Atmos Energy 1998 Annual Report Download - page 33

accounting practices and policies of the various regulatory com-
missions. Regulated utility operations are accounted for in accor-
dance with Statement of Financial Accounting Standards No. 71,
“Accounting for the Effects of Certain Types of Regulation.” This
statement requires cost-based rate regulated entities that meet
certain criteria to reflect the authorized recovery of costs due to
regulatory decisions in their financial statements.
The Company records regulatory assets which represent
assets which are being recovered through customer rates or are
probable of being recovered through customer rates. Significant
regulatory assets as of September 30,1998 included the following:
unamortized debt expense of $5.6million, merger and integration
costs of $59.8million, environmental costs of $4.0million, and
deferred cost of purchased gas proceeding of $1.1million.
Regulatory liabilities represent probable future reductions in rev-
enues associated with amounts that are to be credited to cus-
tomers through the ratemaking process. As of September 30,
1998, the Company had recorded a regulatory liability of $2.2
million for deferred income taxes.
Revenue Recognition Sales of natural gas are billed on a monthly
cycle basis; however, the billing cycle periods for certain classes of
customers do not necessarily coincide with accounting periods used
for financial reporting purposes. The Company follows the revenue
accrual method of accounting for natural gas revenues whereby
revenues applicable to gas delivered to customers but not yet billed
under the cycle billing method are estimated and accrued and the
related costs are charged to expense. Estimated losses due to credit
risk are reserved at the time revenue is recognized.
Utility Property, Plant and Equipment Utility property, plant and
equipment is stated at original cost net of contributions in aid of
construction. The cost of additions includes direct construction
costs, payroll related costs (taxes, pensions and other fringe bene-
fits), administrative and general costs, and the estimated cost of
an allowance for funds used during construction (See AFUDC
below). Major renewals and betterments are capitalized, while
the costs of maintenance and repairs are charged to expense as
incurred. The costs of large projects are accumulated in construc-
tion in progress until the project is completed. When the project
is completed, tested and placed in service, the balance is trans-
ferred to the utility plant in service account, included in rate base
and depreciation begins. As of September 30,1998, the Company
has invested approximately $80 million in its Customer Service
Initiative (“CSI”). The CSI investment is currently recorded in
construction in progress. CSI is a group of projects that are reor-
ganizing processes throughout the Company to leverage technol-
ogy and implement industry best practices. It is expected to be
fully placed in service in 1999. Property, plant and equipment is
depreciated at various rates on a straight-line basis over the esti-
mated useful lives of the assets. The composite rates were 4.0%
and 3.9% for the years ended September 30,1998 and 1997,
respectively. At the time property, plant and equipment is retired,
the cost, plus removal expenses and less salvage, is charged to
accumulated depreciation.
Allowance for Funds Used During Utility Construction (“AFUDC”)
AFUDC represents the estimated cost of funds used to finance the
construction of major projects. Under regulatory practices, the
costs are capitalized and included in rate base for ratemaking pur-
poses when the completed projects are placed in service. Interest
expense of $4.1million, $1.2million and $.4million was capital-
ized in 1998,1997 and 1996, respectively. The increased amounts
in 1998 and 1997 were related to CSI.
Non-Utility Property, Plant and Equipment Balances are stated at
cost and depreciation is computed generally on the straight-line
method for financial reporting purposes.
Inventories Inventories consist primarily of materials and supplies
and merchandise held for resale. These inventories are stated at
the lower of average cost or market. Inventories also include
propane inventories of $979,000 and $722,000 at September 30,
1998 and 1997, respectively. Propane is priced at average cost.
Gas in Storage Net additions of inventory gas to storage and
withdrawals of inventory gas from storage are priced using the
average cost method for all Atmos utility divisions, except for the
United Cities Division, where it is priced on the first-in first-out
method. Gas stored underground and owned by Storage is priced
on the last-in first-out (“LIFO”) method. In accordance with the
United Cities Division’s purchased gas adjustment (“PGA”) clause,
the liquidation of a LIFO layer would be reflected in subsequent
gas adjustments in customer rates and does not affect the results
of operations. Noncurrent gas in storage is classified as property,
plant and equipment and is priced at cost.
Income Taxes The Company provides deferred income taxes for
significant temporary differences in the recognition of revenues
and expenses for tax and financial reporting purposes.
Cash and Cash Equivalents The Company considers all highly
liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Deferred Charges and Other Assets Deferred charges and other
assets at September 30,1998 and 1997 include merger and inte-
gration costs of $59.8million and $49.0million in 1998 and 1997,
respectively; the related reserve for merger and integration costs
of $20.3million in both 1998 and 1997; and the investment in
WMLLC of $11.9million and $10.0million in 1998 and 1997,
respectively. Also included in deferred charges and other assets
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ATMOS ENERGY CORPORATION