UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K

Current Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934

June 17, 2004
 
Date of Report (Date of earliest event reported)

ATMOS ENERGY CORPORATION

(Exact Name of Registrant as Specified in its Charter)
         
TEXAS AND VIRGINIA   1-10042   75-1743247

 
 
 
 
 
(State or Other Jurisdiction
of Incorporation)
  (Commission File
Number)
  (I.R.S. Employer
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)
     
Not Applicable

 
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

TABLE OF CONTENTS

Item 8.01. Other Events.
Item 9.01. Financial Statements and Exhibits.
SIGNATURE
EXHIBIT INDEX
Letter of Deloitte & Touche LLP Re: Unaudited Interim Financial Information
Unaudited Condensed Consolidated Financial Statements of TXU Gas Company
Unaudited Proforma Combined Balance Sheet and Statements of Income

 

Item 8.01. Other Events.

     On June 17, 2004, a subsidiary of Atmos Energy Corporation entered into a definitive agreement to acquire the natural gas distribution and pipeline operations of TXU Gas Company, a subsidiary of TXU Corp. The audited consolidated financial statements of TXU Gas Company and its subsidiaries as of December 31, 2003 and 2002 and for the three years ended December 31, 2003 were filed as Exhibit 99.1 to our current report on Form 8-K on July 7, 2004. The unaudited condensed consolidated financial statements of TXU Gas Company and its subsidiaries as of June 30, 2004 and for the quarterly periods ended June 30, 2004 and 2003 are filed as Exhibit 99.1 hereto. Please note that these audited and unaudited financial statements of TXU Gas Company reflect the entire assets and operations of TXU Gas Company. However, under the terms of the definitive agreement, we are only acquiring the natural gas distribution and pipeline operations of TXU Gas Company. Our unaudited pro forma combined balance sheet as of June 30, 2004 and our unaudited pro forma combined statements of income for the nine months ended June 30, 2004 and the twelve months ended September 30, 2003, which are filed as Exhibit 99.2 hereto, give effect to our acquisition of the TXU Gas operations and entering into the related bridge financing facility, which we will use to finance the acquisition, as well as the application of the net proceeds of $235.8 million from our recent offering of our common stock towards the purchase price of the TXU Gas operations.

 

     Item 9.01. Financial Statements and Exhibits.

  (c)   Exhibits

15.1   Letter of Deloitte & Touche LLP regarding unaudited interim financial information
 
99.1   Unaudited condensed consolidated financial statements of TXU Gas Company and its Subsidiaries as of June 30, 2004 and for the quarterly periods ended June 30, 2004 and 2003
 
99.2   Unaudited pro forma combined balance sheet of Atmos Energy Corporation as of June 30, 2004 and unaudited pro forma combined statements of income for the nine months ended June 30, 2004 and the 12 months ended September 30, 2003

 

 

SIGNATURE

     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 hereunto duly authorized.

         
    ATMOS ENERGY CORPORATION
    (Registrant)
 
       
DATE: August 31, 2004
  By:   /s/ LOUIS P. GREGORY
     
 
      Louis P. Gregory
Senior Vice President
and General Counsel

 

 

EXHIBIT INDEX

 
     
Exhibit Number
  Description
15.1
  Letter of Deloitte & Touche LLP regarding unaudited interim financial information
 
   
99.1
  Unaudited condensed consolidated financial statements of TXU Gas Company and its Subsidiaries as of June 30, 2004 and for the quarterly periods ended June 30, 2004 and 2003
 
   
99.2
  Unaudited pro forma combined balance sheet of Atmos Energy Corporation as of June 30, 2004 and unaudited pro forma combined statements of income for the nine months ended June 30, 2004 and the 12 months ended September 30, 2003

 

 
 
 

EXHIBIT 15.1

Atmos Energy Corporation:

We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited condensed consolidated interim financial information of TXU Gas Company and subsidiaries (TXU Gas) as of June 30, 2004 and for the three and six-month periods ended June 30, 2004 and 2003, and have issued our report thereon dated August 13, 2004; because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in Atmos Energy Corporation’s Current Report on Form 8-K filed on or about August 27, 2004, is incorporated by reference in the Registration Statement of Atmos Energy Corporation on Form S-3 for the registration of its debt securities or common stock.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
August 27, 2004

 
 
 

 

Exhibit 99.1

When the following terms and abbreviations appear in the text of the notes to the financial statements, they shall have the meanings indicated below:

     
1999 Restructuring Legislation
  Legislation that restructured the electric utility industry in Texas to provide for competition
 
   
2003 Form 10-K
  TXU Gas’ Annual Report on Form 10-K for the year ended December 31, 2003
 
   
Bcf
  Billion cubic feet
 
   
Commission
  Public Utility Commission of Texas
 
   
ERCOT
  Electric Reliability Council of Texas, the Independent System Operator and the regional reliability coordinator of the various electricity systems within Texas
 
   
FASB
  Financial Accounting Standards Board, the designated organization in the private sector for establishing standards for financial accounting and reporting
 
   
FIN
  Financial Accounting Standards Board Interpretation
 
   
FIN 46
  FIN No. 46, “Consolidation of Variable Interest Entities”
 
   
FIN 46R
  FIN No. 46 (Revised 2003), “Consolidation of Variable Interest Entities-An Interpretation of ARB No. 51”
 
   
Fitch
  Fitch Ratings, Ltd.
 
   
IRS
  Internal Revenue Service
 
   
Moody’s
  Moody’s Investors Services, Inc.
 
   
RRC
  Railroad Commission of Texas
 
   
S&P
  Standard & Poor’s, a division of The McGraw Hill Companies
 
   
Sarbanes-Oxley
  Sarbanes-Oxley Act of 2002
 
   
SEC
  United States Securities and Exchange Commission
 
   
SFAS
  Statement of Financial Accounting Standards issued by the FASB
 
   
SFAS 140
  SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125”

 
 
     
TCEQ
  Texas Commission on Environmental Quality
 
   
TXU Business Services
  TXU Business Services Company, a subsidiary of TXU Corp.
 
   
TXU Corp
  Refers to TXU Corp., a holding company,and/or its consolidated subsidiaries, depending on context
 
   
TXU Gas
  Refers to TXU Gas Company, a subsidiary of TXU Corp. and/or its subsidiaries, depending on context
 
   
US
  United States of America
 
   
US GAAP
  Accounting principles generally accepted in the US
 
   
US Holdings
  TXU US Holdings Company, a subsidiary of TXU Corp.

 

 

 

TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)

                                 
    Three Months Ended   Six Months Ended
    June 30,
  June 30,
    2004
  2003
  2004
  2003
    (millions of dollars)
Operating revenues
  $ 216     $ 199     $ 724     $ 820  
 
   
 
     
 
     
 
     
 
 
Operating expenses:
                               
Gas purchased for resale
    102       89       428       519  
Operation and maintenance
    137       72       206       139  
Depreciation and amortization
    19       19       38       37  
Income tax expense (benefit)
    (13 )     (9 )     4       16  
Taxes other than income
    30       33       61       55  
 
   
 
     
 
     
 
     
 
 
Total operating expenses
    275       204       737       766  
Operating income (loss)
    (59 )     (5 )     (13 )     54  
Other income and deductions
                               
Other income
    2       1       4       3  
Other deductions
    125             125        
Nonoperating income tax expense (benefit)
    (29 )           (27 )     1  
Interest income
                      1  
Interest expense and related charges
    8       11       16       22  
 
   
 
     
 
     
 
     
 
 
Net income (loss)
    (161 )     (15 )     (123 )     35  
Preferred stock dividends
    1       1       2       2  
 
   
 
     
 
     
 
     
 
 
Net income (loss) applicable to common stock
  $ (162 )   $ (16 )   $ (125 )   $ 33  
 
   
 
     
 
     
 
     
 
 
 

CONDENSED STATEMENTS OF CONSOLIDATED
COMPREHENSIVE INCOME (LOSS)
(Unaudited)

                                 
Net Income (loss)
  $ (161 )   $ (15 )   $ (123 )   $ 35  
 
   
 
     
 
     
 
     
 
 
Other comprehensive income:
                               
Cash flow hedge activity, net of tax effect:
                               
Amounts realized in earnings
          1             2  
 
   
 
     
 
     
 
     
 
 
Total
          1             2  
 
   
 
     
 
     
 
     
 
 
Comprehensive income (loss)
  $ (161 )   $ (14 )   $ (123 )   $ 37  
 
   
 
     
 
     
 
     
 
 

See Notes to Financial Statements.

 

 

 

TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)

                 
    Six Months Ended
    June 30,
    2004
  2003
    (millions of dollars)
Cash flows — operating activities:
               
Net income (loss)
  $ (123 )   $ 35  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
    43       40  
Deferred income taxes — net
    (48 )     7  
Goodwill impairment
    35        
Charge for regulatory disallowances
    153        
Equity in earnings of affiliates and joint ventures
          (1 )
Adjustments related to gas cost recovery
    6       34  
Changes in operating assets and liabilities
    (48 )     (9 )
 
   
 
     
 
 
Cash provided by operating activities
    18       106  
Cash flows — financing activities:
               
Retirements of long-term debt
    (150 )     (125 )
Change in notes payable — commercial paper
    300        
Change in advances from affiliates
    (116 )     60  
Cash dividends paid
    (4 )     (2 )
Debt premium, discount, financing and reacquisition expenses
          (2 )
 
   
 
     
 
 
Cash provided by (used in) financing activities
    30       (69 )
Cash flows — investing activities:
               
Capital expenditures
    (49 )     (48 )
Other
    4       9  
 
   
 
     
 
 
Cash used in investing activities
    (45 )     (39 )
 
   
 
     
 
 
Net change in cash and cash equivalents
    3       (2 )
Cash and cash equivalents— beginning balance
    5       4  
 
   
 
     
 
 
Cash and cash equivalents— ending balance
  $ 8     $ 2  
 
   
 
     
 
 

See Notes to Financial Statements.

 

 

 

TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

                 
    June 30,   December 31,
    2004
  2003
    (millions of dollars)
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 8     $ 5  
Accounts receivable
    29       101  
Inventories
    135       144  
Other current assets
    50       27  
 
   
 
     
 
 
Total current assets
    222       277  
Investments:
               
Restricted cash
    10       10  
Other investments
    31       35  
Property, plant and equipment — net
    1,624       1,685  
Goodwill
    300       305  
Other noncurrent assets
    12       16  
 
   
 
     
 
 
Total assets
  $ 2,199     $ 2,328  
 
   
 
     
 
 
LIABILITIES AND SHAREHOLDER’S EQUITY
               
Current liabilities:
               
Notes payable — banks
  $ 300        
Advances from affiliates
    38       154  
Long-term debt due currently
    150       150  
Accounts payable
    51       148  
Other current liabilities
    130       88  
 
   
 
     
 
 
Total current liabilities
    669       540  
Accumulated deferred income taxes and investment tax credits
    32       79  
Long-term debt held by subsidiary trust
    155       155  
All other long-term debt, less amounts due currently
    125       276  
Regulatory liabilities
    113       35  
Other noncurrent liabilities and deferred credits
    354       364  
 
   
 
     
 
 
Total liabilities
    1,448       1,449  
Contingencies (Note 5)
               
Shareholder’s equity:
               
Preferred stock — not subject to mandatory redemption
    75       75  
Common stock (par value — $.01 per share):
               
Authorized shares - 100,000,000, Outstanding shares - 449,631
           
Additional paid in capital
    815       815  
Retained deficit
    (135 )     (7 )
Accumulated other comprehensive loss
    (4 )     (4 )
 
   
 
     
 
 
Total common stock equity
    676       804  
 
   
 
     
 
 
Total shareholder’s equity
    751       879  
 
   
 
     
 
 
Total liabilities and shareholder’s equity
  $ 2,199     $ 2,328  
 
   
 
     
 
 

See Notes to Financial Statements.

 

 

TXU GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1.   SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS

     Description of Business — TXU Gas, a Texas corporation, is a largely regulated business engaged in the purchase, transmission, distribution and sale of natural gas in the north-central, eastern and western parts of Texas. TXU Gas is a wholly-owned subsidiary of TXU Corp. The TXU Gas business is held for sale as described below.

     TXU Gas serves more than 1.4 million retail gas customers and owns and operates gas distribution mains, gas transportation and gathering pipelines and underground storage reservoirs. TXU Gas also provides transportation services to gas distribution companies, electricity generation plants, end-use industrial customers and through-system shippers.

     TXU Gas’ natural gas pipeline, gas distribution and asset management services operations are managed as one integrated business; accordingly, there are no separate reportable business segments.

     Strategic Initiatives and Other Actions — As previously reported, on February 23, 2004, C. John Wilder was named president and chief executive of TXU Corp. Mr. Wilder was formerly executive vice president and chief financial officer of Entergy Corporation. Mr. Wilder has been reviewing the operations of TXU Corp. and has formulated certain strategic initiatives and continues to develop others. The review has resulted in the decision to sell TXU Gas. Other actions taken that impact TXU Gas relate to TXU Corp.’s cost structure, including organizational alignments and headcount as well as non-core business activities.

     Sale of TXU Gas

     On June 17, 2004, TXU Gas entered into a definitive merger agreement with an acquisition subsidiary of Atmos Energy Corporation (Atmos) pursuant to which Atmos will acquire the operations of TXU Gas for $1.925 billion in cash. The intent to sell the business had been previously disclosed. The transaction is expected to close by the end of the year, subject to the satisfaction of customary closing conditions and Atmos obtaining limited state regulatory approvals.

     Based on June 30, 2004 balance sheet amounts, estimated assets totaling $111 million and liabilities totaling $1.23 billion would not be assumed by the buyer. The assets consist largely of prepayments related to revenue-related taxes and employee deferred compensation-related investments. The liabilities consist largely of short and long-term debt, pension, post retirement benefits and deferred compensation obligations, and income tax liabilities including deferred income taxes.

     Capgemini Energy Agreement

     On May 17, 2004, TXU Corp. entered into a services agreement with a subsidiary of Cap Gemini North America Inc., Capgemini Energy LP (Capgemini), a new company initially providing business process support services to TXU Corp. and subsidiaries, and immediately implementing a plan to offer similar services to other utility companies. Under the ten-year agreement, over 2,500 employees transferred from subsidiaries of TXU Corp. to Capgemini effective July 1, 2004. Outsourced base support services performed by Capgemini for a fixed fee include information technology, customer call center, billing, human resources, supply chain and certain accounting activities.

     As part of the services agreements, TXU Corp. agreed to indemnify Capgemini for severance costs incurred by Capgemini for former employees terminated within 18 months of their transfer to Capgemini. Accordingly, TXU Gas recorded a $7 million ($5 million after-tax) charge for severance expense in the second quarter of 2004, which represents a reasonable estimate of the indemnity and is reported in other deductions. The charge consists principally of an allocation of severance related to TXU Business Services employees. In addition, TXU Corp. committed to pay for costs associated with transitioning the outsourced activities to Capgemini. The transition costs allocable to TXU Gas are expected to be recorded during the remainder of 2004.

     Basis of Presentation — The condensed consolidated financial statements of TXU Gas have been prepared in accordance with US GAAP and on the same basis as the audited financial statements included in its 2003 Form 10-K. In the opinion of management, all other adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. All intercompany items and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and footnotes required by US GAAP, they should be read in conjunction with the audited financial statements and related notes included in the 2003 Form 10-K. The results of operations for an interim period may not give a true indication of results for a full year.

     Certain reclassifications have been made to conform prior period data to the current period presentation. The income statement presentation, which is a regulatory format, differs from previous disclosures in that income tax expense and benefit is presented as a component of both operating and nonoperating results. All dollar amounts in the financial statements and tables in the notes are stated in millions of dollars unless otherwise indicated.

     Changes in Accounting Standards — FIN 46R was issued in December 2003 and replaced FIN 46, which was issued in January 2003. FIN 46R expands and clarifies the guidance originally contained in FIN 46, regarding consolidation of variable interest entities. FIN 46R did not impact results of operations or financial position for the first six months of 2004.

     The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Act) was enacted in December 2003. TXU Corp. is accounting for the effects of the Medicare Act in accordance with FASB Staff Position 106-2. For the three and six months ended June 30, 2004, the effect of adoption of the Medicare Act was a reduction of approximately $1 million and $2 million, respectively, in TXU Gas’ postretirement benefit costs.

2.   GAS DISTRIBUTION RATE CASE

     In May 2003, TXU Gas filed, for the first time, a system-wide rate case for the distribution and pipeline operations. The case was filed in all 437 incorporated cities served by the distribution operations, and at the RRC for the pipeline business and for unincorporated areas served by the distribution operations. The TXU Gas filing requested an annual revenue increase of $69.5 million or 7.24%. All 437 cities took action on the case within their statutory time frame, and TXU Gas appealed these actions to the RRC. Twelve parties intervened in the case.

     On May 25, 2004, the RRC issued a final order in TXU Gas’ system-wide rate case granting an $11.7 million or 1.22% increase in TXU Gas’ rates. Additionally, as a result of the RRC order, TXU Gas recorded a charge of approximately $153 million ($99 million after-tax) in the second quarter 2004 to reserve for certain regulatory disallowances contained within the RRC’s order. The disallowances consisted of the following:

    Gas utility plant investment associated with the replacement of polyethylene pipe (“poly pipe”) in the amount of $77 million, with the related charge reported in other deductions;
 
    Regulatory asset relating to costs incurred for identifying locations requiring polyethylene pipe (“poly pipe”) replacements in the amount of $40 million, with the related charge reported in operation and maintenance expense;
 
    Regulatory asset relating to the costs of employee severance programs occurring in 1997 and again in 1999 in the amount of $31 million, with the related charge reported in operation and maintenance expense;
 
    Gains on sales of land and cushion gas in the combined approximate amount of $5 million, with the related charge reported in other deductions.

     TXU Gas believes that the final order does not follow applicable law or precedent in many important respects and filed a motion for rehearing requesting the RRC to reconsider and reverse significant judgments that TXU Gas believes are in error. The RRC has denied the motion for rehearing. TXU Gas is filing an appeal in district court.

3.   FINANCING ARRANGEMENTS

     Short-term Borrowings — At June 30, 2004, TXU Gas had outstanding short-term borrowings consisting of bank borrowings of $300 million at a weighted average interest rate of 2.18% and $38 million of short-term advances from affiliates at a weighted average interest rate of 2.85%. At March 31, 2004, TXU Gas had outstanding short-term advances from affiliates of $231 million at a weighted average interest rate of 2.86%.

     Credit Facilities — On April 26, 2004, TXU Gas entered into a new $300 million, 364-day credit facility. At June 30, 2004, the facility was fully drawn and borrowings were used to repay advances from affiliates. In July 2004, this facility was repaid and has been terminated.

     Sale of Receivables — TXU Corp. has established an accounts receivable securitization program. The activity under this program is accounted for as a sale of accounts receivable in accordance with SFAS 140. Under the program, subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU Receivables Company, a consolidated wholly-owned bankruptcy remote direct subsidiary of TXU Corp., which sells undivided interests in the purchased accounts receivable for cash to special purpose entities established by financial institutions (the funding entities). As of June 30, 2004, $47 million of undivided interests in TXU Gas’ accounts receivable had been sold by TXU Receivables Company. Effective June 30, 2004, the program was extended through June 28, 2005. Additionally, the extension allows for increased availability of funding through a credit ratings-based reduction of customer deposits previously used to reduce the amount of undivided interests that could be sold. Undivided interests will now be reduced by 100% of the customer deposit for a Baa3/BBB- rating; 50% for a Baa2/BBB rating; and zero % for a Baa1/BBB+ and above rating (based on each originator’s credit rating).

     All new trade receivables under the program generated by the originators are continuously purchased by TXU Receivables Company with the proceeds from collections of receivables previously purchased. Changes in the amount of funding under the program, through changes in the amount of undivided interests sold by TXU Receivables Company, are generally due to seasonal variations in the level of accounts receivable and changes in collection trends. TXU Receivables Company has issued subordinated notes payable to the originators for the difference between the face amount of the uncollected accounts receivable purchased, less a discount, and cash paid to the originators that was funded by the sale of the undivided interests.

     The discount from face amount on the purchase of receivables principally funds program fees paid by TXU Receivables Company to the funding entities, as well as a servicing fee paid by TXU Receivables Company to TXU Business Services. The program fees (losses on sale), which consist primarily of interest costs on the underlying financing, were $1 million for each of the six-month periods ending June 30, 2004 and 2003 and approximated 2.1% and 3.6% for the first six months of 2004 and 2003, respectively, of the average funding under the program on an annualized basis; these fees represent the net incremental costs of the program to TXU Gas and are reported in operation and maintenance expenses. The servicing fee, which totaled approximately $1 million and $2 million, for the first six months of 2004 and 2003, respectively, compensates TXU Business Services for its services as collection agent, including maintaining the detailed accounts receivable collection records.

     The June 30, 2004 balance sheet reflects $85 million face amount of trade accounts receivable reduced by $47 million of undivided interests sold by TXU Receivables Company. Funding under the program decreased $6 million for the six months ended June 30, 2004, primarily due to the effect of seasonal fluctuations. Funding under the program for the six months ended June 30, 2003 increased $22 million. Funding increases or decreases under the program are reflected as operating cash flow activity in the statement of cash flows. The carrying amount of the retained interests in the accounts receivable approximated fair value due to the short-term nature of the collection period.

     Activities of TXU Receivables Company related to TXU Gas for the six months ended June 30, 2004 and 2003 were as follows:

                 
     
Six Months Ended June 30,
    2004
  2003
Cash collections on accounts receivable
  $ 885     $ 915  
Face amount of new receivables purchased
    (872 )     (938 )
Discount from face amount of purchased receivables
    2       3  
Program fees paid
    (1 )     (1 )
Servicing fees paid
    (1 )     (2 )
Increase in subordinated notes payable
    (7 )     1  
 
   
 
     
 
 
TXU Gas’ operating cash flows (provided)/utilized under the program
  $ 6     $ (22 )
 
   
 
     
 
 

     Upon termination of the program, cash flows to TXU Gas would be delayed as collections of sold receivables would be used by TXU Receivables Company to repurchase the undivided interests sold instead of purchasing new receivables. The level of cash flows would normalize in approximately 16 to 31 days.

     Contingencies Related to Sale of Receivables Program — Although TXU Receivables Company expects to be able to pay its subordinated notes from the collections of purchased receivables, these notes are subordinated to the undivided interests of the financial institutions in those receivables, and collections might not be sufficient to pay the subordinated notes. The program may be terminated if either of the following events occurs:

  1)   all of the originators cease to maintain their required fixed charge coverage ratio and debt to capital (leverage) ratio;
 
  2)   the delinquency ratio (delinquent for 31 days) for the sold receivables, the default ratio (delinquent for 91 days or deemed uncollectible), the dilution ratio (reductions for discounts, disputes and other allowances) or the days collection outstanding ratio exceed stated thresholds and the financial institutions do not waive such event of termination. The thresholds apply to the entire portfolio of sold receivables, not separately to the receivables of each originator.

     The delinquency and dilution ratios exceeded the relevant thresholds during the first four months of 2003, but waivers were granted. These ratios were affected by issues related to the transition to competition. Certain billing and collection delays arose due to implementation of new systems and processes within Energy and ERCOT for clearing customers’ switching and billing data. Strengthened credit and collection policies and practices have brought the ratios into consistent compliance with the program requirement.

     Under terms of the receivables sale program, all the originators are required to maintain specified fixed charge coverage and leverage ratios (or supply a parent guarantor that meets the ratio requirements). The failure, by an originator or its parent guarantor, if any, to maintain the specified financial ratios would prevent that originator from selling its accounts receivable under the program. If all the originators and the parent guarantor, if any, fail to maintain the specified financial ratios so that there are no eligible originators, the facility would terminate.

     Long-Term Debt — At June 30, 2004 and December 31, 2003, the long-term debt of TXU Gas and its consolidated subsidiaries consisted of the following:

 
                 
    June 30,   December 31,
    2004
  2003
6.375% Fixed Notes due February 1, 2004
  $     $ 150  
7.125% Fixed Notes due June 15, 2005
    150       150  
6.564% Fixed Remarketed Reset Notes due January 1, 2008, remarketing date July 1, 2005 (a)
    125       125  
Unamortized valuation adjustment
          1  
 
   
 
     
 
 
Total TXU Gas (b)
    275       426  
Less amount due currently
    150       150  
 
   
 
     
 
 
Total long-term debt
  $ 125     $ 276  
 
   
 
     
 
 


(a)   These series are in the multiannual mode and are subject to mandatory tender prior to maturity on the mandatory remarketing date. On such date, the interest rate and interest rate period will be reset for the notes.
 
(b)   Upon the sale of TXU Gas’ operations, under the current definitive agreement, TXU Gas would be required to provide for the satisfaction of the outstanding long-term debt obligations.

4.   LONG-TERM DEBT HELD BY SUBSIDIARY TRUST

     At June 30, 2004 and December 31, 2003, a statutory business trust established as a wholly-owned financing subsidiary of TXU Gas, had 150 units ($147 million) of floating rate mandatorily redeemable preferred securities outstanding. Distributions on these preferred securities are payable quarterly based on an annual floating rate determined quarterly with reference to a three-month LIBOR rate plus a margin. The only assets held by the trust are $155 million principal amount of Floating Rate Junior Subordinated Debentures Series A issued by TXU Gas. The interest on the debentures matches the distributions on the preferred trust securities. The debentures will mature on July 1, 2028. TXU Gas has the right to redeem the debentures and cause the redemption of the preferred securities in whole or in part. TXU Gas owns the common securities issued by its subsidiary trust and has effectively issued a full and unconditional guarantee of the trust’s preferred securities.

     As a result of the adoption of FIN 46R in the fourth quarter of 2003, the subsidiary trust has been deconsolidated. As a result, TXU Gas’ balance sheet reflects the $155 million of long-term debt held by the trust and an investment in the trust of $8 million, instead of the former presentation of $147 million of preferred interests of subsidiaries. Upon the sale of TXU Gas’ operations, under the current definitive agreement, TXU Gas would be required to provide for the satisfaction of these securities.

5.   PREFERRED STOCK

     At June 30, 2004, TXU Gas had 75,000 shares of Adjustable Rate Series F Preferred Stock outstanding (2,000,000 total shares authorized) which is entitled upon liquidation to the stated value of $1,000 per share. The preferred stock series is the underlying preferred stock for depositary shares that were issued to the public. Each depositary share of $25 per share, represents one-fortieth of a share of underlying preferred stock. The dividend rate is determined quarterly, in advance, based on US Treasury rates and was 4.5% at June 30, 2004. Upon the sale of TXU Gas’ operations, under the current definitive agreement, TXU Gas would be required to redeem the preferred stock.

     At June 8, 2004, the Board of Directors declared a dividend of $11.25 per share on the outstanding Adjustable Rate Cumulative Preferred Stock, Series F payable on August 1, 2004 to shareholders of record at the close of business on July 16, 2004.

 

6.   CONTINGENCIES

     On April 13, 2004, the US Commodity Futures Trading Commission (CFTC) issued a subpoena requiring TXU Corp. to produce information about storage of natural gas, including weekly and monthly storage reports submitted to the Energy Information Administration by TXU Gas. This request seeks information for the period of October 31, 2003 through January 2, 2004. TXU Corp. has cooperated with the CFTC, provided the requested information, and believes that TXU Gas has not engaged in any activity that would justify action against it by the CFTC.

     Guarantees — TXU Gas has entered into contracts that contain guarantees to outside parties that could require performance or payment under certain conditions. These guarantees have been grouped based on similar characteristics and are described in detail below.

     Other — In 1992, a discontinued engineering and construction business of TXU Gas completed construction of a plant, the performance of which is warranted by TXU Gas through 2008. The maximum contingent liability under the guarantee is approximately $106 million. No claims have been asserted under the guarantee and none are anticipated.

     Income Tax Contingencies — In April 2003, the IRS proposed to TXU Gas certain adjustments to the US federal income tax returns of ENSERCH Corporation (the acquired predecessor of TXU Gas) for the 1993 calendar year. TXU Gas appealed the proposed adjustments to the IRS Appeals Office and in June 2004, the IRS Appeals Office rejected the substance of TXU Gas’ appeal of the IRS proposed adjustments, refused to consider a settlement of the disputed issues, and indicated that the IRS will issue a statutory notice of deficiency for the tax, penalty, and interest due. If the matter is resolved against TXU Gas, TXU Gas would be assessed a deficiency of $65 million (including penalty and interest through June 30, 2004). In addition, TXU Gas would have tax liabilities of $40 million (plus any interest and penalty assessed) related to subsequent years, for which audits have not yet been completed.

     Based on the unsuccessful settlement negotiations, additional tax reserves of $47 million were recorded during the current period to account for the excess of the tax, penalty, and interest asserted by the IRS over the amount of tax reserves previously recorded. In accordance with acquisition accounting rules, the portion of the additional tax reserve related to the pre-acquisition tax, penalty, and interest ($30 million) has been charged to goodwill, and the remaining portion related to interest for periods after August 5, 1997 ($17 million) has been charged to income. TXU Gas has the right to appeal the IRS’ proposed adjustments through a court proceeding, and its currently evaluating its legal options. Management believes that reserves recorded related to these matters are adequate. Under the definitive sales agreement, the buyer of the TXU Gas operations will not assume liabilities, among others, related to ENSERCH tax returns contested by the IRS.

     General — In addition to the above, TXU Gas and its subsidiaries are involved in various other legal and administrative proceedings in the normal course of business the ultimate resolution of which, in the opinion of each, should not have a material effect upon their financial position, results of operations or cash flows.

 

 
7.   SUPPLEMENTARY FINANCIAL INFORMATION

     Other Deductions —

                                 
    Three Months   Six Months
    Ended June 30,
  Ended June 30,
    2004
  2003
  2004
  2003
Other deductions
                               
Reserve for regulatory allowance (Note 2)
  $ 77     $     $ 77        
Goodwill impairment
    35             35        
Employee severance (Note 1)
    7             7        
Regulatory disallowance (Note 2)
    5             5        
Other
    1             1        
 
   
 
     
 
     
 
     
 
 
Total other deductions
  $ 125     $     $ 125     $  
 
   
 
     
 
     
 
     
 
 

     An additional goodwill amount of $30 million was recorded in the second quarter of 2004 in connection with income tax contingencies related to the acquired predecessor of TXU Gas (see Note 6 to Financial Statements). In consideration of the current best estimate of the net proceeds from the expected sale of the business and the expected carrying value of the assets (including goodwill) to be sold under the definitive sales agreement, a goodwill impairment charge of $35 million (pre and after-tax) was recorded in the second quarter of  
2004.

     Interest Expense and Related Charges —

                                 
    Three Months   Six Months
    Ended June 30,
  Ended June 30,
    2004
  2003
  2004
  2003
Interest (a)
  $ 7     $ 10     $ 13     $ 20  
Interest-affiliated debt
    1       1       3       2  
 
   
 
     
 
     
 
     
 
 
Total interest expense and related charges
  $ 8     $ 11     $ 16     $ 22  
 
   
 
     
 
     
 
     
 
 

     (a) Includes interest on long-term debt held by subsidiary trust.

     Retirement Plan And Other Postretirement Benefits — TXU Gas is a participating employer in the TXU Retirement Plan, a defined benefit pension plan sponsored by TXU Corp. TXU Gas also participates with TXU Corp. and other affiliated subsidiaries of TXU Corp. to offer health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees. The allocated net periodic pension cost and net periodic postretirement benefits cost other than pensions applicable to TXU Gas was $5 million and $4 million for the three months ended June 30, 2004 and 2003, respectively, and $10 million and $9 million for the six months ended June 30, 2004 and 2003, respectively.

     At June 30, 2004, TXU Gas estimates that its total contributions to the pension plan and other postretirement benefit plans for the remainder of 2004 will not be materially different than previously disclosed in the 2003 Form 10-K.

 

     Regulatory Assets (Liabilities) —

                 
    June 30,   December 31,
    2004
  2003
Asset retirement obligations — removal cost
  $ (135 )   $ (129 )
Over-collected gas costs
    (13 )     (2 )
Distribution safety compliance costs(See Note 2)
          41  
Rate case costs
    27       17  
Other regulatory assets
    8       38  
 
   
 
     
 
 
Regulatory liabilities
  $ (113 )   $ (35 )
 
   
 
     
 
 

     Included above are assets of $51 million at December 31, 2003 that were earning a return. There are no regulatory assets at June 30, 2004 that are earning a return. The regulatory assets have an average remaining recovery period of approximately 15 years (see Note 2 to Financial Statements).

     At June 30, 2004 and December 31, 2003, accounts receivable are stated net of allowance for uncollectible accounts of $5 million and $3 million, respectively. During the six months ended June 30, 2004, bad debt expense was $5 million and account write-offs were $3 million. During the six months ended June 30, 2003, bad debt expense was $7 million. Allowances related to receivables sold are reported in other current liabilities and totaled $2 million at June 30, 2004 and December 31, 2003.

     Accounts receivable included $12 million and $27 million of unbilled revenues at June 30, 2004 and December 31, 2003, respectively.

     Intangible assets other than goodwill are comprised of the following:

                                                 
     
As of June 30, 2004
  As of December 31, 2003
    Gross                   Gross        
    Carrying   Accumulated           Carrying   Accumulated    
    Amount
  Amortization
  Net
  Amount
  Amortization
  Net
Amortized intangible assets
                                               
Capitalized software
  $ 33     $ 18     $ 15     $ 32     $ 15     $ 17  
Land easements
    15       8       7       16       9       7  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
  $ 48     $ 26     $ 22     $ 48     $ 24     $ 24  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

     Amortized intangible asset balances are classified as property, plant and equipment in the balance sheet. TXU Gas has no intangible assets (other than goodwill) that are not amortized.

     Aggregate amortization expense for intangible assets was $2 million for each of the six month periods ended June 30, 2004 and 2003.

 

     Inventories by Major Category—

                 
    June 30,   December 31,
    2004
  2003
Materials and supplies, at cost
  $ 6     $ 5  
Gas stored underground, primarily at weighted average cost
    129       139  
 
   
 
     
 
 
Total inventories
  $ 135     $ 144  
 
   
 
     
 
 

     Property, Plant and Equipment— At June 30, 2004, property, plant and equipment totaling $1.6 billion was stated net of accumulated depreciation and amortization of $307 million and net of a $77 million reserve for regulatory allowances, and at December 31, 2003, property, plant and equipment totaling $1.7 billion was stated net of accumulated depreciation and amortization of $275 million.

     Derivatives and Hedges — TXU Gas had interest rate swaps related to the preferred securities of the subsidiary financing trust that expired on July 1, 2003. The terms of these interest rate swap agreements, which had been designated as cash flow hedges, matched the terms of the underlying hedged indebtedness. As a result, TXU Gas experienced no hedge ineffectiveness. TXU Gas had no cash flow hedges during 2004.

     Affiliate Transactions — The following represent significant affiliate transactions of TXU Gas:

    Average daily short-term advances from affiliates for the three months ended June 30, 2004 and 2003 were $114 million and $152 million, respectively, and for the six months ended June 30, 2004 and 2003, were $145 million and $160 million, respectively. Interest expense incurred on the advances for the three months ended June 30, 2004 and 2003 was approximately $1 million in each period, and for the six months ended June 30, 2004 and 2003 was $2 million in each period. The weighted average interest rate for the three months ended June 30, 2004 and 2003 was 2.85% and 3.07%, respectively. The weighted average interest rate for the six months ended June 30, 2004 and 2003 was 2.85% and 2.83%, respectively.
 
    Energy charges TXU Gas for customer and administrative services at cost. For the three months ended June 30, 2004 and 2003, these costs totaled $8 million and $7 million, respectively. For the six months ended June 30, 2004 and 2003, these charges totaled $15 million and $14 million, respectively. These charges are reported in operation and maintenance expenses.
 
    Electric Delivery charges TXU Gas for customer and administrative services at cost. For the three months ended June 30, 2004 and 2003, these costs totaled $5 million and $7 million, respectively. For the six months ended June 30, 2004 and 2003 these charges totaled $10 million and $15 million, respectively. These charges are reported in operation and maintenance expenses.
 
    Included in reported revenues were $3 million and $5 million from the sale and transportation of gas to other TXU Corp. subsidiaries for the three months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004 and 2003, these revenues totaled $4 million and $8 million, respectively.
 
    Affiliated interest expense includes $600 thousand for the six months ended June 30, 2004, related to interest expense allocated to TXU Gas for the LOC 2003 Trust, a special purpose, wholly-owned subsidiary of TXU Corp. (LOC Trust). LOC Trust’s assets constitute collateral for the benefit of the lenders to secure issuances of letters of credit or loans to TXU Corp. and its subsidiaries.
 
    TXU Business Services charges TXU Gas for certain financial, accounting, information technology, environmental, procurement and personnel services and other administrative services at cost. For the three months ended June 30, 2004 and 2003, these costs totaled $12 million and $8 million, respectively. For the six months ended June 30, 2004 and 2003, these costs totaled $21 million and $17 million, respectively. These costs are largely reported in operation and maintenance expense.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TXU Gas Company:

We have reviewed the accompanying condensed consolidated balance sheet of TXU Gas and subsidiaries as of June 30, 2004, and the related condensed statements of consolidated income (loss) and of comprehensive income (loss) for the three-month and six-month periods ended June 30, 2004 and 2003, and the condensed statements of consolidated cash flows for the six-month periods ended June 30, 2004 and 2003. These interim financial statements are the responsibility of TXU Gas’ management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of TXU Gas as of December 31, 2003, and the related statements of consolidated income, comprehensive income, cash flows and shareholder’s equity for the year then ended (not presented herein); and in our report dated March 11, 2004, 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 December 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

DELOITTE & TOUCHE LLP

Dallas, Texas
August 13, 2004

 

 
 
EXHIBIT 99.2

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

On June 17, 2004, LSG Acquisition Corporation, a wholly owned subsidiary of Atmos Energy Corporation (referred to in this report, with its subsidiaries, as Atmos or we, us, the company or a similar word), entered into a definitive agreement with TXU Gas Company to acquire the natural gas distribution and pipeline operations of TXU Gas. The TXU Gas operations we are acquiring are regulated businesses engaged in the purchase, transmission, distribution and sale of natural gas in the north-central, eastern and western parts of Texas. In this report, we refer to TXU Gas Company as TXU Gas and to the acquisition of these operations as the TXU Gas acquisition.

The purchase price, excluding transaction costs, for the acquisition is $1.925 billion, which is payable in cash. The price is subject to adjustment if at the time of closing the working capital of TXU Gas is less or more than approximately $121 million. The price is also subject to increase by the amount of any capital expenditures made by TXU Gas prior to closing that exceed its budgeted amounts. We are not assuming any indebtedness in the transaction. TXU Gas has agreed to repay or redeem all of its existing indebtedness and its preferred stock and to retain or pay certain other liabilities under the terms of the acquisition agreement.

We have received a commitment from Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Capital Corporation to provide a senior unsecured credit facility in the amount of up to $1.925 billion to finance, or backstop the issuance of commercial paper to finance, this acquisition. We refer to this credit facility as the bridge financing facility. The terms of the facility provide that the amount of the bridge financing facility will be reduced to the extent we obtain acquisition financing prior to the closing of the acquisition. In July 2004, we sold 9,939,393 shares of our common stock, which generated net proceeds of approximately $235.8 million that will be used to reduce the amount we intend to borrow under the bridge financing facility. We refer to this offering of our common stock as the July 2004 Offering.

The following unaudited pro forma combined financial statements are based on our historical consolidated financial statements and TXU Gas's historical financial statements, which are included in this current report on Form 8-K and our current report on Form 8-K filed on July 7, 2004, adjusted to give effect to the TXU Gas acquisition, the receipt of approximately $235.8 million in net proceeds from the July 2004 Offering and the proposed bridge financing for the TXU Gas acquisition. The unaudited pro forma combined statements of income for the nine months ended June 30, 2004 and for the twelve months ended September 30, 2003 give effect to the TXU Gas acquisition, the July 2004 Offering and the bridge financing for the acquisition as if each had occurred on October 1, 2002. The unaudited pro forma combined balance sheet as of June 30, 2004 gives effect to the TXU Gas acquisition, the July 2004 Offering and the bridge financing for the TXU Gas acquisition, as if each had occurred on June 30, 2004. The unaudited pro forma combined financial information does not give effect to the anticipated refinancing of the bridge financing facility with long-term debt and additional common equity financings.

The unaudited pro forma combined financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable but are subject to change. In our opinion, all adjustments have been made that are necessary to present fairly the pro forma information. The unaudited pro forma combined financial statements do not purport to represent what our results of operations or financial position would actually have been had the TXU Gas acquisition, the July 2004 Offering and the bridge financing for the TXU Gas acquisition occurred on such dates or to project our results of operations or financial position for any future date or period. The unaudited pro forma combined financial statements include adjustments that reflect our preliminary estimates of the allocation of the purchase price to the acquired assets and assumed liabilities of TXU Gas. The preliminary purchase price allocation is subject to change as more detailed analyses are completed and additional information related to the fair values of TXU Gas's assets and liabilities assumed in the TXU Gas acquisition become available. Final purchase accounting adjustments may differ materially from the pro forma adjustments presented herein. The unaudited pro forma combined financial statements also reflect the receipt of the net proceeds from the July 2004 Offering, the incurrence of the indebtedness under the bridge financing facility and related fees and expenses. The unaudited pro forma combined financial statements do not reflect any operating efficiencies and cost savings that we may achieve with respect to the combined entities nor any expense associated with achieving these benefits. The pro forma combined financial statements also do not give any effect to the interest income that may be derived from investing the proceeds of the July 2004 Offering in short-term cash equivalent investments between the closing of the July 2004 Offering and the closing of the TXU Gas acquisition. Further, the pro forma adjustments eliminate the income statement effects pertaining to the disallowance of certain assets and liabilities in TXU Gas's rate case on May 25, 2004. The decision in the rate case was available and considered by us as we finalized our offer for the operations of TXU Gas and, thus, directly related to the TXU Gas acquisition.

The historical financial statements of TXU Gas are based on TXU Gas's historical financial statements as filed with the SEC. To prepare the unaudited pro forma combined statement of income for the year ended September 30, 2003, we used our consolidated statement of income for the twelve months ended September 30, 2003 and TXU Gas's statement of income for the twelve months ended December 31, 2003. To prepare the unaudited pro forma combined statement of income for the nine months ended June 30, 2004 we used our consolidated statement of income for the nine months ended June 30, 2004 and derived TXU Gas's statement of income for the nine months ended June 30, 2004 using TXU Gas's unaudited statement of income for the six months ended June 30, 2004, which is included in this current report on Form 8-K and its audited statement of income for the twelve months ended December 31, 2003, which is included in our current report on Form 8-K filed with the SEC on July 7, 2004 as well as TXU Gas's unaudited statement of income for the nine months ended September 30, 2003, which we have not filed with the SEC.

You should read the following unaudited pro forma combined financial information in conjunction with our audited and unaudited consolidated financial statements and related notes, which are included in our annual report on Form 10-K for the year ended September 30, 2003 and our quarterly report on Form 10-Q for the quarterly period ended June 30, 2004 filed with the SEC. TXU Gas's audited and unaudited financial statements and related notes are included in our current report on Form 8-K filed with the SEC on July 7, 2004 and in this current report on Form 8-K.

 
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2004

                                      HISTORICAL       HISTORICAL        PRO FORMA
                                         ATMOS           TXU GAS         ADJUSTMENTS            PRO FORMA
                                         -----           -------         -----------            ---------
                                                                   (IN THOUSANDS)
ASSETS
Property, plant and equipment ...     $ 2,588,059      $ 2,008,888      $  (147,629)(a)(b)     $ 4,449,318
Less accumulated depreciation and
  amortization ..................         903,313          384,619             (884)(a)(b)       1,287,048
                                      -----------      -----------      -----------            -----------
  Net property, plant and
     equipment ..................       1,684,746        1,624,269         (146,745)             3,162,270
Current assets
  Cash and cash equivalents .....         126,895            8,001           (8,001)(a)            126,895
  Accounts receivable, net ......         243,719           28,751           41,760 (a)            314,230
  Gas stored underground ........          90,141          129,528               --                219,669
  Other current assets ..........          18,710           56,071          (33,241)(a)(c)          41,540
                                      -----------      -----------      -----------            -----------
     Total current assets .......         479,465          222,351              518                702,334
Goodwill and intangible assets ..         275,844          299,768          139,440 (b)            715,052
Deferred charges and other assets         240,477           52,236          (11,704)(a)(d)         281,009
                                      -----------      -----------      -----------            -----------
                                      $ 2,680,532      $ 2,198,624      $   (18,491)           $ 4,860,665
                                      ===========      ===========      ===========            ===========
CAPITALIZATION AND LIABILITIES
Shareholders' equity

  Preferred stock ...............     $        --      $    75,000      $   (75,000)(a)        $        --
  Common stock ..................             263                4               46 (b)(c)             313
  Additional paid-in capital ....         762,464          815,521         (579,811)(b)(c)         998,174
  Retained earnings .............         167,535         (135,173)         135,173 (b)            167,535
  Accumulated other comprehensive
     income (loss) ..............          (3,416)          (3,899)           3,899 (b)             (3,416)
                                      -----------      -----------      -----------            -----------
     Shareholders' equity .......         926,846          751,453         (515,693)             1,162,606
Long-term debt ..................         863,266          280,077         (280,077)(a)            863,266
                                      -----------      -----------      -----------            -----------
     Total capitalization .......       1,790,112        1,031,530         (795,770)             2,025,872
Current liabilities
  Accounts payable and accrued
     liabilities ................         201,123           89,273          (54,469)(a)            235,927
  Other current liabilities .....         210,759          129,588          (88,843)(a)            251,504
  Short-term debt ...............              --          300,000        1,398,469 (a)(c)       1,698,469
  Current maturities of long-term
     debt .......................           5,918          150,000         (150,000)(a)              5,918
                                      -----------      -----------      -----------            -----------
     Total current liabilities ..         417,800          668,861        1,105,157              2,191,818
Deferred income taxes ...........         227,899           29,722          (29,722)(b)            227,899
Regulatory cost of removal
  obligation ....................         105,059          134,661               --                239,720
Deferred credits and other
  liabilities ...................         139,662          333,850         (298,156)(a)(d)         175,356
                                      -----------      -----------      -----------            -----------
                                      $ 2,680,532      $ 2,198,624      $   (18,491)           $ 4,860,665
                                      ===========      ===========      ===========            ===========

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.

 
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 2004

                                                      HISTORICAL        HISTORICAL        PRO FORMA
                                                         ATMOS            TXU GAS         ADJUSTMENTS                 PRO FORMA
                                                         -----            -------         -----------                 ---------
                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues
  Utility segment...............................     $  1,425,022    $   1,075,050      $      (6,054)(e)          $  2,494,018
  Natural gas marketing segment.................        1,255,386               --                 --                 1,255,386
  Other nonutility segment......................           20,492               --                 --                    20,492
  Intersegment eliminations.....................         (273,741)              --                 --                  (273,741)
                                                     ------------    -------------      -------------              ------------
                                                        2,427,159        1,075,050             (6,054)                3,496,155
Purchased gas cost
  Utility segment...............................        1,003,977          633,529                 --                 1,637,506
  Natural gas marketing segment.................        1,214,395               --                 --                 1,214,395
  Other nonutility segment......................            9,158               --                 --                     9,158
  Intersegment eliminations.....................         (273,042)              --                 --                  (273,042)
                                                     ------------    -------------      -------------              ------------
                                                        1,954,488          633,529                 --                 2,588,017
                                                     ------------    -------------      -------------              ------------
Gross profit....................................          472,671          441,521             (6,054)                  908,138
Operating expenses
  Operation and maintenance.....................          166,476          280,548            (87,442)(e)(f)            359,582
  Depreciation and amortization.................           69,879           56,988             (5,739)(e)(f)(g)         121,128
  Taxes, other than income......................           45,901           78,962                 10 (e)               124,873
                                                     ------------    -------------      -------------              ------------
     Total operating expenses...................          282,256          416,498            (93,171)                  605,583
                                                     ------------    -------------      -------------              ------------
Operating income................................          190,415           25,023             87,117                   302,555
Miscellaneous income (expense)..................            7,850         (120,306)           123,317 (e)(f)             10,861
Interest charges................................           49,506           26,086             18,503 (e)(f)             94,095
                                                     ------------    -------------      -------------              ------------
Income (loss) before income taxes...............          148,759         (121,369)           191,931                   219,321
Income tax expense..............................           56,148          (15,654)            42,469 (i)                82,963
                                                     ------------    -------------      -------------              ------------
Net income (loss)...............................     $     92,611    $    (105,715)     $     149,462              $    136,358
                                                     ============    =============      =============              ============
Per share data..................................
  Basic income per share........................     $       1.79                                                  $       2.21
                                                     ============                                                  ============
  Diluted income per share......................     $       1.78                                                  $       2.20
                                                     ============                                                  ============
Weighted average shares outstanding:
  Basic.........................................           51,788                               9,939                    61,727
                                                     ============                                                  ============
  Diluted.......................................           52,166                               9,939                    62,105
                                                     ============                                                  ============

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.


UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2003

                                                      HISTORICAL     HISTORICAL      PRO FORMA
                                                         ATMOS         TXU GAS      ADJUSTMENTS              PRO FORMA
                                                         -----         -------      -----------              ---------
                                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues
  Utility segment...............................     $ 1,554,082    $ 1,344,106     $  (17,729)(e)         $  2,880,459
  Natural gas marketing segment.................       1,668,493            --             --                 1,668,493
  Other nonutility segment......................          21,630            --             --                    21,630
  Intersegment eliminations.....................        (444,289)           --             --                  (444,289)
                                                     -----------    -----------     ----------             ------------
                                                       2,799,916      1,344,106        (17,729)               4,126,293
Purchased gas cost
  Utility segment...............................       1,062,679        790,542            --                 1,853,221
  Natural gas marketing segment.................       1,644,328            --             --                 1,644,328
  Other nonutility segment......................           1,540            --             --                     1,540
  Intersegment eliminations.....................        (443,607)           --             --                  (443,607)
                                                     -----------    -----------     ----------             ------------
                                                       2,264,940        790,542            --                 3,055,482
                                                     -----------    -----------     ----------             ------------
Gross profit....................................         534,976        553,564        (17,729)               1,070,811
Operating expenses
  Operation and maintenance.....................         205,090        287,811        (36,554)(e)(f)           456,347
  Depreciation and amortization.................          87,001         74,054         (8,253)(e)(f)(g)        152,802
  Taxes, other than income......................          55,045         91,414          1,138 (e)              147,597
                                                     -----------    -----------     ----------             ------------
     Total operating expenses...................         347,136        453,279        (43,669)                 756,746
                                                     -----------    -----------     ----------             ------------
Operating income................................         187,840        100,285         25,940                  314,065
Miscellaneous income............................           2,191          3,658         (4,361)(e)                1,488
Interest charges................................          63,660         40,862         18,585 (e)(h)           123,107
                                                     -----------    -----------     ----------             ------------
Income before income taxes......................         126,371         63,081          2,994                  192,446
Income tax expense..............................          46,910         19,287          5,822 (i)               72,019
                                                     -----------    -----------     ------------           ------------
Net income (loss)...............................     $    79,461    $    43,794     $   (2,828)            $    120,427
                                                     ===========    ===========     ==========             ============
Per share data
  Basic income per share........................     $      1.72                                           $       2.14
                                                     ===========                                           ============
  Diluted income per share......................     $      1.71                                           $       2.13
                                                     ===========                                           ============
Weighted average shares outstanding:
  Basic.........................................          46,319                         9,939                   56,258
                                                     ===========                                           ============
  Diluted.......................................          46,496                         9,939                   56,435
                                                     ===========                                           ============

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited pro forma combined financial statements give effect to the TXU Gas acquisition and the proposed financing for this acquisition, including the July 2004 Offering (described below) and the bridge financing facility.

The cash purchase price to be paid to TXU Gas for the assets to be acquired is $1.925 billion. For purposes of the unaudited combined pro forma financial statements, we have assumed that the purchase price will not be adjusted on account of any working capital or capital expenditures adjustments as provided for in the acquisition agreement. We expect to incur $7.5 million in related transaction costs for a total purchase price of $1.933 billion. To finance the TXU Gas acquisition, we will use the proceeds of our July 2004 Offering and the bridge financing facility.

The unaudited combined pro forma financial statements give effect to the July 2004 Offering, our sale in July 2004 of 9,939,393 shares of our common stock at a price of $24.75 per share resulting in net proceeds of approximately $235.8 million, after deducting $10.2 million in underwriting discount and commissions and estimated fees and expenses related to the July 2004 Offering.

The bridge financing facility will either serve as a backup liquidity facility for our commercial paper or as a loan facility, in either case in an amount sufficient to finance the remainder of the purchase price. The term of the bridge financing facility is 364 days from the date that the TXU Gas acquisition closes. We will pay a commitment fee on unused amounts under the bridge financing facility that is based on our credit rating. We estimate that this fee will be 0.15% per year. If we use the bridge financing facility to backstop our commercial paper, we will also pay floating interest rates on our commercial paper that will be determined by our credit ratings, investor demand and then current market conditions. We anticipate that these interest rates would be lower than the rate we would pay if we use the bridge financing facility as a loan facility. Therefore, for purposes of these unaudited pro forma combined financial statements, we assume that we will use the bridge financing facility as a loan facility. In that event, we would pay a floating interest rate based on LIBOR plus a margin and a utilization fee that are each based on our credit rating. We estimate that the effective interest rate will be 3.5% per year, including amortization of deferred financing costs and other fees. Depending on the capital markets and other factors, we expect to refinance the bridge financing facility with long-term debt and additional common equity financings prior to the maturity of the bridge financing facility. The unaudited pro forma combined financial statements only give effect to the bridge financing facility and the July 2004 Offering and do not give effect to any commercial paper issuance or any subsequent debt and common equity issuance to refinance the bridge financing facility, as the terms of those issuances cannot be reasonably estimated at this time. Further, the unaudited pro forma combined financial statements do not give effect to any short-term interest income earned on the proceeds of the July 2004 Offering between the closing of the July 2004 Offering and the closing of the TXU Gas acquisition.

The TXU Gas acquisition will be accounted for as an asset purchase with Atmos acquiring substantially all of the assets of TXU Gas. For more information on the assets and liabilities of TXU Gas that will not be acquired, see Note 2 - Pro Forma Adjustments.

The unaudited pro forma combined balance sheet assumes our July 2004 Offering, the TXU Gas acquisition and the bridge financing facility all closed on June 30, 2004. The unaudited pro forma combined statements of income assume the July 2004 Offering, the TXU Gas acquisition and the bridge financing facility all closed on October 1, 2002, the first day of our 2003 fiscal year. The historical amounts used as the basis for the unaudited pro forma combined financial statements have been derived from the historical financial statements as follows:

- Unaudited pro forma combined balance sheet. Both the Atmos and TXU Gas historical amounts are derived from the respective company's unaudited balance sheets as of June 30, 2004. The TXU Gas unaudited balance sheet as of June 30, 2004, is included in this current report on Form 8-K.

- Unaudited pro forma combined statements of income. The Atmos historical amounts are derived from our audited income statement for the year ended September 30, 2003 and our unaudited income statement for the nine months ended June 30, 2004.

As TXU Gas uses a calendar year end and Atmos uses a September 30 fiscal year end, for purposes of the unaudited pro forma combined statement of income for the twelve months ended September 30, 2003, TXU Gas's audited income statement for the twelve months ended December 31, 2003 has been used.

For purposes of the unaudited pro forma combined statement of income for the nine months ended June 30, 2004, TXU Gas's actual nine months ended June 30, 2004 have been used. The historical amounts for TXU Gas for the nine months ended June 30, 2004 are derived by subtracting the corresponding amounts in TXU Gas's unaudited income statement for the nine months ended September 30, 2003 from the corresponding amounts in TXU Gas's audited income statement for the twelve months ended December 31, 2003 and then adding the corresponding amounts in TXU Gas's unaudited income statement for the six months ended June 30, 2004. TXU Gas's audited income statement for the twelve months ended December 31, 2003 is included in our current report on Form 8-K filed with the SEC on July 7, 2004 and its unaudited income statement for the six months ended June 30, 2004 is included in this current report on Form 8-K. TXU Gas's income statement for the nine months ended September 30, 2003 has not been filed with the SEC by Atmos Energy Corporation.

The following table illustrates how the historical amounts for TXU Gas for the nine months ended June 30, 2004 were derived:

 

                                               (A)                (B)               (C)        (A) - (B) + (C)
                                          TWELVE MONTHS       NINE MONTHS       SIX MONTHS       NINE MONTHS
                                              ENDED              ENDED             ENDED            ENDED
                                          DECEMBER 31,       SEPTEMBER 30,       JUNE 30,         JUNE 30,
                                              2003               2003              2004             2004
                                              ----               ----              ----             ----
                                                                    (IN THOUSANDS)
Operating revenues...................    $     1,344,106     $    993,339      $    724,283     $  1,075,050
Purchased gas cost...................            790,542          584,674           427,661          633,529
                                         ---------------     ------------      ------------     ------------
  Gross profit.......................            553,564          408,665           296,622          441,521
Operating expenses
  Operation and maintenance..........            287,811          212,785           205,522          280,548
  Depreciation and amortization......             74,054           55,264            38,198           56,988
  Taxes, other than income...........             91,414           73,893            61,441           78,962
                                         ---------------     ------------      ------------     ------------
     Total operating expenses........            453,279          341,942           305,161          416,498
                                         ---------------     ------------      ------------     ------------
Operating income (loss)..............            100,285           66,723            (8,539)          25,023
Miscellaneous income (expense).......              3,658            2,735          (121,229)        (120,306)
Interest charges.....................             40,862           30,960            16,184           26,086
                                         ---------------     ------------      ------------     ------------
Income before income taxes...........             63,081           38,498          (145,952)        (121,369)
Income tax expense (benefit).........             19,287           12,367           (22,574)         (15,654)
                                         ---------------     ------------      -------------    -------------
Net income...........................    $        43,794     $     26,131      $   (123,378)    $   (105,715)
                                         ===============     ============      =============    =============

The unaudited pro forma combined income statement for the twelve months ended September 30, 2003 excludes the cumulative effect of an accounting change which was recognized by Atmos for the adoption of EITF Consensus 02-03 in 2003, which resulted in a charge of $7.8 million, net of tax. Further, the unaudited pro forma combined income statements exclude a charge of $2.8 million, net of tax, for a discontinued operation that was recognized by TXU Gas in the fourth quarter of calendar 2003. As previously discussed, due to the differing year ends used to prepare the unaudited pro forma combined statements of income, TXU Gas's fourth quarter of calendar 2003 is reflected in the unaudited pro forma combined income statements for both the twelve months ended September 30, 2003 and the nine months ended June 30, 2004.

2. PRO FORMA ADJUSTMENTS

The respective pro forma adjustments are explained below beside the corresponding footnote.

(a) Adjusts the historical balance sheet of TXU Gas for the assets and liabilities Atmos will not acquire. We are acquiring substantially all the assets of TXU Gas. However, TXU Gas is retaining its utility asset management services subsidiary, its cash position, certain vehicles and other insignificant assets and operations. Further, we are not assuming any of TXU Gas's debt, preferred stock, employee benefit liabilities, intercompany assets or liabilities and other insignificant liabilities.

Although we are not assuming the existing employee benefit liabilities or plans of TXU Gas, we have agreed to give the TXU Gas employees credit for years of TXU Gas service for specified purposes under our benefit plans, except for eligibility and benefit accruals for retiree medical benefits. We are discussing with TXU Gas whether it will transfer to us sufficient plan assets to permit us to agree to provide these past service credits for retiree medical benefits. We have not given effect to these retiree medical benefits in this pro forma financial information. With respect to the remaining employee benefit costs, we believe the historical benefit costs recognized by TXU Gas will approximate our benefit costs, and no pro forma adjustment has been recognized for the transition of these employees to the Atmos benefit plans.

TXU Gas's accounts receivable at June 30, 2004 had $41.8 million of intercompany payables netted against its third party receivables as a result of its intercompany securitization program. This adjustment reflects the elimination of that intercompany payable as well as the elimination of TXU Gas's intercompany long-term debt.

The following is a summary of the assets and liabilities to be retained by TXU Gas: (in thousands)

 

Cash...............................................            $     8,001
Accounts receivable................................                (41,760)
Other current assets...............................                 13,535
Other non-current assets...........................                 47,922
Preferred stock....................................                (75,000)
Long-term debt (including current maturities)                     (430,077)
Short-term debt....................................               (300,000)
Accounts payable and accrued liabilities...........                (54,469)
Other current liabilities..........................                (88,843)
Deferred credits and other liabilities.............               (334,374)
                                                               -----------
     Total.........................................            $(1,255,065)
                                                               ===========

(b) The purchase price for the acquired assets and assumed liabilities has been allocated as follows: (in thousands)

 

Cash purchase price................................     $ 1,925,000
Transaction costs and expenses.....................           7,540
                                                        -----------
     Total purchase price..........................     $ 1,932,540
                                                        ===========

Net property, plant and equipment..................     $ 1,477,524
Accounts receivable................................          70,511
Gas stored underground.............................         129,528
Other current assets...............................          21,141
Goodwill and intangible assets.....................         439,208
Deferred charges and other assets..................          40,532
Accounts payable and accrued liabilities...........         (34,804)
Other current liabilities..........................         (40,745)
Regulatory cost of removal obligation..............        (134,661)
Deferred credits and other liabilities.............         (35,694)
                                                        -----------
     Total.........................................     $ 1,932,540
                                                        ===========

This adjustment also reverses TXU Gas's remaining equity ($1.9 billion) after adjustment for the retained assets and liabilities and its current and deferred income taxes ($146.7 million) and goodwill ($299.8 million). As an asset purchase, our initial basis in the acquired assets and liabilities will be the same for both book and tax purposes. Thus, there are no deferred taxes related to the TXU Gas acquisition.

The sale of TXU Gas's assets was held through a competitive bid process. We believe the resulting goodwill is recoverable given the expected synergies we can achieve as a result of the TXU Gas acquisition. To that end, the TXU Gas acquisition significantly expands our existing utility operations in Texas. The North Texas operations of TXU Gas bridge our geographic operations between our existing utility operations in West Texas and Louisiana. TXU Gas's headquarters and service area are centered in Dallas, Texas, which is also the location of our corporate headquarters. Further, the addition of the regulated pipelines in North Texas may create additional gas marketing and other opportunities for our non-regulated subsidiaries, which include gas marketing and storage operations. We believe we will take several years to realize these synergies. Further, for the initial year of the integration, we have entered into agreements with TXU Gas and other affiliates of TXU Gas to provide transition services at cost. Thus, for the initial year of the transition, we do not expect significant changes to the acquired operations' cost structure, and no pro forma adjustment has been recognized for any synergies, economies of scale and cost savings we may achieve.

The amount allocated to property, plant and equipment represents our estimate of the fair value of the assets acquired. We have based that estimate on the amount we believe will ultimately be approved as rate base for rate setting purposes.

(c) Reflects the receipt of the proceeds of $235.8 million from our July 2004 Offering, net of $10.2 million in underwriting discount and commissions and estimated fees and expenses related to the July 2004 Offering, our receipt of the proceeds from the bridge financing facility of $1.7 billion and additional short-term debt borrowings of $9.2 million we expect to incur to pay estimated costs and expenses associated with the TXU Gas acquisition. For purposes of the combined pro forma financial statements, we have assumed we will draw on the bridge financing facility and not finance any portion of the purchase price with the issuance of commercial paper. We expect to incur $1.7 million in deferred financing costs related to the bridge financing facility.

(d) Reflects the reclassification of $36.2 million of regulatory assets from deferred credits and other liabilities to deferred charges and other assets to conform TXU Gas's presentation with our presentation.

(e) Reflects the elimination of the income statement effects of the assets and liabilities retained by TXU Gas, including TXU Gas retained subsidiaries, which were substantially comprised of its utility asset management services operations.

(f) Reflects the elimination of certain income statement effects pertaining to the disallowance for ratemaking purposes of certain assets and liabilities in TXU Gas's rate case on May 25, 2004, goodwill impairments and severance charges. The decision in the rate case was available and considered by us as we finalized our offer for the operations of TXU Gas and thus directly related to the TXU Gas acquisition. TXU Gas has estimated that the rate case will prospectively increase its revenue from its utility operations by approximately $11.7 million. However, as the effect on demand of increased rates cannot be precisely determined, no pro forma adjustment to revenues or operating expenses has been recognized in the unaudited pro forma combined income statements other than for the specific items that were disallowed in the rate case. Further, in anticipation of the TXU Gas acquisition, TXU Gas recognized goodwill impairment and severance costs totaling $42 million, before taxes, in the quarter ended June 30, 2004. The impairment charge is a nonrecurring charge directly related to the TXU Gas acquisition and the associated purchase price, and accordingly, these charges have been reversed in the pro forma statement of operations for the nine months ended June 30, 2004. Although we are not assuming the existing employee benefit liabilities or plans of TXU Gas, we have agreed to give the TXU Gas employees credit for years of TXU Gas service for specified purposes under our benefit plans, except for eligibility and benefit accruals for retiree medical benefits. We are discussing with TXU Gas whether it will transfer to us sufficient plan assets to permit us to agree to provide these past service credits for retiree medical benefits. We have not given effect to these retiree medical benefits in this pro forma financial information. With respect to the remaining employee benefit costs, we believe the historical benefit costs recognized by TXU Gas will approximate our benefit costs, and no pro forma adjustment has been recognized for the transition of these employees to the Atmos benefit plans.

(g) Reflects the anticipated change in depreciation and amortization given the change in basis to property, plant and equipment caused by purchase accounting.

(h) Adjusts the historical interest expense to reflect the anticipated interest expense related to the bridge financing facility, assuming an effective interest rate of 3.5% (see Note 1 -- Basis of Presentation), and the elimination of TXU Gas's interest expense. A 0.125% change in the interest rate would impact net income for the twelve months ended September 30, 2003 and the nine months ended June 30, 2004 by approximately $1.3 million and $1.0 million.

(i) Adjusts tax expense to reflect Atmos's effective tax rate and for the effect of the pro forma adjustments.

 
3. EARNINGS PER SHARE

The following tables reconcile our historical earnings per share calculation to the unaudited pro forma combined earnings per share calculation (in thousands):

Nine months ended June 30, 2004:
  Atmos historical net income..................................    $      92,611
  TXU Gas pro forma net income for assets acquired.............           43,747
                                                                   -------------
       Pro forma net income....................................    $     136,358
                                                                   =============
  Atmos historical weighted average shares outstanding.........           51,788
  Shares issued in July 2004 Offering..........................            9,939
                                                                   -------------
       Denominator for pro forma basic earnings per share......           61,727
  Effect of dilutive securities:
     Restricted stock..........................................              258
     Stock options.............................................              120
                                                                   -------------
       Denominator for pro forma diluted earnings per share....           62,105
                                                                   =============
Twelve months ended September 30, 2003:
  Atmos historical net income..................................    $      79,461
  TXU Gas pro forma net income for assets acquired.............           40,966
                                                                   -------------
       Pro forma net income....................................    $     120,427
                                                                   =============
  Atmos historical weighted average shares outstanding.........           46,319
  Shares issued in July 2004 offering..........................            9,939
                                                                   -------------
       Denominator for pro forma basic earnings per share......           56,258
  Effect of dilutive securities:
     Restricted stock..........................................              109
     Stock options.............................................               68
                                                                   -------------
       Denominator for pro forma diluted earnings per share....           56,435
                                                                   =============