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* ATMOS LOGO
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Bob Stephens:
Thank you for being with us today. I'm Bob Stephens, president and chief
operating officer of Atmos Energy Corporation, and we're very pleased to have
the opportunity to talk to you today about Atmos' proposed merger with United
Cities Gas Company of Brentwood, Tennessee.
In Atmos' first 10 years as a public company, we doubled the size of the company
in terms of customers, and we believe that we are on track to continue that
growth with our definitive agreement to merge with United Cities.
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* Corporate Development Strategy
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Atmos has had a long-term strategy of acquiring natural gas distribution
properties across the United States which provide diversification in economic
conditions, markets, regulatory climates and weather patterns.
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* Current map of Atmos
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I'm sure most of you are aware of the transactions we have done since 1986
resulting in our current family of companies. The merger with United Cities is
the largest to date. I will address the merger terms, timetables and how we will
approach the integration of United Cities into Atmos. James Purser, executive
vice president and chief financial officer, will discuss the potential financial
benefits of this merger.
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* Atmos logo
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We have given each of you a copy of the Joint Proxy Statement/Prospectus of
Atmos and United Cities that discusses the transaction in detail. We want to
qualify our remarks today by reference to the Joint Proxy Statement/Prospectus
and to the publicly filed reports of both companies that are incorporated by
reference in it, and we would urge you to refer to that material for more
detailed information.
Some of the information we are about to discuss is forward-looking in nature.
This information assumes that no significant changes will occur in the operating
environment for Atmos and United Cities prior to or after the merger and is
subject to all of the risks and uncertainties
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discussed in the Joint Proxy Statement. Actual results may vary materially from
the forward-looking statements made today.
We are very excited about this combination. We believe that the result will be a
stronger company that serves growth areas and embodies important characteristics
that should help us to be successful in the competitive utility marketplace of
the future.
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* Map of combined service area
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The combined company will serve approximately 1 million customers in 13 states,
from the Carolinas and the Deep South across the plains, all the way to the
western slope of the Rocky Mountains in Colorado. We do serve two states in
common, Kansas and Missouri, and United
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Cities has storage facilities in Kentucky. With the merger, Atmos will be among
the largest natural gas utilities in the country in terms of customers.
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* Terms of the merger
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Under the terms of the merger, United Cities shareholders will receive one share
of Atmos common stock for each share of United Cities common stock.
As a part of the transaction, Atmos has agreed subject to applicable legal
requirements to increase its common stock dividend for a period of at least four
consecutive quarters from $.96 per share to $1.02 per share. This increase will
commence no later than the first Atmos board
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meeting following the completion of the merger. The increase also will preserve
the dividend currently received by United Cities' stockholders, and provide
Atmos' current stockholders with approximately a 6.3 percent increase over the
current Atmos dividend.
The merger is expected to be tax-free to United Cities shareholders and
accounted for as a pooling of interests.
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* Required Approvals
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The merger requires the approval of the shareholders of both companies, as well
as regulatory approval from 10 states and preclearance under the Hart-Scott-
Rodino Act. To date, we have received approval in Colorado and have filed for
approvals in nine
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other states.
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*Southern Union action
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Some of you may be wondering about the actions by Southern Union Company and
what this may mean to the merger. Let me address this issue up front, and then
we can get on to why we believe this merger makes sense for both United Cities
and Atmos.
In a filing with the Securities and Exchange Commission on August 1, Southern
Union Company announced that it owned 6.5 percent of United Cities' outstanding
common stock. Southern Union has stated in its press statements that it opposes
the merger of United Cities with Atmos and may propose alternatives to the
merger. Atmos and United Cities have
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jointly filed a complaint with the Missouri Public Service Commission contending
that Southern Union purchased United Cities stock in 1995 and 1996 in violation
of a Missouri statute which requires approval by the commission for any purchase
by a public utility of the stock of a public utility operating in Missouri. The
complaint requests, among other things, that the Missouri commission declare the
purchases null and void.
Southern Union subsequently filed suit against United Cities in Tennessee
alleging that the United Cities Board of Directors failed to exercise its
fiduciary duties properly in approving the merger with Atmos. Southern Union
has also requested confidential information from United Cities. Southern Union
also filed suit against United Cities in Missouri
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seeking a determination by the court that the statute which forms the basis for
the complaint brought against Southern Union is either inapplicable or
unconstitutional.
These court actions are still pending. We are pursuing closing the United
Cities merger on schedule. We don't know what Southern Union's plans are. We
do have a termination clause in the agreement that will result in a $15 million
payment to Atmos under certain circumstances if the acquisition is not
completed.
We are optimistic that we can complete the closing by March 31, 1997.
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* Assimilation Plans
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We believe there are a number of synergies and economies of scale that can be
achieved with the merger. We have a history of making successful business
combinations and integrating the operations for the benefit of our share-
holders. That history gives us confidence in our ability to assimilate United
Cities with Atmos.
Our agreement with United Cities provides that United Cities' employees
generally will retain employment for one year following the closing and we have
the ability to use attrition and to move employees to areas in the organization
where they are needed, subject to the provisions of existing collective
bargaining agreements. Ultimately, we will be looking for opportunities to
reduce duplication of services. For example, United Cities has a completely
staffed corporate headquarters, and so does Atmos. It will take
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some time to determine the right number of people we need to run an organization
of this size.
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* Comparison of Operations
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This gives a comparison of the number of employees of both companies, as well as
the investment of each company per customer and the number of customers served
per employee. United Cities has already undertaken some restructuring to improve
its efficiency, and expects to continue those efforts. There is a significant
difference in the Atmos O & M expense per customer of $129 and United Cities at
$216.
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*Energas Employee Slide
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To give you some comparison and feel for potential synergy, it's interesting
that Atmos' Energas Division has approximately 312,000 customers, served by 616
employees. United Cities has about 1,237 employees serving 340,000 customers,
including propane customers. However, United Cities is spread over a much larger
geographic area.
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* Greeley Ski Slide
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I can give you some insight into the kind of achievements in efficiency we have
made in past acquisitions.
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*Greeley Assimilation
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In 1993, Greeley Gas Company had 367 employees in 7 divisions, serving
approximately
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96,000 customers, or 263 meters/employee. Atmos serves 405 customers per
employee. Today, Greeley Gas has 270 employees in three districts, serving over
110,000 customers, and serves 409 meters per employee.
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*Greeley Construction Slide
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I'd also point out that Greeley's average annual meter growth for the three
years preceding the combination was 2 percent, and for the two years following
the combination has averaged 6 percent per year. Greeley Gas has been a very
beneficial acquisition for Atmos, and we believe that United Cities represents
an excellent opportunity as well.
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* Atmos logo
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I'm going to ask James Purser now to give you a more detailed look at the
potential benefits we see for the combined entity of Atmos and United Cities.
James Purser:
Thank you, Bob. It is a real pleasure for me to review with you some of the
reasons why we are enthusiastic about this merger.
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* Atmos Earnings Growth
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I'd like to begin with a brief look at Atmos' recent financial performance. In
fiscal year 1995, net income increased 29 percent from the previous year, in
spite of a warm winter. For the first quarter of 1996, net income increased 42
percent compared with the previous year, and
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net income increased 32 percent in the second quarter of this year. Our third
quarter ended June 30, 1996, reflected a $.02 per share profit, versus $.01 per
share a year ago. In fiscal '95 we lost $.11 in the fourth quarter. This year
the weather in West Texas was wetter and cooler, so the '96 fourth quarter loss
may be greater. The earnings growth is due to customer additions, rate increases
and in 1996, weather that was about normal. Equity constitutes 59 percent of
total capitalization, and our return on average common equity is 15.4 percent.
Within this context of financial strength, let's look at the United Cities
merger.
As Bob mentioned, this merger is a logical extension of our corporate
development strategy. United Cities increases our geographical, weather, market
and regulatory diversity. We think the combination of the two companies is
greater than the sum of its parts.
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* Growth opportunities
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We see improved potential for internal growth. Since 1985, United Cities has
added over 180,000 new customers to its natural gas distribution system through
internal marketing efforts and acquisitions. Currently, United Cities' market
penetration is about 37 percent, compared with about 61 percent for Atmos, and
the service area has attractive population growth rates. For example, the
Murfreesboro, Tenn., area outside Nashville is expanding rapidly because of
industrial growth and suburban growth. United Cities customer growth rate there
is 6 percent per year or more.
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* Reduced weather sensitivity
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The merger reduces the impact of weather
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on Atmos, and enhances the stability and predictability of earnings, cash flows
and dividends, in our opinion. We are diversifying our exposure to weather
patterns by being in 13 states rather than six. We've seen our strategy for
diversification working this year, when we had colder than normal weather in
Kentucky and Louisiana, which offset warmer than normal weather in West Texas,
Colorado and Kansas.
Another factor which adds diversity is United Cities' unregulated businesses.
The unregulated income at United Cities was 42 percent of total net income last
year. We see this as a complement to our existing unregulated business activity.
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* Unregulated Businesses
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United Cities provides us with several attractive non-regulated businesses.
Propane is distributed to about 27,000 customers in Tennessee, North Carolina
and Virginia. They also operate rental and utility services businesses involved
in leasing of facilities and equipment. These operations contributed 35 percent
of United Cities' profits in 1995.
United Cities also has non-jurisdictional natural gas storage fields in Kentucky
and Kansas that accounted for 7 percent of United Cities' profits in 1995. The
company has ownership in a profitable and growing gas marketing company as well.
These unregulated businesses are expected to provide significant profit.
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* Operational Benefits
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In addition to the potential elimination of duplicate functions that Bob
mentioned, we foresee other potential operational benefits in the combination,
which should make us even more efficient and lower our operating costs, such as
more efficient utilization of contracted pipeline capacity; a larger arena in
which to market energy services; and, economies of scale in purchasing gas.
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* United Cities Rate Activity
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Since February 1995, United Cities has received $6.5 million in rate increases
in Iowa, Kansas, Tennessee, Missouri and South Carolina. United Cities has filed
a $5 million rate request in Georgia, and has an $810,000 request pending in
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Virginia.
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* Weather normalization
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United Cities has weather normalization adjustment provisions in Georgia and
Tennessee. Also in Tennessee, the company has an incentive rate program which
compares United Cities' purchased gas prices to market prices, and recognizes
gains or losses resulting from the incentive program. United Cities also has
requested incentive rates in Kansas and Georgia. United Cities' earnings should
be positively impacted by these recent rate increases.
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* Atmos Rate Activity
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This gives you a summary of our recent rate
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activity, which as I said earlier has positively affected our earnings. Atmos
also filed in May 1996 for a $7.7 million rate increase affecting 67 cities in
our West Texas distribution system, including Lubbock, Midland and Odessa. A
settlement has been implemented which allows a $5.3 million increase in annual
revenues, in effect for bills rendered on and after Nov. 1, 1996. In the
settlement Atmos agreed to wait until June 1998 before filing additional rate
requests. We expect to file a rate increase, affecting approximately 22,000
customers later this year for the non-incorporated portions of this West Texas
area.
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* Increased Liquidity
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The merger will increase our shares outstanding by about 13 million shares,
which should
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improve our liquidity.
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* Stock Ownership Comparison
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I'd like to point out that currently about 28 percent of United Cities' stock is
owned by institutions, compared with 22 percent for Atmos. The officers and
directors of United Cities own about 3 percent of the stock, compared with 12
percent for Atmos. The number of shares of the combined company should improve
our float significantly.
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*Atmos Dividends
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Atmos has increased its dividend for the past consecutive eight years. As Bob
mentioned earlier, Atmos has agreed, subject to applicable
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legal requirements, to increase its common stock dividend for a period of at
least four consecutive quarters from $.96 per share to $1.02 per share
commencing no later than the first Atmos board meeting following the completion
of the merger.
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*Total Return
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The total return to Atmos shareholders for the fiscal year ended September 30,
1996, is 23.7 percent, including the reinvestment of dividends. The 10-year
average annual total return including reinvestment of dividends is 14.1 percent.
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* Financials after Merger (slide 1)
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Here's a look at certain proforma financial information for the combined
company. This is based on June 30, 1996, figures, but you can see that revenues,
earnings and cash flow increase.
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*Financials after the Merger (slide 2)
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We anticipate that these will improve when we have completed the assimilation
and begin to experience the benefits we expect the merger to achieve.
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* Atmos Logo
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On that high note, I'd like to turn this presentation back over to Bob.
Bob Stephens:
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Thank you, James. In closing, I'd like to emphasize the potential benefits we
see from this merger. These two companies fit together well and share similar
management philosophies. There's significant customer growth potential by
increasing market share and from population growth. We see many opportunities to
reduce operating costs and enhance efficiencies by melding the organizations
together and eliminating duplications. We have a track record of successfully
completing transactions and assimilating the operations quickly. We have all the
"right stuff" and expect to be a winner in an even more competitive utility
market.
Now, we'd be happy to answer your questions.
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[ATMOS LOGO APPEARS HERE]
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Corporate Development
Strategy
Diversity in:
. Local economic conditions
. Regulatory climates
. Weather exposure
. Markets
[LOGO OF ATMOS APPEARS HERE]
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Atmos Family of Companies
[MAP APPEARS HERE]
[ATMOS LOGO APPEARS HERE]
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[ATMOS LOGO APPEARS HERE]
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Atmos Energy/United Cities Merger
[MAP AND LEGEND APPEARS HERE]
[ATMOS LOGO APPEARS HERE]
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Merger Terms
. 1:1 stock exchange
. Increase ATO dividend to
$1.02/yr [+6.3%]
. Tax-free to UCIT
. Accounted for as pooling
of interests
[LOGO OF ATMOS APPEARS HERE]
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Required Approvals
. 10 states:
Kansas Tennessee
Colorado Virginia
Missouri Illinois
Kentucky Iowa
Georgia S. Carolina
. Hart-Scott-Rodino antitrust
. Approvals by shareholders of UCIT, ATO
[ATMOS LOGO APPEARS HERE]
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Southern Union Action
. 8/1/96 SUG files 13D with SEC
. 8/6/96 ATO/UCIT file joint complaint
with Missouri Commission
. 8/19-20/96 SUG files suits in Mo./Tenn.
. 8/24/96 UCIT files answer in Tenn.
and motion to dismiss in Mo.
[LOGO OF ATMOS APPEARS HERE]
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Assimilation Plans
. History of successfully
integrating acquisitions
. Opportunities to improve
efficiencies
. Benefits of economies of scale
. Eliminate duplication in staff
functions
[LOGO OF ATMOS APPEARS HERE]
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Comparison of Operations
ATO UCIT
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No. of employees 1,660 1,237
No. of customers 673,000 340,000*
O&M expense/
customer $129 $216
Meters/employee 405 268
Net plant/meter $593 $1,020
*Includes propane
[LOGO OF ATMOS APPEARS HERE]
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[PHOTO OF TWO ENERGAS EMPLOYEES WORKING ON A RESIDENTIAL GAS METER APPEARS HERE]
[LOGO OF ATMOS APPEARS HERE]
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[PHOTO OF TWO PEOPLE RIDING A SKI LIFT APPEARS HERE]
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Greeley Gas Assimilation
12/31/93 6/30/96
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Customers 96,469 110,560
Employees 367 270
Structure 7 divisions 3 districts
Meters/employee 263 409
[LOGO OF ATMOS APPEARS HERE]
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[PHOTO OF A PERSON HAMMERING AT A NEW HOUSE CONSTRUCTION SITE APPEARS HERE]
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[LOGO OF ATMOS APPEARS HERE]
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Atmos Earnings Growth
. Net income
Increase
--------
FY 1995 $18.9 mill. 29%
1Q 1996 $ 9.2 mill. 42%
2Q 1996 $18.4 mill. 32%
. Equity as a % of capitalization 59%
. Return on av. common equity 15.4%
[LOGO OF ATMOS APPEARS HERE]
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Growth Opportunities:
Market Penetration
. ATO 61%
. UCIT 37%
[LOGO OF ATMOS APPEARS HERE]
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Reduced Weather Sensitivity
. Earnings, cash flows, dividends
more predictable
. Exposure spread over 13 states
. It's working: offsetting weather
in 1996
. Income from UCIT's unregulated
business
. Improved operating leverage
[LOGO OF ATMOS APPEARS HERE]
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United Cities
Unregulated Businesses
. UCG Energy Corporation
- 27,000 propane customers in Tenn., N.C., Va.
- Leases facilities and equipment
- 45% interest in Woodward Gas Marketing, LLC
- Contributed 35% of 1995 profits
. United Cities Gas Storage Co.
- Storage fields in Kan., Ky.
- Contributed 7% of 1995 profits
[LOGO OF ATMOS APPEARS HERE]
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Operational Benefits
of Merger
. More efficient use of pipeline
capacity
. Larger arena for marketing
energy services
. Economies of scale in
purchasing gas
[LOGO OF ATMOS APPEARS HERE]
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UCIT Rate Activity
Date
Jurisdiction Implemented Amount
- ------------ ----------- ------
Iowa 6/96 $410,000
Tennessee 11/95 $2.2 million
Missouri 10/95 $903,000
Kansas 9/95 $2.7 million
S. Carolina 2/95 $253,000
Pending Requested
Georgia 5/96 (filing) $5.0 million
Virginia 9/95 $810,000
[LOGO OF ATMOS APPEARS HERE]
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Weather Normalization
Adjustments
. Approved in Georgia, Tennessee
. Result: increased revenues
1995 $1.03 mill.
1994 $2.05 mill.
1993 $0.32 mill.
[LOGO OF ATMOS APPEARS HERE]
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Atmos Rate Activity
<TABLE>
<CAPTION>
Month Amount
Jurisdiction Implemented Received
------------ ----------- --------
<S> <C> <C>
Texas 11/96 $5.3 MM
Kentucky 11/95 $4.0 MM
Louisiana (RSC) 3/95 $1.0 MM
Texas 11/94 $1.7 MM
& 1/95
Colorado 5/94 $3.2 MM
Louisiana (RSC) 3/94 $1.1 MM
Kansas 12/93 $2.1 MM
</TABLE>
[LOGO OF ATMOS APPEARS HERE]
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Increased Liquidity
. Shares outstanding +13 million
. Improves float
. Increases market cap
[LOGO OF ATMOS APPEARS HERE]
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Dividends
(Per Share)
[BAR GRAPH APPEARS HERE]
$.55 $.67 $.75 $.77 $.80 $.83 $.85 $.88 $.92 $.96*
1985 1986- 1989 1990 1991 1992 1993 1994 1995 1996*
1988
*Indicated annual dividend as of 12/11/95
[LOGO OF ATMOS APPEARS HERE]
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Stock Performance
Ten Year Results of a $10,000 Investment
[BAR GRAPH APPEARS HERE]
9/30/86 $10,000
9/30/96 $39,901
Average Annual Return: 14.1%
Includes reinvestment of dividends and excludes the effect of any income taxes
[LOGO OF ATMOS APPEARS HERE]
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Atmos and United Cities
Pro Forma Combined Statistics
From Public Documents as of June 30, 1996
(Unaudited)
United Pro Forma
OPERATIONAL Atmos Cities Combined
- ----------- ----- ------ --------
No. of customers 673,000 340,000* 1,013,000
No. of employees 1,660 1,237 2,897
No. of states served 6 10 13
FINANCIAL
12 mo. ending 6/30/96
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(000's except per share)
Operating revenues $491,136 $393,469 $884,605
Net plant in service $398,695 $346,917 $745,612
* Includes propane customers
[LOGO OF ATMOS APPEARS HERE]
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Atmos and United Cities
Pro Forma Combined Statistics
From Public Documents as of June 30, 1996
(Unaudited)
United Pro Forma
Atmos Cities Combined
----- ------ --------
12 mo. ending 6/30/96
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Net income $26,302 $14,981 $41,283
Net income per share $1.67 $1.02 $ 1.44
Cash flow $58,177 $34,912 $93,089
Cash flow per share $3.69 $2.72 $ 3.26
Avg. shares outstanding 15,767 12,819 28,586
% Total
As of 6/30/96 Capital.
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Shareholders equity $179,056 $158,963 $338,019 54%
Long-term debt $125,303 $158,192 $283,495 46%
Total capitalization $304,359 $317,155 $621,514 100%
[LOGO OF ATMOS APPEARS HERE]
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[LOGO OF ATMOS APPEARS HERE]
