UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 8-K
Current Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
June 17, 2004
ATMOS ENERGY CORPORATION
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))
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)
| 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) |
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DATE: August 31, 2004
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By: | /s/ LOUIS P. GREGORY | ||
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Louis P. Gregory Senior Vice President and General Counsel |
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EXHIBIT INDEX
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:
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
See Notes to Financial Statements.
TXU GAS COMPANY AND SUBSIDIARIES
See Notes to Financial Statements.
TXU GAS COMPANY AND SUBSIDIARIES
See Notes to Financial Statements.
TXU GAS COMPANY AND SUBSIDIARIES
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.
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:
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.
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:
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:
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:
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.
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.
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.
Other
Deductions —
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
Interest
Expense and Related Charges —
(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) —
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:
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—
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:
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
Legislation that restructured the electric
utility industry in Texas to provide for competition
TXU Gas’ Annual Report on
Form 10-K for the year ended December 31, 2003
Billion cubic feet
Public Utility Commission of Texas
Electric Reliability Council of Texas, the Independent System Operator and the regional reliability
coordinator of the various electricity systems within Texas
Financial Accounting Standards Board, the designated organization in the private sector for
establishing standards for financial accounting and reporting
Financial Accounting Standards Board Interpretation
FIN No. 46, “Consolidation of Variable Interest
Entities”
FIN No. 46 (Revised 2003), “Consolidation of Variable Interest Entities-An Interpretation of ARB
No. 51”
Fitch Ratings, Ltd.
Internal Revenue Service
Moody’s Investors Services, Inc.
Railroad Commission of Texas
Standard & Poor’s, a division of The McGraw Hill
Companies
Sarbanes-Oxley Act of 2002
United States Securities and Exchange Commission
Statement of Financial Accounting Standards issued by the FASB
SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement 125”
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
Three Months Ended
Six Months Ended
June 30,
June 30,
2004
2003
2004
2003
(millions of dollars)
$
216
$
199
$
724
$
820
102
89
428
519
137
72
206
139
19
19
38
37
(13
)
(9
)
4
16
30
33
61
55
275
204
737
766
(59
)
(5
)
(13
)
54
2
1
4
3
125
—
125
—
(29
)
—
(27
)
1
—
—
—
1
8
11
16
22
(161
)
(15
)
(123
)
35
1
1
2
2
$
(162
)
$
(16
)
$
(125
)
$
33
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
$
(161
)
$
(15
)
$
(123
)
$
35
—
1
—
2
—
1
—
2
$
(161
)
$
(14
)
$
(123
)
$
37
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2004
2003
(millions of dollars)
$
(123
)
$
35
43
40
(48
)
7
35
—
153
—
—
(1
)
6
34
(48
)
(9
)
18
106
(150
)
(125
)
300
—
(116
)
60
(4
)
(2
)
—
(2
)
30
(69
)
(49
)
(48
)
4
9
(45
)
(39
)
3
(2
)
5
4
$
8
$
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,
December 31,
2004
2003
(millions of dollars)
$
8
$
5
29
101
135
144
50
27
222
277
10
10
31
35
1,624
1,685
300
305
12
16
$
2,199
$
2,328
$
300
—
38
154
150
150
51
148
130
88
669
540
32
79
155
155
125
276
113
35
354
364
1,448
1,449
75
75
—
—
815
815
(135
)
(7
)
(4
)
(4
)
676
804
751
879
$
2,199
$
2,328
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.
SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
2.
GAS DISTRIBUTION RATE CASE
•
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.
3.
FINANCING ARRANGEMENTS
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.
(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
5.
PREFERRED STOCK
6.
CONTINGENCIES
7.
SUPPLEMENTARY FINANCIAL INFORMATION
Three Months
Six Months
Ended June 30,
Ended June 30,
2004
2003
2004
2003
$
77
$
—
$
77
—
35
—
35
—
7
—
7
—
5
—
5
—
1
—
1
—
$
125
$
—
$
125
$
—
Three Months
Six Months
Ended June 30,
Ended June 30,
2004
2003
2004
2003
$
7
$
10
$
13
$
20
1
1
3
2
$
8
$
11
$
16
$
22
June 30,
December 31,
2004
2003
$
(135
)
$
(129
)
(13
)
(2
)
—
41
27
17
8
38
$
(113
)
$
(35
)
June 30,
December 31,
2004
2003
$
6
$
5
129
139
$
135
$
144
•
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.
August 13, 2004
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.
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.
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.
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.
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.
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.
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)
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Total......................................... $(1,255,065)
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(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
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Total purchase price.......................... $ 1,932,540
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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)
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Total......................................... $ 1,932,540
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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 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.
(i) Adjusts tax expense to reflect Atmos's effective tax rate and for the effect of the pro forma adjustments.
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
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Pro forma net income.................................... $ 136,358
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Atmos historical weighted average shares outstanding......... 51,788
Shares issued in July 2004 Offering.......................... 9,939
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Denominator for pro forma basic earnings per share...... 61,727
Effect of dilutive securities:
Restricted stock.......................................... 258
Stock options............................................. 120
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Denominator for pro forma diluted earnings per share.... 62,105
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Twelve months ended September 30, 2003:
Atmos historical net income.................................. $ 79,461
TXU Gas pro forma net income for assets acquired............. 40,966
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Pro forma net income.................................... $ 120,427
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Atmos historical weighted average shares outstanding......... 46,319
Shares issued in July 2004 offering.......................... 9,939
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Denominator for pro forma basic earnings per share...... 56,258
Effect of dilutive securities:
Restricted stock.......................................... 109
Stock options............................................. 68
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Denominator for pro forma diluted earnings per share.... 56,435
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