ATMOS Energy Corporation 1994 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended September 30, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from __________ to ____________ Commission File Number 1-10042 ATMOS ENERGY CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-1743247 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Three Lincoln Centre, Suite 1800 5430 LBJ Freeway, Dallas, Texas 75240 (Address of principal executive offices (Zip code) Registrant's telephone number, including area code: (214) 934-9227 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ---------------------- Common stock, No Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No ___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant was $237,127,039 as of December 1, 1994. On December 1, 1994, the registrant had 15,347,251 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's definitive proxy statement filed for the annual meeting of shareholders on February 8, 1995 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS Atmos Energy Corporation (the "Company") was organized under the laws of the State of Texas in 1983 as a subsidiary of Pioneer Corporation ("Pioneer") for the purposes of owning and operating Pioneer's natural gas distribution business in Texas. Immediately following the transfer of such business, which had been operated by Pioneer and its predecessors since 1906, Pioneer distributed the outstanding stock of the Company, then known as Energas Company, to Pioneer shareholders. In September 1988, the Company changed its name from Energas Company to Atmos Energy Corporation. The Company distributes and sells natural gas to residential, commercial, industrial, agricultural, and other customers in 413 cities, towns, and communities in parts of Texas, Louisiana, Kentucky, Colorado, Kansas, and Missouri. The Company also transports gas for others through parts of its distribution system. The Company is also helping promote the development of a market for natural gas as a clean burning vehicular fuel by opening four public refueling facilities in its service areas. The Company's Texas distribution system is operated through its Energas Company division (the "Energas Division") and is located in the western part of Texas covering an area having a population of approximately 950,000 people. The economy of the area is based primarily on oil and gas production and agriculture. The principal cities served by the Energas Division include Amarillo, Lubbock, Midland, and Odessa. At September 30, 1994, the Company had 309,496 gas meters in service in Texas. The Company's Louisiana distribution system is operated through its Trans Louisiana Gas Company division (the "Trans La Division") and is located in Louisiana covering an area having a population of approximately 250,000 people. The economy of the area is based primarily on oil and gas production, agriculture, and food processing. The principal cities served by the Trans La Division are Lafayette, Pineville, and Natchitoches. At September 30, 1994, the Company had 70,361 gas meters in service in Louisiana. The Company's Kentucky distribution system is operated through its Western Kentucky Gas Company division (the "Western Kentucky Division") and covers an area having a population of approximately 680,000 people. The economy of the area is based primarily on industry and agriculture. The principal cities served by the Western Kentucky Division include Bowling Green, Owensboro, and Paducah. At September 30, 1994, the Company had 164,828 gas meters in service in Kentucky. In December 1993, the Company acquired Greeley Gas Company ("GGC") of Denver, Colorado in a merger accounted for as a pool- 1 ing of interests, and accordingly, all amounts included herein have been restated to include GGC's operating results. Since the merger, the business of GGC has been operated through the Company's Greeley Gas Company division (the "Greeley Gas Division"). It serves customers in areas of Colorado, Kansas, and Missouri having a combined population of approximately 228,000 people. The economies of the areas served are based on oil and gas production, agriculture and resort business in Colorado. The principal cities served include Greeley, Durango and Lamar, Colorado and Bonner Springs, Herington and Ulysses, Kansas. At September 30, 1994 the Greeley Gas Division had 104,634 meters in service. The natural gas distribution industry is subject to numerous special factors, many of which affect the Company from time to time. These include (i) adequate and timely rate relief from regulatory authorities to recover costs of service and earn a fair return on invested capital; (ii) inherent seasonality of the business in local gas distribution service areas; (iii) competition from alternate fuels; (iv) competition with other gas sources for industrial customers, including bypass of the Company's facilities, which could result in loss of revenues and reduction in the Company's net income; and (v) possible volatility in the supply and price of natural gas. ACQUISITIONS Since its organization in 1983, the Company has sought to expand its customer base and to diversify the weather patterns, local economic conditions, and regulatory environments to which its operations are subject. As part of this strategy, the Company acquired Trans Louisiana Gas Company, Inc. ("TLG") in January 1986, Western Kentucky Gas Utility Corporation ("WKG") in December 1987, and Greeley Gas Company ("GGC") in December 1993. The Company continues to consider and pursue, where appropriate, additional acquisitions of natural gas distribution properties and other business opportunities. For further information regarding the GGC merger, see Note 2 of notes to consolidated financial statements, and Management's Discussion and Analysis. FIVE-YEAR OPERATING STATISTICS Certain information with respect to the Company's natural gas operations for the past five years is shown on the following page. 2 Year ended September 30, ------------------------ 1994 1993 1992 ------- ------- ------ NUMBER OF ACCOUNTS, at end of year Residential 549,129 539,309 534,762 Commercial 55,027 54,275 55,562 Industrial (including agricultural) 8,78 8,924 9,331 Public authority and other 3,351 3,267 1,745 ------- ------- ------- Total 616,288 605,775 601,400 ======= ======= ======= METERS IN SERVICE, at end of year 649,319 636,159 630,365 ======= ======= ======= HEATING DEGREE DAYS, system average (1) Actual 3,953 4,046 3,676 Normal 3,983 3,983 3,983 Percent of normal 99% 102% 92% SALES VOLUMES - MMcf (2) Residential 51,209 51,763 48,223 Commercial 21,134 21,872 20,675 Industrial (including agricultural) 38,502 31,367 27,489 Public authority and other 5,242 4,403 3,333 ------- ------- ------- Total 116,087 109,405 99,720 TRANSPORTATION VOLUMES - MMcf (2 35,308 39,782 32,203 ------- ------- ------- TOTAL VOLUMES HANDLED - MMcf (2) 151,395 149,187 131,923 ======= ======= ======= OPERATING REVENUES (000's) Gas Revenues Residential $245,931 $237,914 $211,767 Commercial 92,507 91,250 82,311 Industrial (including agricultural) 119,722 92,455 77,218 Public authority and other 22,463 18,315 13,232 -------- -------- -------- Total gas revenues 480,623 439,934 384,528 Transportation Revenues 14,118 15,013 13,674 Other Revenue 5,067 4,694 5,151 -------- -------- -------- Total operating revenues $499,808 $459,641 $403,353 ======== ======== ======== AVERAGE SALES PRICE/Mcf Residential $4.80 $4.60 $4.39 Commercial 4.38 4.17 3.98 Industrial (including agricultural) 3.11 2.95 2.81 Public authority and other 4.29 4.16 3.97 Total 4.14 4.02 3.86 AVERAGE COST OF GAS/Mcf SOLD 2.86 2.71 2.58 See footnotes on page 4. 4 Year ended September 30, ------------------------ 1991 1990 ------- ------- NUMBER OF ACCOUNTS, at end of year Residential 529,498 523,029 Commercial 54,703 53,992 Industrial (including agricultural) 9,793 10,045 Public authority and other 1,788 1,677 ------- ------- Total 595,782 588,743 ======= ======= METERS IN SERVICE, at end of year 619,111 613,542 ======= ======= HEATING DEGREE DAYS, system average (1) Actual 3,583 3,751 Normal 3,983 3,983 Percent of normal 90% 94% SALES VOLUMES - MMcf (2) Residential 47,484 48,635 Commercial 20,778 21,256 Industrial (including agricultural) 29,788 33,018 Public authority and other 3,385 3,515 ------- ------- Total 101,435 106,424 TRANSPORTATION VOLUMES - MMcf (2 35,201 32,178 ------- ------- TOTAL VOLUMES HANDLED - MMcf (2) 136,636 138,602 ======= ======= OPERATING REVENUES (000's) Gas Revenues Residential $ $202,486 $199,818 Commercial 81,414 81,061 Industrial (including agricultural) 81,746 94,653 Public authority and other 13,290 13,115 - -------- -------- Total gas revenues 378,936 388,647 Transportation Revenues 16,348 16,919 Other Revenue 4,383 4,409 - -------- -------- Total operating revenues $ $399,667 $409,975 = ======== ======== AVERAGE SALES PRICE/Mcf Residential $4.26 $4.11 Commercial 3.92 3.81 Industrial (including agricultural) 2.74 2.87 Public authority and other 3.93 3.73 Total 3.74 3.65 AVERAGE COST OF GAS/Mcf SOLD 2.58 2.57 See footnotes on page 4. SALES AND STATISTICAL DATA BY STATE - 1994 Year ended September 30, 1994 -------------- ------------------------------------------------- Texas Louisiana Kentucky Colorado ------- ------ ------- ------ METERS IN SERVICE, at end of year Residential 263,330 64,401 146,384 67,062 Commercial 24,899 4,944 16,653 9,594 Industrial (including agricultural) 18,749 108 268 108 Public authority and other 2,518 908 1,523 - ------- ------ ------- ------ Total 309,496 70,361 164,828 76,764 ======= ====== ======= ====== HEATING DEGREE DAYS, system average Actual 3,561 1,922 4,342 6,116 Normal 3,528 1,760 4,376 6,556 Percent of normal 101% 109% 99% 93% SALES VOLUMES Residential 24,276 3,604 13,776 7,041 Commercial 7,933 1,260 5,820 4,943 Industrial (including agricultural) 25,791 1,606 8,766 734 Public authority and other 2,714 885 1,643 - ------ ----- ------ ----- Total 60,714 7,355 30,005 12,718 TRANSPORTATION VOLUMES 14,179 500 17,498 3,071 ------ ----- ------ ------ TOTAL VOLUMES HANDLED 74,893 7,855 47,503 15,789 ====== ===== ====== ====== OTHER STATISTICS Operating revenues (000's) $234,628 $43,374 $143,508 $55,010 Gross plant (000's) $221,516 $86,771 $127,169 $70,852 Net plant (000's) $119,616 $66,220 $79,410 $40,355 Miles of pipe 13,007 1,815 3,425 2,352 Employees 859 166 387 221 Communities served 92 36 163 62 Estimated population in service area 950,000 250,000 680,000 160,000 Estimated square miles in service area 30,000 7,000 12,000 1,050 Vehicles in fleet 446 137 268 154 Franchises 71 58 62 36 SALES AND STATISTICAL DATA BY STATE - 1994 Year ended September 30, 1994 -------------- ------------------------------------------------- Kansas Mo. Total ------ --- ------- METERS IN SERVICE, at end of year Residential 23,692 546 565,415 Commercial 3,228 71 59,389 Industrial (including agricultural) 333 - 19,566 Public authority and other - - 4,949 ------ --- ------- Total 27,253 617 649,319 ====== === ======= HEATING DEGREE DAYS, system average Actual 5,108 4,990 3,953 Normal 5,158 5,028 3,983 Percent of normal 99% 99% 99% SALES VOLUMES Residential 2,464 48 51,209 Commercial 1,167 11 21,134 Industrial (including agricultural) 1,605 - 38,502 Public authority and other - - 5,242 ----- -- ------ Total 5,236 59 116,087 TRANSPORTATION VOLUMES 60 - 35,308 ----- -- ------- TOTAL VOLUMES HANDLED 5,296 59 151,395 ===== == ======= OTHER STATISTICS Operating revenues (000's) $22,880 $408 $499,808 Gross plant (000's) $36,819 $565 $543,692 Net plant (000's) $21,446 $360 $327,407 Miles of pipe 1,295 33 21,927 Employees 76 - 1,709 Communities served 58 2 413 Estimated population in service area 66,000 2,000 2,108,000 Estimated square miles in service area 580 20 50,650 Vehicles in fleet 52 - 1,057 Franchises 42 2 271 A heating degree day is equivalent to each degree that the average of the high and the low temperatures for a day is below 65 degrees. The greater the number of heating degree days, the colder the climate. Heating degree days are used in the natural gas industry to measure the coldness of weather experienced and to compare relative temperatures between one geographic area and another. Degree day information for the small service area in Missouri is not available for 1993 and would not impact the total Company average. 5 Volumes are reported as metered in million cubic feet ("MMcf"). The Texas column includes 224 and 219 employees in the Dallas general office in 1994 and 1993, respectively. 6 SALES AND STATISTICAL DATA BY STATE - 1993 Year ended September 30, 1993 ----------------------------- Texas Louisiana Kentucky Colorado ------- --------- -------- -------- NUMBER OF ACCOUNTS, at end of year Residential 256,487 60,042 138,443 61,110 Commercial 22,974 4,560 15,229 8,402 Industrial (including agricultural) 8,094 93 312 90 Public authority and other 1,024 768 1,475 - ------- ------ ------- ------ Total 288,579 65,463 155,459 69,602 ======= ====== ======= ====== METERS IN SERVICE 309,270 68,644 161,971 69,602 ======= ====== ======= ====== HEATING DEGREE DAYS, system average (1) Actual 3,661 1,812 4,136 6,955 Normal 3,528 1,760 4,376 6,556 Percent of normal 104% 103% 95% 106% SALES VOLUMES (2) Residential 25,372 3,531 13,314 6,961 Commercial 8,133 1,230 6,110 5,094 Industrial (including agricultural) 22,352 1,211 5,708 679 Public authority and other 2,757 850 796 - ------ ----- ------ ----- Total 58,614 6,822 25,928 12,734 TRANSPORTATION VOLUMES (2) 17,645 354 18,348 3,092 ------ ----- ------ ------ TOTAL VOLUMES HANDLED (2) 76,259 7,176 44,276 15,826 ====== ===== ====== ====== OTHER STATISTICS Operating revenues (000's) $224,264 $38,954 $125,277 $49,372 Gross plant (000's) $201,501 $81,848 $116,055 $70,100 Net plant (000's) $102,684 $62,443 $75,382 $40,663 Miles of pipe 12,878 1,785 3,364 2,251 Employees (3) 843 170 390 260 Communities served 92 36 163 62 Estimated population in service area 950,000 250,000 680,000 160,000 Estimated square miles in service area 30,000 7,000 12,000 1,050 Vehicles in fleet 433 127 265 156 Franchises 71 57 64 34 See footnotes on page 4. SALES AND STATISTICAL DATA BY STATE - 1993 Year ended September 30, 1993 ----------------------------- Kansas Mo. Total ------ ------- ----- NUMBER OF ACCOUNTS, at end of year Residential 22,740 487 539,309 Commercial 3,048 62 54,275 Industrial (including agricultural) 335 - 8,924 Public authority and other - - 3,267 ------ ------- ------- Total 26,123 549 605,775 ====== === ======= METERS IN SERVICE 26,123 549 636,159 ====== === ======= HEATING DEGREE DAYS, system average (1) Actual 5,376 N/A 4,046 Normal 5,158 N/A 3,983 Percent of normal 104% N/A 102% SALES VOLUMES (2) Residential 2,536 49 51,763 Commercial 1,294 11 21,872 Industrial (including agricultural) 1,417 - 31,367 Public authority and other - - 4,403 ----- -- ------ Total 5,247 60 109,405 TRANSPORTATION VOLUMES (2) 343 - 39,782 ----- -- ------ TOTAL VOLUMES HANDLED (2) 5,590 60 149,187 ===== == ======= OTHER STATISTICS Operating revenues (000's) $21,356 $418 $459,641 Gross plant (000's) $31,579 $429 $501,512 Net plant (000's) $17,849 $254 299,275 Miles of pipe 1,149 33 21,460 Employees (3) 93 - 1,756 Communities served 58 2 413 Estimated population in service area 66,000 2,000 2,108,000 Estimated square miles in service area 580 20 50,650 Vehicles in fleet 52 - 1,033 Franchises 39 2 267 7 GAS SALES The Company's natural gas distribution business is seasonal and highly dependent on weather conditions in the Company's service areas. Gas sales to residential and commercial customers are greater during the winter months than during the remainder of the year. The volumes of such sales during the winter months will vary with the temperatures during such months. The seasonal nature of the Company's sales to residential and commercial customers is offset partially by the Company's sales in the spring and summer months to its agricultural customers in Texas and Kansas who utilize natural gas to operate irrigation equipment. The Company's management believes that the Company has lessened its sensitivity to weather risk by diversifying its operations into geographic areas having different weather patterns. The Company's revenues are affected by the cost of natural gas, economic conditions in the areas that the Company serves, and weather conditions. Higher gas costs, which the Company is generally able to pass through to its customers under purchased gas adjustment clauses, may cause customers to conserve, or, in the case of industrial customers, to use alternative energy sources. In recent years, excess supply in the natural gas market has led to a decline in natural gas prices and an increase in the number of competing marketers of natural gas to large volume users. In order to compete with these marketers, the Company's three gas marketing subsidiaries purchase gas for resale to various large volume customers. In certain instances, industrial customers purchase gas directly from other marketers or from one of the Company's gas marketing subsidiaries, and the Company transports such gas through its distribution systems to the customers' facilities for a fee. Transportation of customer-owned gas that otherwise would have been sold by the Company reduces the Company's operating revenues and corresponding purchased gas cost. However, the transportation fees received by the Company may offset the loss of gross profit that would have been realized had the Company sold such gas to such customers. The Company's distribution systems have experienced aggregate peak day deliveries of approximately 1 billion cubic feet ("Bcf") per day. The Company has the ability to curtail deliveries to certain interruptible customers under the terms of contracts and applicable state statutes or regulations which enables it to maintain its deliveries to high priority customers. The Company has not imposed curtailment in its Energas Division since the Company began independent operations in 1983 or in its Trans La Division since the Company acquired TLG in 1986. The Western Kentucky Division curtailed deliveries to certain interruptible customers during exceptionally cold periods in December 1989 and January 1994. GGC has not curtailed deliveries to its sales customers since prior to 1980. GAS SUPPLY The principal gas suppliers to the Company in 1994, 1993 and 1992 included Westar Transmission Company ("Westar"), an affiliate of KNEnergy; Anthem Energy Company, L.P. ("Anthem") an affiliate of KNEnergy; Mesa 9 Operating Company ("Mesa"); Louisiana Intrastate Gas Corporation ("LIG"), an affiliate of Equitable Resources Inc.; Tennessee Gas Pipeline Company ("Tennessee Gas"), an affiliate of Tenneco, Inc.; Texas Gas Transmission Corporation ("Texas Gas"), an affiliate of Transco; Texaco Gas Marketing; Union Pacific Fuels; Vastar, an affiliate of ARCO; Associated Natural Gas, Inc. ("ANGI"); and Rangeline Corporation ("Rangeline"), an affiliate of Astra Resources. The prices paid by the Company for natural gas delivered to it are set by contracts with gas suppliers and/or ratemaking proceedings before regulatory authorities. Charges for gas costs are passed through to the Company's customers under approved or negotiated tariffs or pursuant to contract. 10 The following table sets forth volumes purchased from the Company's principal gas suppliers for the years ended September 30, 1994, 1993, and 1992. Volumes purchased (MMcf as metered) 1994: Westar and Anthem 47,842 Mesa 9,926 LIG 4,254 Texaco Gas Marketing 5,453 Union Pacific Fuels 5,825 Vastar 6,881 Associated Natural Gas, Inc. 3,283 Rangeline Corporation 2,210 1993: Westar and Anthem 45,031 Mesa 10,659 LIG 4,490 Tennessee Gas 2,575 Texas Gas 10,329 Associated Natural Gas, Inc. 3,291 Rangeline Corporation 1,946 1992: Westar and Anthem 38,539 Mesa 9,823 LIG 5,961 Tennessee Gas 2,594 Texas Gas 16,131 Associated Natural Gas, Inc. 3,049 Rangeline 1,295 Westar and Anthem supply natural gas to most of the Energas Division under multiple contracts. The Westar contract expires in 1998. The Anthem contracts are renegotiated annually. Westar purchases gas from various pipeline companies and natural gas processing plants and at the wellhead. Westar's gas price to the Company is subject to an annual adjustment in accordance with the existing contract. Under the Westar contract, the Company has the right annually to elect to buy up to 20% of its monthly requirements for its Energas Division from other suppliers. The principal gas supply for the Company's Amarillo, Texas distribution system is furnished by Mesa under a long-term contract that expires upon the depletion of the field from which the gas is produced. Mesa owns the gas rights in certain specified acreage in the West Panhandle field. Pursuant to a contract between Colorado Interstate Gas Company ("CIG") and Mesa, CIG is obligated to deliver to Mesa the volumes of gas required for sale to customers in Amarillo and its environs, subject to certain contractual volume limitations, so long as the gas reserves from the West Panhandle field are commercially producible. In June 1992, the Company renegotiated the pricing provisions of its primary gas supply 11 contract for the Amarillo, Texas distribution system. The contract calls for a pricing formula which determines the prices the Company pays each year during the five year period that began January 1, 1993. The contract also provides a mechanism for price redetermination each two year period thereafter beginning January 1, 1998. On October 28, 1991, the Company and LIG entered into new agreements which were approved by the Louisiana Public Service Commission ("Louisiana Commission") on November 26, 1991, and became effective June 1, 1992. These agreements provide continued supply by LIG for most of the Trans La Division's gas requirements for a term of ten years (but subject to cancellation by either party after five years). The agreements provide for market sensitive pricing and allow the Company to purchase certain volumes of gas from other suppliers. Under the contract, the Trans La Division has the right to purchase a portion of its requirements from suppliers other than LIG at market sensitive prices. At the end of the second contract year, the Trans La Division had the right to increase its purchases from others up to approximately 45% of its requirements which right was exercised by Trans La. LIG is required to provide standby service to back up the purchases from the other suppliers. The Company purchases some gas supplies for resale to certain of its Louisiana industrial customers from suppliers other than LIG. The Company's Louisiana industrial sales subsidiary, Trans Louisiana Industrial Gas Company, Inc., has entered into supply contracts at market sensitive prices with Enron Gas Services, Inc. for the major portion of its requirements, with the remainder being purchased under 30-day contracts from other suppliers. Gas provided by these suppliers is transported by LIG with delivery into the Trans La Division's system. The Western Kentucky Division transports its natural gas requirements through firm transportation agreements with Texas Gas and Tennessee Gas with the exception of a small percentage of the requirements being purchased directly from intrastate producers. The Western Kentucky Division purchases its supply under staggered term contracts from major producers and marketers including Texaco, Union Pacific, Vastar, Associated Natural, Hadson and Chevron. The Company's distribution system in the Western Kentucky Division includes six underground storage facilities, which are used to help meet customer requirements during peak demand periods and to reduce the need to contract additional pipeline volumes to meet such peak demand periods. See "Item 2. Properties" for further information regarding the underground storage facilities. The Company has also bought gas in underground storage facilities of Tennessee Gas in Louisiana and Kentucky under FERC Order 636. The Greeley Gas Division purchases or transports approximately 72% of its natural gas requirements on eight pipelines. Five of these are regulated by the FERC and the remaining three are state regulated. The FERC pipelines are Colorado Interstate Gas Company, Williams Natural Gas Company, KNEnergy, Northwest Pipeline Corporation, and NorAm. The state regulated pipelines are Public Service Company of Colorado, KPL Gas Service Company and Kansas Pipeline Partnership in Kansas. Approximately 28% of the Divisions's gas supply is purchased from local sources. Several of the operating areas are in or adjacent to natural gas producing fields. 12 Each of the Greeley Gas Division's operating areas is connected to one of the pipeline suppliers so that gas prices can be managed by using any of three sources: pipeline purchase, pipeline transport, or local purchases. Associated Natural Gas, Inc. is the main supplier to the Greeley Gas Division's largest district, the Greeley District. There are two contracts with ANGI - one contract for fixed-price base load gas put directly into the Greeley Gas Division distribution system from natural gas processing plants, and one contract for monthly market-sensitive spot purchases. Rangeline is the principal gas supplier for the Kansas and Missouri districts. Gas is transported through three different pipeline systems (Williams Natural Gas, KPL, and NorAm). The contract with Rangeline for gas transported through Williams Natural Gas expires in October 1996, the contract for the KPL transported gas expires in August 1996, and the contract for the NorAm transported gas is monthly. The contracts with Rangeline provide for market-sensitive pricing. The Company has not experienced curtailment in its Texas distribution system since it began independent operations in 1983, in its Louisiana system since its acquisition, or in Colorado, Kansas or Missouri since prior to 1980. A large proportion of the Company's sales are made to high priority residential and commercial consumers; therefore, any curtailment of supply for these customers is unlikely. However, the distribution system in Kentucky has occasionally interrupted contractually interruptible industrial and large volume commercial customers. The most recent interruption for these Kentucky customers was in January 1994. REGULATION AND RATES Regulation. In the Energas Division, the governing body of each municipality served by the Company has original jurisdiction over all utility rates, operations, and services within its city limits except with respect to sales of natural gas for vehicle fuel and agricultural use. The Company operates pursuant to non-exclusive franchises granted by the municipalities it serves, which franchises are subject to renewal from time to time. The franchises granted to the Company permit it to conduct natural gas distribution within the municipalities' incorporated limits. The Railroad Commission of Texas ("Railroad Commission") has exclusive appellate jurisdiction over all rate and regulatory orders and ordinances of the municipalities and exclusive original jurisdiction over rates and services to customers not located within the limits of a municipality. In Texas, rates for large industrial customers are routinely set by contract negotiation between the Company and industrial customers pursuant to statutory standards and are filed with and subject to the governmental authority of the municipalities or the Railroad Commission, depending on whether the customer is located inside or outside the limits of a municipality. Historically, the Company's rates for large industrial customers have been accepted as filed. Agricultural sales in Texas are not regulated, except that prices for agricultural sales cannot exceed the prices the Company charges the majority of its commercial or other similar large-volume users in Texas. The operations of the Trans La Division are under the jurisdiction of the Louisiana Public Service Commission, which regulates utility services, 13 rates, and other matters. In most of the parishes and incorporated areas in which the Company operates in Louisiana, it does so pursuant to a non- exclusive franchise granted by the governing authority of each parish or incorporated area. The franchise gives the Company the general privilege to operate its gas distribution business in, as well as the right to install its distribution lines along the roadways of, the parish or the incorporated area. Direct sales of natural gas to industrial customers in Louisiana who utilize the gas for fuel or in manufacturing processes and sales of natural gas for vehicle fuel are exempt from regulation. The operations of the Western Kentucky Division are under the jurisdiction of the Kentucky Public Service Commission, which regulates utility services, rates, issuances of securities, and other matters. The Company operates in the various incorporated cities served by it in Kentucky pursuant to non-exclusive franchises granted by such cities. The franchises grant to the Company the right to operate its gas distribution business in the city and to install its distribution lines and related equipment in and along the city's public rights-of-way. Sales of natural gas for use as vehicle fuel in Kentucky are not subject to regulation. The Greeley Gas Division is subject to the regulatory authority of the Colorado Public Utilities Commission, the Kansas Corporation Commission, and the Missouri Public Service Commission with respect to accounting, rates and charges, operating matters, and the issuance of securities. The Company operates in the various incorporated cities served by it in the states of Colorado, Kansas and Missouri under terms of non-exclusive franchises granted by the various cities. The franchises grant to the Company, among other things, the right to install and operate its gas distribution system within the city limits. Most of the Greeley Gas Division's wholesale gas suppliers are regulated by various federal and state commissions. The Company is subject to regulation by the United States Department of Transportation with respect to safety requirements in the operation and maintenance of its gas distribution facilities. The Company's distribution operations are also subject to various state and federal laws regulating environmental matters. From time to time the Company receives inquiries regarding various environmental matters. The Company believes that its properties and operations substantially comply with and are operated in substantial conformity with applicable safety and environmental statutes and regulations. There are no administrative or judicial proceedings arising under environmental quality statutes pending or known to be contemplated by governmental agencies which, if adversely determined, would have a material adverse effect on the Company. Rates. Approximately 87% of the Company's revenues in fiscal 1994 was derived from sales at rates set by or subject to approval by local or state authorities. The method of determining regulated rates varies among the six states in which the Company operates. Generally, the Company applies for a specific rate structure based upon requirements of the regulatory authority. The regulatory authority reviews the Company's rate request and establishes a rate structure intended to generate revenue sufficient to cover the Company's costs of doing business and a reasonable return on invested capital. The Company has not always agreed with its regulators' decisions on its rate filings and has pursued the appeal and rehearing 14 procedures in Texas in 1985 and 1992 and in Kentucky in 1991. The Company also continually reviews its rates in all of its jurisdictions. Substantially all of the sales rates charged by the Company to its customers fluctuate with the cost of gas purchased by the Company. Base rates established by regulatory authorities are adjusted for increases and decreases in the Company's purchased gas cost through automatic purchased gas adjustment mechanisms. Therefore, while the Company's operating revenues may fluctuate, gross profit (which is defined as operating revenues less purchased gas cost) is generally not eroded or enhanced because of gas cost increases or decreases. The following table sets forth the major rate requests made by the Company and the action taken on such requests: Amount Amount Jurisdiction Effective Date Requested Received ------------ ---------------- --------- -------- Texas West Texas System (a) November 1, 1984 $8,915,000 $5,000,000 September 9, 1991 5,987,000 4,600,000 November 18, 1994 2,581,000 1,502,000 (a) Amarillo December 11, 1985 4,850,000 3,400,000 November 25, 1992 4,398,000 2,130,000 Louisiana April 1, 1987 5,195,000 3,610,000 September 3, 1992 3,409,000 974,000(b,c) March 1, 1993 (c) 730,000 (c) March 1, 1994 (c) 1,058,000 (c) Kentucky May 29, 1991 8,973,000 3,632,000 Colorado May 9, 1985 1,651,000 1,575,000 November 6, 1990 2,677,000 1,405,000 May 1, 1994 4,527,000 3,246,000 Kansas July 28, 1983 1,214,000 1,003,000 November 14, 1986 934,000 844,000 October 22, 1990 2,485,000 1,376,000 January 6, 1992 1,495,000 505,000 December 1, 1993 2,604,000 2,088,000 Missouri June 1, 1990 N/A (d) 49,000 --------------------- (a) Excludes the City of Amarillo and certain smaller distribution systems. The $1,502,000 annual increase received in November 1994 applies to customers inside the city limits of the cities in this service area. The portion of the rate request for rural customers, who represent about 10% of the customers in this service area, is pending before the Railroad Commission of Texas. (b) The September 1992 rate order provided an additional $800,000 for franchise tax expense. (c) The September 1992 rate order also approved a Rate Stabilization Clause ("RSC") for three years which provides for an annual adjustment 15 of rates to reflect changes in expenses and investment. The RSC provides the Company the opportunity to earn a return on common equity between 11.75% and 12.25%. (d) The rate request procedures in Missouri that are applicable to the Greeley Gas Division do not require the filing of a formal rate request. The rate increase received is established by the Missouri Public Service Commission on the basis of the Greeley Gas Division's responses to various data requests from the Commission. Consequently, the Greeley Gas Division did not specify a requested rate increase amount. COMPETITION The Company is not currently in significant direct competition with any other distributors of natural gas to residential and commercial customers within its service areas. However, the Company does compete with other natural gas suppliers and suppliers of alternate fuels for sales to industrial and agricultural customers. Beginning in 1985, changes in the federal regulatory environment through FERC orders and conditions related to markets and gas supply in the United States have brought increased competition into the natural gas industry. In 1992, the FERC issued Order 636 and related clarifying orders. These orders provided for further restructuring of interstate pipeline services and are intended to completely unbundle pipeline trans- portation and sales functions. The FERC orders make gas transportation more accessible to users of large quantities of gas and also reduce procedural obstacles allowing such users to bypass local distribution companies, such as the Company, to purchase gas from other suppliers, and to secure transportation directly from pipeline companies. The Company has felt the impact of the competitiveness in the large volume market in some areas resulting from these changes and has dealt with this by seeking regulatory approval for competitive pricing on a case by case basis. The FERC policies apply only to interstate pipelines and have not had a direct impact upon the Company's operations which are primarily supplied by intrastate pipelines. The Company competes in all aspects of its business with alternative energy sources, including, in particular, electricity. Competition for the residential and commercial customers is increasing. Promotional incentives, improved equipment efficiencies, and promotional rates all contribute to the acceptability of electric equipment. In late 1991, the Company opened four public retail facilities for the sale of compressed natural gas ("CNG") for vehicular use. The facilities are located at existing local gasoline stations. Prior to that time, the Company provided CNG for vehicular use only in limited situations (such as for school buses in certain school districts and for the fleet vehicles of certain businesses). With the opening of these public refueling stations the Company began competing against gasoline for vehicular fuel sales. 16 Employees At September 30, 1994, the Company employed 1,709 persons. See page 4 for number of employees by state. ITEM 2. PROPERTIES The Company owns an aggregate of 21,927 miles of underground pipelines throughout its gas distribution systems. These pipelines are located on easements or rights-of-way granted to the Company, which generally provide for perpetual use. The Company maintains its pipelines through a program of continuous inspection and repair and believes that the pipeline system is in good condition. The Company also owns or operates six underground gas storage facilities in Kentucky that have a total storage capacity of approximately 11.7 Bcf. However, approximately 6.5 Bcf of gas in the storage facilities must be retained as cushion gas. The maximum daily delivery capability of the storage facilities is approximately 112 Mmcf. Substantially all of the Company's properties in its Greeley Gas Division with a book value of approximately $59.2 million are subject to a lien under First Mortgage Bonds assumed by the Company in the acquisition of GGC. At September 30, 1994, the lien secured approximately $17.0 million of outstanding 9.4% Series J First Mortgage Bonds due May 1, 2021. The Company leases its executive and administrative headquarters in Dallas, Texas under leases that expire in 1997. The Company also maintains field offices throughout its distribution system, substantially all of which are located in leased premises. The Company holds franchises granted by the incorporated cities and towns and by each Louisiana parish that it serves. At September 30, 1994, the Company held 271 such franchises having terms generally ranging from five to 25 years. The Company believes that each of its franchises will be renewed. ITEM 3. LEGAL PROCEEDINGS See Note 11 of notes to consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 17 EXECUTIVE OFFICERS The following table sets forth certain information as of September 30, 1994, regarding the executive officers of the Company: Name Age Office Currently Held ---- --- --------------------- Charles K. Vaughan 56 Chairman of the Board Ronald L. Fancher 51 President and Chief Executive Officer James F. Purser 44 Executive Vice President and Chief Financial Officer Robert F. Stephens 46 Executive Vice President - Corporate Operations H.F. Harber 52 Senior Vice President - Corporate Services Donald E. James 47 Senior Vice President and General Counsel Charles K. Vaughan has served as Chairman of the Board since the Company's inception on October 18, 1983. From October 1983 through February 1993, he additionally served as President and Chief Executive Officer. From March 1993 through May 1994, he served as Chief Executive Officer. Effective October 1, 1994, Mr. Vaughan elected to take early retirement from the Company, although he remains Chairman of the Board of Directors. Ronald L. Fancher served as a member of the Board of Directors from February 1984 until March 1994. He has served as President since March 1993 and has held the additional title of Chief Executive Officer since June 1994. He was also appointed to the Board of Directors in November 1994. Prior to joining the Company, he served as Chairman of the Board and Chief Executive Officer of Texas Commerce Bank in Odessa, Texas from 1983 until 1993. Additionally, he served as Chairman of the Board and Chief Executive Officer of Texas Commerce Bank - Lubbock, N.A. in January and February 1993. James F. Purser was named Executive Vice President and Chief Financial Officer in May 1989. He previously served as Senior Vice President and Chief Financial Officer from August 1988 until May 1989 and as Vice President from September 1986 until August 1988. Robert F. Stephens was named Executive Vice President - Corporate Operations in May 1989. He served as Senior Vice President, Corporate Operations from January 1988 until May 1989 and as Senior Vice President, Corporate Services from April 1986 until January 1988. He previously served as Vice President, Corporate Development and Regulatory Affairs from August 1984 until April 1986. H.F. Harber was named Senior Vice President - Corporate Services in August 1993. He previously served as Vice President, Human Resources and Administration from July 1991 to August 1993, as Vice President, Human Resources from May 1990 to July 1991, as Director of Human Resources from November 1987 until May 1990, as Manager, Compensation and Employment from 18 May 1987 until November 1987, and as Affirmative Action Coordinator from December 1983 until May 1987. Donald E. James was named Senior Vice President and General Counsel in August 1993. He previously served as Senior Vice President - General Counsel and Corporate Secretary from May 1993 until August 1993, as Senior Vice President and General Counsel from May 1989 until May 1993, as Vice President and General Counsel from January 1986 until May 1989, as Assistant Vice President and General Counsel from August 1985 until January 1986, and as Assistant Vice President and Assistant General Counsel from February 1984 until August 1985. 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's stock trades on the New York Stock Exchange under the trading symbol "ATO". The high and low sale prices and dividends paid per share of the Company's common stock, as adjusted for the 3-for-2 stock split in May 1994, for fiscal 1994 and 1993 are listed below. 1994 1993 ------------------------ ------------------------ Dividends Dividends High Low paid High Low paid Quarter ended:---------------- --------- ------ ------- ------ December 31 $21 1/8 $16 3/4 $ .22 $15 7/8 $13 1/2 $ .2125 March 31 20 17 3/4 .22 17 3/4 15 1/8 .2125 June 30 20 1/4 18 .22 19 3/4 16 1/4 .2125 September 30 19 16 3/8 .22 20 5/8 18 5/8 .2125 ----- ----- $ .88 $.8500 ===== ====== Prior to its acquisition, GGC made distributions to its shareholders in fiscal 1994 and 1993 of $120,000 and $893,000, respectively. The "Dividends paid" information above has not been restated for the pooling of interests in December 1993, but reflects historical cash dividends paid per share of Atmos common stock as restated for the 3-for-2 stock split in May 1994. See Note 3 of notes to consolidated financial statements for restriction on payment of dividends. The number of record holders of the Company's common stock on September 30, 1994 was 19,881. 20 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data with respect to the Company and should be read in conjunction with the consolidated financial statements included herein. Year ended September 30, -------------------------- 1994 1993 1992 1991 1990 -------- -------- -------- -------- ------- (In thousands, except per share data) Operating revenues $499,808 $459,641 $403,353 $399,667 $409,975 ======== ======== ======== ======== ======== Net income $ 14,679 $ 17,544 $ 10,998 $ 9,612 $ 7,653 ======== ======== ======== ======== ======== Net income per share $ .97 $ 1.22 $ .80 $ .71 $ .60 ======== ======== ======== ======== ======== Atmos dividends declared per share $ .88 $ .85 $ .83 $ .80 $ .77 ======== ======== ======== ======== ======== Total assets at end of year $416,678 $391,618 $358,363 $338,714 $330,477 ======== ======== ======== ======== ======== Long-term debt at end of year $138,303 $105,853 $112,153 $116,461 $ 88,508 ======== ======== ======== ======== ======== Supplemental net income (1) $ 18,132 $ 10,570 $ 10,130 $ 9,497 ======== ======== ======== ======== Supplemental net income per share $ 1.26 $ .77 $ .75 $ .75 ======== ======== ======== ======== (1) Supplemental net income reflects results if GGC had not made an S Corporation election in 1987. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company distributes and sells natural gas to residential, commercial, industrial and agricultural customers in six states. Such business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which the Company operates. In addition, the Company's business is affected by seasonal weather patterns, competitive factors within the energy industry, and economic conditions in the areas that the Company serves. A consolidated five-year financial and statistical summary is included elsewhere herein. ACQUISITION OF GREELEY GAS COMPANY THROUGH MERGER The Company has expanded its customer base and sought to diversify the regulations, weather patterns and local economic conditions to which it is subject through acquisitions in 1986 and 1987 and 1993. The Company continues to consider and pursue, where appropriate, additional acquisitions of natural gas distribution properties and other business opportunities. In December 1993, the Company acquired Greeley Gas Company ("GGC") of Denver, Colorado in a merger transaction accounted for as a pooling of interests; therefore, all historical financial statements and notes thereto have been restated to retroactively reflect this merger. At that time, GGC was a privately held company providing natural gas service to nearly 100,000 customers in 122 communities in Colorado, Kansas and a small service area in Missouri. The transaction was structured to be a tax-free reorganization. The Company exchanged 2,329,330 shares of its common stock before the 3-for-2 stock split (3,493,995 shares on a post- split basis) for all of the outstanding stock of GGC. For further information regarding the merger, see Note 2 of notes to consolidated financial statements. The Company believes that, while the merger may result in some dilution during the short term, it is expected to be non-dilutive over the long term with respect to earnings per share. The Company believes this transaction is consistent with its continuing long-term corporate development strategy of increasing the value of the Company through external growth. The Company believes this acquisition will help to further diversify both the geographic scope of its markets and the mix of its customer profile, thereby reducing its exposure to changes in the economic conditions in any given segment of its service area and will add to diversification in the areas of weather, regulatory environment, and economic environment. Over the longer term, the Company expects this combination to contribute to the stability and predictability of earnings and cash flow. 22 RATE ACTIVITY In September 1994, the Company filed to increase revenues by approximately $2.6 million for a portion of its Energas Company service area ("Energas Division"). The proposed rates would produce an overall increase of approximately 1.9% of current annual revenues generated from approximately 217,000 customers and reflects recovery of accrual accounting of postretirement benefits in accordance with SFAS No. 106. See Note 8 of the accompanying notes to consolidated financial statements. In November 1994, the Company implemented an annual revenue increase of approximately $1.5 million affecting about 90% of the customers in this portion of its Energas Division. GGC filed a request for an increase in annual revenues of $4.5 million with the Colorado Public Utility Commission ("Colorado Commission") in September, 1993. On May 1, 1994, the Company implemented an annual increase of $3.2 million or 6.9% in Phase I of this proceeding. The Phase I rates reflect recovery of SFAS No. 106 expenses with external funding, consistent with the recommended decision of the presiding administrative law judge. In October 1994, the Colorado Commission issued its order affirming the increase as set forth in Phase I. The next step in the rate proceeding will be Phase II, which will address rate redesign issues. Effective December 1, 1993, GGC received an annual rate increase of approximately $2.1 million or 10.6% in its Kansas service area. The increase reflects SFAS No. 106 expenses with external funding and a moratorium on rate requests in Kansas until December 1, 1996. On February 11, 1992, the Company filed a rate case with the city of Amarillo, Texas seeking to increase annual revenues by approximately $4.4 million, or 12%. In November 1992, the Railroad Commission issued its decision resulting in a total annual increase of $2.1 million. The Company and the city requested a rehearing of the Order. On January 11, 1993, the Railroad Commission denied rehearing to both parties. In February 1993, the city appealed the Railroad Commission's rate order to the District Court of Travis County, Texas. In January 1994, the District Court denied the city's appeal. The city has appealed to the Court of Appeals. During the period of 1991 through 1993, the Company also filed for and received small rate increases in certain other rate jurisdictions in its Energas Division totaling approximately $.3 million annually. The Company filed for a rate increase with the Louisiana Public Service Commission (the "Louisiana Commission") in November 1991 for its Louisiana service area ("Trans La Division"). The proposed rates would produce approximately $3.4 million per year in additional revenues, or an overall increase of approximately 9.8% for the Trans La Division. Effective September 3, 1992, the Louisiana Commission granted an increase of approximately $1.0 million per year in additional revenues, or an overall increase of approximately 2.8%. The rate order also allowed the Company to collect franchise taxes as a line item on the Company's bills which will reduce taxes, other than income taxes, by approximately $800,000 per year. The rate order also approved a rate stabilization clause for three years that provides for an annual adjustment to the Company's rates to reflect changes in expenses, revenues and invested capital following an 23 annual review. The rate stabilization clause provides an opportunity for a return on jurisdictional common equity of between 11.75% and 12.25%. As a result of the Company's filings under the rate stabilization clause, an increase of $730,000 annually or 2% went into effect on March 1, 1993, and an increase of $1.1 million annually or 2.7% went into effect on March 1, 1994. In September 1990, the Kentucky Public Service Commission (the "Kentucky Commission") issued an order that increased annual revenues approximately $1.0 million for the Company's Kentucky service area. In May 1991, the Kentucky Commission issued an Order on Rehearing increasing allowed revenues an additional $2.6 million. In connection with this rate case the Company filed a Notice of Appeal with the Kentucky Court of Appeals in July 1993. The Company's appeal in Kentucky relates solely to the determination of the appropriate effective date of its last rate increase in Kentucky. The Kentucky Public Service Commission made the increase effective in May 1991, while the Company believes it should have become effective in September 1990. The Company lost the issue at the trial court level. If the Company is successful, it could recover approximately $1 million in additional revenue; if it is unsuccessful, there would be no impact on its revenue. Subsequent to September 30, 1994, the Kentucky Court of Appeals denied the Company's appeal. The Company is currently assessing its options for further appeals. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED The Company has not adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". See Note 9 of notes to consolidated financial statements. The rate treatment of SFAS No. 112 costs has not been determined at this time. Such costs are currently recorded and recovered in rates on the pay-as-you-go basis. The Company does not expect the adoption of this standard to have a material impact on its financial condition or results of operations. RESULTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1994 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1993 Operating revenues increased to $499.8 million in 1994 from $459.6 million in 1993 due to rate increases received in Kansas, Colorado and Louisiana, an increase in the number of customers, changes in cost of gas and increased volumes sold. Average gas sales revenues per thousand cubic feet ("Mcf") increased from 1993 by $.12 to $4.14 in 1994, while the average cost of gas per Mcf sold increased $.15 to $2.86 in 1994. The number of meters in service increased to 649,319 at September 30, 1994 compared with 636,159 at September 30, 1993. Although the weather was 2% warmer in 1994 than in 1993, it was only slightly warmer than normal. Sales to residential, commercial and public authority customers decreased approximately .5 billion cubic feet ("Bcf") in 1994, but sales to industrial and agricultural customers increased approximately 7 Bcf. Total sales volumes increased 6.7 Bcf to 116.1 Bcf in 1994, as compared with 1993. Revenues from gas transported for others decreased $.9 million to approximately $14.1 million in fiscal 1994 due to a decrease in volumes transported of 4.5 Bcf to 35.3 Bcf in 1994. 24 Gross profit increased by approximately 3% to $168.2 million in 1994 from $163.1 million in 1993. The primary factors contributing to the higher gross profit were increased prices and volumes, as discussed above. Operating expenses, excluding income taxes, increased to $133.7 million in 1994 from $122.8 million in 1993 due to increased operation expense and depreciation. Operation expense increased $9.9 million due to increased distribution expense, employee welfare expenses including adoption of SFAS No. 106, GGC acquisition and assimilation costs, and the cost of an early retirement program in the Greeley Gas Division in the fourth quarter. SFAS No. 106 expenses in excess of pay-as-you-go expenses were approximately $3.8 million in 1994. The Company has been successful in seeking recovery of SFAS No. 106 expenses in a portion of its service areas and will continue to seek recovery in its remaining service areas (Note 8). GGC acquisition and assimilation costs were approximately $1.5 million in 1994 compared with approximately $.5 million in 1993. The cost of the early retirement program was approximately $1.3 million in 1994. The acquisition and assimilation costs as well as the early retirement program are one-time costs associated with the GGC acquisition. Income taxes decreased to $8.1 million for 1994 from $10.1 million for 1993. The primary reasons for the decrease were lower pre-tax profits and a lower effective tax rate. The effective tax rate decreased to 35.6% in 1994 from 36.5% in 1993. This was primarily due to the impact of permanent differences on the lower pre-tax profits in 1994. Operating income decreased in 1994 by approximately 13% to $26.5 million from $30.3 million in 1993. The decrease in operating income resulted primarily from increased operating expenses as discussed above. Net income decreased in 1994 by approximately 16% to $14.7 million from $17.5 million in the prior year. This decrease in net income resulted primarily from a decrease in operating income, which was partially offset by a $1.0 million decrease in interest expense. Net income per share decreased to $.97 for 1994 from $1.22 for 1993, reflecting the effects of an increase in average shares outstanding of approximately 6%. One-time acquisition costs, assimilation expenses and an early retirement program in Greeley Gas Company, as well as the effect of adopting SFAS No. 106, reduced earnings per share by approximately $.22 in 1994. YEAR ENDED SEPTEMBER 30, 1993 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1992 Operating revenues increased to $459.6 million in 1993 from $403.4 million in 1992 due to colder weather, increased sales volumes and revenues for every customer type, rate increases received in Texas and Louisiana, and an increased number of customers in fiscal 1993. Total sales volumes increased 9.7 Bcf to 109.4 Bcf in 1993, as compared with 1992. Average gas sales revenues per Mcf increased $.16 to $4.02 in fiscal 1993 from 1992, while the average cost of gas per Mcf sold increased $.13 to $2.71. The number of meters in service increased to 636,159 at September 30, 1993 compared with 630,365 at September 30, 1992. Weather was 10% colder in 1993 than 1992, and was 2% colder than normal. Because of this colder weather, sales volumes to weather sensitive residential, commercial and public authority customers increased 5.8 Bcf, or 8%, to 78.0 Bcf in 1993, as compared with 1992. Sales volumes to industrial and agricultural customers increased 3.9 Bcf, or 14%, because of increased irrigation fuel demand in the Company's West Texas service area. Revenues from gas 25 transported for others increased $1.3 million to approximately $15.0 million in 1993. Average transportation fees decreased from $.42 per Mcf to $.38 per Mcf, while transportation volumes increased 7.6 Bcf to 39.8 Bcf in 1993 as compared with 1992. Average transportation fees decreased in 1993 because of increased competition for large volume customers in Kentucky. Gross profit increased by approximately 12% to $163.1 million in 1993 from $146.3 million in 1992. The primary factors contributing to the higher gross profit were increased rates and colder weather, as discussed above. Operating expenses, excluding income taxes, increased to $122.8 million in 1993 from $117.9 million in 1992 due to increased operating activity. Operation expense increased $3.5 million due to increased distribution expenses, outside services, wages and benefits expense. Income taxes increased to $10.1 million for 1993 from $4.8 million for 1992. The primary reasons for the increase were higher pre-tax profits and a higher effective tax rate. The effective tax rate increased to 36.5% in 1993 from 30.2% in 1992 because of reduced significance of permanent differences due to higher pre-tax profits and a one percent increase in the statutory rate to 35%, effective January 1, 1993. Operating income increased in 1993 by approximately 28% to $30.3 million. The increase in operating income resulted primarily from increased gross profit. Net income increased in 1993 by approximately 60% to $17.5 million from $11.0 million in 1992. This increase in net income resulted primarily from the increase in operating income. Also, interest expense decreased $.5 million in 1993, as compared with 1992, due to lower weighted average interest rates. Net income per share increased approximately 53% to $1.22 for 1993 compared with 1992, including the effects of an increase in average shares outstanding of approximately 4%. CAPITAL RESOURCES AND LIQUIDITY (See "Consolidated Statements of Cash Flows") Cash Flows from Operating Activities Cash flows from operating activities totaled $41.2 million for 1994 compared with $37.1 million for 1993 and $31.4 million for 1992. The decrease in net income in 1994 as compared with 1993 was more than offset by the net changes in assets and liabilities. Gas stored underground decreased in 1994 because of substantially lower gas prices during the summer of 1994 when the storage reservoir was being refilled. The $10.9 million increase in deferred charges and other assets in 1993 related to the $8.4 million increase in deferred credits and other liabilities and recognized funding for the Supplemental Executive Benefits Plan. See "Consolidated Statements of Cash Flows" for other changes in assets and liabilities. Cash Flows from Investing Activities Net cash used in investing activities totaled $48.4 million in 1994 compared with $42.2 million in 1993 and $39.5 million in 1992. Capital expenditures in fiscal 1994 amounted to $50.4 million compared with $43.1 million in 1993 and $42.2 million in 1992. Currently budgeted capital expenditures for 1995 total $56.1 million and include major expenditures 26 for mains, services, meters, vehicles and computer software. Such expenditures will be financed from internally generated funds and financing activities, as discussed below. Cash Flows from Financing Activities Net cash provided by financing activities totaled $7.7 million for 1994 compared with $3.7 million for 1993 and $8.3 million in 1992. Financing activities during these periods included issuance of common stock, dividend payments, borrowings from banks, and issuance and repayments of long-term debt. Cash dividends and distributions paid. The Company paid $12.7 million in cash dividends and distributions during 1994. The $2.6 million increase over 1993 primarily reflects an increase in the Company's quarterly dividend rate and an increase in the number of shares of common stock outstanding in 1994. The Company has increased its historical dividend rate in each of the last six years. Short-term financing activities. At September 30, 1994, the Company had committed lines of credit totaling $72.0 million, all of which was unused, in order to provide for short-term cash requirements. These credit facilities are negotiated at least annually. At September 30, 1994, the Company also had uncommitted short-term credit lines of $130.0 million, of which $71.9 million was unused. At September 30, 1994, $40.0 million of notes payable to banks were classified noncurrent and long- term financing was completed subsequent to September 30, 1994. During 1994, notes payable increased $22.4 million compared with increases of $2.6 million during 1993 and $18.6 million in 1992. The increases in 1994 and 1992 were primarily due to funding of capital expenditures and repayment of long-term debt. The increase in 1993 was less than the increases in 1994 and 1992, partly because of funds provided in 1993 from stock issued under the Direct Stock Purchase Plan. Long-term financing activities. Payments of long-term debt increased $5.4 million to $9.9 million for the year ended September 30, 1994 compared with the year ended September 30, 1993. Payments of long-term debt consisted of a $3.0 million installment on the Company's 9.75% Senior Notes due in 1996, a $2.0 million installment on the 11.2% Senior Notes, the balance of $3.25 million on the 13.75% Series I First Mortgage Bonds and the balance of $1.6 million on the 13% Series G First Mortgage Bonds. At September 30, 1994, the Company was negotiating the private placement of $40.0 million of Senior Notes with two insurance companies. Scheduled payments of long-term debt in fiscal 1993 consisted of a $3.5 million installment on the Company's 9.75% Senior Notes and a $1.0 million payment on the 13.75% Series I First Mortgage Bonds. No long- term debt was issued in 1993. The Company entered into an agreement with an insurance company in August 1992, for a private placement of $10.0 million of unsecured Senior Notes due in annual installments of $1.0 million from 1997 through 2006, with interest to be paid semiannually at 7.95%. The net proceeds from the sale of the Senior Notes were used primarily to refinance an 8.4% note in the amount of $9.8 million. The Company also made scheduled installments of $4.5 million on its 9.75% Senior Notes, $1.0 million on the 13.75% Series I First Mortgage Bonds and a $.3 million installment on GGC's 13% Series G First Mortgage Bonds in fiscal 1992. The loan agreements 27 pursuant to which all the Company's Senior Notes have been issued contain covenants by the Company with respect to the maintenance of certain debt- to-equity ratios and cash flows, and restrictions on the payment of dividends. Also see Note 3 of notes to consolidated financial statements. Issuance of common stock. The Company issued 428,264, 897,089 and 306,880 shares of common stock in 1994, 1993 and 1992, respectively, for its Direct Stock Purchase Plan ("DSPP"), Employee Stock Ownership Plan and Incentive Stock Option Plan. The DSPP was implemented in August 1992. The DSPP has been amended to remove the direct stock purchase feature of the plan and has been renamed the Atmos Energy Corporation Dividend Reinvestment and Stock Purchase Plan ("DRSPP"). In 1994, 1993 and 1992, 173,801, 760,089 and 132,249 shares, respectively, were issued under the plan, generating proceeds of $3.0 million, $13.4 million and $1.9 million, respectively. At September 30, 1994, 712,596 shares were available for future issuance under the plan. The Company believes that internally generated funds, its short-term credit facilities and access to the debt and equity capital markets will provide necessary working capital and liquidity for capital expenditures and other cash needs for 1995. Seasonality The Company's natural gas distribution business is seasonal due to weather conditions in the Company's service areas. Gas sales are affected by winter heating season requirements, and sales to agricultural customers (who use natural gas as fuel in the operation of irrigation pumps) during the period from April through September may be affected by rainfall amounts. These factors generally result in higher operating revenues and net income during the period from October through March of each year and lower operating revenues and either net losses or lower net income during the period from April through September of each year. The following table sets forth, on an unaudited basis, the Company's quarterly operating revenues, quarterly operating revenues as a percentage of annual operating revenues, quarterly net income (loss) and quarterly net income (loss) as a percentage of annual net income for its past two fiscal years. 28 Quarter ended ----------------------------------------------- Year ended September 30, ------------------------ December 31 March 31 June 30 September 30 --------- -------- --------- ---------- (In thousands, except for percentages) 1994 ---- Operating revenues $145,501 $186,944 $90,013 $77,350 29% 37% 18% 16% Net income (loss) $ 7,088 $ 13,242 $(1,224) $(4,427) 48% 90% (8)% (30)% 1993 ---- Operating revenues $130,700 $166,238 $91,219 $71,484 28% 36% 20% 16% Net income (loss) $ 6,765 $ 13,760 $ 831 $(3,812) 39% 78% 5% (22)% Year ended September 30, ------------------------ Total 1994 ---- Operating revenues $499,808 100% Net income (loss) $ 14,679 100% 1993 ---- Operating revenues $459,641 100% Net income (loss) $ 17,544 100% Inflation The Company believes that inflation has caused and will continue to cause increases in certain operating expenses and has required assets and will continue to require assets to be replaced at higher costs. The Company continually reviews the adequacy of its gas rates in relation to the increasing cost of providing service and the inherent regulatory lag in adjusting those gas rates. Environmental Matters From time to time, the Company receives inquiries regarding various environmental matters. The Company believes that its properties and operations substantially comply with and are operated in substantial conformity with all applicable environmental statutes and regulations. There are no administrative or judicial proceedings arising under environmental quality statutes pending or known to be contemplated by governmental agencies which, if adversely determined, would have a material adverse effect on the Company. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page no. Report of independent auditors 30 Consolidated balance sheets 31 Consolidated statements of income 32 Consolidated statements of shareholders' equity 33 Consolidated statements of cash flows 34 Notes to consolidated financial statements 36 Supplementary data (unaudited) 57 30 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Atmos Energy Corporation We have audited the accompanying consolidated balance sheets of Atmos Energy Corporation at September 30, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atmos Energy Corporation at September 30, 1994 and 1993, and its consolidated results of operations and its cash flows for each of the three years in the period ended September 30, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP Dallas, Texas November 9, 1994 31 ATMOS ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS September 30, 1994 1993 -------- -------- ASSETS (In thousands, except share data) Property, plant and equipment Utility plant $537,834 $496,153 Construction in progress 5,858 5,359 -------- -------- 543,692 501,512 Less accumulated depreciation and amortization 216,285 202,237 -------- -------- Net property, plant and equipment 327,407 299,275 Current assets Cash and cash equivalents 2,766 2,286 Accounts receivable, less allowance for doubtful accounts of $787 in 1994 and $963 in 1993 29,678 29,200 Inventories 5,888 6,064 Gas stored underground 12,657 17,603 Prepayments 2,309 4,240 -------- ------- Total current assets 53,298 59,393 Deferred charges and other assets 35,973 32,950 -------- -------- $416,678 $391,618 CAPITALIZATION AND LIABILITIES ======== ======== Shareholders' equity Common stock, no par value (stated at $.005 per share); authorized 50,000,000 shares; issued and outstanding 1994 - 15,297,166 shares, 1993 - 14,868,902 shares $ 77 $ 74 Additional paid-in capital 102,456 94,279 Retained earnings 47,023 45,076 -------- -------- Total shareholders' equity 149,556 139,429 Long-term debt 138,303 105,853 -------- -------- Total capitalization 287,859 245,282 Current liabilities Current maturities of long-term debt 4,000 6,300 Notes payable to banks 18,100 35,700 Accounts payable 21,975 27,803 Taxes payable 4,864 3,797 Customers' deposits 8,257 7,862 Other current liabilities 7,038 6,455 -------- -------- Total current liabilities 64,234 87,917 Deferred income taxes 30,184 32,614 Deferred credits and other liabilities 34,401 25,805 -------- -------- $416,678 $391,618 ======== ======== See accompanying notes to consolidated financial statements. 32 ATMOS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME Year ended September 30, ------------------------------ 1994 1993 1992 -------- -------- -------- (In thousands, except per share data) Operating revenues $499,808 $459,641 $403,353 Purchased gas cost 331,571 296,532 257,091 -------- -------- -------- Gross profit 168,237 163,109 146,262 Operating expenses Operation 92,132 82,185 78,642 Maintenance 5,888 6,335 5,695 Depreciation and amortization 18,841 17,433 17,205 Taxes, other than income 16,808 16,806 16,398 Income taxes 8,102 10,073 4,753 -------- -------- -------- Total operating expenses 141,771 132,832 122,693 -------- -------- -------- Operating income 26,466 30,277 23,569 Other income (expense) Interest income 168 327 376 Other, net 335 239 876 -------- -------- -------- Total other income 503 566 1,252 Interest charges 12,290 13,299 13,823 -------- -------- -------- Net income $ 14,679 $ 17,544 $ 10,998 ======== ======== ======== Net income per share $ .97 $ 1.22 $ .80 ======== ======== ======== Atmos dividends declared per share (Note 2) $ .88 $ .85 $ .83 ======== ======== ======== Average shares outstanding 15,195 14,338 13,789 ======== ======== ======== See accompanying notes to consolidated financial statements. 33 ATMOS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common stock ---------------- Additional Number of Stated paid-in Retained shares value capital earnings ------- ----- ------- -------- (In thousands, except share data) Balance at September 30, 1991, as adjusted for the 3-for-2 stock split 10,170,938 $ 51 $73,392 $16,867 Adjustment for pooling of interests with GGC (Note 2) 3,493,995 17 941 19,690 ---------- ---- ------- ------- Balance, September 30, 1991, as restated 13,664,933 68 74,333 36,557 Net income - - - 10,998 Cash dividends ($.83 per share) - - - (8,516) GGC distributions - - - (402) Common stock issued Stock option plan 6,750 - 71 - Direct stock purchase plan 132,249 1 1,849 - Employee stock ownership plan 167,881 1 2,288 - ---------- ---- ------- ------- Balance, September 30, 1992 13,971,813 70 78,541 38,637 Net income - - - 17,544 Cash dividends ($.85 per share) - - - (9,262) GGC distributions - - - (893) Common stock issued Stock option plan 6,000 - 60 - Direct stock purchase plan 760,089 3 13,401 - Employee stock ownership plan 131,000 1 2,277 - Less: GGC net income for the quarter ended December 31, 1992 (Note 2) - - - (950) ---------- ---- ------- ------- Balance, September 30, 1993 14,868,902 74 94,279 45,076 Net income - - - 14,679 Cash dividends ($.88 per share) - - - (12,612) GGC distributions - - - (120) Common stock issued Restricted stock grant plan 105,000 1 2,134 - Direct stock purchase plan 173,801 1 3,037 - Employee stock ownership plan 149,463 1 2,713 - Other - - 293 - -------- ---- ------- ------- Balance, September 30, 1994 15,297,166 $ 77 $102,456 $47,023 ========== ==== ======= ======= See accompanying notes to consolidated financial statements. 34 ATMOS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, 1994 1993 1992 -------- ------- ------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $14,679 $16,594 $10,998 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Charged to depreciation and amortization 18,841 16,480 17,205 Charged to other accounts 1,476 3,377 4,598 Deferred income taxes 244 2,733 349 Other 2,101 622 281 ------- ------- ------- 37,341 39,806 33,431 Change in assets and liabilities (Increase) decrease in accounts receivable (478) 1,564 (2,202) (Increase) decrease in inventories 176 708 (84) (Increase) decrease in gas stored underground 4,946 (6,176) (14) (Increase) decrease in prepayments 1,931 1,873 (287) (Increase) decrease in deferred charges and other assets (3,824) (10,908) 586 Increase (decrease) in accounts payable (7,128) (58) 1,196 Increase (decrease) in taxes payable (1,314) 195 930 Increase (decrease) in customers' deposits 395 (61) 322 Increase in other current liabilities 583 1,804 803 Increase (decrease) in deferred credits and other liabilities 8,596 8,398 (3,269) ------- ------- ------ Net cash provided by operating activities 41,224 37,145 31,412 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (50,355) (43,143) (42,169) Retirements of property, plant and equipment 1,906 935 2,629 ------- ------- ------- Net cash used in investing activities (48,449) (42,208) (39,540) 35 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in notes payable $ 22,400 $ 2,563 $18,636 Proceeds from issuance of long-term debt - - 10,000 Cash dividends and distributions paid (12,732) (10,155) (8,918) Repayment of long-term debt (9,850) (4,500) (15,608) Issuance of common stock 7,887 15,742 4,210 ------- ------- ------ Net cash provided by financing activities 7,705 3,650 8,320 -------- ------- ------- Net increase (decrease) in cash and cash equivalents 480 (1,413) 192 Cash and cash equivalents at beginning of year 2,286 3,699 3,507 -------- ------- ------- Cash and cash equivalents at end of year $ 2,766 $ 2,286 $ 3,699 ======== ======= ======= See accompanying notes to consolidated financial statements. 36 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies Description of business - Atmos Energy Corporation and its subsidiaries ("Atmos" or the "Company") are in the business of distributing natural gas to residential, commercial, industrial and agricultural customers within service areas located in Texas, Louisiana, Kentucky, Colorado, Kansas and a small portion of Missouri. Such business is subject to federal and state regulation and/or regulation by local authorities in each of the six states in which the Company operates. The Company has no other material business segments. Principles of consolidation - The accompanying consolidated financial statements include the accounts of Atmos Energy Corporation and its subsidiaries. Each subsidiary is wholly-owned and all material intercompany items have been eliminated. Revenue recognition - Sales of natural gas are billed on a monthly cycle basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. The Company follows the revenue accrual method of accounting for natural gas revenues whereby revenues applicable to gas delivered to customers but not yet billed under the cycle billing method are estimated and accrued and the related costs are charged to ex- pense. Estimated losses due to credit risk are reserved at the time revenue is recognized. Property, plant and equipment - Property, plant and equipment is stated at original cost net of contributions in aid of construction. The cost of additions includes an allowance for funds used during construction and applicable overhead charges. Major renewals and betterments are capitalized, while the costs of maintenance and repairs are charged to expense as incurred. Property, plant and equipment is depreciated at various rates on a straight-line basis over the estimated useful lives of the assets. In the first quarter of fiscal 1993, the Company changed the estimated average useful lives used to compute depreciation for certain utility plant assets. These changes resulted from revised estimates of the projected economic life of the affected assets based on recent orders received from regulatory bodies having jurisdiction over the Company and independently performed depreciation service life studies. The effect of this change on net income for the year ended September 30, 1993 was an increase of $1,104,000. The composite rates were 3.5% and 3.7% for the years ended September 30, 1994 and 1993, respectively. At the time property, plant and equipment is retired, the cost, plus removal expenses and less salvage, is charged to accumulated depreciation. 37 Inventories - Inventories consist of materials and supplies and merchandise held for resale. Inventories are stated at the lower of average cost or market. Gas stored underground - Net additions of inventory gas to underground storage and withdrawals of inventory gas from storage are priced using the average cost method. Non-current gas in storage is classified as property, plant and equipment and is priced at cost. Income taxes - The Company provides deferred income taxes for significant temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. Cash and cash equivalents - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Deferred charges and other assets - Deferred charges and other assets at September 30, 1994 and 1993 include assets of the Company's qualified defined benefit retirement plans in excess of the plans' obligations in the amounts of $12,275,000 and $13,289,000, respectively, and Company assets related to the nonqualified retirement plans at September 30, 1994 and 1993 of $15,735,000 and $12,758,000, respectively. At September 30, 1994, a payable of $1,300,000 was recorded for expenses related to an early retirement program under Greeley Gas Company's qualified defined benefit retirement plan. Deferred credits and other liabilities - Deferred credits and other liabilities include customer advances for construction of $8,428,000 and $7,769,000 at September 30, 1994 and 1993, respectively; obligations under capital leases of $6,294,000 and $6,389,000 at September 30, 1994 and 1993, respectively; and obligations under the Company's nonqualified retirement plans of $11,151,000 and $8,317,000 at September 30, 1994 and 1993, respectively. Earnings per share - The calculation of primary earnings per share is based on reported net income divided by weighted average common shares outstanding. The Company does not have other classes of stock or dilutive common stock equivalents. See Note 2 for a discussion of supplemental net income per share. 2. Greeley Gas Company acquisition On December 22, 1993, Atmos acquired by means of a merger all of the assets and liabilities of Greeley Gas Company ("GGC") in accordance with the terms and provisions of an Agreement and Plan of Reorganization dated July 2, 1993. GGC is a natural gas utility engaged in the distribution and sale of natural gas to residential, commercial, industrial, agricultural, and other customers throughout Colorado, Kansas, and a small portion of Missouri. All of the shares of GGC's common stock were exchanged for a total of 3,493,995 shares of Atmos common stock as adjusted 38 for a 3-for-2 stock split (2,329,330 shares on a pre-split basis). See Note 5 for information regarding the stock split in May 1994. This merger transaction was accounted for as a pooling of interests; therefore, all historical financial statements and notes thereto have been restated. Subsequent to the merger, the business of GGC has been operated through the Company's Greeley Gas Company division (the "Greeley Gas Division"). GGC prepared its financial statements on a December 31 fiscal year end. GGC's fiscal year has been changed to September 30 to conform to the Company's year end. The restated September 30, 1993 balance sheet, as presented, is the combined balance sheets of Atmos and GGC as of September 30, 1993. The restated consolidated statements of income and cash flows for the year ended September 30, 1992 include Atmos operations for the year then ended and GGC operations for the year ended December 31, 1992. The restated consolidated statement of income for the year ended September 30, 1993 includes Atmos and GGC operations for the twelve months then ended. As a result, GGC's operations for the three months ended December 31, 1992 (operating revenue of $18,322,842 and net income of $950,185) are included in both the 1993 and 1992 restated statements of income, the GGC net income for this period has been deducted in calculating the shareholders' equity balances at September 30, 1993 and cash flows for the year then ended. In 1987, GGC elected classification as an S Corporation (small business corporation) under the provisions of the Internal Revenue Code. Normally, income taxes are not reported in the financial statements of S Corporations as the liability for payment of federal and state income taxes is the direct responsibility of the shareholders. However, during 1991, as part of the settlement of rate cases filed in the states of Colorado and Kansas, GGC was ordered to begin providing for current and deferred income taxes. Accordingly, the Company's restated 1991 financial statements include a one-time charge to income of $1,081,202 to reinstate deferred income taxes for GGC. Supplemental net income and earnings per share of the Company are presented below to eliminate the one-time charge and to reflect income tax expense in periods prior to 1994 as if GGC had not made the S Corporation election in 1987. Year ended September 30, 1993 1992 -------- ------- (In thousands, except per share data) Supplemental net income $ 18,132 $ 10,570 ======== ======== Supplemental net income per share $ 1.26 $ .77 ======== ======== 39 Results of operations and net income for the previously separate companies for periods prior to the merger are as follows: Results of operations and net income for the previously separate companies for periods prior to the merger are as follows: Quarter ended Year ended September 30, December 31, 1993 1993 1992 ----------------- -------- -------- (In thousands) Operating revenues Atmos $119,223 $388,495 $340,117 GGC 26,278 71,146 63,236 -------- -------- -------- $145,501 $459,641 $403,353 ======== ======== ======== Net income Atmos $ 5,458 $ 15,712 $ 10,031 GGC 1,630 1,832 967 -------- -------- -------- $ 7,088 $ 17,544 $ 10,998 ======== ======== ======== The dividends per share presentation on the consolidated statements of income reflects Atmos dividends declared per share as adjusted for the 3- for-2 stock split in May 1994. The dividends declared by Atmos reflect the per share dividends declared by Atmos Energy Corporation for each of the three years ended September 30, 1994. The restated cash dividends and distributions per share reflect the total amounts paid by Atmos and GGC to their shareholders in each of those three years, divided by the total amount of weighted average shares outstanding in those periods as restated for the shares issued to effect the merger between Atmos and GGC and the 3-for-2 stock split in May 1994. Year ended September 30, ----------------------- 1994 1993 1992 ---- ---- ---- Atmos dividends declared per share $.88 $.85 $.83 ==== ==== ==== Restated cash dividends and distributions per share, including GGC $.84 $.71 $.65 ==== ==== ==== 40 3. Long-term debt and notes payable Long-term debt at September 30, 1994 and 1993 consisted of the following: 1994 1993 --------- ------- (In thousands) Unsecured 7.95% Senior Notes, payable in annual installments of $1,000,000 beginning August 31, 1997 through August 31, 2006 with semiannual interest payments $ 10,000 $ 10,000 Unsecured 9.57% Senior Notes, payable in annual installments of $2,000,000 beginning September 30, 1997 through September 30, 2006 with semiannual interest payments 20,000 20,000 Unsecured 9.76% Senior Notes, payable in annual installments of $3,000,000 beginning December 30, 1995 through December 30, 2004 with semiannual interest payments 30,000 30,000 Unsecured 9.75% Senior Notes, payable in varying annual installments through December 30, 1996 5,000 8,000 Unsecured 11.2% Senior Notes, payable in annual installments of $2,000,000 beginning December 30, 1993 through December 30, 2002 with semiannual interest payments 18,000 20,000 First Mortgage Bonds, 9.4% Series J, due May 1, 2021 17,000 17,000 First Mortgage Bonds, 13% Series G - 1,600 Unsecured 10% Notes, due December 31, 2011 2,303 2,303 First Mortgage Bonds, 13.75% Series I - 3,250 Notes payable to banks financed with long-term debt 40,000 - -------- ------- 142,303 112,153 Less amounts classified as current (4,000) (6,300) -------- -------- $138,303 $105,853 ======== ======== Subsequent to September 30, 1994, the Company obtained commitments to enter into new note purchase agreements with two insurance companies to issue at par $20,000,000 of unsecured Senior Notes at 8.07% payable in annual installments of $4,000,000 beginning October 31, 2002 through October 31, 2006 with semiannual interest payments and $20,000,000 of unsecured Senior Notes at 8.26% payable in annual installments of $1,818,182 beginning October 31, 2004 through October 31, 2014 with semiannual interest payments. At September 30, 1994, $40,000,000 of notes payable to banks were classified as long- term. 41 The Company entered into a note purchase agreement with an insurance company in August 1992, for a private placement of $10,000,000 of unsecured Senior Notes at 7.95%. The net proceeds from the sale of the Senior Notes were used primarily to refinance an 8.4% note in the amount of $9.8 million. The Company may prepay any of the Senior Notes in whole at any time, subject to a prepayment premium. The note agreements provide for certain cash flow requirements and restrictions on additional indebtedness, sale of assets and payment of dividends. Under the most restrictive of such covenants, cumulative cash dividends paid after September 30, 1988 may not exceed the sum of 75% of accumulated net income for periods after September 30, 1988 plus $12,000,000 plus the proceeds from the sale of common stock after September 30, 1988. At September 30, 1994, approximately $44,492,000 of shareholders' equity was not so restricted. As of September 30, 1994, all of the Company's utility plant assets in Colorado, Kansas and Missouri with a book value of approximately $59,173,000 are subject to a lien under the 9.4% Series J First Mortgage Bonds assumed by the Company in the acquisition of GGC. Maturities of long-term debt are as follows (in thousands): 1995 $ 4,000 1996 7,000 1997 9,000 1998 8,000 1999 8,000 Thereafter 106,303 -------- $142,303 ======== Notes payable to banks The Company has committed short-term, unsecured bank credit facilities totaling $72,000,000, all of which was unused at September 30, 1994. One facility of $60,000,000 requires a commitment fee of 1/8 of 1% on the unused portion. A second facility for $12,000,000 requires a commitment fee of 3/16 of 1% on the unused portion. The committed lines are renewed or renegotiated at least annually. The Company also had aggregate uncommitted credit lines of $130,000,000, of which $71,900,000 was unused as of September 30, 1994. The uncommitted lines have varying terms and the Company pays no fee for the availability of the lines. Borrowings under these lines are made on a when and as-available basis at the discretion of the banks. 42 Information related to notes payable to banks follows: 1994 1993 1992 -------- -------- -------- (In thousands, except for percents) Notes outstanding at September 30 prior to long-term financing $58,100 $35,700 $32,600 Reclassification for long-term financing subsequent to year end (40,000) - - -------- -------- -------- Notes outstanding at September 30 $18,100 $35,700 $32,600 Weighted average interest rate at September 30 5.6% 4.1% 4.7% Maximum amount outstanding during the year $58,100 $50,300 $36,800 Daily average amount outstanding during the year $26,597 $19,801 $12,078 Weighted average interest rate during the year computed on a daily basis 4.3% 4.2% 5.3% Notes payable to shareholders and employees Notes payable to shareholders and employees of GGC were outstanding at times prior to September 30, 1993. They were for six-month terms and bore interest at rates ranging from 4.0% to 4.5%. Interest incurred on such notes aggregated $11,326 and $28,593 for 1993 and 1992, respectively. 4. Income taxes The components of income tax expense for 1994, 1993 and 1992 are as follows: 1994 1993 1992 ------- ------- ------- (In thousands) Current $7,858 $7,340 $4,653 Deferred 244 2,733 100 ------ ------ ------ $8,102 $10,073 $4,753 ====== ====== ====== Included in the provision for income taxes are state income taxes of $328,000, $890,000, and $403,000 for 1994, 1993, and 1992, respectively. Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") and, as permitted under the new rules, prior years' financial statements have not been restated. Adoption of the new standard in 1994 had no significant effect on net income. This standard changes the Company's method of accounting for income taxes from the deferred method (APB 11) to the liability 43 method. Previously the Company deferred the past tax effects of timing differences between financial reporting and taxable income. Under the liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax effects of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes reflect the tax effect of differences between the basis of assets and liabilities for book and tax purposes. The tax effect of temporary differences that give rise to significant components of the deferred tax liabilities and deferred tax assets at September 30, 1994 and October 1, 1993 are presented below (in thousands): 1994 1993 ------- ------- Deferred tax assets Costs expensed for book purposes and capitalized for tax purposes $ 914 $ 744 Accruals not currently deductible for tax purposes 1,929 689 Customer advances 2,365 2,128 Nonqualified benefit plans 5,074 2,740 Postretirement benefits 1,442 - Other, net 1,198 1,407 ------- ------- Total deferred tax assets 12,922 7,708 Deferred tax liabilities Tax and book basis of utility plant 37,316 31,949 Prepaid pensions 4,640 5,134 Other, net 1,150 565 ------- ------- Total deferred tax liabilities 43,106 37,648 ------- ------- Net deferred tax liabilities $30,184 $29,940 ======= ======= SFAS No. 109 deferred accounts for rate regulated entities (included in other deferred credits): Liabilities $ 2,647 $ 2,673 ======= ======= 44 During 1993 and 1992, deferred income taxes were provided for significant timing differences in recognition of revenues and expenses for tax and financial reporting purposes. The effects of these timing differences at September 30, 1993 and 1992 were as follows: 1993 1992 ------ ------ (In thousands) Excess of tax over financial depreciation and amortization $1,754 $ 351 Items capitalized for financial reporting and recognized currently for tax reporting 416 388 Deferred gas service revenue recognized currently for tax reporting 1,464 453 Other, net (901) (1,092) ------ ------ Total deferred income taxes $2,733 $ 100 ====== ====== Reconciliations of the provisions for income taxes computed at the statutory rate to the reported provisions for income taxes for 1994, 1993 and 1992 are set forth below: Liability Method Deferred Method --------- ----------------- 1994 1993 1992 -------- ------- ------ (In thousands) Tax at statutory rate of 34% through December 31, 1992 and 35% thereafter $ 7,992 $ 9,603 $5,356 Financial expenses, not deductible for tax reporting 503 680 218 Common stock dividends deductible for tax reporting (573) (462) (446) State taxes 328 682 244 Other, net (148) (430) (619) ------- ------- ------ Provision for income taxes $ 8,102 $10,073 $4,753 ======= ======= ====== 5. Stock split On February 9, 1994, the Board of Directors of Atmos approved a 3-for-2 split of its common stock implemented in the form of a stock dividend, which resulted in shareholders receiving one new share for every two shares held. Fractional shares were not issued but were paid in cash or credited to the accounts of participants of the Dividend Reinvestment and Stock Purchase Plan ("DRSPP") and ESOP. The record date for the split was May 4, 1994 and the payment date for mailing the new shares and cash for fractional shares to shareholders was May 16, 1994. All share and 45 per share amounts in the financial statements and notes thereto have been restated to reflect this split, unless otherwise noted. 6. Common stock and stock options The Company issued 428,264 shares of its common stock in fiscal 1994 in connection with its Direct Stock Purchase Plan, Restricted Stock Grant Plan and Employee Stock Ownership Plan. It also issued common stock in connection with the GGC merger (Note 2) and the stock split (Note 5). The Company has an Employee Stock Ownership Plan as discussed in Note 7. The Company has registered 600,000 shares for issuance under the plan, of which 134,776 shares were available for future issuance on September 30, 1994. In August 1992 the Company announced a Direct Stock Purchase Plan ("DSPP") which was the successor to and replacement for the Dividend Reinvestment Plan ("DRP"). Members of the DRP were automatically enrolled in the DSPP. In November 1993, the Company amended the DSPP to remove the direct stock purchase feature of the plan and to rename the plan the Atmos Energy Corporation Dividend Reinvestment and Stock Purchase Plan ("DRSPP"). The DRSPP is now available to shareholders of record only. Participants in the DRSPP may have all or part of their dividends reinvested at a 3% discount from market prices. DRSPP participants may purchase additional shares of Company common stock as often as weekly with optional cash payments of at least $25, up to an annual maximum of $60,000. At September 30, 1994, 712,596 shares were available for future issuance under the plan. On April 27, 1988, the Company adopted a Shareholders' Rights Plan (the "Rights Plan") and declared a dividend of one right (a "Right") for each outstanding pre-split share of common stock of the Company, payable to shareholders of record as of May 10, 1988. Each Right will entitle the holder thereof, until the earlier of May 10, 1998 or the date of redemption of the Rights, to buy one share of common stock of the Company at an exercise price of $30 per share, subject to adjustment by the Board of Directors upon the occurrence of certain events. The Rights will be represented by the common stock certificates and are not exercisable or transferable apart from the common stock until a "Distribution Date" (which is defined in the Rights Agreement between the Company and the Rights Agent as the date upon which the Rights become separate from the common stock). At no time will the Rights have any voting rights. The exercise price payable and the number of shares of common stock or other securities or property issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. Until the Distribution Date, the Company will issue one Right with each share of common stock that becomes outstanding so that all shares of common stock will have attached Rights. After a Distribution Date, the Company may issue Rights when it issues 46 common stock if the Board deems such issuance to be necessary or appropriate. The Rights have certain anti-takeover effects and may cause substantial dilution to a person or entity that attempts to acquire the Company on terms not approved by the Board of Directors except pursuant to an offer conditioned upon a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors because, prior to the time the Rights become exercisable or transferable, the Rights may be redeemed by the Company at $.05 per Right. The Company has had an Incentive Stock Option Plan for key employees covering an aggregate of 100,000 shares of common stock. The plan provided for options to be granted at prices not less than the fair market value of the stock on the date of grant and to be exercisable over ten years from such date in cumulative annual installments of 25% of the aggregate shares granted, commencing one year after the date of grant. At September 30, 1993, no options were outstanding under the plan. The Company allowed the plan to expire in October 1993 without granting additional options. The following table summarizes the status of the expired Incentive Stock Option Plan as of September 30, 1993 and 1992: 1993 1992 --------------- --------------- Price Price Shares per share Shares per share ------- ---------- ------ ----------- Outstanding options at beginning of year 6,000 $9.25-10.63 12,750 $9.25-10.63 Exercised (6,000) 9.25-10.63 (6,750) 9.25-10.63 ------ ------ Outstanding options at end of year - - 6,000 9.25-10.63 ====== ====== Exercisable options at end of year - 6,000 Options available for future grants (pre-split) 8,150 8,150 The Company's Restricted Stock Grant Plan for management and key employees of the Company, which became effective October 1, 1987, provides for awards of common stock that are subject to certain restrictions. The plan is administered by the Board of Directors. The members of the Board who are not employees of the Company make the final determinations regarding participation in the plan, awards under the plan, and restrictions on the restricted stock awarded. The restricted stock may consist of 47 previously issued shares purchased in the open market or shares issued directly from the Company. The total number of shares of restricted stock that may be awarded under the plan was increased to 600,000 shares (900,000 post-split shares) after receiving shareholder approval in 1993. During 1994, 1993 and 1992, 109,500, 25,500 and 51,750 shares, respectively, were awarded under the plan. Prior to 1992, 328,950 shares were awarded under the plan. Related compensation expense of $1,164,000, $735,000 and $673,000 was recognized in 1994, 1993 and 1992, respectively. At September 30, 1994, 384,300 shares were available for award. 7. Employee retirement and stock ownership plans At September 30, 1994, the Company had three defined benefit pension plans. One covers the Western Kentucky Division employees, one covers the Greeley Gas Division