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.
2
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.
3
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.
4
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.
5
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.
6
- 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.
7
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.
8
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.
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(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
=============
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