TEXAS AND VIRGINIA 75-1743247
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(972) 934-9227
(Registrant's telephone number, including area code)
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Number of shares outstanding of each of the issuer's classes of common stock, as of January 31, 2002.
Class Shares Outstanding ----- ------------------ No Par Value 41,077,144 |
December 31, September 30,
2001 2001
------------ -------------
(Unaudited)
ASSETS
Property, plant and equipment $ 2,148,347 $ 2,109,867
Less accumulated depreciation and amortization 792,850 774,469
----------- -----------
Net property, plant and equipment 1,355,497 1,335,398
Current assets
Cash and cash equivalents 12,785 15,263
Cash held on deposit in margin account 47,529 66,666
Accounts receivable, net 233,602 124,046
Inventories 5,595 6,041
Gas stored underground 109,356 89,555
Assets from risk management activities 69,601 95,968
Deferred gas cost 2,509 10,999
Other current assets and prepayments 10,198 15,713
----------- -----------
Total current assets 491,175 424,251
Intangible assets 11,774 12,125
Goodwill 64,941 64,745
Noncurrent assets from risk management activities 30,374 29,771
Deferred charges and other assets 169,785 169,890
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$ 2,123,546 $ 2,036,180
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SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Common stock $ 205 $ 204
Additional paid-in capital 494,307 489,948
Retained earnings 103,693 95,132
Accumulated other comprehensive income (loss) (783) (1,420)
----------- -----------
Shareholders' equity 597,422 583,864
Long-term debt 679,057 692,399
----------- -----------
Total capitalization 1,276,479 1,276,263
Current liabilities
Current maturities of long-term debt 20,413 20,695
Short-term debt 207,136 201,247
Accounts payable and accrued liabilities 204,191 84,471
Taxes payable 8,375 11,620
Customers' deposits 30,065 32,351
Liabilities from risk management activities 81,558 119,484
Other current liabilities 34,596 41,161
----------- -----------
Total current liabilities 586,334 511,029
Deferred income taxes 145,731 138,934
Noncurrent liabilities from risk management activities 9,521 7,412
Deferred credits and other liabilities 105,481 102,542
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$ 2,123,546 $ 2,036,180
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Three months ended
December 31
------------------------
2001 2000
--------- ---------
Operating revenues $ 271,342 $ 442,790
Purchased gas cost 161,977 332,842
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Gross profit 109,365 109,948
Gas trading margin 7,163 --
Operating expenses
Operation and maintenance 42,528 35,959
Depreciation and amortization 20,474 15,781
Taxes, other than income 10,080 9,267
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Total operating expenses 73,082 61,007
--------- ---------
Operating income 43,446 48,941
Equity in earnings of Woodward Marketing, L.L.C -- 2,040
Miscellaneous income (expense) 5,401 (2,387)
Interest charges, net 15,992 12,246
--------- ---------
Income before income taxes 32,855 36,348
Income taxes 12,222 13,376
--------- ---------
Net income $ 20,633 $ 22,972
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Basic net income per share $ .51 $ .70
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Diluted net income per share $ .50 $ .70
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Cash dividends per share $ .295 $ .290
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Weighted average shares outstanding:
Basic 40,837 32,810
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Diluted 40,922 32,908
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See accompanying notes to condensed consolidated financial statements
Three months ended
December 31
-------------------------
2001 2000
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Cash Flows From Operating Activities
Net income $ 20,633 $ 22,972
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization:
Charged to depreciation and
amortization 20,474 15,781
Charged to other accounts 693 750
Deferred income taxes (benefit) 6,421 (4,606)
Other (171) --
Net assets/liabilities from risk management activities (8,035) --
Net change in operating assets and liabilities 16,587 (49,529)
--------- ---------
Net cash provided (used) by operating activities 56,602 (14,632)
Cash Flows From Investing Activities
Capital expenditures (28,009) (19,464)
Acquisitions (15,747) --
Retirements of property, plant and
equipment, net 123 (147)
Proceeds from sale of assets, net -- 6,625
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Net cash used in investing activities (43,633) (12,986)
Cash Flows From Financing Activities
Net increase (decrease) in short-term debt 5,889 (102,446)
Cash dividends paid (12,072) (9,285)
Repayment of long-term debt (13,624) (7,893)
Issuance of common stock 4,360 3,379
Proceeds from equity offering, net -- 142,043
--------- ---------
Net cash provided (used) by financing activities (15,447) 25,798
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Net decrease in cash and cash equivalents (2,478) (1,820)
Cash and cash equivalents at beginning
of period 15,263 7,379
--------- ---------
Cash and cash equivalents at end
of period $ 12,785 $ 5,559
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See accompanying notes to condensed consolidated financial statements
1. Unaudited interim financial information
In the opinion of management, all material adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been made to the unaudited interim period financial statements. Because of seasonal and other factors, the results of operations for the three month period ended December 31, 2001 are not indicative of expected results of operations for the year ending September 30, 2002. These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation in its Annual Report on Form 10-K for the fiscal year ended September 30, 2001.
Principles of consolidation - The accompanying condensed consolidated financial statements include the accounts of Atmos Energy Corporation and its wholly-owned subsidiaries. Intercompany transactions have been eliminated.
Prior to April 1, 2001, we owned a 45 percent interest in Woodward Marketing, L.L.C. and accounted for that ownership using the equity method of accounting for investments. Subsequent to April 1, 2001, we owned 100 percent of Woodward Marketing and accounted for that ownership on a consolidated basis.
Common stock - As of December 31, 2001, we had 100,000,000 shares of common stock, no par value (stated at $.005 per share), authorized and 41,027,472 shares outstanding. At September 30, 2001, we had 40,791,501 shares outstanding.
Goodwill - Total goodwill was $64.9 million and $64.7 million at December 31, 2001 and September 30, 2001. Goodwill applicable to the utility segment was $36.9 million at December 31, 2001 and September 30, 2001. Goodwill applicable to the non-regulated segment was $28.0 million and $27.8 million at December 31, 2001 and September 30, 2001. Goodwill applicable to the utility segment resulted from the acquisition of the Louisiana Gas Service Company assets on July 1, 2001 and is not subject to amortization under the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Goodwill applicable to the non-regulated segment was amortized over 20 years until September 30, 2001. Effective October 1, 2001, goodwill applicable to the non-regulated segment will not be amortized under the provisions of Statement of Financial Accounting Standards No. 142. The proforma effect on goodwill amortization of adopting Statement of Financial Accounting Standards No. 142 is not material.
Goodwill - Under the provisions of Statement of Financial Accounting Standard No. 142, we evaluate our goodwill balance annually. The initial evaluation will take place during the second quarter of our current fiscal year. We do not anticipate any impairment of the goodwill balance.
Revenue recognition - Sales of natural gas are billed on a monthly cycle basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. We follow the revenue accrual method of accounting for natural gas revenues whereby revenues applicable to gas delivered to customers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense. Estimated losses due to credit risk are reserved at the time revenue is recognized.
Accounts receivable and allowance for doubtful accounts - Accounts receivable consists of natural gas sales to residential, commercial, industrial, agricultural and other customers. The allowance for doubtful accounts is computed based on the aging of outstanding accounts receivable and historical collections experience and represents in management's opinion, an adequate allowance to provide for probable uncollectable accounts.
Risk management assets and liabilities, non-regulated segment - We use storage, transportation and requirements contracts, forwards, over-the-counter and exchange-traded options, futures and swap contracts to conduct our risk management activities. We use the mark-to-market method to account for these activities in accordance with Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." Under this method, the aforementioned contracts are reflected at fair value, inclusive of future servicing costs and valuation adjustments, with resulting unrealized gains and losses recorded as assets or liabilities from risk management activities on the consolidated balance sheet. Current period changes in the assets and liabilities from risk management activities are recognized as net gains or losses on the condensed consolidated statement of income as gas trading margin. Changes in the assets and liabilities from risk management activity result primarily from changes in the valuation of the portfolio of contracts, maturity and settlement of contracts and newly originated transactions. Market prices and models used to value these transactions reflect our best estimate considering various factors including closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts. Values are adjusted to reflect the potential impact of liquidating our positions in an orderly manner over a reasonable period of time under present market conditions. Changes in market prices directly affect our estimate of the fair value of these transactions.
Risk management assets and liabilities, utility segment - Our business units have entered into financial instruments for the 2001-2002 heating season. The purpose of entering into these financial instruments is to protect us and our customers from unusually large winter period gas price increases. We use the mark-to-market method to account for these activities as described above. In accordance with Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation", current period changes in the assets and liabilities from risk management activities are recorded as deferred gas costs on the condensed consolidated balance sheet as these costs will ultimately be recovered from ratepayers. Accordingly, there is no earnings impact as a result of the use of these financial instruments. Upon maturity, the contracts are recognized in purchased gas cost.
Comprehensive income - The following table presents the components of comprehensive income, net of related tax, for the three-month period ended December 31, 2001 and 2000:
Three months ended
December 31
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2001 2000
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(In thousands)
Net income $ 20,633 $ 22,972
Unrealized holding gains (losses) on investments 637 (1,522)
Unrealized losses on derivative financial instruments -- (3,634)
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Comprehensive income $ 21,270 $ 17,816
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The only components of accumulated other comprehensive income (loss), net of related tax, relate to unrealized holding gains and losses associated with certain available for sale investments and unrealized gains and losses associated with derivative financial instruments.
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently issued accounting standards not yet adopted - In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. We are currently in the process of evaluating the impact the adoption of this Statement will have on our financial condition, results of operations or net cash flows.
Reclassifications - Certain prior year amounts have been reclassified to conform with the current year presentation.
Litigation
Greeley Gas Division
On September 23, 1999, a suit was filed in the District Court of Stevens County, Kansas, by Quinque Operating Company, Tom Boles and Robert Ditto, against more than 200 companies in the natural gas industry including us and our Greeley Gas Division. The plaintiffs, who purport to represent a class consisting of gas producers, royalty owners, overriding royalty owners, working interest owners and state taxing authorities, accuse the defendants of underpaying royalties on gas taken from wells situated on non-federal and non-Indian lands throughout the United States and offshore waters predicated upon allegations that the defendants' gas measurements are simply inaccurate and that the defendants failed to comply with applicable regulations and industry standards over the last 25 years. Although the plaintiffs do not specifically allege an amount of damages, they contend that this suit is brought to recover billions of dollars in revenues that the defendants have allegedly unlawfully diverted from the plaintiffs to themselves. On April 10, 2000, this case was consolidated for pre-trial proceedings with other similar pending litigation in federal court in Wyoming in which we are also a defendant along with over 200 other defendants in the case of In Re Natural Gas Royalties Quitam Litigation. In January 2001, the federal court elected to remand this case back to the Kansas state court. A reconsideration of remand was filed, but it was denied. The state court now has jurisdiction over this proceeding and has issued a preliminary case management order. We believe that the plaintiffs' claims are lacking in merit, and we intend to vigorously defend this action. While the results of this litigation cannot be predicted with certainty, we believe the final outcome of such litigation will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that we have adequate insurance and/or reserves to cover any damages that may ultimately be awarded.
Energas Division
On May 18, 2001, a suit was filed in the 99th District Court of Lubbock County, Texas, by the City of Lubbock, Texas, and the West Texas Municipal Agency against Stewart & Stevenson Energy Products, Inc., a division of GE Packaged Power, Inc. ("GE") and our Energas Division. The action arises out of (i) the construction and installation of a gas-fired electric generating facility designed and installed by GE and (ii) the natural gas pipeline, which provides natural gas to the facility, that was designed and installed by our Energas Division. The plaintiffs allege that they incurred damages as a result of certain corrosive products that were introduced into the facility's turbine that damaged the turbine and necessitated repair costs of approximately $0.9 million and consequential damages of approximately $4.7 million comprised of electric power purchases made by the plaintiffs from other sources while the facility was inoperative or operating below specifications. The causes of action asserted by the plaintiffs against the Energas Division include breach of contract, breach of warranty and negligence. We have denied any liability and intend to vigorously defend against the plaintiffs' claims. While the results of this litigation cannot be predicted with certainty, we believe the final outcome of such litigation will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that we have adequate insurance and/or reserves to cover any damages that may ultimately be awarded.
Atmos Energy Louisiana Gas Division
Prior to our acquisition of the assets of Louisiana Gas Service Company, a division of Citizens Communications Company on July 1, 2001, Louisiana Gas Service Company was involved in a proceeding with the Louisiana Public Service Commission relating to past costs associated with the purchase of gas that it charged to its customers. Subsequent to our acquisition of the Louisiana Gas assets on July 1, 2001, we have taken over the defense of this proceeding and will have responsibility for administering and assuring the payment of refunds and/or credits to ratepayers that may arise from Citizens Communications' past activities with respect to the purchased gas costs. However, we believe the outcome of this proceeding will not have a material adverse impact on our financial condition, results of operations or net cash flows as Citizens Communications has agreed to fully indemnify us for any liability that may arise out of this proceeding.
United Cities Propane Gas, Inc.
United Cities Propane Gas, Inc., one of our wholly-owned subsidiaries, is a party to an action filed in June 2000 which is pending in the Circuit Court of Sevier County, Tennessee. The plaintiffs' claims arise out of injuries alleged to have been caused by a low-level propane explosion. The plaintiffs seek to recover damages of $13.0 million. Discovery activities have begun in this case. We have denied any liability, and we intend to vigorously defend against the plaintiffs' claims. While the results of this litigation cannot be predicted with certainty, we believe the final outcome of such litigation will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that we have adequate insurance and/or reserves to cover any damages that may ultimately be awarded.
We are a party to other litigation and claims that arise out of our ordinary business. While the results of such litigation and claims cannot be predicted with certainty, we believe the final outcome of such litigation and claims will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that we have adequate insurance and/or reserves to cover any damages that may ultimately be awarded.
Environmental Matters
Manufactured Gas Plant Sites
The United Cities Gas Division is the owner or previous owner of manufactured gas plant sites in Johnson City and Bristol, Tennessee and Hannibal, Missouri which were used to supply gas prior to availability of natural gas. The gas manufacturing process resulted in certain by-products and residual materials including coal tar. The manufacturing process used by our predecessors was an acceptable and satisfactory process at the time such operations were being conducted. Under current environmental protection laws and regulations, we may be responsible for response actions with respect to such materials if response actions are necessary.
United Cities Gas Company and the Tennessee Department of Environment and Conservation entered into a consent order effective January 23, 1997, to facilitate the investigation, removal and remediation of the Johnson City site. United Cities Gas Company began the implementation of the consent order in the first quarter of 1997 which continued through December 31, 2001. The investigative phase of the work at the site has been completed. An interim removal action was completed in June 2001. The Tennessee Regulatory Authority granted United Cities Gas Company permission to defer, until its next rate case, all costs incurred in Tennessee in connection with state and federally mandated environmental control requirements.
As of December 31, 2001, we had incurred costs of approximately $0.9 million for the investigations of the Johnson City and Bristol, Tennessee and Hannibal, Missouri sites and had a remaining accrual relating to these sites of $0.8 million.
Mercury Contamination Sites
We have completed investigation and remediation activities pursuant to Consent Orders between the Kansas Department of Health and Environment and United Cities Gas Company. The Orders provided for the investigation and remediation of mercury contamination at gas pipeline sites which utilize or formerly utilized mercury meter equipment in Kansas. The Final Interim Characterization and Remediation Report has been submitted to the Kansas Department of Health. We have agreed to amendments of the Orders with the Kansas Department of Health to include all mercury meters that belonged to our Greeley Gas Division before the merger with United Cities Gas Company on July 31, 1997. These sites will be investigated in 2002 and any necessary remediation will be performed. As of December 31, 2001, we had incurred costs of $0.1 million for these sites and had a remaining accrual of $0.3 million for recovery. The Kansas Corporation Commission has authorized us to defer these costs and seek recovery in a future rate case.
We are a party to other environmental matters and claims, including those discussed above, that arise out of our ordinary business. While the ultimate results of response actions to these environmental matters and claims cannot be predicted with certainty, we believe the final outcome of such response actions will not have a material adverse effect on our financial condition, results of operations or net cash flows because we believe that the expenditures related to such response actions will either be recovered through rates, shared with other parties or covered by adequate insurance or reserves.
3. Short-term debt
At December 31, 2001, short-term debt was composed of $189.1 million of commercial paper and $18.0 million outstanding under bank credit facilities.
We have short-term committed credit facilities totaling $318.0 million. One short-term unsecured credit facility is for $300.0 million with an option to increase the amount by $100.0 million and serves as a backup liquidity facility for our commercial paper program. Our commercial paper is rated A-2 by Standard and Poor's and P-2 by Moody's. At December 31, 2001, $189.1 million of commercial paper was outstanding. We have a second facility in place for $18.0 million. At December 31, 2001, $18.0 million was outstanding under this credit facility. These credit facilities are negotiated at least annually and are used for working capital purposes.
Uncommitted credit facilities
Our Woodward Marketing subsidiary has an uncommitted demand credit facility for $125.0 million which is used for its non-regulated business. Atmos Energy Marketing, LLC, our wholly-owned subsidiary, is the sole guarantor of all amounts outstanding under this facility. At December 31, 2001, no amount was outstanding under this credit facility. Related letters of credit totaling $48.6 million reduced the amount available under this facility. This facility is used for working capital purposes.
We also have unsecured short-term uncommitted credit lines from two banks totaling $40.0 million. No amounts were outstanding under these credit facilities at December 31, 2001. The uncommitted lines are renewed or renegotiated at least annually with varying terms and we pay no fee for the availability of the lines. Borrowings under these lines are made on a when- and as-available basis at the discretion of the banks. These facilities are also used for working capital purposes.
In addition, Woodward Marketing has up to $100.0 million of credit available from Atmos for its non-regulated business. At December 31, 2001, $91.8 million was outstanding. This intercompany facility is subordinated in terms of repayment to the $125.0 million uncommitted demand credit facility described above.
4. Earnings per share
Basic earnings per share has been computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share has been computed by dividing net income for the period by the weighted average number of common shares outstanding during the period adjusted for the assumed exercise of restricted stock and other contingently issuable shares of common stock. Net income for basic and diluted earnings per share are the same, as there are no contingently issuable shares of stock whose issuance would have impacted net income. A reconciliation between basic and diluted weighted average common shares outstanding follows:
For the three months ended
December 31
--------------------------
2001 2000
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Weighted average common shares - basic 40,837 32,810
Effect of dilutive securities:
Restricted stock 67 92
Stock options 18 6
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Weighted average common shares - assuming
dilution 40,922 32,908
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5. Segment information
Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies included in Note 1 of notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended September 30, 2001. All intersegment sales prices are market based. We evaluate performance based on net income or loss of the respective operating units.
In accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", we have identified the Utility and Non-regulated segments. For an expanded description of these segments, please refer to Note 1 of notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended September 30, 2001. We consider each business unit within our utility segment to be a reporting unit of the utility segment and not a reportable segment. Our chief executive officer makes decisions about allocating resources to the utility segment as a whole and not to individual reporting units. The individual operations that comprise the non-regulated segment are not currently material to our consolidated financial position or results of operations and therefore do not require separate reporting. Prior to April 1, 2001, we owned a 45 percent interest in Woodward Marketing and accounted for that ownership using the equity method of accounting for investments. Subsequent to April 1, 2001, we own 100 percent of Woodward Marketing and account for that ownership on a consolidated basis.
Non-
Utility Regulated Total
----------- ---------- -----------
(In thousands)
As of and for the three months ended
December 31, 2001:
Operating revenues for reportable
segments $ 265,156 $ 7,635 $ 272,791
Elimination of intersegment
revenues (639) (810) (1,449)
----------- ---------- -----------
Total operating revenues 264,517 6,825 271,342
Net income 16,834 3,799 20,633
Total assets 1,944,012 334,759 2,278,771
December 31, 2000:
Operating revenues for reportable
segments $ 428,462 $ 15,967 $ 444,429
Elimination of intersegment
revenues (753) (886) (1,639)
----------- ---------- -----------
Total operating revenues 427,709 15,081 442,790
Net income 22,838 134 22,972
Total assets 1,508,608 107,961 1,616,569
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A reconciliation of total assets for the reportable segments to total consolidated assets for December 31, 2001 and 2000 is presented below:
December 31
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2001 2000
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(In thousands)
Total assets for reportable segments $ 2,278,771 $ 1,616,569
Elimination of intercompany accounts (155,225) (16,555)
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Total consolidated assets $ 2,123,546 $ 1,600,014
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6. Derivative Instruments and Hedging Activities
Effective October 1, 2000, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that all derivative financial instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or as deferred gas costs, depending on the classification of the derivative. Derivative instruments may be classified as either fair value hedges or cash flow hedges. The cumulative effect of the change in accounting for the adoption of this Statement did not have a material impact on our financial position, results of operations or cash flows.
Weather Hedges and Insurance
In July 2000, we entered into an agreement to purchase weather hedges for our Texas and Louisiana operations effective for the 2000-2001 heating season. The hedges were designed to help mitigate the effects of weather that was at least seven percent warmer than normal in both Texas and Louisiana while preserving any upside. The cost of the weather hedges was approximately $4.9 million which was amortized over the 2000-2001 heating season. No income was recognized for the 2000-2001 heating season for these weather hedges due to the colder than normal weather.
In June 2001, we purchased a three year weather insurance policy with an option to cancel in the third year if we obtain weather protection in our rate structures. The policy is for our Texas and Louisiana operations and covers the entire heating season of October to March beginning with the 2001-2002 heating season. The cost of the three year policy was approximately $13.2 million which was prepaid and will be amortized over the appropriate heating seasons based on degree days. The insurance is designed to protect against weather that is at least seven percent warmer than normal. During the quarter ended December 31, 2001, we recognized $5.9 million in income and $1.9 million in amortization expense relating to this insurance policy.
Utility Hedging Activities
We have historically hedged 20 percent of our gas supply through the use of our underground storage assets. For the 2001-2002 heating season, we covered approximately 64 percent of our anticipated flowing gas requirements through storage and futures and fixed forward contracts. This should provide protection to us and our customers against sharp increases in the price of natural gas during the 2001-2002 heating season.
In accordance with Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation", current period changes in the assets and liabilities from risk management activities are recorded as deferred gas costs on the condensed consolidated balance sheet as these costs will ultimately be recovered from ratepayers. Accordingly, there is no earnings impact as a result of the use of these financial instruments. Upon maturity, the contracts are recognized in purchased gas cost.
Non-Regulated Hedging Activities
At December 31, 2001, we had 2,744 open contracts, representing 0.3 Bcf of notional volumes with average contract maturities of less than two years. These contracts were marked to market. The $4.3 million mark-to-market gain associated with these positions was recorded as unrealized trading margin on the condensed consolidated statement of income.
Effective April 1, 2001, natural gas sales from our natural gas trading operations are netted against purchased gas costs and shown as gas trading margin on the consolidated statements of income. For the three months ended December 31, 2001, our gas trading margin consisted of a $2.9 million realized trading gain and a $4.3 million unrealized trading gain.
We acquired a 45 percent interest in Woodward Marketing, L.L.C. in 1997 as a result of the merger of Atmos and United Cities Gas Company, which had acquired that interest in 1995. In April 2001, we acquired the 55 percent interest that we did not own from J.D. Woodward and others for 1,423,193 restricted shares of our common stock. Immediately following the acquisition, Mr. Woodward was elected as a Senior Vice President of Atmos in charge of all non-regulated business activities, a position he has held since April 2001. Prior to that time, Mr. Woodward had not been an officer or employee of Atmos.
The principal business of Woodward Marketing, including the activities of Trans Louisiana Industrial Gas Company, Inc., is the overall management of natural gas requirements for municipalities, local gas utility companies and industrial customers located primarily in the Southwestern and Midwestern United States. This business involves the sale of natural gas by Woodward Marketing to its customers and the management of storage and transportation contracts for its customers under contracts generally having one to two-year terms. At December 31, 2001, Woodward Marketing had a total of 78 municipal and local gas utility customers and 296 industrial customers. Woodward Marketing also sells natural gas to certain of its industrial customers on a delivered burner tip basis under contract terms from 30 days to two years. In addition, Woodward Marketing supplies us with a portion of our natural gas requirements on a competitive bid basis.
In the management of natural gas requirements for municipal and other local utilities, Woodward Marketing sells physical natural gas for future delivery and hedges the associated price risk through the use of gas futures, including forwards, over-the-counter and exchange-traded options, and swap contracts with counterparties. These financial contracts are marked-to-market at the daily close of business. Woodward Marketing links gas futures to physical delivery of natural gas and balances its futures positions at the end of each trading day. Over-the-counter swap agreements require Woodward Marketing to receive or make payments based on the difference between a fixed price and the market price of natural gas on the settlement date. Woodward Marketing uses these futures and swaps to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of natural gas, which are also carried on a mark to market basis. Options held to hedge price risk provide the right, but not the requirement, to buy or sell energy commodities at a fixed price. Woodward Marketing uses options to manage margins and to limit overall price risk exposure.
Energy related services provided by Woodward Marketing include the sale of natural gas to its various customer classes and management of transportation and storage assets and inventories. More specifically, energy services include contract negotiation and administration, load forecasting, storage acquisition, natural gas purchase and delivery and capacity utilization strategies. In providing these services, Woodward Marketing generates income from its utility, municipal and industrial customers through negotiated prices based on the volume of gas supplied to the customer. Woodward Marketing also generates income by taking advantage of the difference between near-term gas prices and prices for future delivery as well as the daily movement of gas prices by utilizing storage and transportation capacity that it controls.
Woodward Marketing also engages in limited speculative natural gas trading for its own account, subject to a risk management policy established by us which limits the level of trading loss in any fiscal year to a maximum of 25 percent of the budgeted annual operating income of Woodward Marketing. Compliance with such risk management policy is monitored on a daily basis. In addition, Woodward Marketing's bank credit facility limits trading positions that are not closed at the end of the day (open positions) to 2.5 Bcf of natural gas. At December 31, 2001, Woodward Marketing's open positions in its trading operations totaled 0.3 Bcf. In its speculative trading, Woodward Marketing's open trading positions are monitored on a daily basis but are not required to be closed if they remain within the limits set by the bank loan agreement. Woodward Marketing had an unrealized trading gain of $4.3 million for the quarter ended December 31, 2001, but there can be no assurance that Woodward Marketing will have any speculative trading gain in the future. In some prior years, Woodward Marketing experienced losses in its speculative trading business. The financial exposure that results from the daily fluctuations of gas prices and the potential for daily price movements constitutes a risk of loss since the price of natural gas purchased for future delivery at the beginning of the day may not be hedged until later in the day.
Financial instruments, which subject Woodward Marketing to counterparty risk, consist primarily of financial instruments arising from trading and risk management activities and overnight repurchase agreements that are not insured. Counterparty risk is the risk of loss from nonperformance by financial counterparties to a contract. Exchange-traded future and option contracts are generally guaranteed by the exchanges.
Woodward Marketing's operations are concentrated in the natural gas industry, and its customers and suppliers may be subject to economic risks affecting that industry.
The Board of Directors
Atmos Energy Corporation
We have reviewed the accompanying condensed consolidated balance sheet of Atmos Energy Corporation as of December 31, 2001 and the related condensed consolidated statements of income and cash flows for the three-month periods ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally accepted in the Untied States, the consolidated balance sheet of Atmos Energy Corporation as of September 30, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented herein) and in our report dated November 2, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Dallas, Texas
February 6, 2002
Introduction
The following discussion should be read in conjunction with the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q and Management's Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended September 30, 2001.
We distribute and sell natural gas to approximately 1.4 million residential, commercial, industrial, agricultural and other customers. We operate through five divisions in service areas located in Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Missouri, Tennessee, Texas and Virginia. Such business is subject to regulation by state and/or local authorities in each of the states in which we operate. In addition, our business is affected by seasonal weather patterns, competitive factors within the energy industry and economic conditions in the areas that we serve. We also transport natural gas for others through our distribution system.
We provide natural gas storage services and own or hold an interest in natural gas storage fields in Kansas, Kentucky and Louisiana to supplement natural gas used by customers in Kansas, Kentucky, Tennessee, Louisiana and other states. We also provide energy management and gas marketing services to industrial customers, municipalities and other local distribution companies. We also provide electrical power generation to meet peak load demands for a municipality regulated by the Tennessee Valley Authority. In addition, we market natural gas to industrial and agricultural customers primarily in West Texas and to industrial customers in Louisiana.
Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995
The statements contained in this Quarterly Report on Form 10-Q may contain
"forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934. All statements other than statements of
historical fact included in this Report are forward-looking statements made
in good faith by the Company and are intended to qualify for the safe harbor
from liability established by the Private Securities Litigation Reform Act of
1995. When used in this Report, or any other of the Company's documents or oral
presentations, the words "anticipate," "expect," "estimate,"
"plans," "believes," "objective," "forecast,"
"goal" or similar words are intended to identify forward-looking statements.
Such forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
in the statements relating to the Company's strategy, operations, markets, services,
rates, recovery of costs, availability of gas supply and other factors. These
risks and uncertainties include the following:
adverse weather conditions such as warmer or drier than normal weather in the
Company's service territories; national, regional and local economic conditions;
competition from other energy suppliers and alternative forms of energy; recent
national events, including the impact of any future terrorist attacks; regulatory
and business trends and decisions, including the impact of pending rate and
related proceedings before various state regulatory commissions; successful
completion, financing and integration of acquisitions; inflation and the volatility
of commodity prices for natural gas; increased competition; further deregulation
or "unbundling" of the natural gas distribution industry; hedging
and market risk activities and other uncertainties, all of which are difficult
to predict and many of which are beyond the control of the Company. A discussion
of these risks and uncertainties may be found in the Company's Form 10-K for
the year ended September 30, 2001. Accordingly, while the Company believes these
forward-looking statements to be reasonable, there can be no assurance that
they will approximate actual experience or that the expectations derived from
them will be realized. Further, the Company undertakes no obligation to update
or revise any of its forward-looking statements whether as a result of new information,
future events or otherwise.
Weather and Seasonality
Our natural gas distribution business and irrigation sales business is seasonal and dependent upon weather conditions in our service areas. Natural gas sales to residential, commercial and public authority customers are affected by winter heating season requirements. This generally results in higher operating revenues and net income during the period from October through March of each year and lower operating revenues and either net losses or lower net income during the period from April through September of each year. Sales to industrial customers are much less weather sensitive. Sales to agricultural customers, who typically use natural gas to power irrigation pumps during the period from March through September, are affected by rainfall amounts and the price of natural gas. Weather, adjusted for service areas with weather normalized operations, for the three months ended December 31, 2001 was 11% warmer than normal and 29% warmer than weather in the corresponding period of the prior year.
The effects of weather that is above or below normal are partially offset in the Tennessee and Georgia jurisdictions served by the United Cities Gas Division and in the Kentucky jurisdiction served by the Western Kentucky Gas Division through weather normalization adjustments. The Georgia Public Service Commission, the Tennessee Regulatory Authority and the Kentucky Public Service Commission have approved weather normalization adjustments. The weather normalization adjustments, effective October through May each year in Georgia, and November through April each year in Tennessee and Kentucky, allow the United Cities Gas Division and Western Kentucky Gas Division to increase the base rate portion of customers' bills when weather is warmer than normal and decrease the base rate when weather is colder than normal. The net effect of the weather normalization adjustments was an increase in revenues of approximately $2.8 million for the three months ended December 31, 2001, as compared with a decrease of approximately $1.4 million for the three months ended December 31, 2000. Approximately 377,000 or 27 percent of our meters in service are located in Georgia, Tennessee and Kentucky. We did not have weather normalization adjustments in our other service areas during the three months ended December 31, 2001.
In July 2000, we entered into an agreement to purchase weather hedges for our Texas and Louisiana operations effective for the 2000-2001 heating season. The hedges were designed to help mitigate the effects of weather that was at least seven percent warmer than normal in both Texas and Louisiana while preserving any upside. The cost of the weather hedges was approximately $4.9 million which was amortized over the 2000-2001 heating season. The cost of the weather hedges was more than offset by the positive effects of colder weather on our gross profit.
In June 2001, we purchased a three year weather insurance policy with an option to cancel in the third year if we obtain weather protection in our rate structures. The policy is for our Texas and Louisiana operations and covers the entire heating season of October to March beginning with the 2001-2002 heating season. The cost of the three year policy was approximately $13.2 million which was prepaid and will be amortized over the appropriate heating seasons based on degree days. The insurance is designed to protect against weather that is at least seven percent warmer than normal. During the quarter ended December 31, 2001, we recognized $5.9 million in income and $1.9 million in amortization expense relating to this insurance policy.
We have historically hedged 20 percent of our gas supply through the use of our underground storage assets. For the 2001-2002 heating season, we covered approximately 64 percent of our anticipated flowing gas requirements through storage and futures and fixed forward contracts. This should provide protection to us and our customers against sharp increases in the price of natural gas during the 2001-2002 heating season.
Status of Pending Acquisition
In September 2001, we entered into a definitive agreement to acquire Mississippi Valley Gas Company, a privately held natural gas utility, for $150.0 million, consisting of $75.0 million cash and $75.0 million of Atmos common stock. In addition, we will assume outstanding debt of Mississippi Valley Gas, net of working capital, of approximately $45.0 million. Mississippi Valley Gas provides natural gas distribution service to more than 261,500 residential, commercial, industrial and other customers located primarily in the northern and central regions of Mississippi. The acquisition is subject to state and federal regulatory approval. It is anticipated that the acquisition will be completed in fiscal 2002.
For the three months ended December 31, 2001, net cash provided by operating activities totaled $56.6 million compared with net cash used by operating activities of $14.6 million for the three months ended December 31, 2000. The increase in net cash provided by operating activities from net cash used by operating activities was primarily the result of a smaller increase in accounts receivable, a decrease in cash held on deposit in margin accounts and a decrease in deferred gas costs partially offset by an increase in gas stored underground and decreases in net income, accounts payable and taxes payable. In addition, an increase in depreciation and amortization and deferred income taxes added to the increase in net cash provided by operating activities. These increases were offset by the reduction in the net change in our assets/liabilities from risk management activities. The decrease in net income was due primarily to higher operating expenses and interest expense. These higher expenses were partially offset by an increase in gas trading margin and miscellaneous income (expense).
For the three months ended December 31, 2001, net cash used in investing activities totaled $43.6 million compared with $13.0 million for the three months ended December 31, 2000. Major cash flows used in investing activities for the three months ended December 31, 2001 included capital expenditures of $28.0 million compared with $19.5 million for the three months ended December 31, 2000. The capital expenditures budget for fiscal 2002, excluding acquisitions, is expected to be in the range of $121.0 million to $125.0 million as compared with actual capital expenditures of $113.1 million for fiscal 2001. Budgeted capital projects for fiscal 2002 include expenditures for additional mains, services, meters and equipment. In fiscal 2002, we plan to complete the Mississippi Valley Gas Company acquisition for $75.0 million cash, $75.0 million of Atmos common stock and the assumption of approximately $45.0 million of long-term debt. Capital expenditures and acquisitions for fiscal 2002 are planned to be financed from internally generated funds and financing activities as discussed below. For the three months ended December 31, 2001, investing activities included $15.7 million for the acquisition of Kentucky-based market area storage and associated pipeline facility assets and the gas marketing assets of Innovative Gas Services, Inc. and common stock of Southern Resources, Inc. For the three months ended December 31, 2000, we received net proceeds of $6.6 million in connection with the sale of certain utility assets.
For the three months ended December 31, 2001, net cash used by financing activities totaled $15.4 million compared with net cash provided by financing activities of $25.8 million for the three months ended December 31, 2000. For the three-month period ended December 31, 2001, short-term debt increased $5.9 million compared with a decrease of $102.4 million for the three months ended December 31, 2000. The decrease for the three months ended December 31, 2000 was due to the net proceeds of approximately $142.0 million from the equity offering in December 2000 being used to reduce the amount of short-term debt outstanding. Repayments of long-term debt totaled $13.6 million for the three months ended December 31, 2001 compared with $7.9 million for the three months ended December 31, 2000. We paid $12.1 million in cash dividends during the three months ended December 31, 2001 compared with dividends of $9.3 million during the three months ended December 31, 2000. This reflects increases in the quarterly dividend rate and in the number of shares outstanding. During the three months ended December 31, 2001, we issued 235,971 shares of common stock.
The following table presents the number of shares issued for the three-month periods ended December 31, 2001 and 2000:
Three months ended
December 31
-----------------------
2001 2000
--------- ---------
Shares issued:
Employee Stock Ownership Plan 69,961 48,738
Direct Stock Purchase Plan 133,402 105,010
Outside Directors Stock-for-Fee Plan 577 605
Long-Term Incentive Plan 32,031 --
Equity Offering -- 6,741,500
--------- ----------
Total shares issued 235,971 6,895,853
========= ==========
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We believe that internally generated funds, our credit facilities, commercial paper program and access to the public debt and equity capital markets will provide necessary working capital and liquidity for capital expenditures and other cash needs for the remainder of fiscal 2002.
We have short-term committed credit facilities totaling $318.0 million. One short-term unsecured credit facility is for $300.0 million with an option to increase the amount by $100.0 million and serves as a backup liquidity facility for our commercial paper program. Our commercial paper is rated A-2 by Standard and Poor's and P-2 by Moody's. At December 31, 2001, $189.1 million of commercial paper was outstanding. We have a second facility in place for $18.0 million. At December 31, 2001, $18.0 million was outstanding under this credit facility. These credit facilities are negotiated at least annually and are used for working capital purposes.
Our Woodward Marketing subsidiary has an uncommitted demand credit facility for $125.0 million which is used for its non-regulated business. Atmos Energy Marketing, LLC, our wholly-owned subsidiary, is the sole guarantor of all amounts outstanding under this facility. At December 31, 2001, no amount was outstanding under this credit facility. Related letters of credit totaling $48.6 million reduced the amount available under this facility. This facility is used for working capital purposes.
We also have unsecured short-term uncommitted credit lines from two banks totaling $40.0 million. No amounts were outstanding under these credit facilities at December 31, 2001. The uncommitted lines are renewed or renegotiated at least annually with varying terms and we pay no fee for the availability of the lines. Borrowings under these lines are made on a when- and as-available basis at the discretion of the banks. These facilities are also used for working capital purposes.
In December 2001, we filed a shelf registration statement with the Securities and Exchange Commission to issue, from time to time, up to $600.0 million in new common stock and/or debt. In connection with this filing, we are also in the process of filing applications for approval to issue securities with five state utility commissions. Obtaining all the required state regulatory approvals is expected to take from three to six months. The registration statement was declared effective by the Securities and Exchange Commission on January 30, 2002. Once it is approved by the various state utility commissions, we will be authorized to "take securities off the shelf" and issue them to investors and lenders. The proceeds are planned to be used for general corporate purposes, including acquisitions, debt repayment and other business-related matters. The shelf registration statement will provide us with greater flexibility in our financing options.
The following tables provide information about contractual obligations and commercial commitments at December 31, 2001.
Payments Due by Period
---------------------------------------------------------------------
Less than After 5
Total 1 year 1-3 years 4-5 years years
--------- --------- --------- --------- ---------
(In thousands)
CONTRACTUAL OBLIGATIONS
Long Term Debt $ 699,470 $ 20,413 $ 36,774 $ 27,424 $ 614,859
Capital Lease Obligations 6,630 876 1,752 1,276 2,726
Operating Leases 66,467 9,250 16,713 15,624 24,880
--------- --------- --------- --------- ---------
Total Contractual
Obligations $ 772,567 $ 30,539 $ 55,239 $ 44,324 $ 642,465
========= ========= ========= ========= =========
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Payments Due by Period
---------------------------------------------------------------------
Less than After 5
Total 1 year 1-3 years 4-5 years years
--------- --------- --------- --------- ---------
(In thousands)
OTHER COMMERCIAL
COMMITMENTS
Lines of Credit $ 318,000 $ 318,000 $ -- $ -- $ --
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One short-term unsecured credit facility for $300.0 million included in the total lines of credit above serves as a backup liquidity facility for our commercial paper program. Any amounts outstanding on our commercial paper reduce the amount available under this facility.
We conduct our risk management activities through both our utility and non-regulated segments. The following table shows our risk management assets and liabilities by segment at December 31, 2001.
Utility Non-Regulated Total
--------- ------------- ---------
(In thousands)
Assets from risk management
activities, current $ -- $ 69,601 $ 69,601
Assets from risk management
activities, noncurrent -- 30,374 30,374
Liabilities from risk management
activities, current (25,314) (56,244) (81,558)
Liabilities from risk management
activities, noncurrent -- (9,521) (9,521)
--------- --------- ---------
Net assets (liabilities) $ (25,314) $ 34,210 $ 8,896
========= ========= =========
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In accordance with Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation", current period changes in the assets and liabilities from risk management activities are recorded as deferred gas costs on the condensed consolidated balance sheet as these costs will ultimately be recovered from ratepayers. Accordingly, there is no earnings impact as a result of the use of these financial instruments. Upon maturity, the contracts are recognized in purchased gas cost.
To conduct our risk management and trading activities, our non-regulated segment uses natural gas storage, transportation and requirements contracts, forwards, over-the-counter and exchange-traded options, futures and swap contracts.
The mark-to-market method is used to account for these activities, as prescribed in EITF Issue No. 98-10 and EITF Issue 00-17. Under these methods, the aforementioned contracts are reflected at fair value, inclusive of future servicing costs and valuation adjustments, with resulting unrealized gains and losses recorded as "Assets from risk management activities" and "Liabilities from risk management activities" on the condensed consolidated balance sheet. Current period changes in the assets and liabilities from risk management activities are recognized as net gains or losses on the condensed consolidated statement of income as gas trading margin. Changes in assets and liabilities from risk management activities result primarily from changes in valuation of the portfolio of contracts, maturity and settlement of contracts, and newly originated transactions.
Market prices are primarily used to value these transactions. In addition, a market price based model is used for valuing certain storage and transportation contracts. These values reflect management's best estimate considering various factors, including closing exchange and over-the-counter quotations, time value, and volatility factors underlying the contracts. The values are adjusted to reflect the potential impact of liquidating our position in an orderly manner over a reasonable time frame under present market conditions. Changes in market prices directly affect management's estimate of the fair value of these transactions.
Fair value of contracts at September 30, 2001 $ 28,349
Contracts realized/settled 10,568
Fair value of new contracts 3,623
Changes in fair value in valuation
techniques/assumptions --
Other changes in value (8,330)
--------
Fair value of contracts at December 31, 2001 $ 34,210
========
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The fair value of our non-regulated energy trading contracts for the quarter ending December 31, 2001, is segregated below, by time period and fair value source.
Fair Value of Contracts at December 31, 2001
----------------------------------------------------------------------
Maturity Maturity
Less than Maturity Maturity excess of Total Fair
1 year 1-3 years 4-5 years 5 years Value
---------- --------- --------- --------- -----------
(In thousands)
SOURCE OF FAIR VALUE
Prices actively quoted $ (40,066) $ (3,405) $ -- $ -- $ (43,471)
Prices provided by
other external sources 67,977 5,738 655 167 74,537
Prices based on models
and other valuation
methods (3,957) 6,995 106 -- 3,144
--------- -------- ------- ------- ---------
Total Fair Value $ 23,954 $ 9,328 $ 761 $ 167 $ 34,210
========= ======== ======= ======= =========
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RESULTS OF OPERATIONS
Three Months Ended December 31, 2001, Compared with Three Months Ended December 31, 2000
Operating revenues decreased by 39 percent to $271.3 million for the three months ended December 31, 2001 from $442.8 million for the three months ended December 31, 2000. The most significant factors contributing to the decrease in operating revenues were a 23 percent decrease in average sales price due to the decreased cost of gas and a 22 percent decrease in sales volumes due to warmer weather. During the quarter ended December 2001, temperatures were 29 percent warmer than in the corresponding quarter of the prior year and were 11 percent warmer than the 30-year normal for the quarter, adjusted for service areas with weather normalized operations. The total volume of gas sold for the three months ended December 31, 2001 was 41.0 billion cubic feet compared with 52.5 billion cubic feet for the three months ended December 31, 2000. However, the decrease in sales volumes was partially offset by the additional sales volumes related to the Louisiana Gas Service operations acquired in July 2001. The average sales price per Mcf sold decreased $1.89 or 23 percent to $6.33 primarily due to a decrease in the average cost of gas. The average cost of gas per Mcf sold decreased 37 percent to $3.95 for the three months ended December 31, 2001 from $6.29 for the three months ended December 31, 2000. However, the decrease in operating revenues was partially offset by increased revenues from the Louisiana Gas Service acquisition in July 2001 as well as the impact of rate increases in Colorado and West Texas.
Gross profit decreased slightly to $109.4 million for the three months ended December 31, 2001 from $109.9 million for the three months ended December 31, 2000. The decrease in gross profit was due to the decrease in volumes sold to weather sensitive customers mostly offset by the additional gross profit from the Louisiana Gas Service acquisition in July 2001 and the impact of rate increases discussed previously. Changes in the cost of gas do not directly affect gross profit because the fluctuations in gas prices are passed through to the customer.
On April 1, 2001, we completed our acquisition of the remaining 55 percent interest in Woodward Marketing, L.L.C. As a result of this acquisition, the revenues and expenses of Woodward Marketing are now shown on a consolidated basis. For the three months ended December 31, 2001, Woodward Marketing had income of $7.2 million in gas trading margin.
Operating expenses increased to $73.1 million for the three months ended December 31, 2001 from $61.0 million for the three months ended December 31, 2000. Operation and maintenance expense increased due primarily to the addition of $9.2 million relating to the Louisiana Gas Service acquisition in July 2001 and an increase of $3.2 million in pension costs. A decrease in the provision for doubtful accounts of $7.1 million partially offset this increase. Depreciation and amortization increased $4.7 million due to the addition of the assets from the Louisiana Gas Service acquisition in July 2001.
Operating income decreased 11 percent for the three months ended December 31, 2001 to $43.4 million from $48.9 million for the three months ended December 31, 2000. The decrease in operating income resulted primarily from the increase in operating expenses described above partially offset by income from our gas trading margin.
Miscellaneous income (expense) increased $7.8 million to $5.4 million for the three months ended December 31, 2001 compared to $(2.4) million for the three months ended December 31, 2000. This increase was due to income of $5.9 million recognized related to our weather insurance policy and an increase of $1.6 million in net recoveries related to our performance based-ratemaking mechanisms.
Interest expense increased $3.7 million, or 31 percent, for the three months ended December 31, 2001 compared with the three months ended December 31, 2000 due primarily to the interest expense on the $350.0 million debt offering in May 2001.
Net income decreased for the three months ended December 31, 2001 by $2.4 million to $20.6 million from $23.0 million for the three months ended December 31, 2000. This decrease in net income resulted primarily from the decrease in operating income discussed above and the increase in interest expense partially offset by an increase in miscellaneous income.
UTILITY AND NON-REGULATED OPERATING DATA
Our utility business is composed of our five regulated utility divisions: Atmos Energy Louisiana Gas Division, Energas Division, Greeley Gas Division, United Cities Gas Division, Western Kentucky Gas Division and Shared Services. The non-regulated business includes gas marketing and energy management services, operation of natural gas storage fields, construction and operation of electrical power generating plants and associated facilities and non-regulated industrial sales. The following table of operating statistics summarizes data of the utility and non-regulated segments for the three-month periods ended December 31, 2001 and 2000. For further information regarding operating results of the segments, see Note 5 of notes to condensed consolidated financial statements.
Three months ended
December 31
-----------------------------
2001 2000
----------- -----------
METERS IN SERVICE, end of period
Residential 1,249,414 977,410
Commercial 123,286 105,375
Public authority and other 7,359 7,428
Industrial (including agricultural) 13,152 14,277
----------- -----------
Total meters 1,393,211 1,104,490
=========== ===========
HEATING DEGREE DAYS
Actual (weighted average) 1,215 1,713
Percent of normal 89% 126%
SALES VOLUMES - MMcf (1)
Residential 22,832 28,813
Commercial 11,018 13,266
Public authority and other 1,999 2,883
Industrial (including agricultural) 5,108 7,585
----------- -----------
Total 40,957 52,547
Transportation volumes - MMcf (1) 16,068 15,498
----------- -----------
Total throughput - MMcf (1) 57,025 68,045
=========== ===========
OPERATING REVENUES (000's)
Gas sales revenues
Residential $ 157,928 $ 249,834
Commercial 68,596 110,628
Public authority and other 11,154 22,080
Industrial (including agricultural) 21,621 49,320
----------- -----------
Total gas sales revenues 259,299 431,862
Transportation revenues 8,799 6,738
Other revenues 3,244 4,190
----------- -----------
Total operating revenues $ 271,342 $ 442,790
=========== ===========
Cost of gas $ 161,977 $ 330,820
=========== ===========
Average gas sales revenues per Mcf $ 6.33 $ 8.22
Average transportation revenue per Mcf $ .55 $ .43
Average cost of gas per Mcf sold $ 3.95 $ 6.29
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(1) Volumes are reported as metered in million cubic feet (MMcf).
There have been no material changes from the information provided in Item 7A of our Annual Report on Form 10-K for the year ended September 30, 2001.
Item 1. Legal Proceedings
See Note 2 of notes to condensed consolidated financial statements herein for a description of legal proceedings.
Item 5. Other Information
On February 13, 2002, the Company and EquiServe Trust Company, N.A. as Rights Agent executed the Second Amendment to the Rights Agreement, dated as of November 12, 1997, between the Company and the Rights Agent. The purpose of this amendment was to convert the Agreement from a full common share rights plan to a fractional common share rights plan.
The amended Agreement provides that, under certain circumstances, each right entitles the registered holder to purchase from the Company one-tenth of one share of common stock at a purchase price of $8.00 per one-tenth of a share, subject to adjustment. Under the Agreement before it was amended, under these circumstances each right entitled the holder to purchase one share of common stock at a purchase price of $80 per share, subject to adjustment. The amendment to the Agreement does not impact the dilutive effect of the Rights Agreement. For example, the Agreement still provides that upon the occurrence of certain events, a holder would be entitled to purchase $160 worth of common stock for a purchase price of $80.
This description of the Second Amendment to Rights Agreement is qualified in its entirety by reference to the Second Amendment, a copy of which is attached hereto as Exhibit 4.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits required by Item 601 of Regulation S-K and filed as part of this report is set forth in the Exhibits Index, which immediately precedes such exhibits.
(b) Reports on Form 8-K
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 14, 2002 By: /s/ F.E. MEISENHEIMER
---------------------
F.E. Meisenheimer
Vice President and Controller
(Chief Accounting Officer
and duly authorized signatory)
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Exhibit
Number Description
------- -----------
4 Second Amendment to Rights Agreement dated as of February 13, 2002, between
the Company and EquiServe Trust Company, N.A., as Rights Agent
10.1(a) Seventh Amendment to Credit Agreement, effective as of September
30, 2001, among Woodward Marketing, L.L.C., Bank of America, N.A.,
BNP Paribas and Atmos Energy Marketing, LLC
10.1(b) Eighth Amendment to Credit Agreement, effective as of October 31,
2001, among Woodward Marketing, L.L.C., Bank of America, N.A., BNP
Paribas and Atmos Energy Marketing, LLC
10.2(a) Credit Agreement, dated to be effective as of December 1, 2001,
among Woodward Marketing, L.L.C., Fortis Capital Corp. and BNP
Paribas
10.2(b) Guaranty, effective as of December 1, 2001, by Atmos Energy
Marketing, LLC, in favor of Fortis Capital Corp.
10.2(c) First Amendment to Guaranty, effective as of January 31, 2002,
among Atmos Energy Marketing, LLC and Fortis Capital Corp.
12 Computation of ratio of earnings to fixed charges
15 Letter regarding unaudited interim financial information
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This Second Amendment to Rights Agreement (this "Second Amendment") is entered into by and among Atmos Energy Corporation, a Texas and Virginia corporation (the "Company"), and EquiServe Trust Company, N.A., a national association with its principal place of business in Massachusetts and the successor to the stock transfer business of Fleet National Bank (formerly known as BankBoston, N.A) (the "Rights Agent"), on this 13th day of February 2002, at the direction of the Company.
WHEREAS, the Company and the Rights Agent have entered into that certain Rights Agreement, dated November 12, 1997 (the "Rights Agreement"); and
WHEREAS, the Company and the Rights Agent have entered into that that certain First Amendment, dated as of August 11, 1999, to the Rights Agreement; and
WHEREAS, on February 12, 2002, the Board of Directors of the Company determined to amend the Rights Agreement and directed the Rights Agent to enter into this Second Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto do hereby agree as follows:
1. The Rights Agreement is hereby amended as follows:
(a) All references in the Rights Agreement to BankBoston, N.A. shall hereafter be deemed to be references to its successor with respect to this Rights Agreement, EquiServe Trust Company, N.A.
(b) The recital of the Rights Agreement is hereby amended to read in its entirety as follows:
"WHEREAS, on November 12, 1997 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared a
dividend distribution of one Right (as hereinafter defined) for each share of
common stock, no par value, of the Company (the "Common Stock") outstanding
at the close of business on May 10, 1998 (the "Record Date"), and
has authorized the issuance of one Right (as such number may hereinafter be
adjusted pursuant to the provisions of
Section 11(p) hereof) for each share of Common Stock of the Company issued between
the Record Date (whether originally issued or delivered from the Company's treasury)
and the Distribution Date (as hereinafter defined), each Right initially representing
the right to purchase one share of Common Stock, upon the terms and subject
to the conditions hereinafter set forth (the "Rights");
WHEREAS, on August 11, 1999 the Company and the Rights Agent entered into that certain First Amendment to this Agreement; and
WHEREAS, the Board of Directors of the Company has authorized the Company to enter into that certain Second Amendment to the Rights Agreement, which amendment shall provide that each Right shall hereafter represent the right to purchase one-tenth of one share of Common Stock, upon the terms and subject to the conditions hereinafter set forth, and such other amendments as are provided for in that certain Second Amendment."
(c) Section 1(b.1) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(b.1) "Adjusted Exercise Price" shall have the meaning set forth in Section 11(a)(ii) hereof."
(d) The second sentence of Section 4(a) of the Rights Agreement is hereby amended to read in its entirety as follows:
"Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated as of the Record Date and on their face shall entitle the holders thereof to purchase such number of one-tenths of a share of Common Stock as shall be set forth therein at the price set forth therein (such exercise price per one-tenth of a share, the "Purchase Price"), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein."
(e) Section 7(a) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(a) Subject to Section 7(e) hereof, at any time after the Distribution Date, the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein including, without limitation, the restrictions on exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a) hereof) in whole or in part upon surrender of the Rights Certificate, with the form of election to purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of one-tenths of a share of Common Stock (or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercisable, at or prior to the earlier of (i) 5:00 P.M., Boston, Massachusetts time, on May 10, 2008 or such later date as may be established by the Board of Directors prior to the expiration of the Rights (such date, as it may be extended by the Board, the "Final Expiration Date"), or (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the earlier of (i) and (ii) being herein referred to as the "Expiration Date")."
(f) Section 7(b) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(b) The Purchase Price for each one-tenth of a share of Common Stock pursuant to the exercise of a Right shall initially be $8.00 (or the equivalent of $80 per share of Common Stock), and shall be subject to adjustment from time to time as provided in Section 11 and Section 13(a) hereof and shall be payable in accordance with paragraph (c) below."
(g) The first two sentences of Section 7(c) of the Rights Agreement are hereby amended to read in their entirety as follows:
"(c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price (or, after the occurrence of a Section 11(a)(ii) Event or a Section 13 Event, the Adjusted Exercise Price) for the number of one-tenths of a share of Common Stock (or other shares, securities, cash or other assets, as the case may be) to be purchased as set forth below and an amount equal to any applicable transfer tax, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer agent of the shares of Common Stock (or make available, if the Rights Agent is the transfer agent for such shares) certificates for the total number of shares of Common Stock to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) if the Company shall have elected to deposit the total number of shares of Common Stock issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts representing such number of shares of Common Stock as are to be purchased (in which case certificates for the shares of Common Stock represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company will direct the depositary agent to comply with such request, (ii) requisition from the Company the amount of cash, if any, to be paid in lieu of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price or the Adjusted Exercise Price (as such amounts may be reduced pursuant to Section 11(a)(iii) hereof) shall be made in cash or by certified bank check or bank draft payable to the order of the Company. "
(h) Section 9(a) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(a) The Company covenants and agrees that it
will cause to be reserved and kept available out of its
authorized and unissued shares of Common Stock and/or other
securities or out of its authorized and issued shares held in
its treasury, the number of shares of Common Stock and/or
other securities that, as provided in this Agreement, will be
sufficient to permit the exercise in full of all outstanding
Rights after the Distribution Date but prior to a Section
11(a)(ii) Event."
(i) Section 9(d) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all shares of Common Stock and/or other securities delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price for each one-tenth of a share of Common Stock to be purchased or, after a Section 11(a)(ii) Event, the Adjusted Exercise Price), be duly and validly authorized and issued and fully paid and nonassessable."
(j) The first sentence of Section 10 of the Rights Agreement is hereby amended to read in its entirety as follows:
(k) The first sentence of Section 11(a)(i) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Common Stock payable in shares of Common Stock, (B) subdivide the outstanding Common Stock, (C) combine the outstanding Common Stock into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Common Stock or capital stock, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price or, if applicable, the Adjusted Exercise Price, then in effect, the aggregate number and kind of shares of Common Stock, or capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Common Stock transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that if the record date for any such dividend, subdivision, combination or reclassification shall occur prior to the Distribution Date, the Company shall make an appropriate adjustment to the Purchase Price (taking into account any additional Rights which may be issued as a result of such dividend, subdivision, combination or reclassification), in lieu of adjusting (as described above) the number of shares of Common Stock (or other capital shares, as the case may be) issuable upon exercise of the Rights."
(l) Section 11(a)(ii) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(ii) In the event (A) any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan), alone or together with its Affiliates and Associates, shall, at any time after the Rights Dividend Declaration Date, become an Acquiring Person, unless the event causing the 15% threshold to be crossed is a transaction set forth in Section 13(a) hereof, or is an acquisition of shares of Common Stock pursuant to a tender offer or an exchange offer for all outstanding shares of Common Stock at a price and on terms determined by at least a majority of the members of the Board of Directors who are not officers of the Company and who are not representatives, nominees, Affiliates or Associates of an Acquiring Person, after receiving advice from one or more investment banking firms, to be (i) at a price which is fair to shareholders (taking into account all factors which such members of the Board deem relevant, including, without limitation, prices which could reasonably be achieved if the Company or its assets were sold on an orderly basis designed to realize maximum value) and (ii) otherwise in the best interests of the Company and its shareholders (a "Qualified Offer"), or (B) the Board of Directors of the Company shall declare any Person to be an Adverse Person, upon a determination that such Person, alone or together with its Affiliates and Associates, has, at any time after the Rights Dividend Declaration Date, become the Beneficial Owner of an amount of Common Stock which the Board of Directors determines to be substantial (which amount shall in no event be less than 10% of the shares of Common Stock then outstanding) and a determination by at least a majority of the Board of Directors who are not officers of the Company, after reasonable inquiry and investigation, including consultation with such persons as such directors shall deem appropriate, that (i) such Beneficial Ownership by such Persons is intended to cause the Company to repurchase the Common Stock beneficially owned by such Person or to cause pressure on the Company to take action or enter into a transaction or series of transactions intended to provide such Person with short-term financial gain under circumstances where the Board of Directors determines that the best long-term interests of the Company and its shareholders would not be served by taking such action or entering into such transactions or series of transactions at that time or (ii) such Beneficial Ownership is causing or reasonably likely to cause a material adverse impact (including, but not limited to, causing, or being reasonably likely to cause, the Company to become a subsidiary of a registered holding company under the Public Utility Holding Company Act of 1935, as amended) on the business or prospects of the Company, then, promptly following the occurrence of such event, proper provision shall be made so that each holder of a Right (except as provided below and in Section 7(e) hereof) shall thereafter have the right to receive, upon exercise thereof by payment (in lieu of the payment required to be made pursuant to Section 7 to exercise a Right) of an amount equal to the product of (x) the number of one-tenths of a share of Common Stock that would otherwise be issuable upon exercise of a Right after the Distribution Date if no Section 11(a)(ii) Event or Section 13 Event had occurred and (y) ten times the then current Purchase Price for one-tenth of a share of Common Stock that would have been payable in accordance with the terms of this Agreement if such Right had been exercised immediately prior to the first occurrence of a Section 11(a)(ii) Event or Section 13 Event, such number of whole shares of Common Stock of the Company (in lieu of the number of one-tenths of a share of Common Stock for which such Right would have been exercisable after the Distribution Date and prior to the first occurrence of a Section 11(a)(ii) Event or Section 13 Event) as shall equal the result obtained by (x) multiplying the then-current Purchase Price for one-tenth of a share of Common Stock immediately prior to the first occurrence of a Section 11(a)(ii) Event or Section 13 Event by ten times the number of one-tenths of a share of Common Stock for which a Right would have been exercisable after the Distribution Date and immediately prior to the first occurrence of a Section 11(a)(ii) Event or Section 13 Event and (y) dividing that product by 50% of the Current Market Price (determined pursuant to Section 11(d) hereof) per share of Common Stock on the date of such first occurrence (such number of shares, the "Adjustment Shares"). The exercise price of a Right determined pursuant to the immediately preceding sentence at the time of the exercise of the Right, after giving effect to any adjustments in the Purchase Price pursuant to this Section 11 but subject to Section 11(a)(iii), is referred to in this Agreement as the "Adjusted Exercise Price.""
(m) The first two sentences of Section 11(a)(iii) of the Rights Agreement are hereby amended to read in their entirety as follows:
"(iii) In the event that the number of shares of Common Stock which are authorized by the Company's Articles of Incorporation, but which are not outstanding or reserved for issuance for purposes other than upon exercise of the Rights, are not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this Section 11(a), the Company shall: (A) determine the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value"), and (B) with respect to each Right (subject to Section 7(e) hereof), make adequate provision to substitute for the Adjustment Shares, upon the exercise of a Right and payment of the Adjusted Exercise Price, (1) cash, (2) a reduction in the Adjusted Exercise Price, (3) Common Stock or other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock which the Board has deemed to have essentially the same value or economic rights as shares of Common Stock (such shares of preferred stock being referred to as "Common Stock Equivalents")), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Value (less the amount of any reduction in the Adjusted Exercise Price), where such aggregate value has been determined by the Board based upon the advice of a nationally recognized investment banking firm selected by the Board; provided, however, that if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Section 11(a)(ii) Event and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Adjusted Exercise Price, shares of Common Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. For purposes of the preceding sentence, the term "Spread" shall mean the excess of (i) the Current Value over (ii) the Adjusted Exercise Price."
(n) Section 11(f) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(f) If as a result of an adjustment made pursuant to Section 11(a)(ii)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Right and the Purchase Price thereof shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Sections 11(a), (b),
(c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7,
9, 10, 13 and 14 hereof with respect to the Common Stock shall apply on like
terms to any such other shares; provided, however, that the Company shall not
be liable for its inability to reserve and keep available for issuance upon
exercise of the Rights pursuant to Section
11(a)(ii) a number of shares of Common Stock greater than the number then authorized
by the Company's Articles of Incorporation but not outstanding or reserved for
other purposes."
(o) Section 11(h) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one-tenths of a share of Common Stock (calculated to the nearest one ten-thousandth) obtained by (i) multiplying (x) the number of one-tenths of a share covered by a Right immediately prior to this adjustment, by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price."
(p) The first two sentences of Section 11(i) of the Rights Agreement are hereby amended to read in their entirety as follows:
"(i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of one-tenths of a share of Common Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of one-tenths of a share of Common Stock for which a Right was exercisable immediately prior to such adjustment."
(q) Section 11(j) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(j) Irrespective of any adjustment or change in the Purchase Price or the number of one-tenths of a share of Common Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per one-tenth of a share and the number of one-tenths of a share which were expressed in the initial Rights Certificates issued hereunder."
"(k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then stated value, if any, of the number of one-tenths of a share of Common Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable such number of one-tenths of a share of Common Stock at such adjusted Purchase Price."
(s) Section 13(a) of the Rights Agreement is hereby amended to read in its entirety as follows:
"(a) In the event that, following the Stock Acquisition Date, directly
or indirectly, (x) the Company shall consolidate with, or merge with and into,
any other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) here-of), and the Company shall not be the continuing
or surviving corporation of such consolidation or merger, (y) any Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof) shall consolidate with, or merge with or into, the Company, and
the Company shall be the continuing or surviving corporation of such consolidation
or merger and, in connection with such consolidation or merger, all or part
of the outstanding shares of Common Stock shall be changed into or exchanged
for stock or other securities of any other Person or cash or any other property,
or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries
shall sell or otherwise transfer), in one transaction or a series of related
transactions, assets, cash flow or earning power aggregating more than 50% of
the assets, cash flow or earning power of the Company and its Subsidiaries (taken
as a whole) to any Person or Persons (other than the Company or any Subsidiary
of the Company in one or more transactions each of which complies with Section
11(o) hereof), then, and in each such case (except as may be contemplated by
Section 13(d) hereof), proper provision shall be made so that: (i) each holder
of a Right, except as provided in Section 7(e) hereof, shall thereafter have
the right to receive, upon the exercise thereof at the then current Adjusted
Exercise Price in accordance with the terms of this Agreement, such number of
validly authorized and issued, fully paid, non-assessable and freely tradeable
shares of Common Stock of the Principal Party (as such term is hereinafter defined),
not subject to any liens, encumbrances, rights of first refusal or other adverse
claims, as shall be equal to the result obtained by (1) multiplying the then
current Adjusted Exercise Price by the number of one-tenths of a share of Common
Stock for which a Right is exercisable immediately prior to the first occurrence
of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to
the first occurrence of a Section 13 Event, multiplying the number of such one-tenths
of a share for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event by the Adjusted Exercise Price), and
dividing that product by (2) 50% of the Current Market Price (determined pursuant
to Section
11(d) hereof) per share of the Common Stock of such Principal Party on the date
of consummation of such Section 13 Event;
(ii) such Principal Party shall thereafter be liable for, and shall assume,
by virtue of such Section 13 Event, all the obligations and duties of the Company
pursuant to this Agreement; (iii) the term "Company" shall thereafter
be deemed to refer to such Principal Party, it being specifically intended that
the provisions of Section 11 hereof shall apply only to such Principal Party
following the first occurrence of a Section 13 Event; (iv) such Principal Party
shall take such steps (including, but not limited to, the reservation of a sufficient
number of shares of its Common Stock) in connection with the consummation of
any such transaction as may be necessary to assure that the provisions hereof
shall thereafter be applicable, as nearly as reasonably may be,