(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, 2002
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 $853,523,154 as of October 31, 2002. On October 31, 2002 the registrant had 41,731,717 shares of common stock outstanding.
Portions of the registrant's Definitive Proxy Statement to be filed for the
Annual Meeting of Shareholders on February 12, 2003 are incorporated by
reference into Part III of this report.
The terms "we," "our," "us," "Atmos" and "Atmos Energy" 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
Atmos Energy Corporation and its subsidiaries are engaged primarily in the natural gas utility business as well as certain non-regulated businesses. We distribute natural gas through sales and transportation arrangements to approximately 1.4 million residential, commercial, public authority and industrial customers through our five regulated utility divisions. Effective in December 2002, our customer base will increase to approximately 1.7 million. See "Recent Developments." Our five utility operating divisions cover 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.
Prior to October 1, 2002, our five operating divisions were named Greeley Gas Company with operations in Colorado, Kansas and a portion of Missouri; Western Kentucky Gas Company with operations in Kentucky; Atmos Energy Louisiana Gas Company with operations in Louisiana; United Cities Gas Company with operations in Georgia, Illinois, Iowa, our remaining Missouri operations, Tennessee and Virginia; and Energas Company with operations in Texas. Effective October 1, 2002, we united our utility operations under the Atmos Energy brand. Our former Greeley Gas Company operations are now conducted under the name Atmos Energy Colorado-Kansas Division; our former Western Kentucky Gas Company operations are now conducted under the name Atmos Energy Kentucky Division; our former Atmos Energy Louisiana Gas Company operations are now conducted under the name Atmos Energy Louisiana Division; our former United Cities Gas Company operations are now conducted under the name Atmos Energy Mid-States Division; and our former Energas Company operations are now conducted under the name Atmos Energy Texas Division.
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 municipalities and industrial customers. 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 Energas 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
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 and $75.0 million of Atmos common stock. In addition, we will repay outstanding long-term debt of Mississippi Valley Gas of approximately $45.0 million. Mississippi Valley Gas provides natural gas distribution service to approximately 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. On October 31, 2002, we announced that we had received approval from the Mississippi Public Service Commission to acquire Mississippi Valley Gas. The transaction had previously received federal regulatory approval and approvals from the six other state utility commissions that required approval. We expect to close the acquisition in December 2002.
Louisiana Regulatory Actions. In January and February 2002, our Louisiana division submitted its 2001 Rate Stabilization filings to the Louisiana Public Service Commission for the two gas systems we operate in Louisiana. Recently completed audits by the Louisiana Public Service Commission of these filings found our earnings to be deficient and that rate adjustments were appropriate. Approved tariff revisions, which became effective November 1, 2002, will result in $15.8 million in additional revenue per year during the first 24-month period. Subsequent to the first 24-month period, adjusted rates will provide $12.2 million in total annual revenue increases. As a result of the actions taken by the Louisiana Public Service Commission, Atmos Energy has decreased its overall weather sensitivity in Louisiana.
Atmos Power Systems, Inc. constructs power plant. In September 2002, Atmos Power Systems, Inc., a subsidiary of Atmos Energy Holdings, Inc. completed construction of a 20-megawatt natural gas fueled power plant in Tennessee which was placed in operation in October 2002. The plant provides an interruptible electric rate while reducing annual energy costs. Power is directly connected to the customer's substation. The customer has leased the facility for a 10-year period with an option to purchase the plant after the fifth year of the lease. Capital expenditures for construction and related costs totaled $8.5 million. Woodward Marketing, L.L.C., a subsidiary of Atmos Energy Marketing, LLC, has entered into a contract to supply natural gas to the facility.
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:
- increasing our non-regulated gas sales, and
- growing such non-utility businesses as distributed electrical power generation.
We are growing our utility business by acquiring natural gas operations, such as the pending acquisition of Mississippi Valley Gas Company.
Our operations are divided into three segments, the utility segment, which includes our regulated natural gas distribution and sales operations; the natural gas marketing segment, which includes Atmos Energy Marketing, Woodward Marketing and Trans Louisiana Industrial Gas Company, Inc.; and our other non- utility segment, which includes all of our other non-utility operations.
UTILITY OPERATIONS SEGMENT OVERVIEW
Our utility operations segment is operated through our five regulated natural gas divisions:
- Atmos Energy Colorado-Kansas Division (formerly Greeley Gas Company),
- Atmos Energy Kentucky Division (formerly Western Kentucky Gas Company),
- Atmos Energy Louisiana Division (formerly Atmos Energy Louisiana Gas Company),
- Atmos Energy Mid-States Division (formerly United Cities Gas Company), and
- Atmos Energy Texas Division (formerly Energas Company).
Atmos Energy Colorado-Kansas Division: Our Colorado-Kansas Division operates in Colorado, Kansas and a portion of Missouri and is regulated by each respective state's 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 September 30, 2002 and 2001, our Colorado-Kansas Division had 216,980 and 212,484 utility meters in service. For the years ended September 30, 2002 and 2001, this division had total throughput of 33,554 and 37,797 MMcf.
Atmos Energy Kentucky Division: Our Kentucky 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 September 30, 2002 and 2001, our Kentucky Division had 178,379 and 182,275 utility meters in service. For the years ended September 30, 2002 and 2001, this division had total throughput of 43,721 and 46,530 MMcf.
Atmos Energy Louisiana Division: Our Louisiana Division includes the operations of the assets of Louisiana Gas Service Company acquired in July 2001 and our previously existing Trans La Division. Our Louisiana 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 cost savings that resulted 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. Beginning January 1, 2002, 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 those clauses.
Prior to our acquisition of the assets of Louisiana Gas Service Company, a division of Citizens Communications Company, in July 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, we agreed to take responsibility for assuring the payment of refunds and/or credits to ratepayers that may arise from Citizens Communications' past activities with respect to purchased gas costs. On April 10, 2002, the Louisiana Public Service Commission issued a Report of Proceedings in which it approved a Stipulation and Agreement between Citizens Communications, Atmos and the Commission Staff. This Stipulation and Agreement resulted in no refunds being due to customers.
In October 2002, Atmos received written notification from the Executive Secretary of the Louisiana Public Service Commission that he was asserting that a monthly facilities fee of approximately $0.6 million charged since July 2001 to Atmos by Trans Louisiana Gas Pipeline, Inc., a wholly-owned subsidiary of Atmos, pursuant to a contract between the parties, was excessive. The Executive Secretary asserted that all monthly facilities fees in excess of approximately $0.1 million from July 2001 should be refunded to ratepayers with interest.
Atmos has responded to the Secretary and noted that it has previously made all required filings with the Commission fully disclosing the amount of the facilities fee. Atmos intends to file another petition seeking Commission approval of the facilities fee by the end of calendar year 2003 similar to that filed in 2001 but containing updated data. In the interim, Atmos is continuing to charge a facilities fee of approximately $0.6 million per month, as the Executive Secretary's correspondence does not constitute action of the Commission.
The Louisiana Public Service Commission approved a rate stabilization clause for a three year period for our former Trans La Division beginning October 1, 1999. Under the rate stabilization clause, our former Trans La Division will be allowed to earn a return on equity within certain ranges that will be monitored on an annual basis.
At September 30, 2002 and 2001, our Louisiana Division had 370,012 and 368,436 utility meters in service. For the years ended September 30, 2002 and 2001, this division had total throughput of 30,435 and 12,578 MMcf. The increase in throughput from 2001 to 2002 resulted from throughput from the Louisiana Gas Service assets which we purchased in July 2001.
In January and February 2002, our Louisiana division submitted its 2001 Rate Stabilization filings to the Louisiana Public Service Commission for the two gas systems we operate in Louisiana. Recently completed audits by the Louisiana Public Service Commission of these filings found our earnings to be deficient and that rate adjustments were appropriate. Approved tariff revisions, which became effective November 1, 2002, will result in $15.8 million in additional revenue per year during the first 24-month period. Subsequent to the first 24-month period, adjusted rates will provide $12.2 million in total annual revenue increases. As a result of the actions taken by the Louisiana Public Service Commission, Atmos Energy has decreased its overall weather sensitivity in Louisiana.
Atmos Energy Mid-States Division: Our Mid-States 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 September 30, 2002 and 2001, our Mid-States Division had 310,630 and 308,394 utility meters in service. For the years ended September 30, 2002 and 2001, this division had total throughput of 57,144 and 64,924 MMcf.
Atmos Energy Texas Division: Our Texas 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. At September 30, 2002 and 2001, our Texas Division had 313,340 and 314,734 utility meters in service. For the years ended September 30, 2002 and 2001, this division had total throughput of 49,279 and 53,586 MMcf.
NATURAL GAS MARKETING SEGMENT OVERVIEW
Our natural gas marketing and other non-utility segments have operations in 18 states and are organized under Atmos Energy Holdings, Inc.
Atmos Energy Marketing, L.L.C. comprises our natural gas marketing segment. Woodward Marketing, L.L.C. and Trans Louisiana Industrial Gas Company, Inc. are wholly-owned subsidiaries of Atmos Energy Marketing. Atmos Energy Marketing provides a variety of natural gas management services to natural gas utility systems, municipalities and industrial natural gas consumers in several states and to our Colorado-Kansas, Kentucky, Louisiana and Mid-States divisions. These services consist primarily of the furnishing 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. In addition, Trans Louisiana Industrial Gas Company markets natural gas primarily to commercial customers in Louisiana. For the year ended September 30, 2002, Atmos Energy Marketing realized $49.0 million in gas trading margin from the sale of 273.8 Bcf of natural gas to its customers.
We acquired a 45 percent interest in Woodward Marketing in July 1997 as a result of the merger of Atmos and United Cities Gas Company, which had acquired that interest in May 1995. In April 2001, we acquired the 55 percent interest that we did not own from JD 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-utility 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 Atmos Energy Marketing, including the activities of Woodward Marketing and Trans Louisiana Industrial Gas, is the overall management of natural gas requirements for municipalities, local gas utility companies and industrial customers located primarily in the southeastern and midwestern United States. This business involves the sale of natural gas by Atmos Energy 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, 2002, Atmos Energy Marketing had a total of 101 municipal customers and 641 industrial customers. Atmos Energy 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, Atmos Energy Marketing supplies our regulated operations with a portion of our natural gas requirements on a competitive bid basis. Any mark-to-market gains or losses on these affiliate contracts are eliminated.
In the management of natural gas requirements for municipal and other local utilities, Atmos Energy Marketing sells physical natural gas to those customers for future delivery and manages the associated price risk through the use of gas futures, 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. Atmos Energy Marketing links gas derivatives to physical delivery of natural gas and typically balances its derivatives positions at the end of each trading day. Over-the-counter swap agreements require Atmos Energy 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. Atmos Energy 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. Mark-to-market accounting refers to the measurement of contracts at fair value determined at the balance sheet date with any gains and losses included in earnings. Options held to manage price risk provide the right, but not the requirement, to buy or sell energy commodities at a fixed price. Atmos Energy Marketing uses options to manage margins and to limit overall price risk exposure. At any point in time, Atmos Energy Marketing may not have completely hedged its price risk on these activities.
Energy related services provided by Atmos Energy 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, Atmos Energy Marketing generates income from its utility, municipal and industrial customers through negotiated prices based on the volume of gas supplied to the customer. Atmos Energy 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.
Prior to May 2002, Atmos Energy Marketing engaged in limited financial trading for speculative purposes. Financial trading involves utilizing financial instruments (futures, options, swaps, etc.) to hedge natural gas prices or to take a position in the market based on anticipated price movement. In some prior years, Atmos Energy Marketing experienced losses in its financial speculative trading business. Effective in May 2002, Atmos Energy Marketing's financial trading for speculative purposes was discontinued. Atmos Energy Marketing will continue its financial trading for hedging (risk management purposes) related to its physical trading positions. With regard to its physical trading business, Atmos Energy Marketing does engage in limited speculative natural gas trading for its own account primarily related to its storage activity, subject to a risk management policy established by Atmos' management which limits the level of trading loss to a maximum of 25 percent of the budgeted annual operating income of Atmos Energy Holdings. Physical trading involves utilizing physical assets (storage and transportation) to sell and deliver gas to customers or to take a position in the market based on anticipated price movement. 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 5.0 Bcf of natural gas. At September 30, 2002, Atmos Energy Marketing's net open positions in its trading operations totaled 1.9 Bcf. Atmos Energy 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. In addition to the price risk of any net open position at the end of each trading day, the financial exposure that results from intra-day fluctuations of gas prices constitutes a risk of loss since the price of natural gas purchased or sold for future delivery at the beginning of the day may not be hedged until later in the day.
Financial instruments, which subject Atmos Energy 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.
Atmos Energy Marketing's operations are concentrated in the natural gas industry, and its customers and suppliers may be subject to economic risks affecting that industry.
From time to time, Woodward Marketing borrows money to fund its natural gas purchases and to fulfill its obligations to maintain deposit accounts with its counterparties. See Note 3 of notes to consolidated financial statements.
OTHER NON-UTILITY SEGMENT OVERVIEW
- Atmos Pipeline and Storage, L.L.C. Atmos Pipeline and Storage owns or has an interest in underground storage fields in Kansas, Kentucky and Louisiana and provides storage services to our Colorado-Kansas, Mid-States and Louisiana divisions and to other non-utility customers. Our total storage capacity is approximately 26.1 Bcf. Atmos Pipeline and Storage also provides transportation services to our utility operations in Louisiana.
- 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.
OPERATING STATISTICS
The following table shows our consolidated operating statistics for each of the five fiscal years from 1998 through 2002. It is followed by three additional tables that show utility sales and statistical data by division for 2002 and 2001 and our non-utility sales and statistical data for the same periods. Certain prior year amounts have been reclassified to conform with the current year presentation.
YEAR ENDED SEPTEMBER 30
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
METERS IN SERVICE, end of year
Residential...................... 1,247,247 1,243,625 970,873 919,012 889,074
Commercial....................... 122,156 122,274 104,019 98,268 94,302
Industrial (including
agricultural).................. 12,694 13,020 14,259 14,329 16,322
Public authority and other....... 7,244 7,404 7,448 6,386 4,834
---------- ---------- ---------- ---------- ----------
Total meters.............. 1,389,341 1,386,323 1,096,599 1,037,995 1,004,532
Propane customers(1)............. -- -- -- 39,539 37,400
---------- ---------- ---------- ---------- ----------
Total..................... 1,389,341 1,386,323 1,096,599 1,077,534 1,041,932
========== ========== ========== ========== ==========
HEATING DEGREE DAYS(2)
Actual (weighted average)........ 3,368 4,124 2,096 3,374 3,799
Percent of normal................ 94% 115% 82% 85% 95%
SALES VOLUMES -- MMcf
Residential...................... 77,386 79,000 63,285 67,128 73,472
Commercial....................... 35,796 36,922 30,707 31,457 36,083
Industrial (including
agricultural).................. 26,431 33,730 38,687 35,741 44,881
Public authority and other....... 5,875 6,892 5,520 5,793 4,937
---------- ---------- ---------- ---------- ----------
Total sales volumes....... 145,488 156,544 138,199 140,119 159,373
Transportation volumes -- MMcf..... 63,053 61,230 59,365 55,468 56,224
---------- ---------- ---------- ---------- ----------
TOTAL THROUGHPUT -- MMcf........... 208,541 217,774 197,564 195,587 215,597
========== ========== ========== ========== ==========
PROPANE -- Gallons (000's)(1)...... -- -- 19,329 22,291 23,412
========== ========== ========== ========== ==========
OPERATING REVENUES (000's)
Gas sales revenues
Residential...................... $ 535,981 $ 788,902 $ 405,552 $ 349,691 $ 410,538
Commercial....................... 221,728 342,945 176,712 144,836 184,046
Industrial (including
agricultural).................. 112,172 208,168 171,447 117,382 161,382
Public authority and other....... 31,731 58,539 27,198 22,330 20,504
---------- ---------- ---------- ---------- ----------
Total gas sales
revenues............... 901,612 1,398,554 780,909 634,239 776,470
Transportation revenues............ 36,591 28,668 23,610 23,101 23,971
Other gas revenues................. 11,258 10,925 4,674 4,500 8,121
---------- ---------- ---------- ---------- ----------
Total gas revenues........ 949,461 1,438,147 809,193 661,840 808,562
Propane revenues(1)................ -- -- 22,550 22,944 29,091
Other revenues..................... 1,388 4,128 18,409 5,412 10,555
---------- ---------- ---------- ---------- ----------
Total operating
revenues............... $ 950,849 $1,442,275 $ 850,152 $ 690,196 $ 848,208
========== ========== ========== ========== ==========
AVERAGE SALES PRICE/Mcf............ $ 6.20 $ 8.93 $ 5.65 $ 4.53 $ 4.87
AVERAGE COST OF GAS/Mcf SOLD....... 3.81 6.83 3.79 2.79 3.24
AVERAGE TRANSPORTATION
REVENUES/Mcf..................... .58 .47 .40 .42 .43
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See footnotes following these tables.
YEAR ENDED SEPTEMBER 30, 2002
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COLORADO-
KANSAS KENTUCKY LOUISIANA MID-STATES TEXAS TOTAL UTILITY
--------- -------- --------- ---------- -------- -------------
METERS IN SERVICE, at end of
year
Residential............... 196,320 158,296 346,369 273,166 273,096 1,247,247
Commercial................ 18,602 18,017 22,709 35,925 26,903 122,156
Industrial................ 464 409 -- 729 11,092 12,694
Public authority and
other.................. 1,594 1,657 934 810 2,249 7,244
-------- -------- -------- -------- -------- ----------
Total............. 216,980 178,379 370,012 310,630 313,340 1,389,341
======== ======== ======== ======== ======== ==========
HEATING DEGREE DAYS(2)
Actual.................... 5,373 4,346 1,543 3,644 3,259 3,368
Percent of normal......... 95% 100% 90% 94% 92% 94%
SALES VOLUMES -- MMcf(4)
Residential............... 15,660 10,802 15,117 16,245 19,562 77,386
Commercial................ 5,948 4,611 6,442 11,599 7,196 35,796
Industrial................ 1,839 1,931 -- 8,658 13,059 25,487
Public authority and
other.................. 1,190 1,314 847 287 2,237 5,875
-------- -------- -------- -------- -------- ----------
Total............. 24,637 18,658 22,406 36,789 42,054 144,544
TRANSPORTATION
VOLUMES -- MMcf(4)........ 8,917 25,063 8,029 20,355 7,225 69,589
-------- -------- -------- -------- -------- ----------
TOTAL THROUGHPUT
-- MMcf(4)................ 33,554 43,721 30,435 57,144 49,279 214,133
======== ======== ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues
(000's)................ $154,718 $138,772 $188,092 $257,305 $198,639 $ 937,526
Miles of pipe............. 6,454 3,794 7,951 7,637 13,321 39,157
Employees(5).............. 271 245 457 461 332 1,766
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See footnotes following these tables.
YEAR ENDED SEPTEMBER 30, 2001
------------------------------------------------------------------------
COLORADO-
KANSAS KENTUCKY LOUISIANA MID-STATES TEXAS TOTAL UTILITY
--------- -------- --------- ---------- -------- -------------
METERS IN SERVICE, at end of
year
Residential............... 192,056 161,616 344,870 271,233 273,850 1,243,625
Commercial................ 18,376 18,602 22,650 35,518 27,128 122,274
Industrial................ 414 397 -- 711 11,498 13,020
Public authority and
other.................. 1,638 1,660 916 932 2,258 7,404
-------- -------- -------- -------- -------- ----------
Total............. 212,484 182,275 368,436 308,394 314,734 1,386,323
======== ======== ======== ======== ======== ==========
HEATING DEGREE DAYS(2)
Actual.................... 6,041 4,233 2,076 3,755 3,782 4,124
Percent of normal......... 106% 98% 117% 97% 107% 115%
SALES VOLUMES -- MMcf(4)
Residential............... 18,027 12,833 5,257 19,978 22,905 79,000
Commercial................ 6,845 5,669 2,448 13,968 7,992 36,922
Industrial................ 1,224 3,018 -- 10,473 8,395 23,110
Public authority and
other.................. 1,497 1,519 919 339 2,618 6,892
-------- -------- -------- -------- -------- ----------
Total............. 27,593 23,039 8,624 44,758 41,910 145,924
TRANSPORTATION
VOLUMES -- MMcf(4)........ 10,204 23,491 3,954 20,166 11,676 69,491
-------- -------- -------- -------- -------- ----------
TOTAL THROUGHPUT --
MMcf(4)................... 37,797 46,530 12,578 64,924 53,586 215,415
======== ======== ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues
(000's)................ $270,678 $237,047 $ 96,511 $464,498 $311,414 $1,380,148
Miles of pipe............. 6,344 3,779 7,934 7,536 13,345 38,938
Employees(5).............. 272 247 488 470 342 1,819
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YEAR ENDED SEPTEMBER 30
-----------------------
2002 2001
---------- ----------
OPERATIONS DATA (000's)
Operating revenues........................................ $ 14,795 $ 64,116
Gas trading margin........................................ $ 38,538 $ 488
Equity in earnings of Woodward Marketing, L.L.C.(6)....... $ -- $ 8,062
Net income................................................ $ 16,662 $ 6,209
Total assets.............................................. $313,376 $303,884
OTHER STATISTICS
Customers:
Industrial............................................. 641 531
Municipal.............................................. 101 68
Employees................................................. 83 62
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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 our propane operations 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 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 2002 and 2001 is adjusted for service areas included in the Mid-States Division and the Kentucky Division which have weather normalized operations. Degree day information for 2000, 1999 and 1998 has not been adjusted for service areas with weather normalized operations as that information was not available.
(3) These tables present data for our five utility divisions. Their operations include the regulated local distribution companies located in their respective service areas. The operations of Louisiana Gas are included in our Louisiana Division 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 489 and 480 Atmos shared services and customer support center employees and 83 and 62 non-utility employees in 2002 and 2001.
(6) In April 2001, we completed our acquisition of the remaining 55 percent interest in Woodward Marketing that we did not already own. Subsequent to April 2001, the revenues and expenses of Woodward Marketing are now shown on a consolidated basis.
We consider each division within our utility segment to be a reporting unit of the utility segment and not a separate reportable segment.
The following table summarizes certain information regarding the operations of the utility, natural gas marketing and other non-utility segments of Atmos as of and for each of the three years ended September 30, 2002. The information is net of intersegment eliminations.
NATURAL GAS OTHER NON-
UTILITY MARKETING UTILITY TOTAL
---------- ----------- ---------- ----------
(IN THOUSANDS)
2002
Operating revenues.................. $ 936,054 $ 404 $ 14,391 $ 950,849
Gas trading margin.................. -- 38,538 -- 38,538
Operating income.................... 125,506 20,610 9,215 155,331
Net income.......................... 42,994 12,614 4,048 59,656
Identifiable assets................. 1,666,845 242,340 71,036 1,980,221
2001
Operating revenues.................. $1,378,159 $ 7,946 $ 56,170 $1,442,275
Gas trading margin.................. -- 488 -- 488
Operating income (loss)............. 127,980 (3,122) 5,423 130,281
Net income.......................... 49,881 2,551 3,658 56,090
Identifiable assets................. 1,732,296 251,238 52,646 2,036,180
2000
Operating revenues.................. $ 734,835 $ 929 $114,388 $ 850,152
Gas trading margin.................. -- -- -- --
Operating income.................... 77,207 155 7,954 85,316
Net income.......................... 22,459 5,344 8,115 35,918
Identifiable assets................. 1,246,782 37,621 64,355 1,348,758
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GAS SALES
Our natural gas utility 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 2002-2003 heating season by using a combination of storage, financial hedges and fixed forward contracts to stabilize gas prices. For the 2002-2003 heating season, we have covered between 45 and 50 percent of our anticipated flowing gas requirements through storage and financial instruments. The gas hedges should help to moderate the effects of higher customer accounts receivable caused by potentially higher gas prices.
We also have weather normalization adjustments in our rate jurisdictions in Tennessee, Georgia and Kentucky which protect against earnings volatility. We 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 if we obtain weather protection in our rate structures. The policy covers the entire heating season of October through 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 Texas Division since we began independent operations in 1983 or in our Louisiana Division since we acquired Trans Louisiana Gas Company in 1986 and Louisiana Gas Service in 2001. The Kentucky Division curtailed deliveries to certain interruptible customers during exceptionally cold periods in December 1989, January 1994 and during the winter of 1996. Neither the Colorado-Kansas Division nor its predecessor, Greeley Gas Company, has curtailed deliveries to its sales customers since prior to 1980. The Mid-States 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 in our utility operations 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 Kentucky Division's gas supply is delivered primarily by the following pipelines: Williams Pipeline-Texas Gas, Tennessee Gas, Trunkline, Midwestern Pipeline and ANR. During 2002, the Kentucky Division sought and was granted approval by the Kentucky Public Service Commission for a four year extension of its 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.
Our Mid-States 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 Colorado-Kansas Division's requirements. Additionally, the Colorado-Kansas Division purchases substantial volumes from producers that are connected directly to its distribution system.
Our Texas Division receives transportation service from ONEOK Pipeline. In addition, the Texas Division purchases a significant portion of its supply from Pioneer Natural Resources which is connected directly to our Amarillo, Texas distribution system.
Louisiana Intrastate Gas Company, Acadian Pipeline, Gulf South and Williams Pipeline-Texas Gas pipelines deliver most of the Louisiana 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 liquefied 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 266,000 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 requesting proposals from 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 at the best cost. Major suppliers during fiscal 2002 were Reliant Energy, Pioneer Natural Resources, Duke Energy, our non-utility subsidiary Woodward Marketing, ONEOK Gas Marketing, BP Energy, Anadarko and Tenaska Marketing. We do not anticipate problems with obtaining 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. Our environmental claims have arisen out of manufactured gas plant sites in Tennessee and Missouri and mercury contamination sites in Kansas. See Note 5 of notes to consolidated financial statements.
RATES
The method of determining regulated rates varies among the states in which our utility divisions 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.
Substantially all of our sales to our customers fluctuate with the cost of gas that we purchase. 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 98 percent of our revenues in the fiscal year ended September 30, 2002, and approximately 96 percent of our revenues in fiscal 2001 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.
AMOUNT
EFFECTIVE AMOUNT RECEIVED
JURISDICTION DATE REQUESTED (REDUCED)
------------ --------- --------- ---------
(IN THOUSANDS)
Texas
West Texas System.................................. 12/01/00 $ 9,827 $ 3,011
Amarillo System.................................... 01/01/00 4,354 2,200
Louisiana
Trans La System.................................... 11/01/02 -- 364(a)
LGS System......................................... 11/01/02 -- 11,890(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 -- (326)(e)
Illinois............................................. 10/23/00 2,100 1,367
Virginia............................................. 10/01/98 -- (248)(f)
04/01/01 2,100 (534)
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(a) The Louisiana Public Service Commission approved, in October 1999, a rate stabilization clause for three years for our former Trans La Division. The rate stabilization clause will allow the Trans La system to earn a return on equity within certain ranges that will be monitored on an annual basis. In 2002, we submitted our 2001 rate stabilization filing and received tariff revisions which resulted in an increase in annual revenues of $0.5 million during the first 24-month period. Subsequent to the first 24-month period, adjusted rates will provide an increase in annual revenues of $0.4 million.
(b) On January 29, 2001, the Louisiana Public Service Commission approved a rate stabilization clause for our LGS system for a three-year period beginning January 1, 2001. Under the rate stabilization clause, our LGS system will be allowed to earn a return on equity within certain ranges that will be monitored on an annual basis. In 2002, we submitted our 2001 rate stabilization filing and received tariff revisions which resulted in an increase in annual revenues of $15.3 million during the first 24-month period. Subsequent to the first 24-month period, adjusted rates will provide an increase in annual revenues of $11.9 million.
(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.
COMPETITION
Our utility operations 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 alternative 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, our Natural Gas Marketing segment competes with other natural gas brokers in obtaining natural gas supplies for customers.
EMPLOYEES
At September 30, 2002, we had 2,338 employees, consisting of 2,255 employees in our utility segment and 83 employees in our other segments. See "Utility Sales and Statistical Data by Division" for the number of employees by division.
ITEM 2. PROPERTIES
We own an aggregate of 39,157 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 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 seven 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 L.L.C. 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 26.1 Bcf. However, approximately 12.3 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 266,000 Mcf.
Substantially all of our properties in our Colorado-Kansas Division and Mid-States Division with net book values of approximately $184.8 million and $328.8 million are subject to liens under First Mortgage Bonds assumed in our acquisitions of Greeley Gas Company and United Cities Gas Company. At September 30, 2002, the liens collateralized $17.0 million of outstanding 9.4 percent Series J First Mortgage Bonds due May 1, 2021, and $86.6 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 facilities. Our non-utility operations are headquartered in Houston, Texas, with offices in Houston and other locations, primarily in leased facilities.
Net property, plant and equipment at September 30, 2002 included approximately $1,223.9 million for utility, $9.9 million for natural gas marketing and $66.5 million for other non-utility.
We hold franchises granted by the incorporated cities and towns that we serve. At September 30, 2002, we held 555 such franchises having terms generally ranging from five to 25 years. We believe that each of our franchises will be renewed.
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 2002.
The following table sets forth certain information as of September 30, 2002, 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............... 55 5 Chairman, President and Chief Executive Officer
John P. Reddy................ 49 4 Senior Vice President and Chief Financial
Officer
R. Earl Fischer.............. 63 40 Senior Vice President, Utility Operations
JD Woodward III.............. 52 1 Senior Vice President, Non-Utility Operations
Louis P. Gregory............. 47 2 Senior Vice President and General Counsel
Wynn D. McGregor............. 49 14 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 Texas Division from January 1999 to April 2000 and as President of the Kentucky Division from February 1989 to December 1998.
JD Woodward was named Senior Vice President, Non-Utility Operations in April 2001. Prior to joining the Company, Mr. Woodward was President of Woodward Marketing, L.L.C. 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).
Wynn D. McGregor was named Vice President, Human Resources in January 1994. He previously served the Company as Director of Human Resources from February 1991 to December 1993 and as Manager, Compensation and Employment from December 1987 to January 1991.
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 2002 and 2001 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 2002
Quarter ended:
December 31.......................................... $22.10 $19.46 $.295
March 31............................................. 24.20 20.26 .295
June 30.............................................. 24.46 21.25 .295
September 30......................................... 22.75 18.37 .295
-----
$1.18
=====
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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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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, 2002 was 28,829.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company and should be read in conjunction with the consolidated financial statements included herein. All income was from continuing operations.
YEAR ENDED SEPTEMBER 30
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues............ $ 950,849 $1,442,275 $ 850,152 $ 690,196 $ 848,208
========== ========== ========== ========== ==========
Net income.................... $ 59,656 $ 56,090 $ 35,918 $ 17,744 $ 55,265
========== ========== ========== ========== ==========
Diluted net income per
share....................... $ 1.45 $ 1.47 $ 1.14 $ .58 $ 1.84
========== ========== ========== ========== ==========
Cash dividends paid per
share....................... $ 1.18 $ 1.16 $ 1.14 $ 1.10 $ 1.06
========== ========== ========== ========== ==========
Total assets at end of year... $1,980,221 $2,036,180 $1,348,758 $1,230,537 $1,141,390
========== ========== ========== ========== ==========
Long-term debt at end of
year........................ $ 670,463 $ 692,399 $ 363,198 $ 377,483 $ 398,548
========== ========== ========== ========== ==========
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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; regulatory approvals, including the impact of rate proceedings before various state regulatory commissions; successful completion and integration of pending acquisitions; 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, 2002 or rate proceedings completed during the three years ended September 30, 2002.
Results of our rate activity for the three years ended September 30, 2002 can be summarized as follows: no rate increases implemented in 2002, net annual rate increases totaling $6.4 million implemented in 2001 and net annual rate increase totaling $12.1 million in 2000.
In August 1999, the Texas 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 Texas Division received an increase in annual revenues of approximately $2.1 million in base rates plus an increase of $0.1 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 Texas 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 the Texas Division's 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 that covered all 67 cities served by the West Texas System 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 Louisiana Division were involved in a rate investigation before the Louisiana Public Service Commission, including the redesign of 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 our Louisiana Division's rates to be adjusted annually to allow us to earn a return on equity within certain ranges that will be monitored on an annual basis.
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 cost savings that resulted 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. Beginning January 1, 2002, 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 January and February 2002, our Louisiana division submitted its 2001 Rate Stabilization filings to the Louisiana Public Service Commission for the two gas systems we operate in Louisiana. Recently completed audits by the Louisiana Public Service Commission of these filings found our earnings to be deficient and that rate adjustments were appropriate. Approved tariff revisions, which became effective November 1, 2002, will result in $15.8 million in additional revenue per year during the first 24-month period. Subsequent to the first 24-month period, adjusted rates will provide $12.2 million in total annual revenue increases. As a result of the actions taken by the Louisiana Public Service Commission, Atmos Energy has decreased its overall weather sensitivity in Louisiana.
In October 2002, Atmos received written notification from the Executive Secretary of the Louisiana Public Service Commission that he was asserting that a monthly facilities fee of approximately $0.6 million charged since July 2001 to Atmos by Trans Louisiana Gas Pipeline, Inc., a wholly-owned subsidiary of Atmos, pursuant to a contract between the parties, was excessive. The Executive Secretary asserted that all monthly facilities fees in excess of approximately $0.1 million from July 2001 should be refunded to ratepayers with interest.
Atmos has responded to the Secretary and noted that it has previously made all required filings with the Commission fully disclosing the amount of the facilities fee. Atmos intends to file another petition seeking Commission approval of the facilities fee by the end of calendar year 2003 similar to that filed in 2001 but containing updated data. In the interim, Atmos is continuing to charge a facilities fee of approximately $0.6 million per month, as the Executive Secretary's correspondence does not constitute action of the Commission.
In May 1999, the Kentucky 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 March 25, 2002, the Kentucky Commission issued an Order approving a four year extension, effective April 1, 2002, of the Performance-based Ratemaking mechanism related to gas procurement and gas transportation activities filed by the Kentucky Division. The Performance-based Ratemaking mechanism is incorporated into the Kentucky Division's gas cost adjustment clause. As discussed above, it provides for sharing of purchased gas cost savings between our customers and us. We recognized other income of $1.1 million, $0.2 million and $2.1 million under the Kentucky Performance-based Ratemaking mechanism in fiscal years 2002, 2001 and 2000.
In November 2000, the Colorado-Kansas 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 Mid-States Division's request to continue its Performance-based Ratemaking mechanism related to gas procurement and gas transportation activities. 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. Under this agreement, the mechanism has no expiration date and can be amended or cancelled by either the Mid-States Division or the Tennessee Regulatory Authority according to the provisions of the agreement. Similar to Tennessee, the Georgia Public Service Commission renewed our Performance-based Ratemaking program for an additional three years effective May 1, 2002. 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 $0.4 million, $1.0 million and $0.2 million in fiscal years 2002, 2001 and 2000 attributable to the Georgia and Tennessee Performance-based Ratemaking mechanisms.
In February 2000, the Mid-States 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 Mid-States 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 Mid-States 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 Mid-States Division agreed to an annual rate reduction of $0.5 million effective beginning with the April 2001 billing cycle.
In March 2001, the Mid-States 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.
In 2001, the Mid-States Division filed requests for accounting orders related to uncollectable delinquencies in three states. As a result, we were able to defer $1.5 million as a regulatory asset.
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.
WEATHER AND SEASONALITY
Our natural gas utility 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 warmer than normal winter weather in 2002 and 2000 on our consolidated volumes delivered are illustrated by the following degree day information. The degree day information presented below for 2002 and 2001 is adjusted for service areas with weather normalized operations. The degree day information for 2000 has not been adjusted for service areas with weather normalized operations as that information was not available.
YEAR ENDED SEPTEMBER 30
------------------------
2002 2001 2000
------ ------ ------
Sales volumes -- Bcf........................................ 145.5 156.6 138.2
Transportation volumes -- Bcf............................... 63.0 61.2 59.4
----- ----- -----
Total............................................. 208.5 217.8 197.6
===== ===== =====
Degree days:
Actual.................................................... 3,368 4,124 2,096
Percent of normal......................................... 94% 115% 82%
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The effects of temperatures that are above or below normal are partially offset in the Tennessee and Georgia jurisdictions served by the Mid-States Division and in the Kentucky jurisdiction served by the Kentucky 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 Mid-States Division and the Kentucky 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 an increase in revenue of $6.0 million in 2002, a decrease in revenues of $3.3 million for 2001 and an increase in revenues of $4.1 million in 2000. Approximately 374,000 or 27 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, 2002. We also received approval to change our rate structure in our West Texas System of the Texas 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. No income was recognized for the 2000-2001 heating season for these weather hedges due to the colder than normal weather. 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. We will receive a refund of a portion of the cost of the policy if we cancel in the third year. 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 $13.2 million which was prepaid and is being 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 the entire heating season. During the 2001-2002 heating season, weather was not at least seven percent warmer than normal resulting in no claim having been filed under the insurance policy. Only the amortization of $4.4 million of premiums was recognized during the heating season.
We have historically hedged approximately 20 to 25 percent of our gas supply through the use of our underground storage assets. For the 2001-2002 heating season, we covered approximately 64 percent of our flowing gas requirements through storage, financial hedges and fixed forward contracts at a weighted average cost of slightly less than $4.00 per Mcf. For the 2002-2003 heating season, we have covered between 45 and 50 percent of our anticipated flowing gas requirements through storage, financial hedges and fixed forward contracts at a weighted average cost of less than $4.00 per Mcf. This should provide protection to us and our customers against potential sharp increases in the price of natural gas during the 2002-2003 heating season.
STATUS OF PENDING ACQUISITION
In September 2001, we entered into a definitive agreement to acquire Mississippi Valley Gas Company, a privately held natural gas utility, for $150.0 million, consisting of $75.0 million cash and $75.0 million of Atmos common stock. In addition, we will repay outstanding long-term debt of Mississippi Valley Gas of approximately $45.0 million. Mississippi Valley Gas provides natural gas distribution service to approximately 261,500 residential, commercial, industrial and other customers located primarily in the northern and central regions of Mississippi. On October 31, 2002, we announced that we had received approval from the Mississippi Public Service Commission to acquire Mississippi Valley Gas. The transaction had previously received federal regulatory approval and approvals from the six other state utility commissions that require approval. We expect to close the acquisition in December 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General -- Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements required us to make estimates and judgments that affected the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We based our estimates on historical experience and various other assumptions that we believed to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to risk management and trading activities, allowance for doubtful accounts, goodwill and pension and other post retirement plans. Actual results may differ from estimates.
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. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates.
Risk Management and Trading Activities -- We use storage, transportation and requirements contracts, forwards, over-the-counter and exchange-traded options, futures and swap contracts to conduct our risk management and trading activities. 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. The market prices and models used to value these transactions reflect management's best estimates considering various factors including closing exchange and over-the-counter quotations, the time value of money and volatility factors underlying the contracts. We adjust the values 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 management's estimate of the fair value of these transactions. Assumptions different from those used would impact these carrying values.
Allowance for Doubtful Accounts -- For the majority of our receivables, we establish an allowance for doubtful accounts based on an aging of those receivable balances. We apply percentages to each aging category based on our collections experience. On certain other receivables where we are aware of a specific customer's inability or reluctance to pay, we record an allowance for doubtful accounts against amounts due to reduce the net receivable balance to the amount we reasonably expect to collect. We believe our allowance for doubtful accounts is adequate. However, if circumstances change, our estimate of the recoverability of accounts receivable could be different.
Goodwill -- At September 30, 2002, we had $185.0 million of goodwill, $150.3 million of which was attributable to our utility segment, $21.3 million was attributable to our natural gas marketing segment and $13.4 million was attributable to our other non-utility segment. We evaluate our goodwill balances for impairment each year during our second fiscal quarter. Our evaluation during the quarter ended March 31, 2002 resulted in no impairment. If our projections of estimated future cash flows change, those changes could result in a reduction in the carrying value of our goodwill.
Pension and Other Postretirement Plans -- Pension and other postretirement plan expenses and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and assumed discount rates. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets could have a material effect on the amount of pension expense ultimately recognized. The assumed return on plan assets is based on management's expectation of the long-term return on plan assets portfolio. The discount rate used to compute the present value of plan liabilities is based generally on rates of high grade corporate bonds with maturities similar to the average period over which benefits will be paid.
Fiscal 2002 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 the Louisiana Gas Service assets acquired in July 2001, the acquisition of the remaining 55 percent of Woodward Marketing that we did not already own in April 2001 and a decrease in cash held in margin accounts partially offset by increased capital expenditures. Common stock issued primarily through our Retirement Savings 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 notes to consolidated financial statements.
Cash flows from operating activities as reported in the consolidated statements of cash flows totaled $296.2 million for 2002 compared to $83.0 million for 2001 and $54.2 million for 2000. The increase in net cash provided by operating activities from 2001 to 2002 was primarily the result of increases in net income, accounts payable and other current liabilities and decreases in cash held on deposit in margin accounts and deferred gas costs. The increase in net cash provided by operating activities was partially offset by increases in accounts receivable. The increase in net income was due primarily to higher gross profit and income from our gas marketing activities partially offset by higher operating expenses and interest expense.
CASH FLOWS FROM INVESTING ACTIVITIES
During the last three years, a substantial portion of our cash resources was used to fund acquisitions, our ongoing construction program to provide natural gas services to our customer base and technology improvements. Net cash used in investing activities totaled $158.2 million in 2002 compared with $468.1 million in 2001 and $100.1 million in 2000. Capital expenditures in fiscal 2002 amounted to $132.3 million, compared with $113.1 million in 2001 and $75.6 million in 2000. The increase in capital expenditures from 2001 to 2002 was primarily the result of additional capital requirements needed due to our growing customer base. Included in investing activities for 2002 is $15.7 million, in our natural gas marketing and other non-utility operations, for the acquisition of Kentucky-based market area storage and associated pipeline facility assets, certain gas marketing assets and the common stock of Southern Resources, Inc. 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 2003 total approximately $160.2 million and include funds for additional mains, services, meters and equipment. In 2003, we also plan to complete the Mississippi Valley Gas Company acquisition for $150.0 million plus the repayment of approximately $45.0 million of outstanding long-term debt as discussed in Note 2 of the notes to consolidated financial statements. Capital expenditures and acquisitions for fiscal 2003 are planned to be financed from internally generated funds and financing activities as discussed below. In 2002, we had $8.5 million in expenditures for assets to be used in leasing activities. 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 in 2001, 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 used by financing activities totaled $106.4 million for 2002 compared with net cash provided by financing activities of $393.0 million for 2001 and $44.7 million for 2000. 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 change in cash used by financing activities in 2002 as compared to cash provided by financing activities in 2001 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 $20.7 million, $17.7 million and $14.6 million for 2002, 2001 and 2000. Repayments of long-term debt in 2002, 2001 and 2000 consisted of annual installments under the various loan documents. During 2002, short-term debt decreased by $55.5 million due primarily to more effective collection experience of customer accounts receivable balances which increased the amount of cash available to reduce short-term debt. 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.
Issuance of common stock. We issued 884,431, 674,468 and 704,540 shares of common stock in 2002, 2001 and 2000 under our various plans. See the Consolidated Statements of Shareholders' Equity and Note 6 of notes to consolidated financial statements for the number of shares issued and available for 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 $48.6 million in cash dividends during 2002 compared with $44.1 million in 2001 and $36.0 million in 2000. We increased the dividend per share by $.02 in both 2002 and 2001 and $.04 in 2000. The increase in cash dividends in 2002 over 2001 was also due to the increase in the number of shares outstanding as discussed above.
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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2002 2001
------------------ ------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Short-term debt................................ $ 145,791 10.3% $ 201,247 13.4%
Long-term debt................................. 692,443 49.1% 713,094 47.6%
Shareholders' equity........................... 573,235 40.6% 583,864 39.0%
---------- ----- ---------- -----
Total capitalization, including short-term
debt......................................... $1,411,469 100.0% $1,498,205 100.0%
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Total debt as a percentage of total capitalization, including short-term debt, was 59.4 percent and 61.0 percent at September 30, 2002 and 2001. 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 Retirement Savings Plan, access to the debt and equity capital markets and limiting annual maintenance and capital expenditures. It is likely that the debt to capitalization ratio will remain in its current range in the near term.
At September 30, 2002, 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. Our commercial paper is rated A-2 by Standard and Poor's, P-2 by Moody's and F-2 by Fitch. At September 30, 2002, $132.7 million of commercial paper was outstanding. We have a second credit facility in place for $18.0 million. At September 30, 2002, $13.1 million was outstanding under this credit facility. These credit facilities are negotiated at least annually and are used for working capital purposes.
On October 7, 2002, we entered into a $150.0 million short-term unsecured committed credit facility. This credit facility will be used to provide initial funding for the cash portion of the Mississippi Valley Gas acquisition and to refinance Mississippi Valley Gas' existing debt.
At September 30, 2002, our Woodward Marketing subsidiary had an uncommitted demand credit facility for $210.0 million which is used for working capital purposes for our non-utility business. Atmos Energy Holdings, Inc., our wholly-owned subsidiary, is the sole guarantor of all amounts outstanding under this facility. At September 30, 2002, there were no amounts outstanding under this credit facility. Related letters of credit totaling $41.0 million reduced the amount available under this facility. The amount available under this credit facility is also limited by various covenants, including covenants based on working capital. Under the most restrictive covenant, the amount available to Woodward Marketing under this credit facility at September 30, 2002 was $59.0 million.
At September 30, 2002, we also had an unsecured short-term uncommitted credit line for $20.0 million. There were no borrowings under this uncommitted credit facility at September 30, 2002. This uncommitted line is renewed or renegotiated at least annually with varying terms and we pay no fee for the availability of the line. Borrowings under this line are made on a when- and as-available basis at the discretion of the bank.
In addition, Woodward Marketing has up to $100.0 million available from Atmos Energy Holdings for its non-utility business. At September 30, 2002, $20.0 million was outstanding. Any outstanding amounts under the Atmos Energy Holdings facility are subordinated to Woodward Marketing's $210.0 million uncommitted demand credit facility described above. This intercompany loan is eliminated in the consolidated financial statements.
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 notes to consolidated financial statements for more information on these covenants.
The following tables provide information about contractual obligations and commercial commitments at September 30, 2002.
PAYMENTS DUE BY PERIOD
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LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
-------- --------- --------- --------- --------
(IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
Long-term Debt......................... $692,443 $ 21,980 $34,962 $25,766 $609,735
Capital Lease Obligations.............. 5,754 876 1,719 866 2,293
Operating Leases....................... 66,860 9,572 18,528 15,550 23,210
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Total Contractual
Obligations................ $765,057 $ 32,428 $55,209 $42,182 $635,238
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OTHER COMMERCIAL COMMITMENTS
Lines of Credit........................ $145,791 $145,791 $ -- $ -- $ --
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RISK MANAGEMENT AND TRADING ACTIVITIES
We conduct our risk management activities through both our utility and natural gas marketing segments. See Notes 1 and 15 of notes to consolidated financial statements for a description of our risk management activities. The following table shows our risk management assets and liabilities by segment at September 30, 2002.
NATURAL GAS
UTILITY MARKETING TOTAL
------- ----------- --------
(IN THOUSANDS)
Assets from risk management activities, current....... $4,424 $ 23,560 $ 27,984
Assets from risk management activities, noncurrent.... -- 5,241 5,241
Liabilities from risk management activities,
current............................................. -- (18,487) (18,487)
Liabilities from risk management activities,
noncurrent.......................................... -- (3,663) (3,663)
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Net assets (liabilities).............................. $4,424 $ 6,651 $ 11,075
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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 related to our utility segment are recorded as deferred gas cost on the consolidated balance sheet as these costs will ultimately be recovered from ratepayers. Accordingly, there is no earnings impact as a result of the use of these financial instruments. Upon maturity, the contracts are recognized in purchased gas cost on the consolidated statement of income.
To conduct our risk management and trading activities, Atmos Energy Marketing uses natural gas storage, transportation and requirements contracts, forwards, over-the-counter and exchange-traded options, futures and swap contracts. Prior to May 2002, Atmos Energy Marketing engaged in limited financial trading for speculative purposes. Effective in May 2002, Atmos Energy Marketing's financial trading for speculative purposes was discontinued. The mark-to-market method is used to account for these activities, as prescribed in EITF Issue No. 98-10, EITF Issue 00-17 and EITF Issue 02-03. 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 from risk management activities" and "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 as gas trading margin. Changes in assets and liabilities from risk management activities result primarily from changes in valuation of the portfolio of contracts, maturity and settlement of contracts and newly originated transactions.
Market prices are primarily used to value these transactions. In addition, a market price based model is used for valuing certain storage and transportation contracts. These values reflect management's best estimate considering various factors, including closing exchange and over-the-counter quotations, time value, and volatility factors underlying the contracts. The values are adjusted to reflect the potential impact of liquidating our position in an orderly manner over a reasonable time frame under present market conditions. Changes in market prices directly affect management's estimate of the fair value of these transactions.
At its October 2002 meeting, the Emerging Issues Task Force rescinded EITF Issue Nos. 98-10 and 00-17. The impact on Atmos will be to discontinue mark-to-market accounting of our sales, storage and transportation contracts and our natural gas storage inventory. Any cumulative effect of this change in accounting will depend on the number and valuation of our sales, storage and transportation contracts and our natural gas storage inventory level and valuation at the time we adopt the new rules.
The following table reflects the components of the change in fair value of our non-utility energy trading contract activities for the year ended September 30, 2002 (in thousands).
Fair value of contracts at September 30, 2001............... $ 28,349
Contracts realized/settled................................ (18,910)
Fair value of new contracts............................... 2,447
Other changes in value.................................... (5,235)
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Fair value of contracts at September 30, 2002............... $ 6,651
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The fair value of our non-utility energy trading contracts at September 30, 2002, is segregated below, by time period and fair value source.
FAIR VALUE OF CONTRACTS AT SEPTEMBER 30, 2002
----------------------------------------------------------
MATURITY MATURITY
LESS THAN MATURITY MATURITY EXCESS OF TOTAL FAIR
1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS VALUE
--------- --------- --------- --------- ----------
(IN THOUSANDS)
SOURCE OF FAIR VALUE
Prices actively quoted................. $(2,546) $ 908 $-- $-- $(1,638)
Prices provided by other external
sources.............................. 3,145 1,159 20 -- 4,324
Prices based on models and other
valuation methods.................... 4,379 (588) 75 99 3,965
------- ------ --- --- -------
Total Fair Value....................... $ 4,978 $1,479 $95 $99 $ 6,651
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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 2003.
RESULTS OF OPERATIONS
Operating revenues decreased by 34 percent to $950.8 million for 2002 from $1.4 billion for 2001. The most significant factors contributing to the decrease in operating revenues were a 31 percent decrease in average sales price due to the decreased cost of gas and a 17 percent decrease in sales volumes due to warmer weather, excluding the additional sales volumes attributable to the Louisiana Gas Service operations acquired in July 2001. During 2002, temperatures were 18 percent warmer than in the corresponding period of the prior year and were six percent warmer than the 30-year normal, adjusted for service areas with weather normalized operations. The total volume of gas sold, excluding the Louisiana Gas Service volumes, for 2002 was 130.6 Bcf compared with 156.5 Bcf for 2001. However, the decrease in sales volumes was partially offset by the additional sales volumes of 14.9 Bcf attributable to the Louisiana Gas Service operations acquired in July 2001. The average cost of gas per Mcf sold decreased 44 percent to $3.81 for 2002 from $6.83 for 2001. However, the decrease in operating revenues was partially offset by increased revenues resulting from the Louisiana Gas Service acquisition in July 2001.
Gross profit increased by five percent to $392.6 million for 2002 from $374.7 million for 2001. The increase in gross profit was due primarily to the additional gross profit resulting from the Louisiana Gas Service acquisition in July 2001 partially offset by the effect of warmer weather. Changes in the cost of gas do not directly affect gross profit because the fluctuations in gas prices are passed through to the customer.
In April 2001, we completed our acquisition of the remaining 55 percent interest in Woodward Marketing, L.L.C. that we did not already own. As a result of this acquisition, the revenues and expenses of Woodward Marketing are now shown on a consolidated basis. For 2002, Atmos Energy Marketing, which includes the operations of Woodward Marketing and Trans Louisiana Industrial Gas Company, had income of $38.5 million in gas trading margin. For 2001, Atmos Energy Marketing had income of $0.5 million in gas trading margin and an equity in earnings of Woodward Marketing of $8.1 million. The increase for 2002 compared to 2001 was primarily due to gains on inventory sales and favorable pricing under natural gas sales contracts as well as our full consolidation of Woodward Marketing beginning April 2001.
Operating expenses increased to $275.8 million for 2002 from $244.9 million for 2001. Operation and maintenance expense increased due primarily to the addition of $21.5 million relating to the Louisiana Gas Service acquisition in July 2001 and an increase of $10.7 million in pension costs. In addition, operation and maintenance expense increased $9.2 million due to the full consolidation of Woodward Marketing's operations beginning April 1, 2001. A decrease in the provision for doubtful accounts of $26.2 million partially offset this increase. The decrease in the provision for doubtful accounts was attributable to the lower gas commodity prices during 2002 as well as our effective recovery of customer receivable balances. Depreciation and amortization increased $13.8 million due to the addition of the assets from the Louisiana Gas Service acquisition in July 2001. Taxes other than income decreased as a result of decreased 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. The decrease in taxes other than income was partially offset by increases in property and payroll taxes related to the Louisiana Gas Service acquisition in July 2001.
Operating income increased 19 percent for 2002 to $155.3 million from $130.3 million for 2001. The increase in operating income resulted primarily from the increase in gross profit and the income from our gas trading margin described above partially offset by an increase in operating expenses.
Miscellaneous expense decreased $0.6 million to $1.3 million in 2002 compared to $1.9 million in 2001. This decrease was due primarily to an increase in net recoveries related to our performance based-ratemaking mechanisms, the recognition of $0.5 million related to a large industrial contract we received during 2002 and a reduction in the amortization expense recognized related to weather insurance purchased for the 2001-2002 heating season. In addition, we had an increase of $3.0 million in interest income in May 2001 due primarily to interest income earned on the proceeds from our $350.0 million debt offering in 2001. We invested these proceeds in short-term investments until the completion of the Louisiana Gas Service acquisition in July 2001. No such interest income was recognized in 2002.
Interest expense increased $12.2 million to $59.2 million for 2002 compared to $47.0 million for 2001. This increase was due primarily to the interest expense on the $350.0 million debt offering in May 2001.
Net income increased for 2002 by $3.6 million to $59.7 million from $56.1 million for 2001. This increase in net income resulted primarily from the increase in operating income partially offset by the increase in interest expense discussed above.
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. 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 t