before the merger with Untied Cites Gas Company on July 31, 1997. These sites will be investigated and any necessary remediation will be enforced. As of September 30, 2001, we had incurred costs of $0.1 million for these sites and had a remaining accrual of $0.3 million for recovery. The Kansas Corporation Commission has authorized us to defer these costs and seek recovery in a future rate case.
We are a party to other environmental matters and claims, including those discussed above, that arise out of our ordinary business. While the ultimate results of response actions to these environmental matters and claims cannot be predicted with certainty, we believe the final outcome of such response actions will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that the expenditures related to such response actions will either be recovered through rates, shared with other parties or covered by adequate insurance or reserves.
6. COMMON STOCK AND STOCK OPTIONS
We have a Rights Agreement under which each right ("Right") will entitle the holder thereof, until May 10, 2008 or the date of redemption of the Rights, to buy one share of Common Stock of Atmos at the exercise price of $80.00, subject to adjustment. At no time will the Rights have any voting rights. The exercise price payable and the number of shares of Common Stock or other securities or property issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. At the date upon which the rights become separate from our Common Stock (the "Distribution Date"), we will issue one right with each share of Common Stock that becomes outstanding so that all shares of Common Stock will have attached Rights. After the Distribution Date, we may issue Rights when we issue Common Stock if the Board deems such issuance to be necessary or appropriate.
The Rights will separate from the Common Stock and a Distribution Date will occur upon the occurrence of certain events specified in the Agreement, including but not limited to, the acquisition by certain persons of at least 15 percent of the beneficial ownership of our Common Stock. The Rights have certain anti-takeover effects and may cause substantial dilution to a person or entity that attempts to acquire the Company on terms not approved by the Board of Directors except pursuant to an offer conditioned upon a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors because, prior to the time that the Rights become exercisable or transferable, the Rights may be redeemed by us at $.01 per Right.
The following table presents the number of shares issued under our various plans in 2001 and 2000, as well as the number of shares available for future issuance at September 30, 2001.
SHARES AVAILABLE
SHARES ISSUED FOR ISSUANCE AT
----------------- SEPTEMBER 30,
2001 2000 2001
------- ------- ----------------
Restricted Stock Grant Plan......................... -- -- 732,750
Employee Stock Ownership Plan....................... 225,945 258,049 935,064
Direct Stock Purchase Plan.......................... 411,159 440,990 1,374,738
Outside Directors Stock-For-Fee Plan................ 2,152 2,601 35,785
United Cities Long-Term Stock Plan.................. 15,300 4,200 168,550
Long-Term Incentive Plan............................ 17,172 -- 1,482,828
Equity Incentive and Deferred Compensation Plan for
Non-Employee Directors............................ 2,740 -- 147,260
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Our Restricted Stock Grant Plan for management and key employees of the Company, which became effective October 1, 1987 and was amended and restated in February 1998, provides for awards of common stock that are subject to certain restrictions. The Restricted Stock Grant Plan is administered by the Board of Directors. The members of the Board who are not employees of Atmos make the final determinations regarding participation in the Plan, awards under the Plan and restrictions on the restricted stock awarded. The restricted stock may consist of previously issued shares purchased on the open market or shares issued directly from us. During 1998, we increased the number of shares of our common stock that may be issued under the Restricted Stock Grant Plan by 650,000 shares. Compensation expense of $1.1 million, $2.3 million and $1.6 million was recognized in 2001, 2000 and 1999 in connection with the vesting of shares awarded under the Plan.
Prior to January 1, 1999, we had an Employee Stock Ownership Plan and the United Cities Gas Division had a 401(k) savings plan. The Employee Stock Ownership Plan was amended effective January 1, 1999, as is more fully discussed in Note 7.
We also have a Direct Stock Purchase Plan. Participants in the Direct Stock
Purchase Plan may have all or part of their dividends reinvested at a three
percent discount from market prices. Direct Stock Purchase Plan participants may
purchase additional shares of Atmos common stock as often as weekly with
voluntary cash payments of at least $25, up to an annual maximum of $100,000.
In November 1994, the Board adopted the Outside Directors Stock-for-Fee Plan which was approved by the shareholders of Atmos in February 1995 and was amended and restated in November 1997. The plan permits non-employee directors to receive all or part of their annual retainer and meeting fees in stock rather than in cash.
In November 1998, the Board adopted the Equity Incentive and Deferred Compensation Plan for Non-Employee Directors which was approved by the shareholders of Atmos in February 1999. Such plan represents an amendment to the Atmos Energy Corporation Deferred Compensation Plan for Outside Directors adopted by the Company on May 10, 1990 and replaced the pension payable under the Company's Retirement Plan for Non-Employee Directors. Only non-employee directors of Atmos are eligible to participate in the Equity Incentive and Deferred Compensation Plan, the purpose of which is to provide non-employee directors with the opportunity to defer receipt of compensation for services rendered to the Company, invest deferred compensation into either a cash account or a stock account and to receive an annual grant of share units for each year of service on the Board.
We have two stock-based compensation plans that provide for the granting of stock options to officers, key employees and non-employee directors. The objectives of these plans include attracting and retaining the best personnel, providing for additional performance incentives and promoting the success of Atmos by providing employees the opportunity to acquire common stock.
Prior to the merger with Atmos, certain United Cities Gas Company officers and key employees participated in the United Cities Long-Term Stock Plan implemented in 1989. At the time of the merger on July 31, 1997, Atmos adopted this plan by registering a total of 250,000 shares of Atmos stock to be issued under the Long-Term Stock Plan for the United Cities Division. Under this plan, incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock or any combination thereof may be granted to officers and key employees of the United Cities Gas Division. Options granted under the plan become exercisable at a rate of 20 percent per year and expire 10 years after the date of grant. During 2001, 15,300 options were exercised under the plan. At September 30, 2001, there were 19,300 options outstanding, all of which were fully vested. No incentive stock options, nonqualified stock options, stock appreciation rights or restricted stock have been granted under the plan since 1996. Because of the limited nature of this plan, the pro forma effects of applying Statement of Financial Accounting Standards No. 123 would have less than a $.01 per diluted share effect on earnings per share or approximately $4,764, $8,580 and $30,852 for 2001, 2000 and 1999.
On August 12, 1998, the Board of Directors approved and adopted the 1998
Long-Term Incentive Plan, which became effective October 1, 1998 after approval
by the shareholders of Atmos. The Long Term Incentive Plan represents a part of
our Total Rewards strategy which we developed as a result of a study we
conducted of all employee, executive and non-employee director compensation and
benefits. The Long Term Incentive Plan is a comprehensive, long-term incentive
compensation plan providing for discretionary awards of incentive stock options,
non-qualified stock options, stock appreciation rights, bonus stock, restricted
stock and performance-based stock to help attract, retain and reward employees
and non-employee directors of Atmos and its subsidiaries.
We are authorized to grant awards for up to a maximum of 1,500,000 shares of common stock under the Long Term Incentive Plan subject to certain adjustment provisions. The option price is equal to the market price of our stock at the date of grant. The stock options expire 10 years from the date of the grant and options vest annually over a service period ranging from one to three years. At September 30, 2001, we had 1,009,330 options outstanding under the Long Term Incentive Plan at an exercise price ranging from $14.68 to $25.66.
In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," was issued. This statement establishes a fair value-based method of accounting for employee stock options or similar equity instruments and encourages, but does not require, all companies to adopt that method of accounting for all of their employee stock compensation plans. Statement of Financial Accounting Standards No. 123 allows companies to continue to measure compensation cost for employee stock options or similar equity instruments using the intrinsic value method of accounting described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". We have elected to continue using the intrinsic value method as prescribed by Accounting Principles Board No. 25. Under this method no compensation cost for stock options are recognized for stock option awards granted at or above fair market value.
A summary of activity for grants of stock options follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Outstanding -- September 30, 1998........................... -- $ --
Granted................................................... 341,000 24.43
Exercised................................................. -- --
Forfeited................................................. (16,000) 24.41
---------
Outstanding -- September 30, 1999........................... 325,000 24.43
---------
Granted................................................... 379,500 16.03
Exercised................................................. -- --
Forfeited................................................. (46,000) 22.03
---------
Outstanding -- September 30, 2000........................... 658,500 19.76
---------
Granted................................................... 439,500 23.45
Exercised................................................. (17,172) 15.82
Forfeited................................................. (71,498) 19.86
---------
Outstanding -- September 30, 2001........................... 1,009,330 $21.43
---------
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Information about outstanding and exercisable options, as of September 30, 2001, follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER OF LIFE EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS (IN YEARS) PRICE OPTIONS PRICE
------------------------- --------- ----------- -------- --------- --------
$14.68 to $17.49.... 280,330 8.4 $15.63 93,445 $15.63
$17.50 to $20.24.... 32,000 8.9 19.84 10,667 19.84
$20.25 to $23.99.... 406,000 9.4 23.40 334 23.94
$24.00 to $25.66.... 291,000 7.6 24.43 181,002 24.43
-------------------------------------------------------------------------------------
$14.68 to $25.66.... 1,009,330 8.6 21.43 285,448 21.37
|
A summary of outstanding options that are fully exercisable follows:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Exercisable -- September 30, 1999........................... -- --
Exercisable -- September 30, 2000........................... 90,503 $24.43
Exercisable -- September 30, 2001........................... 285,448 $21.37
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Had compensation expense for our stock options been recognized based on the fair value on the grant date under the methodology prescribed by Statement of Financial Accounting Standards No. 123, our net income and earnings per share for the three years ended September 30, would have been impacted as shown in the following table.
2001 2000 1999
----- ----- -----
Net income -- as reported (millions)........................ $56.1 $35.9 $17.7
Net income -- pro forma (millions).......................... $55.7 $35.7 $17.6
Basic earnings per share -- as reported..................... $1.47 $1.14 $0.58
Basic earnings per share -- pro forma....................... $1.46 $1.13 $0.58
Diluted earnings per share -- as reported................... $1.47 $1.14 $0.58
Diluted earnings per share -- pro forma..................... $1.46 $1.13 $0.57
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In accordance with the fair value method of determining compensation expense, the weighted average grant date fair value per share of options granted was as follows:
- $3.97 in fiscal 2001;
- $2.88 in fiscal 2000; and
- $4.10 in fiscal 1999.
We used the Black-Scholes pricing model to estimate the fair value of each option granted with the following weighted average assumptions for the years ended September 30:
2001 2000 1999
---- ---- ----
Expected Life (years)....................................... 5 5 7
Interest rate............................................... 4.7% 5.8% 5.9%
Volatility.................................................. 25.5% 25.1% 22.2%
Dividend yield.............................................. 4.9% 5.0% 5.2%
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7. EMPLOYEE RETIREMENT, STOCK OWNERSHIP AND OTHER PLANS
Effective January 1, 1999, we established the Atmos Pension Account Plan which covers substantially all employees of Atmos. Opening account balances were established for participants as of January 1, 1999 equal to the present value of their respective accrued benefits under the pension plans which were previously in effect as of December 31, 1998. The Pension Account Plan credits an allocation to each participant's account at the end of each year according to a formula based on the participant's age, service and total pay (excluding incentive pay).
The Pension Account Plan also provides for an additional annual allocation based upon a participant's age as of January 1, 1999 for those participants who were participants in the prior pension plans. The plan will credit this additional allocation each year through December 31, 2008. In addition, at the end of each year, a participant's account will be credited with interest on the employee's prior year account balance. A special grandfather benefit also applies through December 31, 2008, for participants who were at least age 50 as of January 1, 1999, and who were participants in one of the prior plans on December 31, 1998. Participants are fully vested in their account balances after five years of service and may choose to receive their account balances as a lump sum or an annuity.
Our funding policy is to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
We record the accrued pension asset in deferred charges and other assets. The following table sets forth the total for the Pension Account Plan's funded status for 2001 and 2000:
2001 2000
-------- --------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $210,152 $200,465
Service cost.............................................. 3,557 2,352
Interest cost............................................. 16,408 14,573
Actuarial (gain) loss..................................... (875) 5,039
Acquisition/merger........................................ (385) 5,156
Benefits paid............................................. (17,979) (17,433)
-------- --------
Benefit obligation at end of year......................... 210,878 210,152
Change in plan assets:
Fair value of plan assets at beginning of year............ 279,498 282,498
Actual return on plan assets.............................. (14,807) 9,277
Acquisition/merger........................................ (385) 5,156
Benefits paid............................................. (17,979) (17,433)
-------- --------
Fair value of plan assets at end of year.................. 246,327 279,498
-------- --------
Funded status............................................... 35,449 69,346
Unrecognized transition asset............................... (72) (362)
Unrecognized prior service cost............................. (7,995) (8,878)
Unrecognized net (gain) loss................................ 17,021 (24,004)
-------- --------
Accrued pension asset....................................... $ 44,403 $ 36,102
======== ========
|
2001 2000 1999
---- ---- ----
Weighted average assumptions for end of year disclosure:
Discount rate............................................. 7.5% 8.0% 7.5%
Rate of compensation increase............................. 4.0% 4.0% 4.0%
Expected return on plan assets............................ 10.0% 10.0% 10.0%
|
The plan assets consist primarily of investments in common stocks, interest bearing securities and interests in commingled pension trust funds.
Net periodic pension cost, which is recorded as an operation expense, for the Pension Account Plan for 2001, 2000 and 1999 included the following components:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Components of net periodic pension cost:
Service cost....................................... $ 3,557 $ 2,352 $ 4,232
Interest cost...................................... 16,408 14,573 14,696
Expected return on assets.......................... (27,093) (27,403) (27,846)
Amortization of:
Transition obligation (asset)...................... (290) (263) (248)
Prior service cost................................. (883) (802) (703)
Actuarial (gain)................................... -- (1,610) (1,487)
-------- -------- --------
Net periodic pension cost....................... $ (8,301) $(13,153) $(11,356)
======== ======== ========
|
We have a nonqualified Supplemental Executive Benefits Plan which provides additional pension, disability and death benefits to the officers and certain other employees of Atmos. The Supplemental Executive Benefits Plan was amended and restated in August 1998. In addition, in August 1998, we adopted the Performance-Based Supplemental Executive Benefits Plan which covers all employees who become officers or business unit presidents after August 12, 1998 or any other employees selected by our Board of Directors in its discretion.
We record the accrued pension cost in deferred credits and other liabilities. The following table sets forth the total for the Supplemental Plans' funded status for 2001 and 2000:
2001 2000
-------- --------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 47,426 $ 38,825
Service cost.............................................. 832 937
Interest cost............................................. 3,751 2,916
Actuarial loss............................................ 3,642 6,482
Benefits paid............................................. (2,806) (1,734)
-------- --------
Benefit obligation at end of year......................... 52,845 47,426
Change in plan assets:
Fair value of plan assets at beginning of year............ -- --
Employer contribution..................................... 2,806 1,734
Benefits paid............................................. (2,806) (1,734)
-------- --------
Fair value of plan assets at end of year.................. -- --
-------- --------
Funded status............................................... (52,845) (47,426)
Unrecognized transition asset............................... 292 388
Unrecognized prior service cost............................. 6,793 7,815
Unrecognized net loss....................................... 11,538 8,220
-------- --------
Accrued pension cost........................................ $(34,222) $(31,003)
======== ========
|
2001 2000 1999
---- ---- ----
Weighted average assumptions for end of year disclosure:
Discount rate............................................. 7.5% 8.0% 7.5%
Rate of compensation increase............................. 4.0% 4.0% 4.0%
Expected return on plan assets............................ 10.0% 10.0% 10.0%
|
Assets for the Supplemental Plans are held in our rabbi trusts (see Note 12) and consist primarily of investments in equity mutual funds. The market value of the rabbi trusts amounted to $25.1 million and $28.6 million at September 30, 2001 and 2000. The assets in the rabbi trusts are included on our balance sheet under deferred charges and other assets and are not presented above as plan assets.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the Supplemental Plans with accumulated benefit obligations in excess of plan assets were $52.8 million, $45.5 million and none, as of September 30, 2001, and $47.4 million, $41.1 million and none, as of September 30, 2000.
Net periodic pension cost, which is recorded as an operation expense, for the Supplemental Plans for 2001, 2000 and 1999 included the following components:
2001 2000 1999
------ ------ ------
(IN THOUSANDS)
Components of net periodic pension cost:
Service cost............................................. $ 832 $ 937 $1,151
Interest cost............................................ 3,751 2,916 2,488
Amortization of:
Transition obligation.................................... 96 96 96
Prior service cost....................................... 1,022 1,022 1,022
Actuarial loss........................................... 325 215 216
------ ------ ------
Net periodic pension cost............................. $6,026 $5,186 $4,973
====== ====== ======
|
Atmos sponsors an Employee Stock Ownership Plan for substantially all employees. Effective January 1, 1999 the Employee Stock Ownership Plan was amended to provide for deferral of a portion of a participant's salary of up to 21 percent. In addition, among other changes to the Employee Stock Ownership Plan, participants are provided with automatic matching contributions of 100 percent of each participant's salary reduction up to 4 percent of the participant's salary and are provided the option of taking out loans against their accounts subject to certain restrictions. Each participant enters into a salary reduction agreement with Atmos pursuant to which the participant's salary is reduced by an amount not more than 21 percent. Taxes on the amount by which the participant's salary is reduced are deferred pursuant to Section 401(k) of the Internal Revenue Code. The amount of the salary reduction is contributed by us to the Employee Stock Ownership Plan for the account of the participant. Matching contributions to the Plan were expensed as incurred and amounted to $3.2 million, $3.0 million, and $2.4 million for 2001, 2000 and 1999. The directors may also approve discretionary contributions, subject to the provisions of the Internal Revenue Code of 1986 and applicable regulations of the Internal Revenue Service. No discretionary contributions were made for 2001, 2000, nor 1999.
The Variable Pay Plan was created to give each employee an opportunity to share in the success of Atmos based on certain criteria. Each fiscal year, we establish key performance measures for the Variable Pay Plan. These performance measures are considered critical to achieving business objectives for a given year and may include such things as growth in earnings, improved cash flows or crucial customer satisfaction and safety results. Each year a performance measure is established, and we make accruals during the year of the expected pay-out based on the best estimates available at that time.
8. OTHER POSTRETIREMENT BENEFITS
Prior to January 1, 1999, Atmos sponsored two postretirement plans other than pensions. Each provided health care benefits to retired employees. One provided benefits to the United Cities Gas Division retirees and the other provided medical benefits to all other retired Atmos employees.
Effective January 1, 1999, the United Cities plan was merged into the Atmos plan and began providing benefits to future retirees that are essentially the same as provided to other Atmos employees.
Substantially all of our employees become eligible for these benefits if they reach retirement age while working for us and attain certain specified years of service. In addition, participant contributions are required under the plan.
We record the accrued postretirement cost primarily in deferred credits and other liabilities. The following table sets forth the total liability currently recognized for the postretirement plan other than pensions for 2001 and 2000:
2001 2000
-------- --------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 63,029 $ 56,832
Service cost.............................................. 2,274 2,543
Interest cost............................................. 5,434 4,119
Plan participants' contributions.......................... 649 653
Actuarial loss............................................ 6,023 170
Acquisitions/divestitures................................. 10,402 2,593
Benefits paid............................................. (4,961) (3,881)
-------- --------
Benefit obligation at end of year......................... 82,850 63,029
Change in plan assets:
Fair value of plan assets at beginning of year............ 11,872 9,964
Actual return on plan assets.............................. (463) 809
Employer contributions.................................... 6,757 4,118
Plan participants' contributions.......................... 649 653
Acquisitions/divestitures................................. -- 209
Benefits paid............................................. (4,961) (3,881)
-------- --------
Fair value of plan assets at end of year.................. 13,854 11,872
-------- --------
Funded status............................................... (68,996) (51,157)
Unrecognized transition obligation.......................... 18,709 20,221
Unrecognized prior service cost............................. 2,054 2,574
Unrecognized net (gain) loss................................ 4,834 (2,306)
-------- --------
Accrued postretirement cost................................. $(43,399) $(30,668)
======== ========
|
2001 2000 1999
---- ---- ----
Weighted average assumptions for end of year disclosure:
Discount rate............................................. 7.5% 8.0% 7.5%
Expected return on plan assets............................ 5.3% 5.3% 5.3%
Initial trend rate........................................ 7.0% 8.0% 9.0%
Ultimate trend rate....................................... 5.0% 5.0% 5.0%
Number of years from initial to ultimate trend............ 3 4 5
|
Net periodic postretirement cost, which is recorded as an operation expense, for the combined postretirement benefit plans for 2001, 2000 and 1999 included the following components:
2001 2000 1999
------ ------ ------
(IN THOUSANDS)
Components of net periodic postretirement cost:
Service cost............................................. $2,274 $2,543 $2,150
Interest cost............................................ 5,434 4,119 4,360
Expected return on assets................................ (653) (540) (349)
Amortization of:
Transition obligation.................................... 1,511 1,511 1,511
Prior service cost....................................... 520 520 520
Actuarial (gain) loss.................................... -- (94) 648
------ ------ ------
Net periodic postretirement cost...................... $9,086 $8,059 $8,840
====== ====== ======
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the plans. A one-percentage point change in assumed health care cost trend rates would have the following effects on the latest actuarial calculations:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)
Effect on total of service and interest cost components... $ 607 $ (448)
Effect on postretirement benefit obligation............... $8,160 $(7,021)
|
We are currently recovering other postretirement benefits costs through our regulated rates under Statement of Financial Accounting Standards No. 106 accrual accounting in Colorado, Kansas, the majority of the Texas service area and Kentucky. We receive rate treatment as a cost of service item for other postretirement benefits costs on the pay-as-you-go basis in Louisiana. Other postretirement benefits costs have been specifically addressed in rate orders in each jurisdiction served by the United Cities Gas Division or have been included in a rate case and not disallowed. Management believes that accrual accounting in accordance with Statement of Financial Accounting Standards No. 106 is appropriate and will continue to seek rate recovery of accrual-based expenses in its ratemaking jurisdictions that have not yet approved the recovery of these expenses.
9. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share has been computed by dividing net income for the period by the weighted average number of common shares outstanding during the period adjusted for restricted stock and other contingently issuable shares of common stock. Net income for the years ended September 30, 2001, 2000 and 1999 for basic and diluted earnings per share are the same, as there were no contingently issuable shares of stock whose issuance would have impacted
net income. A reconciliation between basic and diluted weighted average common shares outstanding at September 30 follows:
2001 2000 1999
------ ------ ------
(IN THOUSANDS)
Weighted average common shares -- basic.................... 38,156 31,461 30,566
Effect of dilutive securities:
Restricted stock......................................... 79 125 238
Stock options............................................ 12 8 15
------ ------ ------
Weighted average common shares -- diluted.................. 38,247 31,594 30,819
====== ====== ======
|
10. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
Supplemental disclosures of cash flow information for 2001, 2000 and 1999 are presented below.
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Cash paid (received) for
Interest.............................................. $41,042 $46,243 $40,446
Income taxes.......................................... $16,808 $(7,989) $(7,184)
|
In connection with our transaction related to the sale of our propane business (see Note 1 of notes to consolidated financial statements), we contributed property, plant and equipment of $38.9 million with a related accumulated depreciation of $17.1 million and deferred charges and other assets of $3.9 million in exchange for an indirect investment in Heritage Propane Partners. In addition, we received net proceeds of $6.5 million and recorded a gain on the transaction of $5.8 million.
In May 2000, we completed the acquisition, which was accounted for as a purchase, of the Missouri natural gas distribution assets of Southwestern Energy Company and subsequent thereto, its operations were included in our consolidated results. We paid $32.0 million in connection with this acquisition. Of the $32.0 million paid in cash, we recorded property, plant and equipment of $52.3 million with a related accumulated depreciation of $21.7 million, accounts receivable of $1.3 million, inventories of $0.3 million and gas stored underground of $2.0 million. In addition, we recorded accounts payable of $0.2 million, taxes payable of $0.4 million, customer deposits of $1.2 million and deferred credits of $0.4 million.
In April 2001, we completed the acquisition, which was accounted for as a purchase, of the remaining 55 percent of Woodward Marketing that we did not already own in exchange for 1,423,193 restricted shares of our common stock. Subsequent to the acquisition, Woodward Marketing's operations were included in our consolidated results. Consideration given for the stock purchase was $26.7 million. In connection with the issuance of the stock for this acquisition, we recorded property, plant and equipment of $2.1 million with a related accumulated depreciation of $0.4 million, accounts receivable of $94.8 million, gas stored underground of $10.7 million, assets from risk management activities of $9.8 million, intangible assets of $0.2 million and goodwill of $12.3 million. In addition, we received $8.6 million in cash and $4.5 million of cash held on deposit in margin accounts. We also reduced deferred charges and other assets by $12.1 million which related to the net of the amounts received in the purchase and the removal of the 45 percent equity investment we had in Woodward Marketing which we had previously owned. Liabilities assumed in the acquisition included $95.2 million in accounts payable, $0.5 million in customer deposits, $7.3 million in other current liabilities and $0.8 million in deferred credits and other liabilities.
In July 2001, we completed the acquisition, which was accounted for as a purchase, of the natural gas operations of Louisiana Gas Service Company and LGS Natural Gas Company. Subsequent to the
acquisition, the operations of Louisiana Gas Service and LGS Natural Gas were included in our consolidated results. We paid $363.4 million in cash in connection with this acquisition. We recorded property, plant and equipment of $466.5 million with a related accumulated depreciation of $153.2 million, accounts receivable of $18.1 million, gas stored underground of $12.4 million, a deferred gas credit of $10.8 million, assets from risk management activities of $11.7 million, noncurrent assets from risk management activities of $5.3 million and deferred charges and other assets of $1.0 million. In addition, we recorded intangible assets of $11.2 million, goodwill of $49.8 million and $9.0 million in deferred tax assets. Liabilities assumed in the acquisition included $12.8 million in accounts payable, $16.0 million in customer deposits, $14.1 million in liabilities from risk management activities, $3.1 million in other current liabilities and $11.6 million in deferred credits and other liabilities.
11. SEGMENT INFORMATION
Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All intersegment sales prices are market based. We evaluate performance based on net income or loss of the respective operating units.
In accordance with Statement of Financial Accounting Standards No. 131, we have identified the Utility and Non-regulated segments, as described in Note 1. We consider each business unit within our utility segment to be a reporting unit of the utility segment and not a reportable segment. Our chief executive officer makes decisions about allocating resources to the utility segment as a whole and not to individual reporting units. The individual operations that comprise the non-regulated segment are not currently material to our consolidated financial position or results of operation and therefore do not require separate reporting.
Summarized financial information concerning our reportable segments is shown in the following table:
NON-
UTILITY REGULATED TOTAL
---------- --------- ----------
(IN THOUSANDS)
As of and for the year ended
September 30, 2001:
Operating revenues................................ $1,380,148 $ 67,382 $1,447,530
Intersegment revenues............................. 1,989 3,266 5,255
Depreciation and amortization..................... 65,614 2,050 67,664
Operating income.................................. 127,980 2,301 130,281
Equity in earnings of Woodward Marketing, L.L.C... -- 8,062 8,062
Interest charges, net............................. 45,313 1,698 47,011
Net income........................................ 49,881 6,209 56,090
Total assets...................................... 1,732,697 367,156 2,099,853
Equity investment in unconsolidated investee...... -- 23,840 23,840
Expenditures for additions to long-lived assets... 112,683 426 113,109
|
NON-
UTILITY REGULATED TOTAL
---------- --------- ----------
(IN THOUSANDS)
As of and for the year ended
September 30, 2000:
Operating revenues................................ 739,951 118,855 858,806
Intersegment revenues............................. 5,116 3,538 8,654
Depreciation and amortization..................... 60,120 3,735 63,855
Operating income.................................. 77,207 8,109 85,316
Equity in earnings of Woodward Marketing, L.L.C... -- 7,307 7,307
Interest charges, net............................. 42,096 1,727 43,823
Net income........................................ 22,459 13,459 35,918
Total assets...................................... 1,253,023 112,294 1,365,317
Equity investment in unconsolidated investee...... -- 42,330 42,330
Expenditures for additions to long-lived assets... 105,012 1,128 106,140
As of and for the year ended
September 30, 1999:
Operating revenues................................ 621,211 76,360 697,571
Intersegment revenues............................. 3,898 3,477 7,375
Depreciation and amortization..................... 52,503 4,371 56,874
Operating income.................................. 49,000 5,239 54,239
Equity in earnings of Woodward Marketing, L.L.C... -- 7,156 7,156
Interest charges, net............................. 35,799 1,264 37,063
Net income........................................ 10,800 6,944 17,744
Total assets...................................... 1,152,469 94,627 1,247,096
Equity investment in unconsolidated investee...... -- 15,973 15,973
Expenditures for additions to long-lived assets... 108,454 1,899 110,353
|
The following table presents a reconciliation of the operating revenues to total consolidated revenues for the years ended September 30, 2001, 2000 and 1999:
2001 2000 1999
---------- -------- --------
(IN THOUSANDS)
Total revenues for reportable segments.............. $1,447,530 $858,806 $697,571
Elimination of intersegment revenues................ (5,255) (8,654) (7,375)
---------- -------- --------
Total operating revenues....................... $1,442,275 $850,152 $690,196
========== ======== ========
|
A reconciliation of total assets for the reportable segments to total consolidated assets for September 30, 2001, 2000 and 1999 is presented below:
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Total assets for reportable segments............. $2,099,853 $1,365,317 $1,247,096
Elimination of intercompany accounts............. (63,673) (16,559) (16,559)
---------- ---------- ----------
Total consolidated assets................... $2,036,180 $1,348,758 $1,230,537
========== ========== ==========
|
The following table summarizes our revenues by products and services for the year ended September 30:
2001 2000 1999
---------- -------- --------
(IN THOUSANDS)
Gas sales revenues:
Residential....................................... $ 788,902 $405,552 $349,691
Commercial........................................ 342,945 176,712 144,836
Public authority and other........................ 58,539 27,198 22,330
Industrial........................................ 148,180 97,089 73,194
---------- -------- --------
Total gas sales revenues....................... 1,338,566 706,551 590,051
Transportation revenues............................. 28,668 23,610 23,035
Other gas revenues.................................. 10,925 4,674 4,227
---------- -------- --------
Total utility revenues......................... 1,378,159 734,835 617,313
Propane revenues.................................... -- 22,550 22,944
Non-Regulated revenues.............................. 64,116 92,767 49,939
---------- -------- --------
Total operating revenues....................... $1,442,275 $850,152 $690,196
========== ======== ========
|
12. MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," all marketable securities are classified as available-for-sale and are reported at market value with unrealized gains and losses shown as a component of shareholders' equity labeled "unrealized holding gains (losses) on investments, net." All marketable securities are held in rabbi trusts for the Supplemental Executive Benefits Plans.
The cost, unrealized holding gain (loss) and the market value of the marketable securities are as follows:
UNREALIZED
HOLDING MARKET
COST GAIN (LOSS) VALUE
------- ----------- -------
(IN THOUSANDS)
As of September 30, 2001:
Available-for-sale securities:
Domestic equity mutual funds..................... $24,565 $(1,496) $23,069
Foreign equity mutual funds...................... 2,845 (804) 2,041
------- ------- -------
$27,410 $(2,300) $25,110
======= ======= =======
As of September 30, 2000:
Available-for-sale securities:
Domestic equity mutual funds..................... $22,557 $ 3,148 $25,705
Foreign equity mutual funds...................... 2,462 398 2,860
------- ------- -------
$25,019 $ 3,546 $28,565
======= ======= =======
|
13. LEASES
We have entered into non-cancelable operating leases for office and warehouse space used in our operations. The remaining lease terms range from one to 17 years and generally provide for the payment of taxes, insurance and maintenance by the lessee. We have also entered into capital leases for division offices
and operating facilities. Property, plant and equipment included amounts for capital leases of $5.2 million and $4.6 million at September 30, 2001 and 2000. Accumulated depreciation for these capital leases totaled $1.9 million and $1.4 million at September 30, 2001 and 2000.
The related future minimum lease payments at September 30, 2001 were as follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
2002........................................................ $ 876 $ 9,127
2003........................................................ 876 8,361
2004........................................................ 876 8,169
2005........................................................ 843 7,992
2006........................................................ 433 7,494
Thereafter.................................................. 2,726 24,880
------- -------
Total minimum lease payments................................ 6,630 $66,023
=======
Less amount representing interest........................... (3,297)
-------
Present value of net minimum lease payments................. $ 3,333
=======
|
Consolidated lease and rental expense amounted to $5.9 million, $9.0 million and $10.6 million for fiscal 2001, 2000 and 1999. Rents for the regulated business are expensed, and we receive rate treatment as a cost of service on a pay-as-you-go basis.
14. RELATED PARTY TRANSACTIONS
Included in purchased gas cost were purchases from Woodward Marketing of $525.6 million, $228.6 million and $117.4 million in 2001, 2000 and 1999. Volumes purchased were 96.3 Bcf, 74.4 Bcf and 50.9 Bcf in 2001, 2000 and 1999. These purchases were made in a competitive open bidding process and reflect market prices. Average prices per Mcf for gas purchased from Woodward Marketing were $5.46, $3.07 and $2.31 in 2001, 2000 and 1999. In addition, we have entered into contracts with Woodward Marketing to manage a significant portion of our underground storage facilities. Woodward Marketing has acted as agent in placing financial instruments for the various business units that protect us and our customers from unusually large winter period gas price increases.
15. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective October 1, 2000, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that all derivative financial instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or as deferred gas costs, depending on the classification of the derivative. Derivative instruments may be classified as either fair value hedges or cash flow hedges. The cumulative effect of the change in accounting for the adoption of this Statement did not have a material impact on our financial position, results of operations or cash flows.
In July 2000, we entered into an agreement to purchase weather hedges for our Texas and Louisiana operations effective for the 2000-2001 heating season. The hedges were designed to help mitigate the effects of weather that was at least seven percent warmer than normal in both Texas and Louisiana while preserving any upside. The cost of the weather hedges was approximately $4.9 million which was amortized over the 2000-2001 heating season.
In June 2001, we purchased a three year weather insurance policy with an option to cancel in the third year if we obtain weather protection in our rate structures. The policy is for our Texas and Louisiana operations and covers the entire heating season of October to March beginning with the 2001-2002 heating season. The cost of the three year policy was approximately $13.2 million which was prepaid and will be amortized over the appropriate heating seasons based on degree days. The insurance is designed to protect against weather that is at least seven percent warmer than normal.
We have historically hedged 20 percent of our gas supply through the use of our underground storage assets. This hedging process will continue. For the 2001-2002 heating season, we plan to cover approximately 64 percent of our anticipated flowing gas requirements through storage and futures and fixed forward contracts at a weighted average cost of slightly less than $4.00 per Mcf. This should provide protection to us and our customers against sharp increases in the price of natural gas during the 2001-2002 heating season.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data is presented below. The sum of net income per share by quarter may not equal the net income per share for the year due to variations in the weighted average shares outstanding used in computing such amounts. Our businesses are seasonal due to weather conditions in our service areas. For further information on its effects on quarterly results, please see the "Weather and seasonality" discussion included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section herein.
QUARTER ENDED
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR 2001
Operating revenues................... $442,790 $675,113 $164,260 $160,112
Gross profit......................... 109,948 138,324 61,279 65,169
Operating income..................... 48,941 73,891 3,174 4,275
Net income (loss).................... 22,972 44,074 (3,400) (7,556)
Net income (loss) per share.......... .70 1.13 (.08) (.19)
|
QUARTER ENDED
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR 2000
Operating revenues................... $224,458 $314,197 $152,362 $159,135
Gross profit......................... 89,550 118,127 60,030 57,999
Operating income (loss).............. 30,141 55,987 (2,344) 1,532
Net income (loss).................... 14,324 29,573 (4,396) (3,583)
Net income (loss) per share.......... .46 .94 (.14) (.11)
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on February 13, 2002. Information regarding executive officers is included in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on February 13, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on February 13, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on February 13, 2002.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial statements and financial statement schedules.
The financial statements and financial statement schedules listed in the accompanying Index to Financial Statements are filed as part of this Form 10-K.
3. Exhibits
The exhibits listed in the accompanying Exhibits Index are filed as part of this Form 10-K. The exhibits numbered 10.21(a) through 10.32(b) are management contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K
The Company filed a Form 8-K Current Report, Item 2, Acquisition or Disposition of Assets, dated July 1, 2001, announcing that it had acquired the assets of the Louisiana Gas Service Company division of Citizens Communications Company as well as the assets of LGS Natural Gas Company, a wholly-owned subsidiary of Citizens, effective July 1, 2001.
Under Item 7, Financial Statements and Exhibits, a description that the financial statements of the business acquired and pro forma financial information would be filed within 60 days of the required filing date of this Form 8-K. Also, an exhibit was attached: a copy of a related press release dated July 2, 2001.
The Company filed a Form 8-K/A Current Report (Amendment No. 1), Item 7 Financial Statements and Exhibits, dated July 1, 2001, disclosing the required financial statements of the business acquired and pro forma financial information relating to the acquisition of the assets of the Louisiana Gas Service Company division of Citizens Communications Company as well as the assets of LGS Natural Gas Company, a wholly-owned subsidiary of Citizens.
Under Item 7, Financial Statements and Exhibits, an exhibit was attached: a copy of a related press release dated September 24, 2001.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By /s/ JOHN P. REDDY
------------------------------------
John P. Reddy
Senior Vice President
and Chief Financial Officer
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Date: November 20, 2001
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert W. Best and John P. Reddy, or either of them acting alone or together, as his true and lawful attorney-in-fact and agent with full power to act alone, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
/s/ ROBERT W. BEST Chairman, President and Chief November 20, 2001
--------------------------------------------------- Executive Officer
Robert W. Best
/s/ JOHN P. REDDY Senior Vice President and November 20, 2001
--------------------------------------------------- Chief Financial Officer
John P. Reddy
/s/ F.E. MEISENHEIMER Vice President and Controller November 20, 2001
--------------------------------------------------- (Principal Accounting
F.E. Meisenheimer Officer)
/s/ TRAVIS W. BAIN, II Director November 20, 2001
---------------------------------------------------
Travis W. Bain, II
/s/ DAN BUSBEE Director November 20, 2001
---------------------------------------------------
Dan Busbee
/s/ RICHARD W. CARDIN Director November 20, 2001
---------------------------------------------------
Richard W. Cardin
/s/ THOMAS J. GARLAND Director November 20, 2001
---------------------------------------------------
Thomas J. Garland
/s/ RICHARD K. GORDON Director November 20, 2001
---------------------------------------------------
Richard K. Gordon
/s/ GENE C. KOONCE Director November 20, 2001
---------------------------------------------------
Gene C. Koonce
/s/ THOMAS C. MEREDITH Director November 20, 2001
---------------------------------------------------
Thomas C. Meredith
/s/ PHILLIP E. NICHOL Director November 20, 2001
---------------------------------------------------
Phillip E. Nichol
/s/ CARL S. QUINN Director November 20, 2001
---------------------------------------------------
Carl S. Quinn
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/s/ CHARLES K. VAUGHAN Director November 20, 2001
---------------------------------------------------
Charles K. Vaughan
/s/ RICHARD WARE II Director November 20, 2001
---------------------------------------------------
Richard Ware II
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FORM 10-K
PAGE NO.
---------
Report of independent auditors.............................. 32
Financial statements and supplementary data:
Consolidated balance sheets at September 30, 2001 and
2000................................................... 33
Consolidated statements of income for the years ended
September 30, 2001, 2000 and 1999...................... 34
Consolidated statements of shareholders' equity for the
years ended September 30, 2001, 2000 and 1999.......... 35
Consolidated statements of cash flows for the years ended
September 30, 2001, 2000 and 1999...................... 36
Notes to consolidated financial statements................ 37
Supplementary Quarterly Financial Data (unaudited)........ 66
Financial statement schedule for the years ended September
30, 2001, 2000 and 1999
II. Valuation and Qualifying Accounts.................. 73
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All other financial statement schedules are omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and accompanying notes thereto.
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST & OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- ---------
2001
Allowance for doubtful accounts....... $10,589 $26,226 -- $20,664(1) $16,151
2000
Allowance for doubtful accounts....... $ 9,231 $17,724 -- $16,366(1) $10,589
1999
Allowance for doubtful accounts....... $ 1,969 $ 8,899 -- $ 1,637(1) $ 9,231
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(1) Uncollectible accounts written off
PAGE NUMBER OR
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Plan of Reorganization
2.1 Purchase and Sale Agreement (Louisiana Gas Exhibit 2.1 to Registration
Operations), by and among Citizens Utilities Statement on Form S-3/A filed
Company (now known as Citizens Communications November 6, 2000 (File No.
Company), LGS Natural Gas Company and Atmos Energy 333-73705)
Corporation, dated as of April 13, 2000
2.2 Agreement and Plan of Merger and Reorganization
dated as of September 21, 2001, by and among Atmos
Energy Corporation, Mississippi Valley Gas Company
and the Shareholders Named on the Signature Pages
hereto
Articles of Incorporation and Bylaws
3.1(a) Restated Articles of Incorporation of the Company, Exhibit 3.1 of Form 10-K for
as Amended (as of July 31, 1997) fiscal year ended September
30, 1997 (File No. 1-10042)
3.1(b) Articles of Amendment to the Restated Articles of Exhibit 3a of Form 10-Q for
Incorporation of Atmos Energy Corporation as quarter ended March 31, 1999
Amended (Texas) (File No. 1-10042)
3.1(c) Articles of Amendment to the Restated Articles of Exhibit 3b of Form 10-Q for
Incorporation of Atmos Energy Corporation as quarter ended March 31, 1999
Amended (Virginia) (File No. 1-10042)
3.2(a) Bylaws of the Company (Amended and Restated as of Exhibit 3.2 of Form 10-K for
November 12, 1997) fiscal year ended September
30, 1997 (File No. 1-10042)
3.2(b) Amendment No. 1 to Bylaws of Atmos Energy Exhibit 3.1 of Form 10-Q for
Corporation (Amended and Restated as of November quarter ended March 31, 2001
12, 1997) (File No. 1-10042)
Instruments Defining Rights of Security Holders
4.1 Specimen Common Stock Certificate (Atmos Energy Exhibit (4)(b) of Form 10-K
Corporation) for fiscal year ended
September 30, 1988 (File No.
1-10042)
4.2 Rights Agreement, dated as of November 12, 1997, Exhibit 4.1 of Form 8-K dated
between the Company and BankBoston, N.A., as Rights November 12, 1997 (File No.
Agent 1-10042)
4.3 First Amendment to Rights Agreement dated as of Exhibit 2 of Form 8-A,
August 11, 1999, between the Company and Amendment No. 1, dated August
BankBoston, N.A., as Rights Agent 12, 1999 (File No. 1-10042)
4.4 Form of Indenture between Atmos Energy Corporation Exhibit 4.1 to Registration
and U.S. Bank Trust National Association, Trustee Statement on Form S-3 filed
April 20, 1998 (File No.
333-50477)
4.5 Indenture between Atmos Energy Corporation, as Exhibit 99.3 of Form 8-K
Issuer, and Suntrust Bank, Trustee dated as of May dated May 15, 2001 (File No.
22, 2001 1-10042)
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4.6(a) Indenture of Mortgage, dated as of July 15, 1959, Exhibit to Registration
from United Cities Gas Company to First Trust of Statement of United Cities
Illinois, National Association, and M.J. Kruger, as Gas Company on Form S-3 (File
Trustees, as amended and supplemented through No. 33-56983)
December 1, 1992 (the Indenture of Mortgage through
the 20th Supplemental Indenture)
4.6(b) Twenty-First Supplemental Indenture dated as of Exhibit 10.7(a) of Form 10-K
February 5, 1997 by and among United Cities Gas for fiscal year ended
Company and Bank of America Illinois and First September 30, 1997 (File No.
Trust National Association and Russell C. Bergman 1-10042)
supplementing Indenture of Mortgage dated as of
July 15, 1959
4.6(c) Twenty-Second Supplemental Indenture dated as of Exhibit 10.7(b) of Form 10-K
July 29, 1997 by and among the Company and First for fiscal year ended
Trust National Association and Russell C. Bergman September 30, 1997 (File No.
supplementing Indenture of Mortgage dated as of 1-10042)
July 15, 1959
4.7(a) Form of Indenture between United Cities Gas Company Exhibit to Registration
and First Trust of Illinois, National Association, Statement of United Cities
as Trustee dated as of November 15, 1995 Gas Company on Form S-3 (File
No. 33-56983)
4.7(b) First Supplemental Indenture between the Company Exhibit 10.8(a) of Form 10-K
and First Trust of Illinois, National Association, for fiscal year ended
as Trustee dated as of July 29, 1997 September 30, 1997 (File No.
1-10042)
4.8(a) Seventh Supplemental Indenture, dated as of October Exhibit 10.1 of Form 10-Q for
1, 1983 between Greeley Gas Company ("The Greeley quarter ended June 30, 1994
Gas Division") and the Central Bank of Denver, N.A. (File No. 1-10042)
("Central Bank")
4.8(b) Ninth Supplemental Indenture, dated as of April 1, Exhibit 10.2 of Form 10-Q for
1991, between The Greeley Gas Division and Central quarter ended June 30, 1994
Bank (File No. 1-10042)
4.8(c) Tenth Supplemental Indenture, dated as of December Exhibit 10.4 of Form 10-Q for
1, 1993, between the Company and Colorado National quarter ended June 30, 1994
Bank, formerly Central Bank (File No. 1-10042)
9 Not Applicable
Material Contracts
10.1(a) Note Purchase Agreement, dated as of December 21, Exhibit 10(c) of Form 8-K
1987, by and between the Company and John Hancock filed January 7, 1988 (File
Mutual Life Insurance Company No. 0-11249)
Note Purchase Agreement, dated as of December 21,
1987, by and between the Company and John Hancock
Charitable Trust I (Agreement is identical to
Hancock Agreement listed above except as to the
parties thereto.)
Note Purchase Agreement dated as of December 21,
1987, by and between the Company and Mellon Bank,
N.A., Trustee under Master Trust Agreement of AT&T
Corporation, dated January 1, 1984, for Employee
Pension Plans -- AT&T -- John Hancock -- Private
Placement (Agreement is identical to Hancock
Agreement listed above except as to the parties
thereto.)
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10.1(b) Amendment to Note Purchase Agreement, dated October Exhibit (10)(b)(ii) of Form
11, 1989, by and between the Company and John 10-K for fiscal year ended
Hancock Mutual Life Insurance Company revising Note September 30, 1989 (File No.
Purchase Agreement dated December 21, 1987 1-10042)
Amendment to Note Purchase Agreement, dated October
11, 1989, by and between the Company and John
Hancock Charitable Trust I revising Note Purchase
Agreement dated December 21, 1987. (Amendment is
identical to Hancock amendment listed above except
as to the parties thereto.)
Amendment to Note Purchase Agreement, dated October
11, 1989, by and between the Company and Mellon
Bank, N.A., Trustee under Master Trust Agreement of
AT&T Corporation, dated January 1, 1984, for
Employee Pension Plans -- AT&T -- John Hancock --
Private Placement revising Note Purchase Agreement
dated December 21, 1987 (Amendment is identical to
Hancock amendment listed above except as to the
parties thereto.)
10.1(c) Amendment to Note Purchase Agreement, dated Exhibit 10(b)(iii) of Form
November 12, 1991, by and between the Company and 10-K for fiscal year ended
John Hancock Mutual Life Insurance Company revising September 30, 1991 (File No.
Note Purchase Agreement dated December 21, 1987 1-10042)
Amendment to Note Purchase Agreement, dated
November 12, 1991, by and between the Company and
John Hancock Charitable Trust I revising Note
Purchase Agreement dated December 21, 1987.
(Amendment is identical to Hancock amendment listed
above except as to the parties thereto.)
Amendment to Note Purchase Agreement, dated
November 12, 1991, by and between the Company and
Mellon Bank, N.A., Trustee under Master Trust
Agreement of AT&T Corporation, dated January 1,
1984, for Employee Pension Plans -- AT&T -- John
Hancock -- Private Placement revising Note Purchase
Agreement dated December 21, 1987. (Amendment is
identical to Hancock amendment above except as to
the parties thereto.)
10.1(d) Amendment to Note Purchase Agreement, dated Exhibit 4.3(d) to
December 22, 1993, by and between the Company and Registration Statement on
John Hancock Mutual Life Insurance Company revising Form S-3 filed April 20, 1998
Note Purchase Agreement dated December 21, 1987 (File No. 333-50477)
Amendment to Note Purchase Agreement, dated
December 22, 1993, by and between the Company and
Mellon Bank, N.A., Trustee under Master Trust
Agreement of AT&T Corporation, dated January 1,
1984, for Employee Pension Plans -- AT&T -- John
Hancock -- Private Placement revising Note Purchase
Agreement dated December 21, 1987 (Amendment is
identical to Hancock amendment listed above except
as to the parties thereto and the amounts thereof)
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10.1(e) Amendment to Note Purchase Agreement, dated Exhibit 4.3(e) to
December 20, 1994, by and between the Company and Registration Statement on
John Hancock Mutual Life Insurance Company revising Form S-3 filed April 20, 1998
Note Purchase Agreement dated December 21, 1987 (File No. 333-50477)
Amendment to Note Purchase Agreement, dated
December 20, 1994, by and between the Company and
Mellon Bank, N.A., Trustee under Master Trust
Agreement of AT&T Corporation, dated January 1,
1984, for Employee Pension Plans -- AT&T -- John
Hancock -- Private Placement revising Note Purchase
Agreement dated December 21, 1987 (Amendment is
identical to Hancock amendment listed above)
10.1(f) Amendment to Note Purchase Agreement, dated July Exhibit 4.3(f) to
29, 1997, by and between the Company and John Registration Statement on
Hancock Mutual Life Insurance Company revising Note Form S-3 filed April 20, 1998
Purchase Agreement dated December 21, 1987 (File No. 333-50477)
Amendment to Note Purchase Agreement, dated July
29, 1997, by and between the Company and Mellon
Bank, N.A., Trustee under Master Trust Agreement of
AT&T Corporation, dated January 1, 1984, for
Employee Pension Plans -- AT&T -- John
Hancock -- Private Placement revising Note Purchase
Agreement dated December 21, 1987 (Amendment is
identical to Hancock amendment listed above except
as to the parties thereto and the amounts thereof)
10.2(a) Note Purchase Agreement, dated as of October 11, Exhibit 10(c) of Form 10-K
1989, by and between the Company and John Hancock for fiscal year ended
Mutual Life Insurance Company September 30, 1989 (File No.
1-10042)
10.2(b) Amendment to Note Purchase Agreement, dated as of Exhibit 10(c)(ii) of Form
November 12, 1991, by and between the Company and 10-K for fiscal year ended
John Hancock Mutual Life Insurance Company revising September 30, 1991 (File No.
Note Purchase Agreement dated October 11, 1989 1-10042)
10.2(c) Amendment to Note Purchase Agreement, dated Exhibit 4.4(c) to
December 22, 1993, by and between the Company and Registration Statement on
John Hancock Mutual Life Insurance Company revising Form S-3 filed April 20, 1998
Note Purchase Agreement dated October 11, 1989 (File No. 333-50477)
10.2(d) Amendment to Note Purchase Agreement, dated Exhibit 4.4(d) to
December 20, 1994, by and between the Company and Registration Statement on
John Hancock Mutual Life Insurance Company revising Form S-3 filed April 20, 1998
Note Purchase Agreement dated October 11, 1989 (File No. 333-50477)
10.2(e) Amendment to Note Purchase Agreement, dated July Exhibit 4.4(e) to
29, 1997, by and between the Company and John Registration Statement on
Hancock Mutual Life Insurance Company revising Note Form S-3 filed April 20, 1998
Purchase Agreement dated October 11, 1989 (File No. 333-50477)
10.3(a) Note Purchase Agreement, dated as of August 29, Exhibit 10(f)(i) of Form 10-K
1991, by and between the Company and The Variable for fiscal year ended
Annuity Life Insurance Company September 30, 1991 (File No.
1-10042)
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10.3(b) Amendment to Note Purchase Agreement, dated Exhibit 10(f)(ii) of Form
November 26, 1991, by and between the Company and 10-K for fiscal year ended
The Variable Annuity Life Insurance Company September 30, 1991 (File No.
revising Note Purchase Agreement dated August 29, 1-10042)
1991
10.3(c) Amendment to Note Purchase Agreement, dated Exhibit 4.5(c) to
December 22, 1993, by and between the Company and Registration Statement on
The Variable Annuity Life Insurance Company Form S-3 filed April 20, 1998
revising Note Purchase Agreement dated August 29, (File No. 333-50477)
1991
10.3(d) Amendment to Note Purchase Agreement, dated July Exhibit 4.5(d) to
29, 1997, by and between the Company and The Registration Statement on
Variable Annuity Life Insurance Company revising Form S-3 filed April 20, 1998
Note Purchase Agreement dated August 29, 1991 (File No. 333-50477)
10.4(a) Note Purchase Agreement, dated as of August 31, Exhibit (10)(f) of Form 10-K
1992, by and between the Company and The Variable for fiscal year ended
Annuity Life Insurance Company September 30, 1992 (File No.
1-10042)
10.4(b) Amendment to Note Purchase Agreement, dated Exhibit 4.6(b) to
December 22, 1993, by and between the Company and Registration Statement on
The Variable Annuity Life Insurance Company Form S-3 filed April 20, 1998
revising Note Purchase Agreement dated August 31, (File No. 333-50477)
1992
10.4(c) Amendment to Note Purchase Agreement, dated July Exhibit 4.6(c) to
29, 1997, by and between the Company and The Registration Statement on
Variable Annuity Life Insurance Company revising Form S-3 filed April 20, 1998
Note Purchase Agreement dated August 31, 1992 (File No. 333-50477)
10.5(a) Note Purchase Agreement, dated November 14, 1994, Exhibit 10.1 of Form 10-Q for
by and among the Company and New York Life quarter ended December 31,
Insurance Company, New York Life Insurance and 1994 (File No. 1-10042)
Annuity Corporation, The Variable Annuity Life
Insurance Company, American General Life Insurance
Company, and Merit Life Insurance Company
10.5(b) Amendment to Note Purchase Agreement, dated July Exhibit 4.7(b) to
29, 1997 by and among the Company and New York Life Registration Statement on
Insurance Company, New York Life Insurance and Form S-3 filed April 20, 1998
Annuity Corporation, The Variable Annuity Life (File No. 333-50477)
Insurance Company, American General Life Insurance
Company and Merit Life Insurance Company revising
Note Purchase Agreement dated November 14, 1994
10.6 Bond Purchase Agreement, dated as of April 1, 1991, Exhibit 10.3 of Form 10-Q for
between the Greeley Division and Central Bank quarter ended June 30, 1994
(File No. 1-10042)
10.7(a) Purchase Agreement for 6 3/4% Debentures due 2028 Exhibit 99.1 of Form 8-K
by and among Merrill Lynch Co., NationsBanc dated July 22, 1998 (File No.
Montgomery Securities LLC, Edward D. Jones & Co., 1-10042)
L.P. and Atmos Energy Corporation dated July 22,
1998
10.7(b) Purchase Agreement for 7 3/8% Senior Notes due 2011 Exhibit 99.1 of Form 8-K
by and among Banc of America Securities LLC, Banc dated May 15, 2001 (File No.
One Capital markets, Inc, First Union Securities, 1-10042)
Inc, Fleet Securities, Inc, SG Cowen Securities
Corporation and Atmos Energy Corporation dated May
15, 2001
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10.7(c) Purchase Agreement for 6,741,500 Shares of Common Exhibit 99.1 of Form 8-K
Stock (No Par Value) by and among Merrill Lynch, dated December 14, 2000 (File
Pierce, Fenner & Smith Incorporated, UBS Warburg No. 1-10042)
LLC, A.G. Edwards & Sons, Inc, Edward D. Jones &
Co., L.P. and Atmos Energy Corporation dated
December 14, 2000
10.8(a) Amended and Restated Revolving Credit Agreement,
dated as of August 2, 2001, among Atmos Energy
Corporation, Bank of America, N.A., Bank One, NA,
Societe Generale, First Union National Bank and
Fleet National Bank
10.8(b) Credit Agreement, dated to be effective as of Exhibit 10.2 to Registration
August 9, 2000, among Woodward Marketing, L.L.C., Statement on Form S-3/A filed
and Bank of America, N.A. November 6, 2000 (File No.
333-93705)
10.8(c) Guaranty, effective as of August 9, 2000, by Atmos Exhibit 10.3 to Registration
Energy Marketing, LLC, in favor of Bank of America, Statement on Form S-3/A filed
N.A. November 6, 2000 (File No.
333-93705)
10.8(d) First Amendment to Credit Agreement and Guaranty of Exhibit 10.4 to Registration
Atmos Energy Marketing, LLC, effective as of Statement on Form S-3/A filed
September 29, 2000, among Woodward Marketing, November 6, 2000 (File No.
L.L.C., Bank of America, N.A., Woodward Marketing, 333-93705)
Inc., Atmos Energy Marketing, LLC, J.D. Woodward
and James Kifer
10.8(e) Second Amended and Restated Guaranty of Atmos
Energy Marketing, LLC, effective as of December 22,
2000, among Bank of America, N.A. and Atmos Energy
Marketing, LLC
10.8(f) Second Amendment to Credit Agreement, effective as
of November 3, 2000, among Woodward Marketing,
L.L.C., Bank of America, N.A., Woodward Marketing,
Inc., Atmos Energy Marketing, LLC, J.D. Woodward
and James Kifer
10.8(g) Third Amendment to Credit Agreement, effective as
of December 7, 2000, among Woodward Marketing,
L.L.C., Bank of America, N.A., Woodward Marketing,
Inc., Atmos Energy Marketing, LLC, J.D. Woodward
and James Kifer
10.8(h) Fourth Amendment to Credit Agreement, effective as
of December 22, 2000, among Woodward Marketing,
L.L.C., Bank of America, N.A., BNP Paribas,
Woodward Marketing, Inc., Atmos Energy Marketing,
LLC, J.D. Woodward and James Kifer
10.8(i) Fifth Amendment to Credit Agreement, effective as
of December 31, 2000, among Woodward Marketing,
L.L.C., Bank of America, N.A., BNP Paribas and
Atmos Energy Marketing, LLC
10.8(j) Sixth Amendment to Credit Agreement, effective as
of June 29, 2001, among Woodward Marketing, L.L.C.,
Bank of America, N.A., BNP Paribas and Atmos Energy
Marketing, LLC
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Gas Supply Contracts
10.9(a) Firm Gas Transportation Agreement No. 123535 dated Exhibit 10.10(a) of Form 10-K
November 1, 1998 between Greeley Gas Company and for fiscal year ended
Public Service Company of Colorado September 30, 1999 (File No.
1-10042)
10.9(b) Transportation Storage Service Agreement No. Exhibit 10.6(b) of Form 10-K
TA-0544 between Greeley Gas Company and Williams for fiscal year ended
Natural Gas Company dated October 1, 1993, as September 30, 1994 (File No.
amended to extend to October 1, 2003 1-10042)
10.9(c) Firm Transportation Service Agreement No.
33182000C, Rate Schedule TF-1, between Colorado
Interstate Gas Company and Greeley Gas Company
dated October 1, 2001
10.9(d) No-Notice Storage and Transportation Delivery
Service Agreement No. 31044000, Rate Schedule
NNT-1, between Colorado Interstate Gas Company and
Greeley Gas Company dated October 1, 2001
10.9(e) Transportation-Storage Contract No. TA-0614 Exhibit 10.6 of Form 10-Q for
(Request 0180) between Greeley Gas Company quarter ended March 31, 1998
(transferred from United Cities Gas Company (File No. 1-10042)
effective January 1, 2000) and Williams Natural Gas
Company dated October 1, 1993, as amended to extend
to October 1, 2002
10.9(f) Transportation-Storage Contract No. TA-0611 Exhibit 10.7 of Form 10-Q for
(Request 0002) between Greeley Gas Company quarter ended March 31, 1998
(transferred from United Cities Gas Company (File No. 1-10042)
effective January 1, 2000) and Williams Natural Gas
Company dated October 1, 1993, as amended to extend
to October 1, 2003
10.10(a) Agreement for Firm Intrastate Transportation of Exhibit 10.1 of Form 10-Q for
Natural Gas in the State of Louisiana between Trans quarter ended March 31, 1998
La (now known as Atmos Energy Louisiana) and (File No. 1-10042)
Louisiana Intrastate Gas Company L.L.C. (LIG) dated
December 22, 1997 and effective July 1, 1997, as
amended to extend to December 1, 2004
10.10(b) Agreement for Firm 311(a)(2) Transportation of Exhibit 10.2 of Form 10-Q for
Natural Gas in the State of Louisiana between Trans quarter ended March 31, 1998
La (now known as Atmos Energy Louisiana) and (File No. 1-10042)
Louisiana Intrastate Gas Company L.L.C. (LIG) dated
December 22, 1997 and effective July 1, 1997
10.11(a) Gas Transportation Agreement between Texas Gas and Exhibit 10.3 of Form 10-Q for
Western Kentucky Gas dated November 1, 1993 quarter ended December 31,
(Contract no. T3355, zone 3), as amended to extend 1993 (File No. 1-10042)
to November 1, 2004
10.11(b) Gas Transportation Agreement between Texas Gas and Exhibit 10.4 of Form 10-Q for
Western Kentucky Gas dated November 1, 1993 quarter ended December 31,
(Contract no. T3819, zone 4), as amended to extend 1993 (File No. 1-10042)
to November 1, 2004
10.11(c) Gas Transportation Agreement between Texas Gas and Exhibit 10.5 of Form 10-Q for
Western Kentucky Gas dated November 1, 1993 quarter ended December 31,
(Contract no. N0210, zone 2, Contract no. N0340, 1993 (File No. 1-10042)
zone 3, Contract no. N0435, zone 4), as amended to
extend to November 1, 2004
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10.12(a) Gas Transportation Agreement, Contract No. 2550, Exhibit 10.17(a) of Form 10-K
dated September 1, 1993, between Tennessee Gas for fiscal year ended
Pipeline Company, a division of Tenneco, Inc. September 30, 1993 (File No.
("Tennessee Gas"), and Western Kentucky, 1-10042)
Campbellsville Service Area, as amended to extend
to November 1, 2002
10.12(b) Gas Transportation Agreement, Contract No. 2546, Exhibit 10.17(b) of Form 10-K
dated September 1, 1993, between Tennessee Gas and for fiscal year ended
Western Kentucky, Danville Service Area, as amended September 30, 1993 (File No.
to extend to November 1, 2002 1-10042)
10.12(c) Gas Transportation Agreement, Contract No. 2385, Exhibit 10.17(c) of Form 10-K
dated September 1, 1993, between Tennessee Gas and for fiscal year ended
Western Kentucky, Greensburg et al Service Area, as September 30, 1993 (File No.
amended to extend to November 1, 2002 1-10042)
10.12(d) Gas Transportation Agreement, Contract No. 2551, Exhibit 10.17(d) of Form 10-K
dated September 1, 1993, between Tennessee Gas and for fiscal year ended
Western Kentucky, Harrodsburg Service Area, as September 30, 1993 (File No.
amended to extend to November 1, 2002 1-10042)
10.12(e) Gas Transportation Agreement, Contract No. 2548, Exhibit 10.17(e) of Form 10-K
dated September 1, 1993, between Tennessee Gas and for fiscal year ended
Western Kentucky, Lebanon Service Area, as amended September 30, 1993 (File No.
to extend to November 1, 2002 1-10042)
10.13 Gas Service Agreement (Service for Firm Exhibit 10.5 of Form 10-Q for
Transportation) between Energas and Oneok Gas quarter ended December 31,
Transmission, Inc., (now known as Oneok WesTex 1996 (File No. 1-10042)
Transmission, Inc.) dated January 1, 1996, as
assigned by KN to Oneok effective April 6, 2000
10.14 Gas Service Agreement (Service for Firm Exhibit 10.7 of Form 10-Q for
Transportation) between Oneok Gas Transmission, quarter ended December 31,
Inc. (now known as Oneok WesTex Transmission, Inc.) 1996 (File No. 1-10042)
and EnerMart Trust (now known as EnerMart Energy
Services Trust) dated January 1, 1996, as assigned
by KN to Oneok effective April 6, 2000 (Irrigation)
10.15 Amarillo Supply Agreement dated January 2, 1993 Exhibit 10.7(a) of Form 10-K
between Energas and Pioneer Natural Resources, USA, for fiscal year ended
Inc. (formerly Mesa Operating Company) September 30, 1994 (File No.
1-10042)
10.16 Gas Sales Agreement (Swing) between Energas and Exhibit 10.13 of Form 10-Q
Oneok Energy Trading & Marketing Company, formerly for quarter ended December
KN Marketing, dated January 1, 1996, as assigned by 31, 1996 (File No. 1-10042)
KN to Oneok effective April 6, 2000
10.17 Operating Agreement between Energas and Oneok Gas Exhibit 10.16 of Form 10-Q
Transmission, Inc. (now known as Oneok WesTex for quarter ended December
Transmission, Inc.), effective December 1, 1996, as 31, 1996 (File No. 1-10042)
assigned by KN to Oneok effective April 6, 2000
10.18(a) Gas Transportation Agreement No. 30774, Rate Exhibit 10.1 of Form 10-Q for
Schedules FT-A and FT-GS, between United Cities Gas quarter ended December 31,
Company and East Tennessee Natural Gas Company 1999 (File No. 1-10042)
dated October 1, 1999
10.18(b) Gas Transportation Agreement No. 27311 between Exhibit 10.20(c) of Form 10-K
United Cities Gas Company and Tennessee Gas for fiscal year ended
Pipeline Company dated November 1, 2000 September 30, 2000 (File No.
1-10042)
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PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
------- ----------- ----------------
10.18(c) Service Agreement No. 867760, under Rate Schedule Exhibit 10.8 of Form 10-Q for
FT, between United Cities Gas Company and Southern quarter ended March 31, 1998
Natural Gas Company dated November 1, 1993, as (File No. 1-10042)
amended to extend to November 1, 2005
10.18(d) Service Agreement No. 867761 under Rate Schedule Exhibit 10.9 of Form 10-Q for
FT-NN between United Cities Gas Company and quarter ended March 31, 1998
Southern Natural Gas Company dated November 1, (File No. 1-10042)
1993, as amended to extend to November 1, 2005
10.18(e) FTS-1 Service Agreement No. 59572 between United Exhibit 10.20(f) of Form 10-K
Cities Gas Company and Columbia Gulf Transmission for fiscal year ended
Company dated November 1, 1998 September 30, 2000 (File No.
1-10042)
10.18(f) Gas Transportation Agreement No. 34538 (Rocky Top Exhibit 10.20(g) of Form 10-K
Expansion) between United Cities Gas Company and for fiscal year ended
East Tennessee Natural Gas Company dated November September 30, 2000 (File No.
1, 2000 1-10042)
Asset Purchase Agreements
10.19 Asset Sale and Purchase Agreement by and among Exhibit 99.2 of Form 8-K
Southwestern Energy Company, Arkansas Western Gas dated May 31, 2000 (File No.
Company and Atmos Energy Corporation dated as of 1-10042)
October 15, 1999
10.20 Asset Purchase Agreement by and among Atmos Energy Exhibit 10.1 to Registration
Corporation, Atmos Energy Marketing, LLC, Woodward Statement on Form S-3/A filed
Marketing, Inc., J.D. and Linda Woodward and James November 6, 2000 (File No.
and Rita B. Kifer dated as of August 7, 2000 333-93705)
Executive Compensation Plans and Arrangements
10.21(a)* Form of Atmos Energy Corporation Change in Control Exhibit 10.21(b) of Form 10-K
Severance Agreement -- Tier I for fiscal year ended
September 30, 1998 (File No.
1-10042)
10.21(b)* Form of Atmos Energy Corporation Change in Control Exhibit 10.21(c) of Form 10-K
Severance Agreement -- Tier II for fiscal year ended
September 30, 1998 (File No.
1-10042)
10.22* Atmos Energy Corporation Long Term Stock Plan for Exhibit 99.1 of Form S-8
the United Cities Gas Company Division filed July 29, 1997 (File No.
333-32343)
10.23(a)* Atmos Energy Corporation Executive Retiree Life Exhibit 10.31 of Form 10-K
Plan for fiscal year ended
September 30, 1997 (File No.
1-10042)
10.23(b)* Amendment No. 1 to The Atmos Energy Corporation Exhibit 10.31(a) of Form 10-K
Executive Retiree Life Plan for fiscal year ended
September 30, 1997 (File No.
1-10042)
10.24(a)* Description of Financial and Estate Planning Exhibit 10.25(b) of Form 10-K
Program for fiscal year ended
September 30, 1997 (File No.
1-10042)
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PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
------- ----------- ----------------
10.24(b)* Description of Sporting Events Program Exhibit 10.26(c) of Form 10-K
for fiscal year ended
September 30, 1993 (File No.
1-10042)
10.25(a)* Atmos Energy Corporation Supplemental Executive Exhibit 10.26 of Form 10-K
Benefits Plan, Amended and Restated in its Entirety for fiscal year ended
August 12, 1998 September 30, 1998 (File No.
1-10042)
10.25(b)* Atmos Energy Corporation Performance-Based Exhibit 10.32 of Form 10-K
Supplemental Executive Benefits Plan, Effective for fiscal year ended
Date August 12, 1998 September 30, 1998 (File No.
1-10042)
10.25(c)* Amendment Number One to the Atmos Energy Exhibit 10.2 of Form 10-Q for
Corporation Performance-Based Supplemental quarter ended December 31,
Executive Benefits Plan, Effective Date January 1, 2000 (File No. 1-10042)
1999
10.25(d)* Atmos Energy Corporation Performance-Based Exhibit 10.1 of Form 10-Q for
Supplemental Executive Benefits Plan Trust quarter ended December 31,
Agreement, Effective Date December 1, 2000 2000 (File No. 1-10042)
10.25(e)* Form of Individual Trust Agreement for the Exhibit 10.3 of Form 10-Q for
Supplemental Executive Benefits Plan quarter ended December 31,
2000 (File No. 1-10042)
10.26* Atmos Energy Corporation Restricted Stock Grant Exhibit 99.1 of Form S-8
Plan (Amended and Restated as of February 12, 1998) filed February 13, 1998 (File
No. 333-46337)
10.27* Atmos Energy Corporation Executive Nonqualified Exhibit 10.33 of Form 10-K
Deferred Compensation Plan for fiscal year ended
September 30, 1998 (File No.
1-10042)
10.28(a)* Consulting Agreement between the Company and Exhibit 10.2 of Form 10-Q for
Charles K. Vaughan, effective October 1, 1994 quarter ended June 30, 1997
(File No. 1-10042)
10.28(b)* Amendment No. 1 to Consulting Agreement between the Exhibit 10.3 of Form 10-Q for
Company and Charles K. Vaughan, dated May 14, 1997 quarter ended June 30, 1997
(File No. 1-10042)
10.28(c)* Amendment No. 2 to Consulting Agreement between the Exhibit 10.30(c) of Form 10-K
Company and Charles K. Vaughan, dated August 12, for fiscal year ended
1998 September 30, 1998 (File No.
1-10042)
10.28(d)* Amendment No. 3 to Consulting Agreement between the Exhibit 10.30(d) of Form 10-K
Company and Charles K. Vaughan, dated November 10, for fiscal year ended
1999 September 30, 1999 (File No.
1-10042)
10.28(e)* Amendment No. 4 to Consulting Agreement between the Exhibit 10.32(e) of Form 10-K
Company and Charles K. Vaughan, dated November 9, for fiscal year ended
2000 September 30, 2000 (File No.
1-10042)
10.28(f)* Mini-Med/Dental Benefit Extension Agreement dated
October 1, 1994
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PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
------- ----------- ----------------
10.28(g)* Amendment No. 1 to Mini-Med/Dental Benefit
Extension Agreement dated August 14, 2001
10.29* Atmos Energy Corporation Equity Incentive and Exhibit C of Definitive Proxy
Deferred Compensation Plan for Non-Employee Statement on Schedule 14A
Directors filed December 30, 1998 (File
No. 1-10042)
10.30(a)* Atmos Energy Corporation Retirement Plan for Exhibit 10(y) of Form 10-K
Outside Directors for fiscal year ended
September 30, 1992 (File No.
1-10042)
10.30(b)* Amendment No. 1 to the Atmos Energy Corporation Exhibit 10.2 of Form 10-Q for
Retirement Plan for Outside Directors quarter ended December 31,
1996 (File No. 1-10042)
10.31* Atmos Energy Corporation Outside Directors Exhibit 10.28 of Form 10-K
Stock-for-Fee Plan (Amended and Restated as of for fiscal year ended
November 12, 1997) September 30, 1997 (File No.
1-10042)
10.32(a)* Atmos Energy Corporation 1998 Long-Term Incentive Exhibit A of Definitive Proxy
Plan Statement on Schedule 14A
filed December 30, 1998 (File
No. 1-10042)
10.32(b)* Atmos Energy Corporation Annual Incentive Plan for Exhibit B of Definitive Proxy
Management Statement on Schedule 14A
filed December 30, 1998 (File
No. 1-10042)
11 Not applicable
12 Computation of ratio of earnings to fixed charges
13 Not applicable
16 Not applicable
18 Not applicable
Other Exhibits, as indicated
21 Subsidiaries of the registrant
22 Not applicable
23 Consent of independent auditor, Ernst & Young LLP
24 Power of Attorney Signature page of Form 10-K
for fiscal year ended
September 30, 2001
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* This exhibit constitutes a "management contract or compensatory plan, contract, or arrangement."
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which
it is attached but is inserted for convenience only.
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Page
No.
----
ARTICLE I MERGER AND CLOSING......................................................................................1
1.01 The Merger..................................................................................1
1.02 Closing.....................................................................................2
1.03 Articles of Merger; Effective Time..........................................................2
1.04 Articles of Incorporation and Bylaws of the Surviving Corporation...........................3
1.05 Directors and Officers of the Surviving Corporation.........................................3
1.06 Effects of the Merger.......................................................................3
1.07 No Appraisal Rights.........................................................................3
1.08 Further Assurances..........................................................................3
ARTICLE II EFFECT ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES......................................................3
2.01 Effect on Capital Stock.....................................................................3
2.02 Adjustments to Merger Consideration.........................................................4
2.03 Exchange of Certificates....................................................................5
2.04 Withholding Rights..........................................................................5
2.05 Share Adjustment............................................................................5
ARTICLE III CLOSING DELIVERIES....................................................................................6
3.01 Deliveries at Closing.......................................................................6
3.02 Bank Accounts...............................................................................7
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS.........................................................7
4.01 Power and Authority.........................................................................7
4.02 Company's Power and Authority...............................................................8
4.03 Corporate Existence of the Company..........................................................8
4.04 Capital Stock...............................................................................8
4.05 Subsidiaries................................................................................8
4.06 No Conflicts................................................................................9
4.07 Governmental Approvals and Filings.........................................................10
4.08 Books and Records..........................................................................10
4.09 Financial Statements and Condition.........................................................10
4.10 Taxes......................................................................................13
4.11 Legal Proceedings; Orders..................................................................15
4.12 Compliance With Laws and Orders; Regulatory Filings........................................15
4.13 Benefit Plans; ERISA.......................................................................16
4.14 Real Property..............................................................................19
4.15 Tangible Personal Property; Sufficiency....................................................20
4.16 Intellectual Property Rights...............................................................21
4.17 Contracts..................................................................................21
4.18 Licenses...................................................................................23
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4.19 Insurance..................................................................................23
4.20 Affiliate Transactions.....................................................................24
4.21 Labor Relations............................................................................24
4.22 Environmental Matters......................................................................25
4.23 Information Supplied.......................................................................26
4.24 Brokers....................................................................................26
4.25 Certain Securities Matters.................................................................27
ARTICLE V REPRESENTATIONS AND WARRANTIES OF ATMOS................................................................28
5.01 Corporate Existence........................................................................28
5.02 Authority..................................................................................28
5.03 No Conflicts...............................................................................28
5.04 Governmental Approvals and Filings.........................................................29
5.05 Capitalization.............................................................................29
5.06 Atmos Shares...............................................................................29
5.07 SEC Filings; Financial Statements; No Adverse Change.......................................29
5.08 Legal Proceedings..........................................................................30
5.09 Financing..................................................................................30
5.10 Information Supplied.......................................................................30
5.11 Brokers....................................................................................30
ARTICLE VI COVENANTS OF SHAREHOLDERS AND THE COMPANY.............................................................31
6.01 Regulatory and Other Approvals.............................................................31
6.02 HSR Filings................................................................................31
6.03 Investigation by Atmos.....................................................................31
6.04 No Solicitations; Permitted Transfer of Company Shares.....................................32
6.05 Conduct of Business........................................................................33
6.06 Financial Statements and Reports...........................................................33
6.07 Certain Restrictions.......................................................................34
6.08 Employee Matters...........................................................................36
6.09 Notification of Certain Matters............................................................37
6.10 Certain Prohibited Sales...................................................................37
6.11 Certain Tax Matters........................................................................38
6.12 Note Purchase Agreements...................................................................38
6.13 Fulfillment of Conditions..................................................................38
ARTICLE VII COVENANTS OF ATMOS...................................................................................38
7.01 Regulatory and Other Approvals.............................................................38
7.02 HSR Filings................................................................................39
7.03 Investigation by Shareholders..............................................................39
7.04 Employees, Compensation and Benefits.......................................................39
7.05 Severance Policy and Other Agreements......................................................40
7.06 Directors' and Officers' Indemnification and Insurance.....................................40
7.07 Listing of Stock...........................................................................41
7.08 Certain Tax Matters........................................................................41
7.09 Fulfillment of Conditions..................................................................41
7.10 Environmental Due Diligence................................................................42
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7.11 Note Purchase Agreements...................................................................43
ARTICLE VIII CONDITIONS TO OBLIGATIONS OF ATMOS..................................................................44
8.01 Representations and Warranties.............................................................44
8.02 Performance................................................................................44
8.03 Bring-Down Certificates....................................................................44
8.04 Orders and Laws............................................................................44
8.05 Regulatory Consents and Approvals..........................................................44
8.06 Third Party Consents.......................................................................45
8.07 Certificates...............................................................................45
8.08 Resignations of Directors..................................................................45
8.09 Escrow Agreement...........................................................................45
8.10 Standstill Agreement.......................................................................45
8.11 Releases...................................................................................45
8.12 Closing Opinions...........................................................................45
ARTICLE IX CONDITIONS TO OBLIGATIONS OF SHAREHOLDERS AND THE COMPANY.............................................45
9.01 Representations and Warranties.............................................................45
9.02 Performance................................................................................46
9.03 Bring-Down Certificate.....................................................................46
9.04 Orders and Laws............................................................................46
9.05 Regulatory Consents and Approvals..........................................................46
9.06 Third Party Consents.......................................................................46
9.07 Escrow Agreement...........................................................................46
9.08 Registration Rights Agreement..............................................................46
9.09 Closing Opinions...........................................................................46
9.10 Listing....................................................................................47
ARTICLE X SURVIVAL; NO OTHER REPRESENTATIONS.....................................................................47
10.01 Survival of Representations, Warranties, Covenants and Agreements..........................47
10.02 No Other Representations...................................................................47
ARTICLE XI INDEMNIFICATION.......................................................................................48
11.01 Indemnification............................................................................48
11.02 Method of Asserting Claims.................................................................49
11.03 Method of Calculating Losses...............................................................51
11.04 Exclusivity................................................................................51
11.05 No Punitive Damages........................................................................52
11.06 INDEMNIFICATION IN CASE OF STRICT LIABILITY OR INDEMNITEE NEGLIGENCE.......................52
ARTICLE XII TERMINATION..........................................................................................52
12.01 Termination................................................................................52
12.02 Effect of Termination......................................................................54
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ARTICLE XIII DEFINITIONS.........................................................................................54
13.01 Definitions................................................................................54
ARTICLE XIV MISCELLANEOUS........................................................................................64
14.01 Notices....................................................................................64
14.02 Entire Agreement...........................................................................66
14.03 Expenses...................................................................................66
14.04 Public Announcements.......................................................................66
14.05 Waiver.....................................................................................66
14.06 Amendment..................................................................................67
14.07 No Third Party Beneficiary.................................................................67
14.08 No Assignment; Binding Effect..............................................................67
14.09 Headings...................................................................................67
14.10 Consent to Jurisdiction....................................................................67
14.11 Invalid Provisions.........................................................................67
14.12 Governing Law..............................................................................68
14.13 Counterparts...............................................................................68
14.14 Limitation on Trustee and Executor Liability...............................................68
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EXHIBIT A Form of Escrow Agreement EXHIBIT B Form of Standstill Agreement EXHIBIT C Form of Release EXHIBIT D-1 Closing Opinion of Milbank, Tweed, Hadley & McCloy LLP EXHIBIT D-2 Closing Opinion of Forman Perry Watkins Krutz & Tardy, PLLC EXHIBIT D-3 Closing Opinion of Counsel to the Shareholders (Hess) EXHIBIT D-4 Closing Opinion of Counsel to the Shareholders (Hearin) EXHIBIT E Registration Rights Agreement EXHIBIT F-1 Closing Opinion of Gibson, Dunn & Crutcher LLP EXHIBIT F-2 Closing Opinion of Hunton & Williams EXHIBIT G Company Tax Matters Certificate EXHIBIT H Atmos Tax Matters Certificate EXHIBIT I Substitute Agreement |
This AGREEMENT AND PLAN OF MERGER AND REORGANIZATION dated as of September 21, 2001, is made and entered into by and among Atmos Energy Corporation, a Texas and Virginia corporation ("Atmos"), Mississippi Valley Gas Company, a Mississippi corporation (the "Company"), and the shareholders of the Company named on the signature pages hereto (each a "Shareholder" and collectively, the "Shareholders"). Capitalized terms not otherwise defined herein have the meanings set forth in Section 13.01.
WHEREAS, the Shareholders collectively own One Thousand (1,000) shares of common stock, par value $5.00 per share, of the Company, constituting all issued and outstanding shares of capital stock of the Company (such shares being referred to herein as the "Company Shares"); and
WHEREAS, the Boards of Directors of Atmos and the Company have each determined that it is advisable and in the best interests of their respective shareholders to consummate, and have approved, the business combination transaction provided for herein in which the Company would merge with and into Atmos and Atmos would be the surviving corporation (the "Merger"); and the Shareholders, as the sole shareholders of the Company, have unanimously approved the Merger.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.01 The Merger.
(a) Upon the terms and subject to the conditions of this Agreement, at the Effective Time, the Company shall be merged with and into Atmos in accordance with the Mississippi Business Corporation Act (the "MBCA"), the Texas Business Corporation Act (the "TBCA") and the Virginia Stock Corporation Act (the "VSCA"), whereupon the separate existence of the Company shall cease and Atmos shall continue as the surviving corporation (the "Surviving Corporation"). The Merger is intended to qualify as a reorganization within the meaning of Section 368 of the Code. Atmos and the Company are sometimes referred to herein as the "Constituent Corporations".
(b) If any of the following conditions is not satisfied, the transactions contemplated by this Agreement shall be restructured as a sale of all of the Company Shares and Atmos, the Company and the Shareholders shall enter into a substitute agreement providing for such sale in the form attached hereto as Exhibit I:
(ii) the Shareholders shall have received the opinion of Milbank, Tweed, Hadley & McCloy LLP, dated the Closing Date, to the effect that the Merger will qualify as a reorganization within the meaning of Section 368 of the Code; or
(iii) (A) the product of (1) the regular trading day closing price of Atmos Common Stock on the New York Stock Exchange on the trading day completed on the Closing Date and (2) the aggregate number of shares of Atmos Common Stock to be issued by Atmos to the Shareholders and any Permitted Transferees pursuant to the terms of this Agreement (the "Total Issuable Shares"), including the Share Amount and any shares that Atmos elects to include as Additional Consideration pursuant to Section 12.01(g) (the "Total Stock Value"), shall exceed (B) 45% of the sum of (1) the aggregate amount of cash to be paid by Atmos to the Shareholders and any Permitted Transferees pursuant to the terms of this Agreement (the "Total Payable Cash"), including the Cash Amount and any cash that Atmos elects to include as Additional Consideration pursuant to Section 12.01(g), and (2) the Total Stock Value.
1.02 Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 12.01, and subject to the satisfaction or waiver (where applicable) of the conditions set forth in Articles VIII and IX, the closing of the Merger (the "Closing") will take place on the Closing Date at the offices of Gibson, Dunn & Crutcher LLP, 2100 McKinney Avenue, Dallas, Texas 75201, or at such other place as Atmos and the Company mutually agree upon in writing.
1.03 Articles of Merger; Effective Time.
(a) At the Closing, the Constituent Corporations shall duly execute and deliver for filing after the completion of the trading day commenced on the Closing Date:
(i) to the Secretary of State of the State of Mississippi (the "Mississippi Secretary of State"), articles of merger as provided in Section 79-4-11.05 of the MBCA (the "Mississippi Articles of Merger");
(ii) to the Secretary of State of the State of Texas (the "Texas Secretary of State"), articles of merger as provided in Article 5.04 of the TBCA (the "Texas Articles of Merger"); and
(iii) to the State Corporation Commission of Virginia (the "Virginia Commission", and together with the Mississippi Secretary of State and the Texas Secretary of State, the "State Agencies"), articles of merger as provided in Section 13.1-720 of the VSCA (the "Virginia Articles of Merger", and together with the Mississippi Articles of Merger and the Texas Articles of Merger, the "Articles of Merger").
1.04 Articles of Incorporation and Bylaws of the Surviving Corporation. At the Effective Time, (i) the Articles of Incorporation of Atmos as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by Law and such Articles of Incorporation, and (ii) the Bylaws of Atmos as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until thereafter amended as provided by Law, the Articles of Incorporation of the Surviving Corporation and such Bylaws.
1.05 Directors and Officers of the Surviving Corporation. The directors of Atmos and the officers of Atmos immediately prior to the Effective Time shall, from and after the Effective Time, be the directors and officers, respectively, of the Surviving Corporation until their successors shall have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Articles of Incorporation and Bylaws.
1.06 Effects of the Merger. Subject to the foregoing, the effects of the Merger shall be as provided in the applicable provisions of the MBCA, the TBCA and the VSCA.
1.07 No Appraisal Rights. The Shareholders hereby waive all appraisal, dissenter's and similar rights under the MBCA, TBCA and VSCA in respect of the Merger.
1.08 Further Assurances. Each party hereto will, either prior to or after the Effective Time, execute such further documents, instruments, deeds, bills of sale, assignments and assurances and take such further actions as may reasonably be requested by one or more of the others to consummate the Merger, to vest the Surviving Corporation with full title to all assets, properties, rights, approvals, immunities and franchises of either of the Constituent Corporations or to effect the other purposes of this Agreement.
2.01 Effect on Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of Atmos, the Company or any holder of any of the following securities:
(a) No Conversion of Atmos Common Stock. Each share of the common stock, no par value, of Atmos ("Atmos Common Stock") issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding Atmos Common Stock.
(b) Cancellation of Certain Shares of Company Common Stock. All shares of Company Common Stock that are owned by the Company as treasury stock shall be canceled and retired and shall cease to exist, and no stock of Atmos or other consideration shall be delivered in exchange therefor.
(c) Conversion of Company Common Stock. All of the issued and outstanding shares of Company Common Stock (other than shares to be canceled in accordance with Section 2.01(b)) shall be converted into the right to receive $150,000,000, less the adjustments, if any, provided in Section 2.02 (as so adjusted, the "Merger Consideration"). Subject to Section 12.01(g), the Merger Consideration shall be payable 50% in cash (the "Cash Amount") and 50% in a number of shares (the "Share Amount") of Atmos Common Stock, determined by dividing 50% of the Merger Consideration by the Stock Value, rounded up to the nearest whole number (the "Atmos Shares"). The Merger Consideration shall be allocated among the Shareholders and any Permitted Transferees in the manner provided in Section 2.03. For the purpose of the foregoing, the "Stock Value" means the average of the closing prices per share of the Atmos Common Stock as reported for New York Stock Exchange Composite Transactions for the 20 trading days ending on the date that is five trading days prior to the Closing Date (the "Average Price"); provided that if the Average Price is less than $17.65, the Stock Value shall be $17.65. Atmos shall promptly deliver notice of the Average Price to the Shareholders. All shares of Company Common Stock converted in accordance with this Section 2.01(c) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the shares of Atmos Common Stock and cash to be issued or paid in consideration therefor, upon the surrender of such certificate in accordance with Section 3.01, without interest.
2.02 Adjustments to Merger Consideration. The Merger Consideration shall be decreased by the following adjustments (the "Adjustments"):
(a) the amount, if any, by which the aggregate amount of dividends or other distributions made on the Company Shares after September 30, 2000 through the Closing Date (which dividends are payable in arrears following the end of each fiscal quarter) exceeds the rate of $500,000 with respect to each fiscal quarter (or with respect to the Company's first fiscal quarter, $700,000) (with the dividend payable in respect of any portion of the fiscal quarter that includes the Closing Date being appropriately prorated);
(b) the amount, if any, by which the aggregate amount paid in satisfaction of claims with respect to the pending lawsuit between the Company and the City of Clarksdale Public Utility Commission described in Section 4.11 of the Disclosure Schedule (the "Clarksdale Lawsuit") exceeds the Clarksdale Settlement Amount, if such claims are settled prior to the Closing Date; and
2.03 Exchange of Certificates. At the Effective Time, each Shareholder and Permitted Transferee shall be entitled to receive (i) a certificate or certificates representing such Shareholder's or Permitted Transferee's pro rata share of the Total Issuable Shares as set forth on Schedule I hereto (as the same may be amended from time to time to reflect the transfer of Company Shares to one or more Permitted Transferees) plus (ii) cash representing such Shareholder's or Permitted Transferee's pro rata share of the Total Payable Cash as set forth on Schedule I hereto, reduced, in the case of each Shareholder or Permitted Transferee, by such Shareholder's or Permitted Transferee's pro rata share of the Escrow Funds (as defined below) as set forth on Schedule I hereto, to be deposited in escrow as set forth below. As soon as practicable on the Closing Date after the last to occur of (i) the proper filing of the Mississippi Articles of Merger with the Mississippi Secretary of State, (ii) the proper filing of the Texas Articles of Merger with the Texas Secretary of State, and (iii) the proper filing of the Virginia Articles of Merger with the Virginia Commission (the "Delivery Time"), cash included in the Total Payable Cash in an amount equal to $10,000,000 (the "Escrow Funds") shall be delivered by Atmos to an escrow agent selected by Atmos and approved by the Shareholders (which approval shall not be unreasonably withheld or delayed) (the "Escrow Agent"). The Escrow Funds shall be held and administered by the Escrow Agent in accordance with the terms and conditions of an Escrow Agreement to be entered into on the Closing Date by the Shareholders, any Permitted Transferee, Atmos and the Escrow Agent substantially in the form of Exhibit A hereto (the "Escrow Agreement"), and the Escrow Funds shall be treated for all purposes of this Agreement as having been paid to the Shareholders and any Permitted Transferees.
2.04 Withholding Rights. Atmos shall be entitled to deduct and withhold from the Total Payable Cash otherwise payable pursuant to this Agreement to the Shareholders and any Permitted Transferees such amounts as Atmos is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state or local Tax Law. To the extent that amounts are so withheld by Atmos, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Shareholders and any Permitted Transferees.
2.05 Share Adjustment. The number and kind of the Total Issuable Shares, and determinations of prices associated therewith, shall be subject to such customary adjustments as shall be determined in good faith by Atmos to reflect any stock splits, reverse stock splits, stock dividends, reclassifications, recapitalizations, mergers, consolidations or other changes in capital structure occurring or for which a record date occurs after the date hereof.
3.01 Deliveries at Closing.
(a) On the Closing Date, the Company and the Shareholders shall deliver to Atmos:
(i) certified copies of the Company's Articles of Incorporation, Bylaws and all corporate resolutions of the Company with respect to the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby (together with an incumbency and signature certificate regarding the officer(s) signing on behalf of the Company);
(ii) a certificate of good standing for the Company from the State of Mississippi;
(iii) certified copies of all resolutions of the Robert M. Hearin Support Foundation with respect to the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby;
(iv) a certified copy of Letters Testamentary issued by the local probate court with respect to the Estate of Leon Hess;
(v) a certificate of the trustee(s) of the Twenty-Five Year Charitable Lead Annuity Trust under the Will of Leon Hess (the "CLAT") with respect to the existence and irrevocability of the trust, the identity of the trustor(s) and trustee(s), and the authority of the trustee(s) to bind the trust;
(vi) certificates representing the Company Shares, together with letters of transmittal with respect thereto; and
(vii) such other items as are specified in Article VIII.
(b) Atmos shall deliver:
(i) to the Shareholders on the Closing Date, certified copies of its Articles of Incorporation, Bylaws and corporate resolutions with respect to the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby (together with an incumbency and signature certificate regarding the officer(s) signing on behalf of Atmos);
(ii) to the Shareholders on the Closing Date, certificates of good standing for Atmos from the State of Texas and the Commonwealth of Virginia;
(iii) to each Shareholder and Permitted Transferee, as soon as practicable on the Closing Date after the Delivery Time, a certificate for shares of Atmos Common Stock in the name of such Shareholder (or its designee) or Permitted Transferee (or its designee) representing such Shareholder's or Permitted Transferee's pro rata share of the Total Issuable Shares and an amount of cash representing such Shareholder's or Permitted Transferee's pro rata share of the Total Payable Cash (less such Shareholder's or Permitted Transferee's pro rata share of the Escrow Funds) payable by delivery of immediately available funds to the account as such Shareholder or Permitted Transferee may reasonably direct by written notice delivered to Atmos by each such Shareholder or Permitted Transferee at least three Business Days before the Closing Date, in each case to which such Shareholder or Permitted Transferee is entitled pursuant to Section 2.03;
(iv) to the Escrow Agent, as soon as practicable on the Closing Date after the Delivery Time, an amount of cash representing the Escrow Funds payable by delivery of immediately available funds in the manner contemplated by the Escrow Agreement; and
(v) such other items as are specified in Article IX.
3.02 Bank Accounts. In order to facilitate the transfer of the Total Payable Cash (less the Escrow Funds) to the Shareholders as soon as practicable on the Closing Date after the Delivery Time, Atmos and the Shareholders shall use commercially reasonable efforts to open separate accounts at a bank approved by Atmos and the Shareholders (which approvals shall not be unreasonably withheld or delayed) so as to permit an intra-bank transfer of such cash.
The Shareholders hereby jointly and severally represent and warrant to Atmos as follows; provided that any representation or warranty as to any Shareholder shall be deemed made only by that Shareholder.
4.01 Power and Authority. The Robert M. Hearin Support Foundation is duly organized, validly existing and in good standing under the Laws of the State of Mississippi. John B. Hess, Nicholas F. Brady, Thomas H. Kean, Burton T. Lefkowitz and John Y. Schreyer have been duly and validly appointed and are presently acting as the executors of the Estate of Leon Hess and as trustees of the CLAT, which is a validly existing trust. The Robert M. Hearin Support Foundation has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The executors of the Estate of Leon Hess have full power and authority to execute and deliver this Agreement and to perform the obligations of the Estate of Leon Hess hereunder and to consummate the transactions contemplated hereby without the special authorization of the probate or other court. The trustees of the CLAT have full trust power and authority to execute and deliver this Agreement and to perform the obligations of the CLAT hereunder and to consummate the transactions contemplated hereby without the special authorization of any probate or other court. The execution and delivery by each Shareholder of this Agreement and the performance by each Shareholder of its obligations hereunder have been duly and validly authorized by or on behalf of such Shareholder, no other action on the part of such Shareholder or any beneficiary thereof being necessary. This Agreement has been duly and validly executed and delivered by each Shareholder and constitutes a legal, valid and binding obligation of such Shareholder enforceable against such Shareholder in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law).
4.02 Company's Power and Authority. The Company has full corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery by the Company of this Agreement, and the performance by the Company of its obligations hereunder, have been duly and validly authorized by the Board of Directors of the Company and by the Shareholders as the sole shareholders of the Company, no other corporate action on the part of the Company or its shareholders being necessary. This Agreement has been duly and validly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law).
4.03 Corporate Existence of the Company. The Company is a corporation, duly organized, validly existing and in good standing under the Laws of the State of Mississippi, and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its Assets and Properties. The Company is duly qualified, licensed or admitted to do business and is in good standing in the State of Mississippi, which is the only jurisdiction in which the ownership, use or leasing of its Assets and Properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for those jurisdictions in which the adverse effects of all such failures by the Company to be qualified, licensed or admitted and in good standing could not in the aggregate reasonably be expected to have a material adverse effect on the Business or Condition of the Company.
4.04 Capital Stock. The authorized capital stock of the Company consists solely of Three Million (3,000,000) shares of Company Common Stock, of which only the Company Shares have been issued and are outstanding. The Company Shares are duly authorized, validly issued, outstanding, fully paid and nonassessable and have been issued free of any pre-emptive rights. Each Shareholder or its Permitted Transferee owns its respective Company Shares, beneficially and of record, free and clear of all Liens. Except for this Agreement, there are no outstanding Options with respect to the Company.
4.05 Subsidiaries. Each Subsidiary is a corporation validly existing and in good standing under the Laws of its jurisdiction of incorporation identified in the Disclosure Schedule, and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its Assets and Properties. Each Subsidiary is duly qualified, licensed or admitted to do business and is in good standing in those jurisdictions specified in the Disclosure Schedule, which are the only jurisdictions in which the ownership, use or leasing of such Subsidiary's Assets and Properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for those jurisdictions in which the adverse effects of all such failures by the Company and the Subsidiaries to be qualified, licensed or admitted and in good standing could not in the aggregate reasonably be expected to have a material adverse effect on the Business or Condition of the Company. The Disclosure Schedule lists for each Subsidiary the amount of its authorized capital stock, the amount of its outstanding capital stock and the record owners of such outstanding capital stock. Except as disclosed in the Disclosure Schedule, all of the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued free of any pre-emptive rights, are fully paid and nonassessable, and are owned, beneficially and of record, by the Company or Subsidiaries wholly owned by the Company free and clear of all Liens, other than restrictions on the payment of dividends arising under applicable Law and restrictions on transferability arising under applicable securities Laws. There are no outstanding Options with respect to any Subsidiary. Neither the Company nor any Subsidiary owns, or has any Contract to acquire, any Investment Assets, except as disclosed in the Disclosure Schedule.
4.06 No Conflicts.
(a) The execution and delivery by each Shareholder and the Company of this Agreement do not, and the performance by such Shareholder and the Company of their respective obligations under this Agreement and the consummation of the transactions contemplated hereby will not:
(i) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the instruments of organization or formation of such Shareholder, the Company or any Subsidiary;
(ii) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in the Disclosure Schedule, conflict with or result in a violation or breach of, in any material respect, any term or provision of any Law or Order applicable to such Shareholder, the Company or any Subsidiary or any of their respective Assets and Properties; or
(iii) except as disclosed in the Disclosure Schedule, (i) conflict with or result in a violation or breach of, in any material respect, (ii) constitute (with or without notice or lapse of time or both) a default under, in any material respect, (iii) require such Shareholder, the Company or any Subsidiary to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in or give to any Person (with or without notice or lapse of time or both) any right of termination, cancellation, acceleration or modification in or with respect to, or (v) result in the creation or imposition of any Lien upon such Shareholder, the Company or any Subsidiary or any of their respective Assets and Properties under, any Contract or License to which such Shareholder, the Company or any Subsidiary is a party or by which any of their respective Assets and Properties is bound.
4.07 Governmental Approvals and Filings. Except (i) for the filing of the Articles of Merger with the State Agencies, (ii) for the filing of a premerger notification report by the Company under the HSR Act, (iii) for the approval of the MPSC in accordance with the 1956 Mississippi Public Utility Act, as amended (77-3-1 et seq.), and (iv) as disclosed in the Disclosure Schedule, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of any Shareholder, the Company or any Subsidiary is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except those as would be required solely as a result of the identity or the legal or regulatory status of Atmos or any of its Affiliates.
4.08 Books and Records. The minute books and other similar records of the Company and the Subsidiaries as made available to Atmos prior to the execution of this Agreement contain a true and complete record, in all material respects, of all action taken at all meetings and by all written consents in lieu of meetings of the shareholders, the boards of directors and committees of the boards of directors of the Company and the Subsidiaries. The stock transfer ledgers of the Company and the Subsidiaries as made available to Atmos prior to the execution of this Agreement accurately reflect all record transfers in the capital stock of the Company and the Subsidiaries. The books of account of the Company and the Subsidiaries are complete and correct, in all material respects, and have been maintained, in all material respects, in accordance with sound business practice and the requirements of Section 13(b)(2) of the Exchange Act (regardless of whether or not the Company and the Subsidiaries are subject to such section), including the maintenance of an adequate system of internal controls.
4.09 Financial Statements and Condition.
(a) Prior to the execution of this Agreement, the Shareholders have caused the Company to deliver to Atmos true and complete copies of the following: (i) the audited balance sheets of the Company and its consolidated subsidiaries as of September 30, 1998, 1999 and 2000, and the related audited consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years then ended, including the notes thereto and together with a true and correct copy of the report on such audited information by Deloitte & Touche LLP, and all letters from such accountants with respect to the results of such audits; and (ii) the unaudited balance sheet of the Company and its consolidated subsidiaries as of June 30, 2001 (the "June 30, 2001 Balance Sheet"), and the related unaudited consolidated statements of operations, shareholders' equity and cash flows for the nine-month period then ended, including the notes thereto, copies of which are also included in the Disclosure Schedule. Except as set forth in the notes thereto and as disclosed in the Disclosure Schedule, all such Financial Statements were prepared in accordance with GAAP and fairly present in all material respects the consolidated financial condition, results of operations, changes in shareholders' equity and cash flows of the Company and its consolidated subsidiaries as of the respective dates thereof and for the respective periods covered thereby, subject, in the case of the interim Financial Statements, to normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse) and the absence of notes (that, if presented, would not differ materially from those included in the latest audited Financial Statements). Except for those Subsidiaries listed in the Disclosure Schedule, the financial condition and results of operations of each Subsidiary are, and for all periods referred to in this Section 4.09 have been, consolidated with those of the Company.
(b) Except as set forth in the Disclosure Schedule, the Company and the Subsidiaries have no material Liabilities other than (i) the liabilities reflected in the June 30, 2001 Balance Sheet, (ii) liabilities incurred since the date thereof in the ordinary course of business consistent with past practices (none of which is materially adverse), and (iii) liabilities specifically delineated as to nature and amount in the Disclosure Schedule.
(c) Except for the execution and delivery of this Agreement and the transactions to take place pursuant hereto on or prior to the Closing Date and as disclosed in the Disclosure Schedule, since September 30, 2000, (i) the business of the Company and the Subsidiaries has been operated in all material respects in the ordinary course consistent with past practice, (ii) there has not been any material adverse change in the Business or Condition of the Company, other than those occurring as a result of general economic or financial conditions affecting the United States as a whole or the region in which the Company and the Subsidiaries conduct their business or other developments which are not unique to the Company and the Subsidiaries but also affect other Persons who participate or are engaged in the lines of business in which the Company and the Subsidiaries participate or are engaged and (iii) the Company and the Subsidiaries have used their commercially reasonable efforts to preserve their business and goodwill, including the goodwill of their customers, employees, subcontractors, suppliers, insurers, regulators and other Persons having business relations with them, and maintained their assets and property in at least as good an order and condition as existed on such date, reasonable wear and tear excepted, which is sufficient to continue to conduct their business as heretofore conducted.
(d) Except as disclosed in the Disclosure Schedule, since September 30, 2000, there has not been, occurred or arisen, whether or not in the ordinary course of business:
(i) any change in or event affecting the Company or any of the Subsidiaries that has had or is reasonably expected to have a material adverse effect on the Business or Condition of the Company other than those occurring as a result of general economic or financial conditions affecting the United States as a whole or the region in which the Company and the Subsidiaries conduct their business or other developments which are not unique to the Company and the Subsidiaries but also affect other Persons who participate or are engaged in the lines of business in which the Company and the Subsidiaries participate or are engaged;
(ii) any casualty, loss, damage or destruction (whether or not covered by insurance) of any of the Assets and Properties of the Company or any of the Subsidiaries that has involved or may involve a material loss to any of the Company and the Subsidiaries in excess of all applicable insurance coverage (excepting deductible amounts);
(iii) any amendment of the Company's Articles of Incorporation or Bylaws or any charter or bylaws of the Subsidiaries;
(iv) any transaction between the Company or any Subsidiary and any of the Shareholders;
(v) any declaration or payment of any dividend or distribution with respect to capital stock of the Company or any Subsidiary (whether in cash or in kind), other than dividends to the Company, or redemption, purchase or other acquisition of any of its capital stock;
(vi) any capital expenditure (or series of related capital expenditures) by the Company or any Subsidiary outside the ordinary course of business or inconsistent with past practice;
(vii) any increase in the bonus, salaries or other compensation or benefits of any of the directors, officers, employees, agents or consultants of the Company or any Subsidiary outside the ordinary course of business or inconsistent with past practice or any other change in the employment terms (including severance provisions) for any of its officers or employees outside the ordinary course of business or inconsistent with past practice;
(viii) any delay or postponement by the Company or any Subsidiary of the payment of any accounts payable or other liabilities in a manner inconsistent with the ordinary course of business or past practice;
(ix) any assumption, creation, guarantee or incurrence by the Company or any Subsidiary of any Indebtedness, whether absolute or contingent (other than for working capital in the ordinary course of business consistent with past practice);
(x) any settlement of any lawsuit by the Company or any Subsidiary, other than settlements that have an immaterial effect upon them;
(xi) any adverse change, in any material respect, in the Company's rate base, its rate agreement with the MPSC (including its allowed rate of return, purchased gas adjustments or weather normalization adjustments), or in rate adjustments;
(xii) any adverse change in the customer satisfaction surveys or comparison of rates versus other Southeastern United States gas companies that might affect the Company's performance adjustment in any material respect; or
(xiii) any other action by the Company or any Subsidiary which, if taken after the date hereof, would violate Section 6.07.
(a) Each of the Company and the Subsidiaries has filed (or there has been filed on their behalf) all Tax Returns required to be filed by or on behalf of each of them, or requests for extensions to file such returns have been timely filed or granted and have not expired, and all such Tax Returns are complete and accurate in all respects. The Company and each of the Subsidiaries has paid (or there has been paid on their behalf) all Taxes required to be paid by them. The Company and each Subsidiary has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and back-up withholding requirements, including maintenance of required records with respect thereto, in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. The accrual for Taxes in the most recent Financial Statements equals or exceeds the liability of the Company and the Subsidiaries for all Taxes payable by the Company and the Subsidiaries for all taxable periods and portions thereof accrued through the date of such Financial Statements. All Taxes of the Company and the Subsidiaries accrued following the end of the most recent period covered by the Financial Statements have been accrued in the ordinary course of business and do not exceed comparable amounts incurred in similar periods in prior years (taking into account any changes in operating results). Neither the Company nor any of the Subsidiaries has taken any action not in accordance with past practice that would have the effect of deferring a measure of Tax (including income, sales, gross receipts or payroll) from a period (or portion thereof) ending on or prior to the Effective Time to a period (or portion thereof) beginning after the Effective Time. No requests for waivers of the time to assess any Taxes against the Company or any of the Subsidiaries have been granted or are pending. The Company and the Subsidiaries have complied with all applicable Laws pertaining to Taxes.
(b) Neither the Company nor any of the Subsidiaries is a party to, is bound by, or has any obligation under, any agreement relating to the allocation or sharing of Taxes or has any liability for the Taxes of any Person other than the Company or the Subsidiaries, as a transferee or successor or otherwise (including any liability under Treasury Regulations Section 1.1502-6 or any similar provision of state, local or foreign Law). Neither the Company nor any of its Subsidiaries has entered into any closing agreement or any other agreement with any Tax Authority that remains in effect. Neither the Company or any of the Subsidiaries has been a "distributing corporation" or a "controlled corporation" in connection with a distribution described in Section 355 of the Code.
(c) Neither the Company nor any of the Subsidiaries has ever been a member of an affiliated group of corporations (within the meaning of Code Section 1504(a)) filing consolidated Tax Returns, other than the affiliated group of which the Company is the common parent.
(d) None of the assets of the Company or any Subsidiary are treated as "tax-exempt use property" within the meaning of Section 168(h) of the Code.
(e) Neither the Company nor any Subsidiary is a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of (i) any "excess parachute payments" within the meaning of Section 280G of the Code (without regard to the exception set forth in Section 280G(b)(4) of the Code) or (ii) any amount of compensation for which a deduction would be disallowed under Section 162 of the Code. The Shareholders have approved, in accordance with the requirements of Section 280G of the Code, the payments under the following agreements, so that the payments under such agreements will not be treated as "parachute payments" under said Section 280G: (i) the Change in Control Termination Benefits Agreements dated September 11, 2000, by and between the Company and Messrs. Hardwick, Anderson, Wise, Langley, Novick and Aven, as amended; (ii) the Special Retirement Benefit and Severance Agreement dated as of January 1, 1996, by and between the Company and Matthew L. Holleman, III, as amended; and (iii) the Supplemental Pension Benefit Letter Agreement dated February 23, 1994, between the Company and Matthew L. Holleman, III, as amended.
(f) Neither the Company nor any Subsidiary has filed any consent agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company or any Subsidiary.
(g) No outstanding material adjustment relating to any Tax Return filed by the Company or any Subsidiary has been proposed by any Tax authority to the Company or any Subsidiary.
(h) Neither the Company nor any Subsidiary has agreed to make any adjustment under Section 481(a) of the Code (or any corresponding provision of state, local or foreign Tax Law) by reason of a change in accounting method or otherwise. The Company and the Subsidiaries use the accrual method of accounting for federal income Tax purposes.
(i) No claim has been made by an applicable Tax authority in a jurisdiction where the Company and the Subsidiaries do not file Tax Returns that the Company or any Subsidiary is or may be subject to Tax in that jurisdiction. The Disclosure Schedule contains a list of all jurisdictions, whether foreign or domestic, to which a Tax is properly payable by the Company or any Subsidiary.
(j) Neither the Company nor any Subsidiary has, nor has had, a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States and such foreign country.
(k) None of the Tax Returns filed by the Company or any Subsidiary was required to contain (in order to avoid the imposition of a penalty and determined without regard to the ability to file an amended Tax Return at any time after the filing of the original Tax Return) a disclosure statement under former Section 6661 of the Code or current Section 6662 of the Code (or any similar provision of state, local or foreign Tax law).
(l) Neither the Company nor any Subsidiary has ever been a party to a plan or agreement that could be treated as a partnership for U.S. federal income Tax purposes.
(m) The Company has made available to Atmos true and complete copies of all income Tax audit reports, statements of deficiency, closing or other agreements received by the Company or the Subsidiaries relating to Taxes, and all federal and state income or franchise Tax Returns for the Company and the Subsidiaries for all open years. No material election with respect to Taxes has been made in any Tax Return not made available to Atmos.
(n) Neither the Company nor any Shareholder has taken any action that could prevent the Merger from qualifying as a "reorganization" within the meaning of Section 368 of the Code.
4.11 Legal Proceedings; Orders.
(a) Except as disclosed in the Disclosure Schedule, there are no Actions or Proceedings pending or, to the Knowledge of Shareholders and the Company, threatened against, relating to or affecting the Company or any Subsidiary or any of their respective Assets and Properties. There are no Actions or Proceedings pending or, to the knowledge of the Shareholders, threatened against, relating to or affecting any Shareholder that could reasonably be expected to prevent or delay the consummation of the Merger or otherwise prevent or delay such Shareholder from performing its obligations under this Agreement. None of the Actions or Proceedings disclosed in the Disclosure Schedule has had or could reasonably be expected to have, individually or in the aggregate with other such Actions or Proceedings, a material adverse effect on the Business or Condition of the Company or to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement. Except as disclosed in the Disclosure Schedule, to the Knowledge of the Shareholders and the Company, no event has occurred or circumstance exists that may give rise to or serve as the basis for any such Action or Proceeding that could reasonably be expected, individually or in the aggregate with other such Actions or Proceedings, to have a material adverse effect on the Business or Condition of the Company. The Company has delivered to Atmos all material pleadings, correspondence and other documents in the Actions listed in the Disclosure Schedule except for those pleadings, correspondence and other documents that, in the opinion of counsel to the Company, if delivered to Atmos would cause a waiver by the Company of an attorney/client privilege.
(b) Except as disclosed in the Disclosure Schedule, none of such Orders has materially adversely affected or could reasonably be expected, individually or in the aggregate with other such Orders, to materially adversely affect the Business or Condition of the Company.
4.12 Compliance With Laws and Orders; Regulatory Filings.
(a) Except as disclosed in the Disclosure Schedule, neither the Company nor any Subsidiary is, or since September 30, 1997 has been, in any material respect, in violation of or in default under any Law or Order applicable to the Company or any Subsidiary or any of their respective Assets and Properties. Except as disclosed in the Disclosure Schedule, since September 30, 1997, neither the Company nor any Subsidiary has received any notice or other communication from any Governmental or Regulatory Authority regarding any violation of, or failure to comply with, any Law or Order, in any material respect, or to undertake, or to bear all or any portion of the cost of, any remedial action or correct any unsafe condition or practice of any nature with respect thereto or effect a refund to customers or a recall of appliances or other goods sold to customers.
(c) The Company and the Subsidiaries (other than Mississippi Energies, Inc.) are subject to regulation by the MPSC. Neither the Company nor any Subsidiary is subject to regulation by FERC as a "natural-gas company" under the Natural Gas Act pursuant to a Hinshaw exemption.
(d) All material filings required to be made by the Company or any of the Subsidiaries since December 31, 1996 under applicable federal and state Laws have been filed with the appropriate federal or state Government or Regulatory Authority (including the MPSC), as the case may be, including all material written forms, statements, reports and agreements and all material documents, exhibits, amendments and supplements appertaining thereto, including all material rates, tariffs, franchises, service agreements and related documents, all of which filings complied, as of their respective dates, with all applicable requirements of the appropriate statute and the rules and regulations thereunder in all material respects.
(e) Neither the Company, nor any Subsidiary, nor, to the Knowledge of the Shareholders and the Company, any officer, employee or agent thereof, has directly or indirectly given or agreed to give any gift or similar benefit to any customer, supplier, government employee, or other Person who was or is in a possible position to help or hinder the Company or any of the Subsidiaries, which gift or benefit (a) could reasonably be expected to subject the Company or any of the Subsidiaries to any damages or penalties in any civil or criminal Action or Proceeding, or (b) could reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Business or Condition of the Company if not given or continued.
4.13 Benefit Plans; ERISA.
(a) The Disclosure Schedule contains a true and complete list of each of the Benefit Plans.
(b) Except as disclosed in the Disclosure Schedule, neither the Company nor any Subsidiary maintains or is obligated to provide benefits under any life, medical or health plan (other than as an incidental benefit under a Qualified Plan) which provides benefits to retirees or other terminated employees other than benefit continuation rights under the Consolidated Omnibus Budget Reconciliation of 1985, as amended. The Disclosure Schedule contains a true and complete list of all retirees and other terminated employees who are receiving pension or retiree medical benefits as of August 1, 2001.
(c) Except as disclosed in the Disclosure Schedule, neither the Company, any Subsidiary, any ERISA Affiliate nor any other corporation or organization controlled by or under common control with any of the foregoing within the meaning of Section 4001 of ERISA has at any time contributed to or has any obligation to contribute to or has any liability (contingent or otherwise) to any "multiemployer plan", as that term is defined in Section 4001 of ERISA.
(e) The Company and its Subsidiaries have performed, in all material respects, all of their obligations under all Benefit Plans, and all contributions and other payments required to be made by the Company or any Subsidiary to any Benefit Plan with respect to any period ending before or at or including the Closing Date have been made or reserves adequate for such contributions or other payments have been or will be set aside therefor and have been or will be reflected in the Financial Statements in accordance with GAAP.
(f) To the Knowledge of Shareholders and the Company, no transaction contemplated by this Agreement will result in material liability to the PBGC or otherwise under Section 302(c)(11), 4062, 4063, 4064 or 4069 of ERISA, or otherwise, with respect to the Company, any Subsidiary, any ERISA Affiliate or any other corporation or organization controlled by or under common control with any of the foregoing within the meaning of Section 4001 of ERISA.
(g) There are no pending, or to the Knowledge of Shareholders and the Company, threatened claims by or on behalf of any Benefit Plan, or by any Person covered thereby, other than ordinary claims for benefits submitted by participants or beneficiaries, which, individually or in the aggregate, could result in material liability on the part of Atmos, the Company, any Subsidiary or any fiduciary of any such Benefit Plan.
(h) Except as disclosed in the Disclosure Schedule, no employer securities, employer real property or other employer property is included in the assets of any Benefit Plan.
(i) The Disclosure Schedule correctly sets forth, for each Subject Defined Benefit Plan, as of the last day of the plan year of such plan which coincides with or first precedes the date of this Agreement, the fair market value of the assets of such plan and the actuarial present value of the benefit liabilities (as defined in Section 4001(a)(16) of ERISA) under such plan at such date as established on the basis of the actuarial assumptions to be used to calculate present values under Section 417(e)(3)(A) of the Code.
(j) The Company has delivered to Atmos:
(i) all documents that set forth the terms of each Benefit Plan and of any related trust, including (A) all plan descriptions and summary plan descriptions of Benefit Plans for which Shareholders, the Company or any Subsidiary is required to prepare, file, and distribute plan descriptions and summary plan descriptions, and (B) all summaries and descriptions furnished to participants and beneficiaries regarding Benefit Plans for which a plan description or summary plan description is not required;
(iii) all collective bargaining agreements pursuant to which contributions have been made or obligations incurred (including both pension and welfare benefits) by the Company, any Subsidiary and the ERISA Affiliates, and all collective bargaining agreements pursuant to which contributions are being made or obligations are owed by such entities;
(iv) a written description of any Benefit Plan that is not otherwise in writing;
(v) all insurance policies which were purchased by or to provide benefits under any Benefit Plan currently in force or for which the Company or any Subsidiary currently has any liability (contingent or otherwise);
(vi) all Contracts with third party administrators, actuaries, investment managers, consultants, and other independent contractors that relate to any Benefit Plan currently in force or for which the Company or any Subsidiary currently has any liability (contingent or otherwise);
(vii) all reports, including all discrimination testing reports and actuarial reports, submitted within the four years preceding the date hereof by third party administrators, actuaries, investment managers, consultants, or other independent contractors with respect to any Benefit Plan currently in force or for which the Company or any Subsidiary currently has any liability (contingent or otherwise);
(viii) all notifications given within the four years
preceding the date hereof to employees of their rights under Section
601 et seq. of ERISA, Section 4980B of the Code, Section 9801 et seq.
of the Code, and under all other applicable federal and state laws
regulating the notice requirements of Group Health Plans (as defined in
Section 607(1) of ERISA);
(ix) the Form 5500 filed in each of the most recent three plan years with respect to each Benefit Plan, including all schedules thereto and the opinions of independent accountants;
(x) all notices or reports that were given by the Company, any Subsidiary or any ERISA Affiliate, or any Benefit Plan to the IRS, the PBGC or the DOL, pursuant to statute, within the four years preceding the date hereof, including notices that are expressly mentioned elsewhere in this Section 4.13;
(xi) all notices that were given by the IRS, the PBGC, or the DOL to the Company, any Subsidiary, any ERISA Affiliate, or any Benefit Plan within the four years preceding the date hereof; and
(k) Except as disclosed in the Disclosure Schedule, neither the Company, any Subsidiary, any ERISA Affiliate nor any Shareholder has engaged in or knowingly permitted to occur and, to the Knowledge of Shareholders and the Company, no other party has engaged in or permitted to occur any transaction prohibited by Section 406 of ERISA or "prohibited transaction" under Section 4975(c) of the Code with respect to any Company Plan, except for any transactions which are exempt under Section 408 of ERISA or Section 4975 of the Code.
(l) Except for any formal written qualification requirement with respect to which the remedial amendment period set forth in Section 401(b) of the Code, and any regulations, rulings or other IRS releases thereunder, has not expired, (i) each Benefit Plan that is intended to be a Qualified Plan has received a favorable determination letter from the IRS and is qualified in form and operation under Section 401(a) of the Code, and each trust for each such Plan is exempt from federal income tax under Section 501(a) of the Code, and (ii) no event has occurred or circumstance exists that gives rise to disqualification or loss of tax-exempt status of any such Plan or trust.
(m) Except as disclosed in the Disclosure Schedule, each Benefit Plan can be terminated without payment of any additional contribution or amount and, except for any vesting of benefits of a Qualified Plan, without the vesting or acceleration of any benefits promised by such Plan.
(n) Except as disclosed in the Disclosure Schedule, no event has occurred or circumstance exists that could result in a material increase in premium costs of Benefit Plans that are insured, or a material increase in benefit costs of such Plans that are self-insured.
(o) Except as disclosed in the Disclosure Schedule, the Company and the Subsidiaries have the right to modify and terminate benefits as to retirees (other than pensions) with respect to both retired and active employees.
(p) Except as disclosed in the Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not result in the payment, vesting, or acceleration of any benefit, assuming that no Benefit Plan is terminated, in connection with the transactions contemplated by this Agreement.
4.14 Real Property.
(a) Except as disclosed in the Disclosure Schedule, the Company or a Subsidiary has good and valid title to or a valid and subsisting leasehold estate in all the real property, easements, rights of way and other interests in real property constituting its transmission, distribution, storage and service systems (the "System Property") other than imperfections in title or interest that are immaterial to the System Property as a whole and have not adversely affected the operation of the System Property in the ordinary course of business in any material respect. The System Property is free and clear of all Liens except for Permitted Liens and other Liens disclosed in the Disclosure Schedule. There are no Actions or Proceedings or other claims pending or, to the Knowledge of the Shareholders and the Company, threatened against the Company or a Subsidiary asserting that the Company or such Subsidiary does not have good and valid title to or a valid and subsisting leasehold estate in, as the case may be, any of the System Property. Except for real property leased to others as disclosed in the Disclosure Schedule, the Company or a Subsidiary is in possession of each parcel of real property owned by it, together with all buildings, structures, facilities, fixtures and other improvements owned by Company or a Subsidiary and located thereon. All improvements on such real property lie wholly within the boundaries of such real property and do not encroach upon the property of, or otherwise conflict with the property rights of, any other Person in any material respect.
(b) The Company or a Subsidiary has a valid and subsisting leasehold estate in and the right to quiet enjoyment of the real property interests purported to be leased by it as lessee for the full term of the lease thereof. The Disclosure Schedule contains a true and complete list of all such leases. Each such lease is a legal, valid and binding agreement, enforceable in accordance with its terms, of the Company or a Subsidiary and, to the Knowledge of Shareholders and the Company, of each other Person that is a party thereto, and except as set forth in the Disclosure Schedule, there is no default (or any condition or event which, after notice or lapse of time or both, would constitute a default) thereunder by the Company or any Subsidiary or, to the Knowledge of the Shareholders and the Company, any other Person that is a party thereto. To the Knowledge of Shareholders and the Company, the underground gas storage horizons of the gas storage facilities leased by the Company and any Subsidiary have not been impaired by directional drilling by the lessors thereof or any unauthorized third parties.
(c) Except as disclosed in the Disclosure Schedule, the improvements on the System Property or the other real property interests owned or leased by the Company and the Subsidiaries are in all material respects structurally sound, in good operating condition and in a state of good maintenance and repair consistent with past custom and practice, ordinary wear and tear excepted, are adequate and suitable for the purposes for which they are presently being used and there are no condemnation or appropriation proceedings pending or, to the Knowledge of the Shareholders and the Company, threatened against any of the System Property or such other real property interests or the improvements thereon.
4.15 Tangible Personal Property; Sufficiency.
(a) The Company or a Subsidiary is in possession of and has good and valid title to, or has valid leasehold interests in or valid rights under Contract to use, all material tangible personal property used in or necessary to the conduct of the business of the Company and the Subsidiaries as currently conducted, including the personal property reflected in the June 30, 2001 Balance Sheet other than those disposed of since June 30, 2001, in the ordinary course of business consistent with past practice. All such tangible personal property is free and clear of all Liens, other than Permitted Liens or Liens disclosed in the Disclosure Schedule, and is in all material respects in good order and condition, ordinary wear and tear excepted, in safe operating condition and adequate and suitable for the purposes for which they are presently being used. Since September 30, 1997, the safety or operating condition has not been the subject of any Action or Proceeding or been the basis for any citation, fine or notice from any Governmental or Regulatory Authority, except as set forth in the Disclosure Schedule. The Disclosure Schedule correctly discloses, by type, the composition of the Company's transmission, distribution and service lines. The Company has made available to Atmos all MPSC inspection records or reports, leak history reports and unaccounted for gas records, in each case for the last five years, regarding its transmission, distribution and service lines.
(b) The Assets and Properties of the Company and the Subsidiaries are sufficient in all material respects for the continued conduct of the business of the Company and the Subsidiaries as currently conducted. The cast iron and steel pipe included in the System Property have sufficient capacity and other features required for the operation of the System Property in accordance with Good Utility Practice.
(c) Except as set forth in the Disclosure Schedule, to the Knowledge of the Shareholders and the Company, the costs to replace the Company's remaining cast iron pipe included in the System Property will not exceed in any material respect the amount therefor set forth in the Disclosure Schedule.
4.16 Intellectual Property Rights. The Disclosure Schedule discloses all material Intellectual Property used in the business of the Company and the Subsidiaries, each of which the Company or a Subsidiary either has all right, title and interest in or a valid and binding rights under Contract to use. Such Intellectual Property is sufficient for the continued conduct of the business of the Company and the Subsidiaries as currently conducted. Except as disclosed in the Disclosure Schedule, (i) all registrations with and applications to Governmental or Regulatory Authorities in respect of Intellectual Property owned by the Company or a Subsidiary as disclosed in the Disclosure Schedule are valid and in full force and effect, (ii) there are no material restrictions on the direct or indirect transfer of any Contract, or any interest therein, held by the Company or any Subsidiary in respect of Intellectual Property disclosed in the Disclosure Schedule, (iii) neither the Company nor any Subsidiary is in default (or with the giving of notice or lapse of time or both, would be in default) under any Contract to use the Intellectual Property disclosed in the Disclosure Schedule in any material respect, (iv) to the Knowledge of Shareholders and the Company, the Intellectual Property disclosed in the Disclosure Schedule is not being infringed by any other Person in any material respect, and (v) the use of such Intellectual Property by and the conduct of the business of the Company and the Subsidiaries do not infringe on the Intellectual Property rights of any other Person in any material respect. None of the Shareholders, the Company nor any Subsidiary has received any notice or other communication that the Company or any Subsidiary is infringing any Intellectual Property of any other Person, and no claim is pending or has been made to such effect that has not been resolved.
4.17 Contracts.
(a) The Disclosure Schedule contains a true and complete list of each of the following Contracts, to which the Company or any Subsidiary is a party or by which any of their respective Assets and Properties is bound:
(i) all Contracts (excluding Benefit Plans) providing for a commitment of employment or consultation services for a specified or unspecified term or otherwise relating to employment or the termination of employment, the name, position and rate of compensation of each party to each such Contract and the expiration date of each such Contract;
(iii) all partnership, joint venture, shareholders' or other similar Contracts with any Person;
(iv) all Contracts relating to Indebtedness of the Company or any Subsidiary in excess of $100,000 (other than Indebtedness owing to the Company or any wholly-owned Subsidiary);
(v) all Contracts with distributors, dealers, manufacturer's representatives, sales agencies or franchisees which in any case involve a binding payment or obligation, pursuant to the terms of any such Contract, by or to the Company or any Subsidiary of more than $100,000 annually;
(vi) all Contracts for gas supply, transportation or storage (and commodity, hedge or similar arrangements in respect thereof) or to provide or receive services from or to any other local distribution company which in any case involve a binding payment or obligation, pursuant to the terms of any such Contract, by or to the Company or any Subsidiary of more than $100,000 annually;
(vii) all Contracts involving take-or-pay obligations with respect to gas purchases or gas marketing; and all Contracts involving weather hedges;
(viii) all Contracts relating to (A) the future disposition or acquisition of any Assets and Properties individually or in the aggregate material to the Business or Condition of the Company, other than dispositions or acquisitions in the ordinary course of business consistent with past practice, (B) any merger or other business combination (other than this Agreement), (C) the construction of any plant, pipeline, facility or other material capital improvement or (D) the acquisition of all or substantially all of the Assets and Properties of any Person or division or line of business of any Person;
(ix) all collective bargaining or similar labor Contracts;
(x) all Contracts (other than this Agreement) that (A) limit or contain restrictions on the ability of the Company or any Subsidiary to declare or pay dividends on, to make any other distribution in respect of or to issue or purchase, redeem or otherwise acquire its capital stock, to incur Indebtedness, to incur or suffer to exist any Lien, to change the lines of business in which it participates or engages or to engage in any merger or other business combination or (B) require the Company or any Subsidiary to maintain specified financial ratios or levels of net worth or other indicia of financial condition;
(xii) all other Contracts the loss of which would have a material adverse effect on the Business or Condition of the Company.
(b) Each Contract required to be disclosed in the Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms in all material respects, of the Company or a Subsidiary and, to the Knowledge of Shareholders and the Company, of each other party thereto; and except as disclosed in the Disclosure Schedule, neither the Company, any Subsidiary nor, to the Knowledge of Shareholders and the Company, any other party to such Contract is in violation or breach of or default under any such Contract (or with notice or lapse of time or both, would be in violation or breach of or default under any such Contract) in any material respect. Complete and correct copies of all such Contracts have been delivered to Atmos.
4.18 Licenses. The Company and the Subsidiaries have all material Licenses required for the conduct of their business, and the ownership and operation of their Assets and Properties as currently conducted, owned and operated. The Disclosure Schedule contains a true and complete list of all such Licenses (and all pending applications for any such Licenses), setting forth the grantor, the grantee, the function and the expiration and renewal date of each. Except as disclosed in the Disclosure Schedule:
(a) the Company or a Subsidiary owns or validly holds all such Licenses;
(b) each such License is valid, binding and in full force and effect; and
(c) neither the Company nor any Subsidiary is, or since September 30, 1997 has been, in default (or with the giving of notice or lapse of time or both, would be in default) under any such License in any material respect.
Except as disclosed in the Disclosure Schedule, neither the Company nor any Subsidiary has received any notice or other communication from any Governmental or Regulatory Authority regarding any material violation or failure to comply with any term or requirement of any License or any actual proposed, possible or potential revocation, withdrawal, suspension, cancellation, termination of or modification to any License.
4.19 Insurance. The Disclosure Schedule contains a true and complete list of all material insurance policies in effect, currently or since September 30, 1997 (or in the case of the Company's liability policies, since June 1, 1989), that insure the business, operations or employees of the Company or any Subsidiary or affect or relate to the ownership, use or operation of any of the Assets and Properties of the Company or any Subsidiary and that have been issued to the Company or any Subsidiary. True and correct copies of all such policies, and all pending applications for policies of insurance, have been delivered to Atmos. Each such policy is valid and binding and in full force and effect, no premiums due thereunder have not been paid, all claims thereunder have been timely made in accordance with the terms thereof, and neither the Company nor any Subsidiary has received notice or other communication of any (i) cancellation or termination in respect of any such policy, (ii) default by the Company or any Subsidiary in respect of any such policy, (iii) refusal of coverage, (iv) claim that defense under any such policy will be afforded with reservation of rights or (v) claim that any such policy will not be renewed. None of such policies provide for any retrospective premium adjustment or other experience-based liability on the part of the Company or any Subsidiary. Other than the deductibles provided in such policies, neither the Company nor any Subsidiary has any self-insurance arrangement or any Contract, other than a policy of insurance, for the transfer or sharing of risk by or with the Company or any Subsidiary. The Disclosure Schedule sets forth for each liability policy (i) by year, for the current policy year and each of the preceding policy years beginning on or after June 1, 1989, a summary of the loss experience, a list of claims reported to the Company or any Subsidiary and claims reported to the insurance carriers, and (ii) as of the date hereof, a list of open claims.
4.20 Affiliate Transactions. Except as disclosed in the Disclosure Schedule, (i) there is no Indebtedness between the Company or any Subsidiary, on the one hand, and any Shareholder or any Affiliate (other than the Company or any Subsidiary) of such Shareholder, on the other, (ii) none of the Shareholders nor any such Affiliate provides or causes to be provided any assets, services or facilities to the Company or any Subsidiary, and (iii) neither the Company nor any Subsidiary provides or causes to be provided any assets, services or facilities to any Shareholder or any such Affiliate. Except as disclosed in the Disclosure Schedule, each of the Liabilities and transactions listed in the Disclosure Schedule was incurred or engaged in, as the case may be, on an arm's-length basis and in the ordinary course of business.
4.21 Labor Relations. Except as disclosed in the Disclosure Schedule:
(a) No employee of the Company or any Subsidiary is presently a member of a collective bargaining unit and, to the Knowledge of Shareholders and the Company, there are no overtly threatened attempts to organize for collective bargaining purposes any additional employees of the Company or any Subsidiary. Since September 30, 1997, there has been no work stoppage, strike, slow down or other concerted action by employees of the Company or any Subsidiary which materially adversely affected the Company or any Subsidiary.
(b) There is no controversy pending or, to the Knowledge of Shareholders and the Company, threatened between the Company or any Subsidiary and any of their respective employees. There is no basis for any claim, grievance, arbitration, negotiation, suit, action or charge of or by any employee of the Company or any Subsidiary, and no complaint is pending against the Company or any Subsidiary before the National Labor Relations Board or any other Governmental or Regulatory Authority. The Company and the Subsidiaries have complied, in respect of their employees, in all material respects with all applicable Laws, including those related to equal employment opportunity, non-discrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar Taxes, occupational health and safety, and plant closing.
4.22 Environmental Matters. Except as described in the Disclosure Schedule:
(a) Each of the Company and the Subsidiaries has obtained all material Licenses which are required under applicable Environmental Laws in connection with the conduct of the business or operations of the Company or such Subsidiary. Each of such Licenses is in full force and effect and each of the Company and the Subsidiaries is in compliance, in all material respects, with the terms and conditions of all such Licenses and with any applicable Environmental Law.
(b) No oral or written notification of a Release of a Hazardous Material has been filed by or on behalf of the Company or any Subsidiary; nor, to the Knowledge of the Shareholders and the Company, have any events occurred that would have required such a notice. To the Knowledge of Shareholders and the Company, no site or facility now or previously owned, operated or leased by the Company or any Subsidiary is listed or proposed for listing on the NPL, CERCLIS or any similar state or local list of sites requiring investigation or clean-up. Neither the Company nor any Subsidiary has transported wastes to or arranged for disposal of wastes at any such listed site.
(c) To the Knowledge of the Shareholders and the Company, there have been no material environmental investigations, studies, audits, tests, reviews other analyses conducted by, or that are in the possession of, the Company or any Subsidiary in relation to any site or facility now or previously owned, operated or leased by the Company or any Subsidiary which have not been delivered to Atmos prior to the date hereof.
(d) Neither the Company, the Subsidiaries, nor, to the Knowledge of Shareholders or the Company, any previous occupant, owner, tenant, or user of the real property owned by the Company and the Subsidiaries, has received any written notice, demand, letter, claim or request for information alleging that it may be in violation of or liable under any Environmental Law or License.
(e) Neither the Company nor any Subsidiary has entered into or agreed to any Order, and is not subject to any outstanding Order, relating to compliance with or liability under any Environmental Law. Neither the Company nor any Subsidiary is subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law.
(f) The real property owned or leased by the Company and the Subsidiaries (including soils, groundwater, surface water, buildings and other structures) is not contaminated with any Hazardous Materials, in any material respect; and, to the Knowledge of the Shareholders and the Company, no event has occurred or circumstance exists that presents an imminent threat of a future Release of any Hazardous Materials on such real property.
(h) Neither the Company nor any Subsidiary has disposed or arranged for disposal of Hazardous Materials on any third party property that, to the Knowledge of the Shareholders and the Company, could be reasonably expected to subject the Company or any Subsidiary to material liability under any Environmental Law.
(i) To the Knowledge of the Shareholders and the Company, no underground storage tanks, asbestos-containing material or polychlorinated biphenyls have ever been located on real property owned, leased or used by the Company or any Subsidiary.
(j) To the Knowledge of the Shareholders and the Company, the representations and warranties in this Section 4.22 are also correct and complete with respect to all real property that the Company and the Subsidiaries previously owned, leased or used through the time that the Company's or respective Subsidiary's ownership, lease, or use ceased.
(k) Neither the Shareholders, the Company nor any Subsidiary is required to make any filings under any Environmental Law in connection with the transactions contemplated hereby.
(l) The representations and warranties set forth in this Section 4.22 constitute the exclusive representations and warranties of the Shareholders under this Agreement with respect to any License issued under, or violation of, or liability arising under, any Environmental Law.
4.23 Information Supplied. Neither the Disclosure Schedule nor the information supplied or to be supplied in writing by or on behalf of Shareholders or the Company and the Subsidiaries for inclusion in any documents to be filed by the Company, Shareholders or Atmos with any Governmental or Regulatory Authority in connection with this Agreement and the transactions contemplated hereby contain or will, on the date of its filing, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading
4.24 Brokers. Except for Goldman, Sachs & Co., whose fees, commissions and expenses are the sole responsibility of Shareholders, all negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by the Shareholders directly with Atmos without the intervention of any Person on behalf of the Shareholders in such manner as to give rise to any valid claim by any Person against Atmos, the Company or any Subsidiary for a finder's fee, brokerage commission or similar payment.
(a) The Shareholders understand that the Atmos Shares will be issued without registration under the Securities Act, in reliance upon exemptions from registration under the Securities Act including the safe harbor provided by Regulation D promulgated under Section 4(2) of the Securities Act. The Shareholders understand that such exemptions depend in part upon, and such shares will be issued in reliance on, the representations and warranties made by the Shareholders in this Section 4.25.
(b) Each of the Shareholders will acquire the Atmos Shares for its own respective account for investment purposes only and not with a view to resale or other distribution thereof, in whole or in part, except as contemplated by the Registration Rights Agreement; provided, however, that, subject to the terms hereof, the disposition of its property shall at all times be within their control; and the Shareholders will not assign, sell, hypothecate or otherwise transfer the Atmos Shares unless (i)(a) a registration statement is in effect under the Securities Act with respect to such shares or (b) a written opinion of counsel acceptable to Atmos is obtained to the effect that no such registration is required, and (ii) they have complied with all applicable holding periods imposed by the Securities Act (and the regulations thereunder). The Shareholders acknowledge that a restrictive legend to such effect will be placed on the certificates representing the Atmos Shares and a notation will be made in the appropriate records of Atmos indicating that the Atmos Shares are subject to such restrictions on transfer.
(c) Each of the Shareholders qualifies as an "accredited investor" within the meaning of Rule 501 under the Securities Act, because it has total assets exceeding $5,000,000.
(d) Each of the Shareholders acknowledges that it:
(i) has been furnished with the articles of incorporation and bylaws of Atmos and the Atmos SEC Reports and is capable of understanding and evaluating the risks of acquiring the Atmos Shares;
(ii) has been given the opportunity to ask questions of, and receive answers from, Atmos and its officers and employees concerning the terms and conditions of the acquisition of the Atmos Shares and other matters pertaining to an investment in the Atmos Shares, has been given the opportunity to obtain such additional information necessary to evaluate the merits and risks of acquiring the Atmos Shares to the extent Atmos possesses such information;
(iii) has not relied upon any representations or warranties or other information (whether oral or written) from Atmos or its directors, officers or Affiliates, or from any other Persons, other than the representations and warranties of Atmos made in this Agreement;
(iv) is familiar with the nature of and risks attendant to investments in the business of Atmos and securities in general and has carefully considered and has, to the extent it believes such discussion necessary, discussed with its professional legal, financial and tax advisers the suitability of an investment in the Atmos Shares for its financial and tax situations, consistent with the fiduciary duties applicable to the management and conduct of its affairs, and has determined that the Atmos Shares are a suitable investment for it.
Atmos hereby represents and warrants to the Shareholders, any Permitted Transferees and the Company as follows:
5.01 Corporate Existence. Atmos is a corporation validly existing and in good standing under the Laws of the State of Texas and the Commonwealth of Virginia.
5.02 Authority. Atmos has full corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery by Atmos of this Agreement, and the performance by Atmos of its obligations hereunder, have been duly and validly authorized by the Board of Directors of Atmos, no other corporate action on the part of Atmos or its shareholders being necessary. This Agreement has been duly and validly executed and delivered by Atmos and constitutes a legal, valid and binding obligation of Atmos enforceable against Atmos in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law).
5.03 No Conflicts. The execution and delivery by Atmos of this Agreement do not, and the performance by Atmos of its obligations under this Agreement and the consummation of the transactions contemplated hereby will not:
(a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Articles of Incorporation or Bylaws of Atmos;
(b) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Schedule 5.04 hereto, conflict with or result in a violation or breach of, in any material respect, any term or provision of any Law or Order applicable to Atmos or any of its Assets and Properties; or
(c) except as disclosed in Schedule 5.03 hereto, (i) conflict with or result in a violation or breach of, in any material respect, (ii) constitute (with or without notice or lapse of time or both) a default under, in any material respect, (iii) require Atmos to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in or give to any Person (with or without notice or lapse of time or both) any right of termination, cancellation, acceleration or modification in or with respect to, or (v) result in the creation or imposition of any Lien upon Atmos or any of its Assets or Properties under, any Contract or License to which Atmos is a party or by which any of its Assets and Properties is bound.
5.04 Governmental Approvals and Filings. Except (i) for the filing of the Articles of Merger with the State Agencies, (ii) for the filing of a premerger notification report by Atmos under the HSR Act, (iii) for the approval of the MPSC in accordance with the 1956 Mississippi Public Utility Act, as amended (77-3-1 et seq.), (iv) for the approvals of the issuance of the Atmos Shares by Governmental or Regulatory Authorities in the States of Colorado, Georgia, Illinois, Kentucky and Virginia, (v) for a waiver in respect of the Merger by the Governmental or Regulatory Authorities in the State of Iowa, and (vi) as disclosed in Schedule 5.04 hereto, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of Atmos is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except those as would be required solely as a result of the identity or the legal or regulatory status of Shareholders or their respective Affiliates (other than the Company or the Subsidiaries).
5.05 Capitalization. The entire authorized capital stock of Atmos consists of 100,000,000 shares of Atmos Common Stock. As of September 20, 2001, (i) 40,774,510 shares of Atmos Common Stock are issued and outstanding, all of which are duly authorized, validly issued, fully paid and nonassessable and free of statutory pre-emptive rights, and (ii) no shares of Atmos Common Stock are held in the treasury of Atmos. As of the date hereof, other than options granted by Atmos under its 1998 Long-Term Incentive Plan and the Long-Term Stock Plan for the United Cities Gas Company Division and stock units under its Equity Incentive and Deferred Compensation Plan for Non-Employee Directors or as described in the Atmos SEC Reports, there are no Options with respect to Atmos. There are no obligations, contingent or otherwise, of Atmos to repurchase, redeem or otherwise acquire any shares of Atmos Common Stock.
5.06 Atmos Shares. The Atmos Shares have been duly authorized and, when issued in accordance with this Agreement, will be (a) validly issued, fully paid and nonassessable, free of pre-emptive rights, and (b) listed on the New York Stock Exchange.
5.07 SEC Filings; Financial Statements; No Adverse Change.
(a) Atmos has filed all forms, reports and documents required to be filed
with the SEC since September 30, 1999, and has heretofore delivered to the Shareholders,
in the form filed with the SEC, (i) its Annual Reports on Form 10-K for the
fiscal years ended September 30, 1999 and 2000, (ii) its Quarterly Reports on
Form 10-Q for the periods ended December 31, 2000, March 31, 2001, and June
30, 2001, (iii) all proxy statements relating to Atmos' meetings of shareholders
(whether annual or special) held since September 30, 2000, (iv) all Forms 8-K
filed by Atmos with the SEC since September 30, 2000,
(v) all other reports or registration statements filed by Atmos with the SEC
since September 30, 1999, and (vi) all amendments and supplements to all such
reports and registration statements filed by Atmos with the SEC since September
30, 1999 (collectively, the "Atmos SEC Reports"). The Atmos SEC Reports
are all the documents (other than preliminary material) that Atmos and its subsidiaries
were required to file with the SEC since September 30, 1999. The Atmos SEC Reports
were prepared in substantial compliance, in all material respects, with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and did not at the time they were filed contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) Atmos has heretofore delivered to the Shareholders its audited consolidated financial statements of Atmos and its subsidiaries (together with the notes thereto) for its fiscal years ended September 30, 1999 and 2000 and its unaudited consolidated financial statements for the period ended June 30, 2001. All such financial statements and all other financial statements included in the Atmos SEC Reports (the "Atmos Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby and complied as to form, in all material respects, with the published rules and regulations of the SEC with respect thereto. The Atmos Financial Statements (together with the notes thereto) fairly, in all material respects, present the financial condition and results of operations and cash flows of Atmos and its subsidiaries on a consolidated basis at the dates and for the periods set forth therein (subject, in the case of any such financial statements that are unaudited, to year-end adjustments in such amount and of such type as are or will be consistent with adjustments made in prior fiscal years).
(c) Except as disclosed in the Atmos SEC Reports, since September 30, 2000, there has not occurred or arisen, whether or not in the ordinary course of business, any change in or event affecting Atmos or any of its subsidiaries that has had or is reasonably expected to have a material adverse effect on the business, assets, liabilities, financial condition or results of operations of Atmos and its subsidiaries taken as a whole, other than those occurring as a result of general economic or financial conditions affecting the United States as a whole or the region in which Atmos and its subsidiaries conduct their business or other developments which are not unique to Atmos and its subsidiaries but also affect other Persons who participate or are engaged in the lines of business in which Atmos and its subsidiaries participate or are engaged.
5.08 Legal Proceedings. There are no Actions or Proceedings pending or, to the Knowledge of Atmos, threatened against, relating to or affecting Atmos or any of its Assets and Properties which could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement.
5.09 Financing. Atmos has sufficient cash and/or available credit facilities to pay the Total Payable Cash and to make all other necessary payments of fees and expenses in connection with the transactions contemplated by this Agreement.
5.10 Information Supplied. The information supplied or to be supplied in writing by or on behalf of Atmos for inclusion in any documents to be filed by the Company, Atmos, or Shareholders with any Governmental or Regulatory Authority in connection with this Agreement and the transactions contemplated hereby will not, on the date of its filing, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading.
5.11 Brokers. Except for Merrill Lynch & Co., whose fees, commissions and expenses are the sole responsibility of Atmos, all negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by Atmos directly with Shareholders and the Company without the intervention of any Person on behalf of Atmos in such manner as to give rise to any valid claim by any Person against Shareholders, the Company or any Subsidiary for a finder's fee, brokerage commission or similar payment.
Each of the Shareholders and the Company covenants and agrees with Atmos that, at all times from and after the date hereof, it will comply with all covenants and provisions of this Article VI, except to the extent Atmos may otherwise consent in writing.
6.01 Regulatory and Other Approvals. The Shareholders and the Company will, and will cause the Subsidiaries to, as promptly as practicable (a) take all commercially reasonable steps necessary or desirable to obtain all consents, approvals or actions of, make all filings with and give all notices to Governmental or Regulatory Authorities or any other Person required of any such Shareholder, the Company or any Subsidiary to consummate the transactions contemplated hereby, including those described in the Disclosure Schedule, (b) provide such other information and communications to such Governmental or Regulatory Authorities or other Persons as such Governmental or Regulatory Authorities or other Persons may reasonably request in connection therewith and (c) provide reasonable cooperation to Atmos in connection with the performance of its obligations under Sections 7.01 and 7.02. Shareholders will provide prompt notification to Atmos when any such consent, approval, action, filing or notice referred to in clause (a) above is obtained, taken, made or given, as applicable, and will advise Atmos of any communications (and, unless precluded by Law, provide copies of any such communications that are in writing) with any Governmental or Regulatory Authority or other Person regarding any of the transactions contemplated by this Agreement.
6.02 HSR Filings. In addition to and not in limitation of the covenants contained in Section 6.01, the Shareholders and the Company will, and will cause the Subsidiaries to, (a) take promptly all actions necessary to make the filings required of any Shareholder, the Company or their Affiliates under the HSR Act, (b) comply at the earliest practicable date with any request for additional information received by any such Shareholder, the Company or their Affiliates from the Federal Trade Commission or the Antitrust Division of the Department of Justice pursuant to the HSR Act and (c) cooperate with Atmos in connection with Atmos's filing under the HSR Act and in connection with resolving any investigation or other inquiry concerning the transactions contemplated by this Agreement commenced by either the Federal Trade Commission or the Antitrust Division of the Department of Justice or state attorneys general.
6.03 Investigation by Atmos. The Shareholders and the Company will, and will cause the Subsidiaries to, (a) provide Atmos and its officers, employees, counsel, accountants, financial advisors, consultants and other representatives (together, "Representatives") with full access, upon reasonable prior notice and during normal business hours, to all officers, employees, agents and accountants of the Company and the Subsidiaries and their Assets and Properties and Books and Records, but only to the extent that such access does not unreasonably interfere with the business and operations of the Company and the Subsidiaries, (b) in connection with and during the preparation of the audited financial statements of the Company and its consolidated subsidiaries, permit Atmos, its independent accounting firm and its representatives to examine and (unless prohibited by applicable accounting standards, in the case of work papers and other documents prepared by the Company's independent accountants) make copies of the work papers and other documents that are generated or reviewed, and to consult with the Company's independent accounting firm after signing a reasonable nondisclosure and indemnification letter, (c) furnish Atmos with all material pleadings, correspondence and other documents in the Actions or Proceedings listed in the Disclosure Schedule, except for those pleadings, correspondence and other documents that, in the opinion of counsel of the Company, if delivered to Atmos would cause a waiver by the Company of an attorney/client privilege, and (d) furnish Atmos and such other Persons with all such other information and data (including copies of Contracts, Benefit Plans and other Books and Records) concerning the business and operations of the Company and the Subsidiaries as Atmos or any of such other Persons reasonably may request in connection with such investigation, except to the extent that furnishing any such information or data would violate any Law, Order, Contract or License applicable to the Company or any Subsidiary or by which any of their respective Assets and Properties is bound.
6.04 No Solicitations; Permitted Transfer of Company Shares. Except as set
forth in the following sentence, the Shareholders and the Company will not take,
nor will they permit the Subsidiaries or any of their Affiliates (or authorize
or permit any investment banker, financial advisor, attorney, accountant or
other Person retained by or acting for or on behalf of such Shareholder, the
Company, the Subsidiaries or any such Affiliate) to (i) take, directly or indirectly,
any action to solicit, encourage, receive, negotiate, assist or otherwise facilitate
(including by furnishing information with respect to the Company or any Subsidiary
or permitting access to the Assets and Properties and Books and Records of the
Company or any Subsidiary) any offer or inquiry from any Person concerning an
Acquisition Proposal, (ii) enter into any agreement with respect to an Acquisition
Proposal, (iii) take, directly or indirectly, any action to solicit, encourage,
receive, negotiate, assist or otherwise facilitate any offer or inquiry from
any Person concerning an acquisition of any Company Shares, or (iv) transfer,
or enter into any agreement to transfer any Company Shares. Notwithstanding
anything in this Section 6.04 to the contrary, the Estate of Leon Hess shall
be entitled to transfer any portion of the Company Shares owned by it in accordance
with the provisions of the Last Will and Testament of Leon Hess if such transfer
does not prevent or delay the consummation of the transactions contemplated
hereby; provided that no such transfer shall relieve the Estate of Leon Hess
of its obligations under this Agreement; provided further that prior to any
such transfer, each transferee (each a "Permitted Transferee") shall
deliver an instrument reasonably acceptable to Atmos, pursuant to which such
Permitted Transferee shall (i) waive all appraisal, dissenter's and similar
rights under the MBCA, TBCA and VSCA in respect of the Merger, (ii) agree, either
prior to or after the Effective Time, to execute such further documents and
take such further actions as may reasonably be requested by Atmos to effect
the other purposes of this Agreement,
(iii) provide to Atmos those representations and warranties set forth in Sections
4.01, 4.04 (the third sentence thereof), 4.06, 4.07, 4.10(e) (the last sentence
thereof, if necessary for the representation and warranty in the first sentence
thereof to be true and correct as of the Closing Date), 4.11, and 4.25, to the
same extent as if it were named as a Shareholder herein, (iv) covenant and agree
with Atmos to comply with the covenants and provisions set forth in Sections
6.02, 6.10 and 6.11, (v) covenant and agree with Atmos to deliver to Atmos on
the Closing Date the certificate(s) representing the Company Shares owned by
such Permitted Transferee in accordance with Section 3.01(a)(vi), (vi) covenant
and agree to deliver to Atmos on the Closing Date the items set forth in Sections
8.03, 8.09, 8.10, 8.11 and 8.12 (substantially to the effect set forth on Exhibit
D-3), (vii) agree to indemnify Atmos and its directors, officers, employees,
stockholders and Affiliates in accordance with the provisions of Article 11
to the extent of the Merger Consideration received by such Permitted Transferee,
and (viii) consent to jurisdiction in the manner set forth in Section 14.10.
6.05 Conduct of Business. The Company will, and will cause the Subsidiaries to, conduct business only in the ordinary course. Without limiting the generality of the foregoing, the Company will, and will cause the Subsidiaries to, use commercially reasonable efforts, to (a) preserve intact the present business organization and reputation of the Company and the Subsidiaries in all material respects, (b) keep available (subject to dismissals and retirements in the ordinary course of business) the services of the key officers and employees of the Company and the Subsidiaries, (c) maintain the Assets and Properties of the Company and the Subsidiaries in working order and condition consistent with past custom and practice, ordinary wear and tear excepted, (d) maintain the good will of key customers, suppliers, insurers, regulators and lenders and other Persons with whom the Company or any Subsidiary otherwise has significant business relationships, (e) maintain in full force and effect insurance coverage from insurers, in amounts and on other terms no less favorable to the Company and the Subsidiaries than the insurance coverage in effect on the date hereof and timely provide all notices, make all claims and otherwise administer such insurance coverage so as to provide the Company and the Subsidiaries the full benefits of such insurance coverage in accordance with the terms thereof; and (f) vigorously and diligently prosecute and defend all Actions and Proceedings, and all claims that might give use to any Action or Proceeding. In addition, the Company will, and will cause the Subsidiaries to, advise, and upon the reasonable request by Atmos, confer with, Atmos concerning operational matters of a material nature, including risk management matters. Conferences shall be held during normal business hours, and only to the extent that they do not unreasonably interfere with the business and operations of the Company and the Subsidiaries.
6.06 Financial Statements and Reports.
(a) As promptly as practicable and in any event no later than 45 days after the end of each fiscal quarter ending after the date hereof and before the Closing Date (other than the fourth quarter) or 90 days after the end of each fiscal year ending after the date hereof and before the Closing Date, as the case may be, the Company will deliver to Atmos true and complete copies of (in the case of any such fiscal year) the audited and (in the case of any such fiscal quarter) the unaudited consolidated balance sheet, and the related audited or unaudited consolidated statements of operations, shareholders' equity and cash flows, of the Company and its consolidated subsidiaries, in each case as of and for the fiscal year then ended or as of and for each such fiscal quarter and the portion of the fiscal year then ended, as the case may be, together with the notes, if any, relating thereto, which financial statements shall be prepared on a basis consistent with the audited financial statements referred to in Section 4.09.
(c) The Company shall furnish to Atmos such additional consolidated financial statements of the Company and the Subsidiaries as may be required or, in the judgment of Atmos, are advisable to be filed by Atmos in accordance with Regulation S-X under the Securities Act prior to the Closing Date.
(d) All Financial Statements shall meet the requirements for the Financial Statements delivered pursuant to Section 4.09 as represented and warranted in such Section.
6.07 Certain Restrictions. Unless otherwise consented to in writing by Atmos or expressly permitted in the Disclosure Schedule, the Shareholders will cause the Company and the Subsidiaries to refrain from:
(a) amending the certificates or articles of incorporation or bylaws (or other comparable corporate charter documents) of the Company and the Subsidiaries or taking any action with respect to any such amendment or any recapitalization, reorganization, liquidation or dissolution of the Company and the Subsidiaries;
(b) authorizing, issuing, selling or otherwise disposing of any shares of capital stock of or any Option with respect to the Company or any Subsidiary, or modifying or amending any right of any holder of outstanding shares of capital stock of or Option with respect to the Company or any Subsidiary;
(c) (i) declaring, setting aside or paying any dividend or other distribution in respect of the capital stock of the Company or any Subsidiary not wholly owned, directly or indirectly, by the Company, or (ii) directly or indirectly redeeming, purchasing or otherwise acquiring any capital stock of or any Option with respect to the Company or any Subsidiary not wholly owned, directly or indirectly, by the Company; provided that the Company may continue to pay quarterly cash dividends (which dividends are payable in arrears following the end of each fiscal quarter) consistent with past practice at the rate of $500,000 with respect to each fiscal quarter (or with respect to the Company's first fiscal quarter, $700,000);
(d) acquiring or disposing of, or incurring any Lien (other than a Permitted Lien) on, any material Assets and Properties, other than (i) as contemplated by the Budget or (ii) in the ordinary course of business consistent with past practices provided Atmos has consented thereto in writing, which consent shall not be unreasonably withheld or delayed; provided that the Company may continue to conduct negotiations in connection with, enter into agreements with respect to, and proceed with construction of, a pipeline intended to expand the Company's supply capabilities into the Tupelo, Mississippi market, so long as all expenditures in connection with such pipeline do not exceed $20,000,000 in the aggregate for the life of the project (the "Tupelo Pipeline") and are consistent with the Company's original estimates of capital expenditures for the project previously provided to Atmos; and provided further that the Company may dispose of its one-third interest in a King Air twin-engine turboprop C90 airplane, whether in the form of a dividend to shareholders or any other means, on terms customary therefor that are not adverse to the Company in any material respect, and regardless of the consideration received therefor;
(e) other than in the ordinary course of business consistent with past practice, entering into, amending, modifying, terminating (partially or completely), granting any waiver under or giving any consent with respect to any material Contract or License; provided (i) that the Company and the Subsidiaries may enter into, modify, amend or terminate any material Contract or License relating to gas supply, pipeline transportation and storage as long as (A) such Contract or License (1) with respect to gas supply, ensures a reasonably adequate supply of gas for ongoing operations on commercially reasonable terms, (2) with respect to transportation, ensures that the Company will have a reasonably proper amount of transportation capacity on commercially reasonable terms, and (3) with respect to storage, provides that the Company's gas storage facilities are supplied with a reasonable amount of gas on commercially reasonable terms, considering the time of year such facilities are to be utilized, and (B) such Contract or License does not result in the Company having outstanding hedge positions at any time that are speculative or inconsistent with (1) any applicable MPSC order in effect or (2) any existing Company policy, and (ii) the Company may enter into Contracts with blanket contractors and construction contractors to the extent required to effect the capital expenditures contemplated by the Budget consistent with past practice; provided further that the Company and the Subsidiaries may not enter into any such Contract or License for a term greater than one year or extend the term of any such Contract or License for more than one year;
(f) (i) voluntarily incurring Indebtedness; provided that the Company and the Subsidiaries may incur Indebtedness that does not provide for any prepayment penalty and which is incurred (A) in the ordinary course of business consistent with past practice to finance working capital, or (B) as reasonably required to finance the expenditures contemplated by the Budget, including all expenditures in connection with the Tupelo Pipeline or (ii) other than in the ordinary course of business consistent with past practice, purchasing, canceling, prepaying or otherwise providing for a complete or partial discharge in advance of a scheduled payment date with respect to, or waiving any right under, any Indebtedness in an aggregate principal amount exceeding $100,000 (in either case other than Indebtedness of the Company or a Subsidiary owing to the Company or a wholly-owned Subsidiary);
(g) engaging with any Person in any merger or other business combination;
(h) other than as contemplated by the Budget, making capital expenditures or commitments for additions to property, plant or equipment constituting capital assets in an aggregate amount exceeding $1,000,000, except as may be required by Law or deemed necessary in the exercise of Good Utility Practice;
(i) except to the extent required by applicable Law or GAAP, making any material change in (A) any pricing, investment, accounting, financial reporting, inventory, credit, allowance or Tax practice or policy, or (B) any method of calculating any bad debt, contingency or other reserve for accounting, financial reporting or Tax purposes;
(j) making any change in its fiscal year;
(k) engaging in any activities which would cause a change in its status, or that of its Subsidiaries, under PUHCA, including any action or inaction that would cause the prior approval of the SEC under PUHCA to be required for the consummation of the transactions contemplated hereby;
(l) enter into any new line of business or expand any immaterial line of business as of the date hereof beyond the activities required by Contracts in existence as of the date hereof;
(m) agreeing or consenting to any material agreements or modifications of material existing agreements with any Government or Regulatory Authority, including its rate agreement with the MPSC (including its allowed rate of return, purchased gas adjustments or weather normalization adjustments), in respect of the operations of their businesses, it being acknowledged and agreed that the Company's allowed rate of return, which is determined using an agreed-upon formula, may fluctuate as a result of the application of such formula;
(n) other than a settlement with respect to the Clarksdale Lawsuit in an amount not to exceed the Clarksdale Settlement Amount and on non-monetary terms that could not be reasonably expected to be materially adverse to the Company, settling any Action or Proceeding, or any claim that might give rise to any Action or Proceeding, except to the extent such settlements are covered by insurance (less a deductible not exceeding $250,000 as to any occurrence (within the meaning of the applicable insurance policy)) and on terms that could not be reasonably expected to be materially adverse to the continuing insurance coverage and risk management strategy of the Company and the Subsidiaries;
(o) taking any action that is reasonably expected to cause the representations and warranties of the Shareholders in Article IV not to be true and correct on and as of the Closing Date, except as expressly contemplated by any of the foregoing; or
(p) entering into any Contract to do or engage in any of the foregoing.
6.08 Employee Matters.
(a) Except as may be required by Law or as expressly permitted in the Disclosure Schedule, the Shareholders will cause the Company and the Subsidiaries to refrain from:
(i) making any increase in the salary, wages or other compensation of any officer or employee of the Company or any Subsidiary, other than increases which are consistent with the prior practice and policy of the Company;
(iii) except as consistent with the prior practices and policies of the Company, establishing or modifying any (A) targets, goals, pools or similar provisions in respect of any fiscal year under any Benefit Plan, employment-related Contract or other employee compensation arrangement or (B) salary ranges, increase guidelines or similar provisions in respect of any Benefit Plan, employment-related Contract or other employee compensation arrangement, except for published salary information.
(b) The Shareholders and the Company will, and will cause the Subsidiaries to, administer each Benefit Plan, or cause the same to be so administered, in all material respects in accordance with the applicable provisions of the Code, ERISA and all other applicable Laws. Shareholders will promptly notify Atmos in writing of any receipt by Shareholders, the Company or any Subsidiary (and furnish Atmos with copies) of any notice of investigation or administrative proceeding by the IRS, DOL, PBGC or other Person involving any Benefit Plan, or any notice by the Company or any Subsidiary to the IRS or the DOL regarding any voluntary compliance procedures with respect to any Benefit Plan.
(c) The Shareholders and the Company will cause the Company's Gratuitous Pay Plan to be terminated prior to Closing and shall pay to or for the benefit of those employees with 10 or more years of continuous service with the Company at termination of the Plan, an amount equal to the severance benefits those employees would have been entitled to receive if they had terminated employment at the termination of such Plan.
6.09 Notification of Certain Matters. The Shareholders and the Company shall give prompt notice to Atmos of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect, or (ii) any failure of the Shareholders or the Company materially to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.09 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice.
6.10 Certain Prohibited Sales. Prior to the Closing Date, neither the Shareholders nor the Company, or any Person acting on their behalf or for their benefit, shall offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any Atmos Common Stock or securities convertible into or exchangeable or exercisable for any Atmos Common Stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of the Atmos Common Stock, whether any such aforementioned transaction is to be settled by delivery of the Atmos Common Stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement.
6.11 Certain Tax Matters. The Shareholders and the Company shall not take or fail to take any action that would cause the Merger to fail to qualify as a reorganization under Section 368 of the Code. The Company shall use its best efforts to execute and deliver at Closing the certificate substantially in the form attached hereto as Exhibit G, and such other representations as reasonably requested by counsel to the Company or Atmos, at such time or times as reasonably requested by such legal counsel in connection with their delivery of the opinions referred to in Sections 1.01(b)(i) and (ii). Prior to the Effective Time, none of Company, the Subsidiaries, nor the Shareholders shall take or cause to be taken any action that would cause to be untrue (or fail to take or cause not to be taken any action that would cause to be untrue) any of the representations in Exhibits G or H and such other representations as so requested.
6.12 Note Purchase Agreements. For each Contract set forth in Section 4.17(a)(iv)(1) of the Disclosure Schedule, the Shareholders and the Company will use commercially reasonable efforts to cooperate with Atmos in obtaining an irrevocable waiver of the debt limitation restrictions provided therein on terms reasonably acceptable to Atmos.
6.13 Fulfillment of Conditions. The Shareholders and the Company will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of Atmos contained in this Agreement and will not, and will not permit any Subsidiary to, take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. Nothing contained in this Section 6.13 shall require the Shareholders or the Company to institute or defend any Action or Proceeding, make any material payment or incur any economic burden, dispose of any material asset or business or suffer any material detriment, including any change in the applicable rates or tariffs of the business of the Company or the imposition of any other materially adverse term or condition on the business or the Assets and Properties of the Company and the Subsidiaries.
Atmos covenants and agrees with the Shareholders and any Permitted Transferees that, at all times from and after the date hereof, Atmos will comply with all covenants and provisions of this Article VII, except to the extent the Shareholders and the Company may otherwise consent in writing.
7.01 Regulatory and Other Approvals. Atmos will as promptly as practicable (a) take all commercially reasonable steps necessary or desirable to obtain all consents, approvals or actions of, make all filings with and give all notices to Governmental or Regulatory Authorities or any other Person required of Atmos to consummate the transactions contemplated hereby, including those described in Schedules 5.03 and 5.04 hereto, (b) provide such other information and communications to such Governmental or Regulatory Authorities or other Persons as such Governmental or Regulatory Authorities or other Persons may reasonably request in connection therewith and (c) provide reasonable cooperation to Shareholders, the Company and the Subsidiaries in connection with the performance of their obligations under Sections 6.01 and 6.02. Atmos will provide prompt notification to the Shareholders when any such consent, approval, action, filing or notice referred to in clause (a) above is obtained, taken, made or given, as applicable, and will advise the Shareholders of any communications (and, unless precluded by Law, provide copies of any such communications that are in writing) with any Governmental or Regulatory Authority or other Person regarding any of the transactions contemplated by this Agreement.
7.02 HSR Filings. In addition to and without limiting Atmos's covenants contained in Section 7.01, Atmos will (i) take promptly all actions necessary to make the filings required of Atmos or its Affiliates under the HSR Act, (ii) comply at the earliest practicable date with any request for additional information received by Atmos or its Affiliates from the Federal Trade Commission or the Antitrust Division of the Department of Justice pursuant to the HSR Act and (iii) cooperate with the Shareholders in connection with the Shareholders' or the Company's filing under the HSR Act and in connection with resolving any investigation or other inquiry concerning the transactions contemplated by this Agreement commenced by either the Federal Trade Commission or the Antitrust Division of the Department of Justice or state attorneys general.
7.03 Investigation by Shareholders. Atmos will (a) provide the Shareholders and their Representatives with full access, upon reasonable prior notice and during normal business hours, to all officers, employees, agents and accountants of Atmos and its subsidiaries and their Assets and Properties and Books and Records, but only to the extent that such access does not unreasonably interfere with the business and operations of Atmos and its subsidiaries, and (b) furnish the Shareholders and such other Persons with all such information and data concerning the business operations of Atmos and its subsidiaries as the Shareholders or any of such other Persons reasonably may request in connection with such investigation, except to the extent that furnishing any such information or data would violate any Law, Order, Contract or License applicable to Atmos or any of its subsidiaries or by which any of their respective Assets and Properties is bound.
7.04 Employees, Compensation and Benefits.
(a) Atmos, in its sole discretion, shall determine the job titles and duties of all of the employees of the Company and its Subsidiaries immediately prior to the Effective Time (the "Assumed Employees") and, except as otherwise required by any collective bargaining agreement, shall provide compensation and employee benefits to such Assumed Employees which are comparable to the compensation and employee benefits provided to all other non-union employees of Atmos.
(b) Any Assumed Employee who continues his or her employment with Atmos and who was a participant in a Benefit Plan and any former employee of the Company or any Subsidiary and who was a participant in a Benefit Plan may continue to participate in such Benefit Plan so long as such Plan is maintained by Atmos or one of its subsidiaries; provided, however, that Atmos, in its sole discretion, shall have the right, subject to the terms of any applicable collective bargaining agreement, to merge or terminate any such Benefit Plan and to transfer such Assumed Employees or former employees to another employee plan or program which is maintained by Atmos or one of its subsidiaries.
(c) Atmos shall credit all Assumed Employees (i) with their period of employment with the Company or any of the Subsidiaries for eligibility, participation and vesting (but not benefit accrual) purposes in any employee plan or program maintained by Atmos or one of its subsidiaries and for which such employees are eligible and (ii) for any co-payments and deductibles paid during the current plan year and prior to the Closing Date in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans in which such employees are eligible to participate after the Closing Date and during the current plan year of such welfare plans (it being understood that Assumed Employees who continue to be covered under any Benefit Plan shall not, during the period of such coverage, be eligible to participate in any other employee plan or program which provides the same or similar benefits and which is maintained by Atmos or one of its subsidiaries).
(d) Except as otherwise provided in this Section 7.04 and Section 7.05, it is expressly understood by the parties hereto that Atmos makes no commitment for the maintenance and continuation after the Closing of any Benefit Plan or the provisions of any particular benefits for any Assumed Employee or former employee of the Company or any of its Subsidiaries.
7.05 Severance Policy and Other Agreements.
(a) Except as otherwise provided in Section 7.05(b), Atmos may, in its sole discretion, terminate any standard severance policy covering any Assumed Employees or former employees of the Company or any of the Subsidiaries; provided that Atmos shall make available severance benefits to such employees on a basis which is consistent with the past practice of Atmos in connection with acquisitions.
(b) Following the Closing Date, Atmos shall honor or cause to be honored all severance agreements and employment-related Contracts between the Company and its directors, officers or employees that are listed in Section 7.05 of the Disclosure Schedule.
7.06 Directors' and Officers' Indemnification and Insurance.
(a) From and after the Closing Date and until the sixth anniversary of the Closing Date and for so long thereafter as any claim for indemnification asserted on or prior to such date has not been fully adjudicated, Atmos shall, to the fullest extent permitted by Law and the Articles of Incorporation and Bylaws of Atmos as of the date hereof (but not in excess of the extent permitted by the certificates or articles of incorporation and the bylaws (or other comparable charter documents) of the Company and the Subsidiaries as of the date hereof), indemnify, defend and hold harmless each Person who is now, or has been at any time prior to the date hereof or who becomes prior to the Closing Date, a director or officer of the Company or any of the Subsidiaries (the "Indemnified Agents") against all losses, claims, damages, costs and expenses (including reasonable attorneys' fees), liabilities, judgments and settlement amounts that are paid or incurred in connection with any claim, action, suit, proceeding or investigation (whether civil, criminal, administrative or investigative and whether asserted or claimed prior to, at or after the Closing Date) that is based on, or arises out of, the fact that such Indemnified Agent is or was a director or officer of the Company or any of its Subsidiaries and relates to or arises out of any action or omission occurring on or prior to the Closing Date ("Indemnified Liabilities"); provided that Atmos shall not be liable for any settlement of any claim effected without its written consent. Any Indemnified Agent wishing to claim indemnification under this Section 7.06, upon learning of any such claim, action, suit, proceeding or investigation, shall notify Atmos, but the failure so to notify Atmos shall not relieve Atmos from any liability which it may have under this paragraph except to the extent such failure prejudices Atmos. The Indemnified Agents as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Agents, in which case the Indemnified Agents may retain more than one law firm.
(b) Atmos shall, until the sixth anniversary of the Closing Date and (if required for coverage thereof) for so long thereafter as any claim for insurance coverage asserted on or prior to such date has not been fully adjudicated, cause to be maintained in effect, to the extent available, the policies of directors' and officers' liability insurance maintained by the Company and the Subsidiaries as of the date hereof ($25,000,000 in coverage with a $100,000 deductible), or policies of at least the same coverage and amounts containing terms that are no less advantageous to the insured parties, with respect to claims arising from facts or events that occurred on or prior to the Closing Date; provided that in no event shall Atmos be obligated to expend in order to maintain or procure insurance coverage pursuant to this Section 7.06(b) any amount per annum in excess of 150% of the aggregate premiums payable by the Company and the Subsidiaries in 2000 (on an annualized basis) for such purpose.
7.07 Listing of Stock. Atmos shall use commercially reasonably efforts to cause the Atmos Shares to be listed, upon official notice of issuance, on each national securities exchange on which the Atmos Common Stock is traded, on or prior to the Closing Date.
7.08 Certain Tax Matters. Atmos shall not take or fail to take any action that would cause the Merger to fail to qualify as a reorganization under Section 368 of the Code. Atmos shall use its best efforts to execute and deliver at Closing the certificate substantially in the form attached hereto as Exhibit H, and such other representations as reasonably requested by counsel to the Company or Atmos, at such time or times as reasonably requested by such legal counsel in connection with their delivery of the opinions referred to in Sections 1.01(b)(i) and (ii). Prior to the Effective Time, Atmos shall not take or cause to be taken any action that would cause to be untrue (or fail to take or cause not to be taken any action that would cause to be untrue) any of the representations in Exhibits G or H and such other representations as so requested.
7.09 Fulfillment of Conditions. Atmos will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of Shareholders contained in this Agreement and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. Nothing contained in Section 7.01 or 7.02 or in this Section 7.09 shall require Atmos or any of its subsidiaries to institute or defend any Action or Proceeding, make any material payment or incur any economic burden, dispose of any material asset or business or suffer any material detriment, including any change in the applicable rates or tariffs of its business or the business of the Company and the Subsidiaries or the imposition of any other materially adverse term or condition on the business or the Assets or Properties of Atmos or its subsidiaries or the Company or the Subsidiaries.
7.10 Environmental Due Diligence.
(a) All environmental due diligence (including employee interviews and sampling of any media or wastewater) conducted by Atmos shall be conducted in accordance with this Section 7.10. All activities of Atmos regarding environmental due diligence shall be conducted to minimize any inconvenience or interruption of the business of the Company and the Subsidiaries.
(b) Atmos shall provide to the Shareholders or to the
Shareholders' counsel, copies of all reports, assessments and other information
composed or compiled by Atmos or Atmos's environmental consultant(s) promptly
following Atmos's receipt thereof. Atmos shall treat all such information
delivered to, or composed or compiled by, Atmos or Atmos's environmental
consultant(s) as Environmental Data in accordance with the procedures of this
Section 7.10.
(c) Prior to the Closing, neither Atmos nor its environmental consultant(s) shall disclose or release any audits, reports and studies delivered to or prepared by Atmos and any other information collected and generated as a result of Atmos's environmental due diligence ("Environmental Data") without the prior written consent of the Shareholders and all such information shall be kept strictly confidential. Atmos expressly agrees that until the Closing, it will not distribute the Environmental Data to any third party without the Shareholders' prior written consent.
(d) Atmos may retain one or more outside environmental consultants to assist in its environmental due diligence concerning the Assets and Properties of the Company and the Subsidiaries and shall notify the Shareholders of the environmental consultant or consultants Atmos intends to retain. Thereafter, the Shareholders shall have five Business Days after receipt of such notification to notify Atmos in writing of the Shareholders' objection (which must be based upon reasonable grounds) and substantiate the basis for that objection. If Shareholders do not so object within such five Business Day period, the Shareholders shall be deemed to have consented to Atmos's selection.
(e) Atmos may conduct, at its sole expense, Phase I "environmental assessment activities" (within the meaning of the applicable ASTM standards) with respect to the Assets and Properties of the Company and the Subsidiaries, and upon reasonable advance notice shall be afforded access to existing environmental reports in the possession of the Shareholders, the Company or any Subsidiary, relevant correspondence, permits issued under Environmental Laws and related materials regarding the Assets and Properties of the Company and the Subsidiaries and all other Phase I activities as set forth in the ASTM protocol regarding Phase I assessments. Any permitted Phase I environmental assessment activities shall not include any sampling or intrusive testing. All Phase I environmental assessment activities shall be conducted in accordance with ASTM standards regarding Phase I assessments. Upon completion of such Phase I assessment activities, Atmos's environmental consultant(s) may prepare and deliver to Atmos a written report with respect thereto (consistent with the procedures and standards set forth in this Section 7.10.
(f) Prior to Closing, Atmos may not conduct any Phase II environmental assessment activities with respect to the Assets and Properties of the Company and the Subsidiaries (including the taking and analysis of soil, surface water and groundwater samples, testing of buildings, drilling wells, taking soil borings and excavating) without the prior written consent of the Shareholders, which consent may be withheld, conditioned or delayed by the Shareholders in their sole discretion.
(g) Atmos may conduct, at its sole expense, asbestos survey activities with respect to the Assets and Properties of the Company and the Subsidiaries, including reviewing existing reports, correspondence and other related documents, inspecting individual sites and collecting samples of suspected asbestos-containing materials; provided that such sampling activities do not adversely affect property value, appearance or integrity and such sampling locations are repaired and restored to substantially their original condition. These asbestos survey activities shall be conducted in accordance with the provisions of Section 7.10(e).
(h) Notwithstanding the foregoing, if prior to Closing the Shareholders, the Company or any Subsidiary receives notice of any Action or Proceeding, pending or threatened, arising under Environmental Laws or if any of the Shareholders or the Company otherwise acquires knowledge that is reasonably likely to require a change to the Disclosure Schedule, the Shareholders promptly shall notify Atmos of the same and Atmos may request that the Shareholders authorize Atmos to conduct specific additional environmental due diligence measures if and to the extent that such measures are required to determine the extent of any potential environmental liability relating thereto. Such authorization shall not be unreasonably withheld, conditioned or delayed by the Shareholders. Any such additional environmental due diligence shall be conducted at Atmos's sole expense.
(i) Atmos hereby agrees to indemnify and hold harmless the Shareholders, the Shareholders' Affiliates and their respective officers, directors, employees, agents, successors and assigns from and against any and all Losses with respect to personal injury or property damage arising out of or in connection with any site visit by Atmos or its environmental consultant(s) and resulting from an act or omission of Atmos or its environmental consultant(s), including any breach of this Agreement, in the course of its environmental inspections.
7.11 Note Purchase Agreements. In the event that the Shareholders and the Company are unable to obtain, for any Contract set forth in Section 4.17(a)(iv)(1) of the Disclosure Schedule, an irrevocable waiver of the debt limitation restrictions provided therein on terms reasonably acceptable to Atmos, then Atmos shall, on the Closing Date, repay in full the indebtedness issued pursuant thereto in accordance with the terms thereof.
The obligation of Atmos under this Agreement to effect the Merger is subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Atmos in its sole discretion):
8.01 Representations and Warranties. (a) The representations and warranties made by Shareholders in this Agreement shall be true and correct in all material respects as of the date hereof; (b) the representations and warranties made by Shareholders in Sections 4.10 and 4.13 shall be true and correct in all material respects on and as of the Closing Date as though made on and as of the Closing Date; and (c) the representations and warranties made by Shareholders in this Agreement (other than Sections 4.10 and 4.13) shall be true and correct (without regard to any materiality limitations or qualifications set forth therein) on and as of the Closing Date as though made on and as of the Closing Date, except to the extent that any failure of such representations and warranties to be true and correct on account of actions, events or conditions arising after the date hereof, individually or in the aggregate, could not reasonably be expected to be materially adverse to the Business or Condition of the Company or to the Shareholders' ability to consummate the transactions contemplated hereby; provided that the truth and correctness of representations and warranties made as of a specified date earlier than the date hereof shall be determined only on and as of such earlier date; provided further that the condition provided in clause (a) above with respect to any representation and warranty shall be deemed satisfied if such representation and warranty is true and correct in all material respects as of the Closing Date.
8.02 Performance. Shareholders and the Company shall have performed and complied with, in all material respects, the agreements, covenants and obligations required by this Agreement to be so performed or complied with by Shareholders and the Company at or before the Closing.
8.03 Bring-Down Certificates. Each Shareholder and the Company shall have delivered to Atmos a certificate, dated the Closing Date and executed in its name and on its behalf by a duly authorized representative, certifying as to the compliance by it with Sections 8.01 and 8.02.
8.04 Orders and Laws. There shall not be in effect on the Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal or providing for damages or other relief in respect of the consummation of any of the transactions contemplated by this Agreement, and there shall not be pending or threatened in writing any Action or Proceeding by any Governmental or Regulatory Authority seeking any such Order.
8.05 Regulatory Consents and Approvals. The MPSC shall have issued an Order approving the transactions contemplated hereby; such Order shall not contain any restrictions, conditions or other provisions (other than those in effect on the date hereof or requiring that the regulatory treatment with respect to the business of the Company and the Subsidiaries in existence as of the date hereof be continued following the Closing) that are materially adverse to the conduct of the business of the Company and the Subsidiaries as operated on the date hereof; the other terms and conditions of such Order shall not be materially adverse to Atmos; and such Order shall have become final. In addition, all consents, approvals and actions of, filings with and notices to any other Governmental or Regulatory Authority necessary to permit Atmos, the Company and Shareholders to perform their obligations under this Agreement and to consummate the transactions contemplated hereby shall have been duly obtained, made or given on terms not materially adverse to Atmos and shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement, including under the HSR Act, shall have occurred.
8.06 Third Party Consents. The consents (or in lieu thereof waivers) listed in Schedule 8.06 hereto shall have been obtained and shall be in full force and effect.
8.07 Certificates. Shareholders shall have delivered the certificates representing the Company Shares as contemplated in Section 3.01.
8.08 Resignations of Directors. The members of the boards of directors of the Subsidiaries shall have tendered, effective at the Closing, their resignations as such directors.
8.09 Escrow Agreement. Each of the Shareholders and the Escrow Agent shall have executed and delivered the Escrow Agreement.
8.10 Standstill Agreement. Each of the Shareholders shall have executed and delivered the Standstill Agreement substantially in the form of Exhibit B hereto.
8.11 Releases. The Shareholders shall have delivered the Releases of the Company and the Subsidiaries substantially in the form of Exhibit C hereto.
8.12 Closing Opinions. The Shareholders shall have delivered to Atmos the opinions of Milbank, Tweed, Hadley & McCloy LLP, Forman Perry Watkins Krutz & Tardy, PLLC, and their respective counsel substantially to the effect set forth on Exhibits D-1, D-2, D-3 and D-4, respectively.
The obligation of each of the Shareholders and the Company under this Agreement to effect the Merger is subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Shareholders and the Company in their sole discretion):
9.01 Representations and Warranties. The representations and warranties made by Atmos in this Agreement (a) shall be true and correct in all material respects as of the date hereof and (b) shall be true and correct (without regard to any materiality limitations or qualifications set forth herein) on and as of the Closing Date as though made on and as of the Closing Date, except to the extent that any failure of such representations and warranties to be true and correct on account of actions, events, or conditions arising after the date hereof, individually or in the aggregate, could not reasonably be expected to be materially adverse to the business, assets, liabilities, financial condition, results of operations or prospects of Atmos and its subsidiaries taken as a whole or to Atmos's ability to consummate the transactions contemplated hereby; provided that the truth and correctness of representations and warranties made as of a specified date earlier than the date hereof shall be determined only on and as of such earlier date; provided further that the condition provided in clause (a) above with respect to any representation and warranty shall be deemed satisfied if such representation and warranty is true and correct in all material respects as of the Closing Date.
9.02 Performance. Atmos shall have performed and complied with, in all material respects, the agreements, covenants and obligations required by this Agreement to be so performed or complied with by Atmos at or before the Closing.
9.03 Bring-Down Certificate. Atmos shall have delivered to Shareholders a certificate, dated the Closing Date and executed in the name and on behalf of Atmos by a duly authorized officer, certifying as to the compliance by it with Sections 9.01 and 9.02.
9.04 Orders and Laws. There shall not be in effect on the Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal or providing for damages or other relief in respect of the consummation of any of the transactions contemplated by this Agreement, and there shall not be pending or threatened in writing any Action or Proceeding by any governmental or Regulatory Authority seeking any such Order.
9.05 Regulatory Consents and Approvals. All consents, approvals and actions of, filings with and notices to any