Atmos Energy 2004 Annual Report Download - page 5

Dedicated and experienced employees. Our new division
already was a well-run natural gas system. Its 1,344 gas
professionals who transferred to Atmos Energy are work-
ing to integrate the operations as soon as possible and
are contributing their “knowledge capital” to benefit our
entire system.
Prompt recovery of new capital investment. Texas law
permits a utility to make annual adjustments for additions
to net plant, using its most recent return on investment,
depreciation rate and tax rates. The law lets us recover our
capital invest-
ment in new
pipelines and
other facilities
much faster
without having
to file a general
rate case. As we invest in our expanding Texas markets,
we will be able to earn a return on our investment faster
than in most of our other jurisdictions.
About 90 percent of earnings from regulated operations.
Adding the TXU Gas properties has increased the propor-
tion of our assets regulated by state commissions. Many
investors see this increase as positive because, although it
does not guarantee our profitability, it increases our
opportunity for consistent, long-term earnings growth.
SUCCESSFUL FINANCINGS
Atmos Energy paid approximately $1.905 billion in cash
for the TXU Gas operations. To finance the acquisition,
we sold 9.9 million shares of common stock through
a public offering in July. Because of strong interest, the
offering raised approximately $235.7 million in net
proceeds, with the purchasers mainly being retail holders.
In October 2004, we made another public offering,
selling 16.1 million common shares to raise approximately
$382.5 million in net proceeds before other offering costs.
The purchasers
were mainly
large institu-
tional holders.
In a separate
offering at the
same time, we
also sold four series of senior unsecured notes to raise net
proceeds of approximately $1.39 billion.
We are gratified by the success of all three
offerings. We believe the prices that investors bid indicate
the market’s confidence in our ability to integrate and
operate the TXU Gas operations successfully. Within the
next three to five years, we expect to apply some of the
additional cash flow from the new operations to return
to a 50 percent to 55 percent debt-to-capitalization
ratio, as we have done consistently after completing our
nine previous major acquisitions.
LETTER TO SHAREHOLDERS 5
COMPLEMENTARY NONUTILITY OPERATIONS
Our nonutility operations achieved impressive results in
fiscal 2004, building on initiatives begun in 2003 to
reduce the risk from volatile natural gas prices. The con-
tribution to net income from our nonutility operations
in 2004 was 27 percent. We expect these contributions to
remain strong during the next five years.
One ofthe keys to our nonutility growth will
be managing the pipeline and storage assets acquired with
TXU Gas. Although these assets remain regulated, we
expect to operate them to deliver more volumes to whole-
sale customers. We also are working on optimizing our
nonutility natural gas marketing and storage operations.
During 2004, for example, we made changes in the
way we procure the billions of cubic feet of natural gas
for our utility system to take better advantage of our
nonutility operations’ expertise.
CONCENTRATION ON PERFORMANCE
Our goal has been to provide an attractive rate of return
through both capital appreciation and dividends. We
expect earnings per share to grow between 3 percent and
6 percent a year and our dividend yield to remain an
attractive 4 percent to 5 percent.
We expect to provide investors with a total annual
return between 8 percent and 11 percent. We have done
this consistently in the past and expect to continue to do
so in the future. We have accomplished this through an
intense focus on improving efficiency and managing costs,
mitigating the effects of weather on our utility operations
and fostering productive relationships with the regulators
in our operating jurisdictions.
We also have been successful because of our focus
on the basics. While many in the industry are claiming
a return to the basics, we can confidently say we never
left the basics. We always have been dedicated to natural
gas distribution as our core business.
KEEPING RATES CURRENT
In 2004, we added $16.2 million in net revenues through
rate increases. During the next five years, we expect to
receive approximately $15 million to $20 million in average
annual rate increases. One of our goals is to monitor our
rates of return in all jurisdictions to keep our actual
returns as close as possible to our allowed rates of return.
In states that have warmer winters, we have sought
to adjust our rates using a weather normalization adjust-
ment. We now have WNA or higher base rates in our eight
largest states. Only about 17 percent of our margins
are exposed to weather in the 2004–2005 heating season.
We have proposed other rate adjustments to offset
the effects of declining natural gas consumption. Nationally,
gas consumption has been going down about 2 percent a
year during the past decade. We also have sought to recoup
higher collection expenses and to recover bad debt expense
incurred during winter cutoff moratoriums.
Excellence in customer service stands
as a key part of our corporate vision–
we call it our Spirit of Service.
SM
4 LETTER TO SHAREHOLDERS