UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 1-10042 ATMOS ENERGY CORPORATION (Exact name of registrant as specified in its charter) TEXAS AND VIRGINIA 75-1743247 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1800 Three Lincoln Centre 5430 LBJ Freeway, Dallas, Texas 75240 (Address of principal executive offices) (Zip Code) (972) 934-9227 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares outstanding of each of the issuer's classes of common stock, as of February 1, 2000. Class Shares Outstanding ----- ------------------ No Par Value 31,532,276 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) December 31, September 30, 1999 1999 ------------- ------------- ASSETS Property, plant and equipment $1,565,924 $1,549,258 Less accum. depreciation and amort. 601,166 583,476 ---------- ---------- Net property, plant and equipment 964,758 965,782 Current assets Cash and cash equivalents 25,169 8,585 Accounts receivable, net 163,653 70,564 Inventories of supplies and mdse. 7,902 8,209 Gas stored underground 54,936 44,653 Prepayments 2,783 3,142 ---------- ---------- Total current assets 254,443 135,153 Deferred charges and other assets 134,934 129,602 ---------- ---------- $1,354,135 $1,230,537 LIABILITIES AND SHAREHOLDERS' EQUITY ========== ========== Shareholders' equity Common stock $ 157 $ 156 Additional paid-in capital 298,406 293,359 Retained earnings 88,630 83,231 Accumulated other comprehensive income 2,362 917 ---------- ---------- Total shareholders' equity 389,555 377,663 Long-term debt 372,815 377,483 ---------- ---------- Total capitalization 762,370 755,146 Current liabilities Current maturities of long-term debt 15,519 17,848 Short-term debt 249,386 168,304 Accounts payable 95,040 64,167 Taxes payable 529 848 Customers' deposits 8,369 9,657 Other current liabilities 23,230 25,951 ---------- ---------- Total current liabilities 392,073 286,775 Deferred income taxes 121,944 112,610 Deferred credits and other liabilities 77,748 76,006 ---------- ---------- $1,354,135 $1,230,537 ========== ========== See accompanying notes to condensed consolidated financial statements. ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data) Three months ended December 31, ------------------------------- 1999 1998 -------- -------- Operating revenues $224,458 $210,227 Purchased gas cost 134,908 119,019 -------- -------- Gross profit 89,550 91,208 Operating expenses Operation 33,082 35,878 Maintenance 2,342 2,671 Depreciation and amortization 16,500 13,600 Taxes, other than income 7,485 7,371 -------- -------- Total operating expenses 59,409 59,520 -------- -------- Operating income 30,141 31,688 Other income 3,958 1,720 Interest charges, net 11,217 9,073 -------- -------- Income before income taxes 22,882 24,335 Income taxes 8,558 8,955 -------- -------- Net income $ 14,324 $ 15,380 ======== ======== Basic net income per share $ .46 $ .51 ======== ======== Diluted net income per share $ .46 $ .50 ======== ======== Cash dividends per share $ .285 $ .275 ======== ======== Weighted average shares outstanding: Basic 31,122 30,273 ======== ======== Diluted 31,339 30,516 ======== ======== See accompanying notes to condensed consolidated financial statements. ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Three months ended December 31, -------------------- 1999 1998 -------- -------- Cash Flows From Operating Activities Net income $14,324 $ 15,380 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization: Charged to depreciation and amortization 16,500 13,600 Charged to other accounts 1,151 1,020 Deferred income taxes 8,511 2,180 Net change in operating assets and liabilities (77,483) (53,027) -------- -------- Net cash used by operating activities (36,997) (20,847) Cash Flows From Investing Activities Capital expenditures (17,472) (19,900) Retirements of property, plant and equipment 845 (1,064) -------- -------- Net cash used in investing activities (16,627) (20,964) Cash Flows From Financing Activities Net increase in short-term debt 81,082 101,594 Cash dividends paid (8,925) (8,392) Repayment of long-term debt (6,997) (47,944) Issuance of common stock 5,048 6,538 -------- -------- Net cash provided by financing activities 70,208 51,796 -------- -------- Net increase in cash and cash equivalents 16,584 9,985 Cash and cash equivalents at beginning of period 8,585 4,735 -------- -------- Cash and cash equivalents at end of period $25,169 $ 14,720 ======== ======== See accompanying notes to condensed consolidated financial statements. ATMOS ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) DECEMBER 31, 1999 1. Unaudited interim financial information In the opinion of management, all material adjustments necessary for a fair presentation have been made to the unaudited interim period financial statements. Such adjustments consisted only of normal recurring accruals. Because of seasonal and other factors, the results of operations for the three month period ended December 31, 1999 are not indicative of expected results of operations for the year ending September 30, 2000. 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 ("Atmos" or the "Company") in its 1999 Annual Report on Form 10-K. Common stock - As of December 31, 1999, the Company had 100,000,000 shares of common stock, no par value (stated at $.005 per share), authorized and 31,489,280 shares outstanding. At September 30, 1999, the Company had 31,247,800 shares outstanding. Comprehensive income - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", the Company is required to report comprehensive income and its components (revenues, expenses, gains and losses) in any complete presentation of general purpose financial statements. Comprehensive income includes all changes, except those resulting from investments by owners and distribu tions to owners, in the equity of a business enterprise from transactions and other events including, as applicable, foreign- currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. The following table presents the components of comprehensive income, net of related tax, for the three-month period ended December 31, 1999. Three months ended December 31,1999 -------------- (In thousands) Net income $14,324 Unrealized holding gains on investments 1,445 ------- Comprehensive income $15,769 ======= The only component of accumulated other comprehensive income, net of related tax, at December 31, 1999, relates to unrealized gains and losses associated with certain available for sale investments. Total accumulated other comprehensive income at December 31, 1999, was $2.4 million. 2. Rates The Company's ratemaking activity over the three-year period ended September 30, 1999 was discussed in Note 3 of notes to consolidated financial statements in the Company's Form 10-K for the year ended September 30, 1999. New developments in ratemaking activity since September 30, 1999 are discussed below. In May 1999, the Western Kentucky Division requested from th e Kentucky Public Service Commission ("KPSC") an increase in revenues of approximately $14.1 million, a weather normalization adjustment and changes in rate design to shift a portion of revenues from commodity charges to fixed rates. In December 1999, the KPSC granted an increase in annual revenues of approximately $9.9 million to the Western Kentucky Division. The new rates were effective for services rendered on or after December 21, 1999. In addition, the KPSC approved a five-year pilot program for weather normalization beginning in November 2000. This program will be similar to the Company's program in Georgia and Tennessee and will be in effect from November through April. The Western Kentucky Division serves approximately 180,000 customers in Kentucky. In August 1999, the Energas Division filed rate cases in its West Texas System cities and Amarillo, Texas, requesting rate increases of approximately $8.8 million and $4.4 million, respectively. In December 1999, the City of Amarillo, Texas, granted an increase in annual revenues of approximately $2.05 million in base rates plus an increase of $.1 million in service charges to the Energas Division. The new rates became effective for bills rendered on or after January 1, 2000. The increase in service charges allows the Energas Division to more nearly recover the actual cost of service calls. In addition, rate design was restructured to reduce the impact of warmer than normal weather and a zero-based gas cost adjustment was implemented to position the Energas Division for possible future deregulation. If the Company and the West Texas System cities cannot agree on the amount of a rate increase, the Company must appeal to the Railroad Commission of Texas, with a final resolution expected in September 2000. In January 2000, the Company requested an increase of approximately $48,000 in the environs area outside the city limits of Amarillo and will likewise request an increase of approximately $1.0 million in the environs of the West Texas System cities when that case is settled. Rates in areas outside the city limits in Texas are subject to the jurisdiction of the Railroad Commission of Texas. At this time, management cannot predict the outcome of this rate proceeding. 3. Contingencies Litigation Greeley Division In Colorado, the Greeley Division is a defendant in several lawsuits filed as a result of a fire in a building in Steamboat Springs, Colorado on February 3, 1994. The plaintiffs claimed that the fire resulted from a leak in a severed gas service line owned by the Greeley Division. On January 12, 1996, the jury awarded the plaintiffs approximately $2.5 million in compensatory damages and approximately $2.5 million in punitive damages. The jury assessed the Company with liability for all of the damages awarded. The Company appealed the judgment to the Colorado Court of Appeals, which reversed the trial court verdict and ordered a new trial. The Colorado Supreme Court upheld the Court of Appeals reversal and order for a new trial. As a result of mediation, a settlement was reached with five of the claimants, leaving only three remaining claimants with aggregate claims of approximately $2 million. The Company does not expect the final outcome of this case to have a material adverse effect on the financial condition, the results of operations or the cash flows of the Company because the Company believes it has adequate insurance and reserves to cover any damages that may ultimately be awarded. 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 the Company and the 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 have been inaccurate and that the defendants have 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 has been brought to recover billions of dollars in revenues that the defendants have allegedly unlawfully diverted from the plaintiffs to themselves. Since the filing of the petition, this case has been removed to the United States District Court in Wichita, Kansas, where there are numerous and various motions pending, including a request for remand by the plaintiffs as well as a notice filed to consolidate this case with other similar pending litigation in federal court in Wyoming in which the Company is also a defendant along with over 200 other defendants, the case of Jack J. Grynberg, on behalf of the United States of America. The Company believes that the plaintiffs' claims are lacking in merit and intends to vigorously defend this action. However, the Company cannot assess, at this time, the likelihood of whether or not the plaintiffs may prevail on any one or more of their asserted claims. In any event, the Company does not expect the final outcome of this case to have a material adverse effect on the financial condition, the results of operations or the net cash flows of the Company because the Company believes that it has adequate reserves to cover any damages that may ultimately be awarded. The Company is a party to other litigation matters and claims that have arisen out of the ordinary business of the Company. While the results of these litigation matters and claims cannot be predicted with certainty, the Company does not believe the final outcome of such litigation and claims will have a material adverse effect on the financial condition, the results of operations or the cash flows of the Company because the Company believes that it has adequate insurance and reserves to cover any damages that may ultimately be awarded. Guarantees The Company's wholly-owned subsidiary, Atmos Energy Marketing, LLC ("AEM"), and Woodward Marketing, Inc. ("WMI"), sole members of Woodward Marketing, LLC ("WMLLC"), act as guarantors of up to $12.5 million of balances outstanding under a $30.0 million bank credit facility for WMLLC. AEM guarantees the payment of up to approximately $5.6 million of borrowings under this facility. At December 31, 1999, $14.6 million was outstanding under this credit facility. AEM and WMI also act as joint and several guarantors on payables of WMLLC up to $40.0 million of natural gas purchases and transportation services from suppliers. WMLLC payable balances outstanding that were subject to these guarantees amounted to $31.5 million at December 31, 1999. Environmental Matters The United Cities Division is the owner or previous owner of manufactured gas plant sites in Keokuk, Iowa; 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 the Company was an acceptable and satisfactory process at the time such operations were being conducted. Under current environmental protection laws and regulations, the Company may be responsible for response actions with respect to such materials, if response actions are necessary. As of December 31, 1999, the Company had accrued and deferred for recovery $1.1 million, including $258,000 that was incurred for an insurance recoverability study, and $750,000 for the investigations of the Johnson City and Bristol, Tennessee and Hannibal, Missouri sites. As of December 31, 1999, the Company has incurred costs of approximately $492,000 for these sites. Iowa sites In June 1995, United Cities Gas Company ("UCGC") entered into an agreement to pay $1.8 million to Union Electric Company, now Ameren, whereby Union Electric agreed to assume responsibility for UCGC's continuing investigation and environmental response action obligations as outlined in the feasibility study related to a former manufactured gas plant in Keokuk. The $1.8 million was paid in five annual installments, with the last installment being paid in July 1999. In a rate case effective June 1, 1996, UCGC began collecting increased rates, which included a 10-year amortization of the $1.8 million payment to Union Electric. Tennessee sites UCGC and the Tennessee Department of Environment and Conservation entered into a consent order effective January 23, 1997, for the purpose of facilitating the investigation, removal and remediation of the Johnson City site. UCGC began the implementation of the consent order in the first quarter of 1997, which continued through December 31, 1999. The Company is unaware of any information that suggests the Bristol site would give rise to a present health or environmental risk as a result of the manufactured gas process or that any response action will be necessary. The Tennessee Regulatory Authority granted UCGC permission to defer, until its next rate case, all costs incurred in Tennessee in connection with state and federally mandated environmental control requirements. Missouri sites On July 22, 1998, Atmos entered into an Abatement Order on Consent with the Missouri Department of Natural Resources addressing the former manufactured gas plant located in Hannibal, Missouri. Atmos, through its United Cities Division, agreed in the order to perform a removal action, a subsequent site evaluation and to reimburse the response costs incurred by the state of Missouri in connection with the property. The removal action was conducted and completed in August 1998 and the site evaluation fieldwork was conducted in August 1999. On March 9, 1999, the Missouri Public Service Commission issued an order authorizing Atmos to defer the costs associated with this site until the next rate increase, which must be proposed before March 9, 2001. Kansas sites Atmos is currently conducting investigation and remediation activities pursuant to Consent Orders between the Kansas Department of Health and Environment ("KDHE") and UCGC. The Orders provide for the investigation and remediation of mercury contamination at gas pipeline sites, which utilize or formerly utilized mercury meter equipment in Kansas. As of December 31, 1999, the Company had identified approximately 720 sites where mercury may have been used and had incurred $100,000 for recovery. In addition, based upon available current information, the Company accrued and deferred for recovery an additional $280,000 for the investigation of these sites. The Kansas Corporation Commission has authorized the Company to defer these costs and seek recovery in a future rate case. The Company is a party to other environmental matters and claims that arise out of the ordinary business of the Company. While the ultimate results of response actions to these environmental matters and claims cannot be predicted with certainty, the Company does not believe the final outcome of such response actions will have a material adverse effect on the financial condition, the results of operations or the cash flows of the Company because the Company believes 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. 4. Short-term debt At December 31, 1999, short-term debt was composed of $124.4 million of commercial paper and $125.0 million outstanding under bank credit facilities. The Company has two short-term committed credit facilities. One short-term unsecured credit facility is for $250.0 million with $125.0 million outstanding at December 31, 1999. A second facility is for $12.0 million. No amounts were outstanding under this facility at December 31, 1999. The Company also has unsecured short-term uncommitted credit lines totaling $74.0 million. No borrowings were outstanding under these lines at December 31, 1999. The Company implemented a $250.0 million commercial paper program in October 1998. It is supported by the $250.0 million committed line of credit described above. The Company's commercial paper is rated A-2 by Standard and Poor's and P-2 by Moody's. 5. Statements of cash flows Supplemental disclosures of cash flow information for the three-month periods ended December 31, 1999 and 1998 are presented below. Three months ended December 31, --------------------- 1999 1998 -------- ------ (In thousands) Cash paid (received) for Interest $12,993 $12,275 Income taxes (116) 3,983 6. Earnings per share Basic earnings per share has been computed by dividing net income available to common stockholders 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 available to common stockholders 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, ---------------------- 1999 1998 ------ ------ Weighted average common shares - basic 31,122 30,273 Effect of dilutive securities: Restricted stock 207 228 Stock options 10 15 ------ ------ Weighted average common shares - assuming dilution 31,339 30,516 ====== ====== 7. Segment Information In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", the Company has identified the following three segments: Utility, Propane and Energy Services. For a more complete description of these segments, please refer to Note 1 of notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. Summarized financial information concerning the Company's reportable segments for the three months ended December 31, 1999 and 1998 is shown in the following table: Energy Utility Propane Services Total ---------- ------- -------- -------- (In thousands) As of and for the three months ended December 31, 1999: - ------------------- Operating revenues $ 209,295 $ 7,839 $ 8,791 $ 225,925 Intersegment revenues 596 - 871 1,467 Net income 11,104 422 2,798 14,324 Total assets 1,279,138 15,897 75,659 1,370,694 Energy Utility Propane Services Total ---------- ------- -------- -------- As of and for the (In thousands) three months ended December 31, 1998: - ------------------- Operating revenues $ 196,982 $ 7,295 $ 6,414 $ 210,691 Intersegment revenues 464 - - 464 Net income 14,372 410 598 15,380 Total assets 1,168,866 22,867 68,876 1,260,609 The following table presents a reconciliation of the operating revenues to total consolidated revenues for the three months ended December 31, 1999 and 1998. Three months ended December 31, ------------------- 1999 1998 -------- -------- (In thousands) Total revenues for reportable segments $225,925 $210,691 Elimination of intersegment revenues (1,467) (464) -------- -------- Total operating revenues $224,458 $210,227 ======== ======== A reconciliation of total assets for the reportable segments to total consolidated assets for December 31, 1999 and 1998 is presented below. December 31, ---------------------- 1999 1998 ---------- ---------- (In thousands) Total assets for reportable segments $1,370,694 $1,260,609 Elimination of intercompany receivables (16,559) (14,556) ---------- ---------- Total consolidated assets $1,354,135 $1,246,053 ========== ========== 8. Related party transactions Atmos owns a 45% interest through its ownership of Atmos Energy Marketing, LLC, in Woodward Marketing, LLC, a limited liability company headquartered in Houston, Texas, which is engaged in gas marketing and energy services. Included in purchased gas cost were purchases from WMLLC of approximately $48.4 million and $20.7 million for the three-month periods ended December 31, 1999 and 1998, respectively. 9. Recently issued accounting standards not yet adopted The Company has not yet adopted Statement of Financial Accounting Standards No. 133 " Accounting for Derivative Instruments and Hedging Activities." The Statement will be effective for the Company's fiscal year 2001. It establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Statement does not allow retroactive application to financial statements of prior periods. The Company's management is currently in the process of evaluating the impact of adopting this statement on its reported financial condition, results of operations and cash flows. INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors Atmos Energy Corporation We have reviewed the accompanying condensed consolidated balance sheet of Atmos Energy Corporation as of December 31, 1999, and the related condensed consolidated statements of income and cash flows for the three-month periods ended December 31, 1999 and 1998. 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 generally accepted auditing standards 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 at December 31, 1999, and for the three-month periods ended December 31, 1999 and 1998 for them to be in conformity with generally accepted accounting principles in the United States. We have previously audited, in accordance with generally accepted auditing standards in the United States, the consolidated balance sheet of Atmos Energy Corporation as of September 30, 1999, 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 9, 1999, 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, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP January 31, 2000 Dallas, Texas Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 the Company's 1999 Annual Report to Shareholders and the Company's Annual Report on Form 10-K for the year ended September 30, 1999. The Company distributes and sells natural gas and propane to residential, commercial, industrial and agricultural customers in thirteen states. Such business is subject to regulation by state and/or local authorities in each of the states in which the Company operates. In addition, the Company's business is affected by seasonal weather patterns, competitive factors within the energy industry, and economic conditions in the areas that the Company serves. Cautionary Statement under the Private Securities Litigation Reform Act of 1995 The matters discussed or incorporated by reference 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 facts included in this Quarterly Report including, but not limited to, those contained in the following sections, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to condensed consolidated financial statements, regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations, 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 in any of the Company's other 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 operations, markets, services, rates, recovery of costs, availability of gas supply, and other factors. These risks and uncertainties include, but are not limited to, national, regional and local economic and competitive conditions, regulatory and business trends and decisions, technological developments, Year 2000 issues, inflation rates, weather conditions, and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. Accordingly, while the Company believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations will be realized or will approximate actual results. Ratemaking Activity During the quarter ended December 31, 1999, the Western Kentucky Division received a rate increase in Kentucky of approximately $9.9 million in annual revenues, effective December 21, 1999, and a five-year weather normalization pilot program beginning in November 2000. The Energas Division received an increase in annual revenues of approximately $2.05 million in base rates plus an increase of $.1 million in service charges in Amarillo, Texas, effective for bills rendered on or after January 1, 2000. The agreement also provided for changes in rate structure to reduce the impact of warmer than normal weather and to improve the recovery of the actual cost of service calls. If the Energas Division's request for an annual increase of $8.8 million from the cities served by its West Texas System can not be settled, it will be appealed to the Railroad Commission of Texas with a final decision expected in September 2000. Upon the settlement of these cases, the Railroad Commission is expected to act upon requests for similar increases totaling approximately $1.05 million in the environs outside Amarillo and the West Texas System cities. For further information regarding rate activity, see Note 2 of notes to condensed consolidated financial statements. The Company continues to monitor rates in all its service areas for recovery of its service costs and an adequate return on its investment. Year 2000 Readiness The Year 2000 issues arose because many computer systems and software applications, as well as embedded computer chips in plant and equipment currently in use, were constructed using an abbreviated date field that eliminates the first two digits of the year. It was believed that on January 1, 2000, these systems, applications and embedded computer chips could have incorrectly recognized the date as January 1, 1900. Accordingly, many computer systems and software applications, as well as embedded chips, could have incorrectly processed financial and operating information or fail to process such information completely. Since October 1996, the Company has worked on ensuring that all critical systems, facilities and processes have been identified, analyzed for Year 2000 readiness, corrected if necessary, and tested if changes are necessary. As of December 31, 1999, the Company had incurred a total of approximately $1.2 million in direct fees and expenses in connection with its Year 2000 efforts. While there can be no assurance that there will be no problems in the future related to Year 2000 issues, it appears that to date these efforts were successful since January 1, 2000 passed with no significant impact on any of the Company's systems or operations. The Company will continue to monitor any Year 2000 issues that may develop in the future and has in place procedures to address such issues in the unlikely event that any related problems may occur. Weather and Seasonality The Company's natural gas and propane distribution businesses are seasonal due to weather conditions in the Company's service areas. Sales are affected by winter heating season requirements. Sales to agricultural customers (who use natural gas as fuel in the operation of irrigation pumps during the period from April through September) are affected by rainfall amounts. These factors generally result in higher operating revenues and net income during the period from October through March of each year and lower operating revenues and either net losses or lower net income during the period from April through September of each year. Weather for the three months ended December 31, 1999 was 17% warmer than normal and 2% warmer than weather in the corresponding period of the prior year as shown below. This caused total throughput to decrease 1.6 billion cubic feet ("Bcf") or 3%. HEATING DEGREE DAYS Three months ended Weather December 31, Sensitive ------------------------- Service Area Customers % 1999 1998 Normal - ---------------- ----------- ----- ----- ------ Energas 29% 1,226 1,232 1,402 Trans La 8% 552 530 661 Western Kentucky 18% 1,201 1,300 1,613 Greeley Gas 20% 1,763 1,899 2,133 United Cities 25% 1,212 1,131 1,420 ---- System Average 100% 1,261 1,284 1,517 The Company has weather normalization adjustments ("WNAs") in Georgia and Tennessee, where it serves approximately 186,000 customers or approximately 18% of the Company's total customers and revenues. The WNAs increase the base rate when weather is warmer than normal and decrease it when weather is colder than normal. The effect of the WNAs was to increase revenues approximately $.9 million for the three months ended December 31, 1999, as compared with an increase of approximately $2.0 million for the three months ended December 31, 1998. The Company did not have WNAs in its other service areas during the quarter ended December 31, 1999. Status of Acquisition In October 1999, the Company entered into a definitive agreement with Southwestern Energy Company ("Southwestern") to acquire the Missouri natural gas distribution assets of Associated Natural Gas, a division of Arkansas Western Gas, which is a wholly-owned subsidiary of Southwestern. Under the terms of the agreement, the Company will purchase the Missouri gas system for approximately $32.0 million in cash plus working capital adjustments. This transaction, which will add approximately 48,000 customers, is expected to be completed by mid-year 2000, subject to approvals by the Missouri Public Service Commission and the Federal Energy Regulatory Commission. FINANCIAL CONDITION For the three months ended December 31, 1999, net cash used by operating activities totaled $37.0 million compared with $20.8 million for the three months ended December 31, 1998. Net income decreased $1.1 million to $14.3 million for the three months ended December 31, 1999 from $15.4 million for the three months ended December 31, 1998. Depreciation and amortization increased $2.9 million for the three months ended December 31, 1999 because of utility property additions placed in service during the past year. Net operating assets and liabilities increased $77.5 million for the three months ended December 31, 1999 compared with an increase of $53.0 million for the three months ended December 31, 1998. This increase in net operating assets and liabilities resulted primarily from the large fluctuations in accounts receivable, gas stored underground and accounts payable that occur when entering and leaving the winter or heating season. Major cash flows used in investing activities for the three months ended December 31, 1999 included capital expenditures of $17.5 million compared with $19.9 million for the three months ended December 31, 1998. The capital expenditures budget for fiscal 2000 is approximately $75.0 million, as compared with actual capital expenditures of $110.4 million in fiscal 1999. The decreased capital expenditures budget resulted from the completion of the customer billing system, customer support center, enterprise resource planning system and other technology projects in fiscal 1999. Budgeted capital projects for fiscal 2000 include major expenditures for mains, services, meters, vehicles and computer software and equipment. These expenditures will be financed from internally generated funds and financing activities. For the three months ended December 31, 1999, cash flows provided by financing activities amounted to $70.2 million as compared with $51.8 million for the three months ended December 31, 1998. During the three-month period, commercial paper and notes payable to banks increased $81.1 million, as compared with an increase of $101.6 million for the three months ended December 31, 1998, due to short-term borrowings for repayment of $40.0 million of long-term notes due in November 1998 and seasonal factors. Payments of long-term debt totaled $7.0 million for the three months ended December 31, 1999, as compared with $47.9 million for the three months ended December 31, 1998. The Company paid $8.9 million in cash dividends during the three months ended December 31, 1999, compared with dividends of $8.4 million paid during the three months ended December 31, 1998. This reflects increases in the quarterly dividend rate and in the number of shares outstanding. In the three months ended December 31, 1999, the Company issued 241,480 shares of common stock. The following table presents the number of shares issued under the various plans for the three- month periods ended December 31, 1999 and 1998. Three months ended December 31, --------------------- 1999 1998 -------- -------- Shares issued: Restricted Stock Grant Plan - 60,000 Employee Stock Ownership Plan 40,557 20,892 Direct Stock Purchase Plan 200,406 143,458 Outside Directors Stock-for-Fee Plan 517 437 United Cities Long-term Stock Plan - 1,250 ------- ------- Total shares issued 241,480 226,037 ======= ======= The Company believes that internally generated funds, its short-term credit facilities, commercial paper program and access to the debt and equity capital markets will provide necessary working capital and liquidity for capital expenditures and other cash needs for the remainder of fiscal 2000. At December 31, 1999 the Company had $262.0 million in committed short-term credit facilities, of which $125.0 million was outstanding and $124.4 supported commercial paper outstanding. The committed lines of credit are renewed or renegotiated at least annually. At December 31, 1999, the Company also had $74.0 million of uncommitted short-term lines of credit, all of which was unused. In December 1999, the Company filed a universal shelf registration statement with the Securities and Exchange Commission ("SEC") to issue, from time to time, up to $500 million in new common stock and/or debt. The Company also filed applications for approval to issue securities with seven state utility commissions. Obtaining all the required state regulatory approvals is expected to take from three to six months. Once the shelf filing is declared effective by the SEC and is approved by the various state utility commissions, the Company 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 universal shelf will provide the Company with greater flexibility in its financing options. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1999, COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 1998 Operating revenues increased by 7% to $224.5 million for the three months ended December 31, 1999 from $210.2 million for the three months ended December 31, 1998. The most significant factor contributing to the increase in operating revenues was a 13% increase in average sales price. During the quarter ended December 1999, temperatures were 2% warmer than in the corresponding quarter of the prior year, and were 17% warmer than the 30-year normal for the quarter. The total volume of gas sold and transported for the three months ended December 31, 1999 was 53.7 billion cubic feet ("Bcf") compared with 55.3 Bcf for the three months ended December 31, 1998. Decreased sales due to warmer than normal weather were partially offset by weather normalization adjustments in Tennessee and Georgia, which provided approximately $.9 million of additional revenues as compared with an increase of approximately $2.0 million in the quarter ended December 31, 1998. The average sales price per Mcf sold increased $.62 or 13% to $5.35 primarily due to an increase in the average cost of gas. The average cost of gas per Mcf sold increased 19% to $3.37 for the three months ended December 31, 1999 from $2.84 for the three months ended December 31, 1998 due to decreased supply availability in the current market. Gross profit decreased by 2% to $89.6 million for the three months ended December 31, 1999, from $91.2 million for the three months ended December 31, 1998. The decrease in gross profit was due to the decrease in volumes sold to weather sensitive customers and a decrease of $1.2 million in transportation revenues due to lower average transportation revenue per Mcf. Changes in cost of gas do not directly affect gross profit. Operating expenses decreased slightly to $59.4 million for the three months ended December 31, 1999 from $59.5 million for the three months ended December 31, 1998. The components of operating expenses that produced the decrease in the quarter ended December 31, 1999 were operation and maintenance expenses, which decreased 8% primarily as a result of lower employee benefits expenses. The Company also realized savings from reduced meter reading and outside services expenses as a result of the completion of technology initiatives in fiscal 1999 and the realization of operating efficiencies and cost controls in fiscal 2000. The decrease in operation and maintenance expenses was offset by an increase in depreciation and amortization related to additional utility plant placed in service in the past year. Operating income decreased 5% for the three months ended December 31, 1999 to $30.1 million from $31.7 million for the three months ended December 31, 1998. The decrease in operating income resulted primarily from decreased gross profit, as described above. Other income increased $2.2 million for the three months ended December 31, 1999 compared with the three months ended December 31, 1998 primarily due to an increase in the earnings from the Company's 45% interest in Woodward Marketing LLC. Propane statistics for the three months ended December 31, 1999 and 1998 are included in the "Operating Statistics" tables which appear at the end of Management's Discussion and Analysis. The propane operations sold 6.4 million gallons of propane for the three months ended December 31, 1999, as compared with 6.1 million gallons for the three months ended December 31, 1998. The increase of $.5 million in propane revenues for the three months ended December 31, 1999 compared with the same period last year was the result of a combination of the increased sales volumes and a slightly higher average sales price due to a slightly higher cost of supply. The number of propane customers at December 31, 1999 increased 2,660, or 7%, as compared with December 31, 1998. Interest expense increased $2.1 million, or 24%, for the three months ended December 31, 1999, compared with the three months ended December 31, 1998, due to a slight increase in the average debt outstanding and a significant reduction in interest capitalized in 2000. Approximately $1.9 million of interest was capitalized in connection with various technology projects that were in process for the three months ended December 31, 1998. No interest was capitalized for the three months ended December 31, 1999, as these projects were completed and placed into service by the end of fiscal 1999. The provision for income taxes decreased 4% to $8.6 million in the quarter ended December 31, 1999 compared with $9.0 million for the corresponding quarter of the prior year due to decreased pre-tax income. Net income decreased for the three months ended December 31, 1999 by $1.1 million to $14.3 million from $15.4 million for the three months ended December 31, 1998. This decrease in net income resulted primarily from the decrease in sales volumes due to unusually warm winter weather, as discussed above. UTILITY, PROPANE AND ENERGY SERVICES OPERATING DATA Atmos' Utility business is conducted by the Company's regulated utility divisions: Energas Division, Greeley Gas Division, Trans La Division, United Cities Division, Western Kentucky Division and Shared Services. The Propane business is conducted through United Cities Propane and includes wholesale and retail propane sales to approximately 41,000 customers in four states. The Energy Services business includes nonregulated irrigation sales, energy services to large volume customers, nonregulated underground storage operations, a 45% interest in Woodward Marketing LLC, leasing of real estate, vehicles and appliances and nonregulated shared services. The following table of operating statistics by segment summarizes data of the utility, propane, and energy services segments of the Company for the three-month periods ended December 31, 1999 and 1998. For further information regarding operating results of the segments, see Note 7 of notes to condensed consolidated financial statements. ATMOS ENERGY CORPORATION CONSOLIDATED OPERATING STATISTICS Three months ended December 31, ----------------------- 1999 1998 --------- --------- METERS IN SERVICE, end of period Residential 923,083 902,284 Commercial 98,032 94,976 Public authority and other 7,380 6,552 Industrial (including agricultural) 14,518 16,247 --------- --------- Total meters 1,043,013 1,020,059 Propane customers 41,401 38,741 --------- --------- Total 1,084,414 1,058,800 ========= ========= HEATING DEGREE DAYS Actual (weighted average) 1,261 1,284 Percent of normal 83% 85% SALES VOLUMES -- MMcf(1) Residential 19,929 21,114 Commercial 10,080 10,126 Public authority and other 1,833 2,193 Industrial (including agricultural) 7,310 7,439 ------- ------ Total 39,152 40,872 Transportation volumes -- MMcf(1) 14,510 14,438 ------- ------ Total Throughput - MMcf (1) 53,662 55,310 ======= ====== Propane - Gallons (000's) 6,354 6,138 ======= ====== OPERATING REVENUES (000's) Gas sales revenues Residential $117,304 $111,209 Commercial 52,438 47,294 Public authority and other 8,802 9,119 Industrial (including agricultural) 31,007 25,780 -------- -------- Total gas sales revenues 209,551 193,402 Transportation revenues 5,617 6,805 Propane revenues 7,839 7,295 Other revenues 1,451 2,725 -------- -------- Total operating revenues $224,458 $210,227 ======== ======== Cost of gas (excluding propane and other) $131,815 $115,873 ======== ======== Average gas sales revenues per Mcf $ 5.35 $ 4.73 Average transportation revenue per Mcf $ .39 $ .47 Average cost of gas per Mcf sold $ 3.37 $ 2.84 (1) Volumes are reported as metered in million cubic feet ("MMcf"). ATMOS ENERGY CORPORATION OPERATING STATISTICS BY SEGMENT Three months ended December 31, ----------------------- 1999 1998 --------- --------- UTILITY Operating revenues ($000) $ 208,699 $ 196,518 Sales volumes (MMcf) 36,904 39,337 Transportation volumes (MMcf) 14,510 14,438 ------ ------ Total throughput 51,414 53,775 ====== ====== Heating degree days Actual 1,261 1,284 30-year normal 1,517 1,517 Percent of normal 83% 85% Meters, end of period 1,043,013 1,020,059 PROPANE Operating revenues ($000) $7,839 $7,295 Sales volumes (000 gallons): Retail 5,736 5,498 Wholesale 618 640 ------- ------ Total 6,354 6,138 ======= ====== Propane degree days 1,323 1,277 Percent of normal 87% 84% Customers, end of period 41,401 38,741 ENERGY SERVICES Operating revenues ($000) $7,920 $6,414 Gas revenues ($000) $7,261 $4,808 Gas sales volumes (MMcf): Irrigation 600 23 Industrial 1,648 1,512 ------- ------ Total 2,248 1,535 ======= ====== Atmos equity in earnings of WMLLC ($000) $3,032 $1,213 NOTE: Segment operating revenues and volumes are net of inter- segment eliminations. See Note 7 for intersegment revenues. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes from the information provided in Item 7A of the Company's Annual Report on Form 10-K for the year ended September 30, 1999. PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note 3 of notes to condensed consolidated financial statements herein for a description of legal proceedings. 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. SIGNATURES 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. ATMOS ENERGY CORPORATION (Registrant) Date: February 11, 2000 By: /s/ DONALD P. BURMAN ------------------------------ Donald P. Burman Assistant Controller (Chief Accounting Officer and duly authorized signatory) EXHIBITS INDEX Item 6(a) Exhibit Page Number Description Number - ------- ----------- ------- 10.1 Gas Transportation Agreement No. 30774, Rate Schedules FT-A and FT-GS, dated October 1, 1999, between United Cities Gas Company and East Tennessee Natural Gas Company 15 Letter regarding unaudited interim financial information 27 Financial Data Schedule for Atmos Energy Corporation for the three months ended December 31, 1999