UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification Number
1-14174 AGL RESOURCES INC. 58-2210952
(A Georgia Corporation)
817 West Peachtree Street, N.E.
Suite 1000
Atlanta, Georgia 30308
404-584-9470
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 2000.
Common Stock, $5.00 Par Value
Shares Outstanding at June 30, 2000 ...........................54,186,135
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AGL RESOURCES INC.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2000
Table of Contents
Item Page
Number Number
PART I-- FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Condensed Statements of Consolidated Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
3 Quantitative and Qualitative Disclosure About Market Risk 30
PART II-- OTHER INFORMATION
1 Legal Proceedings 31
5 Other Information 31
6 Exhibits and Reports on Form 8-K 32
SIGNATURE 33
Page 2 of 33
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED
JUNE 30, 2000 AND 1999
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Nine Months
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 131.8 $ 185.6 $ 474.2 $ 884.6
Cost of Sales 11.6 61.1 96.9 480.1
Operating Margin 120.2 124.5 377.3 404.5
Other Operating Expenses 81.8 95.0 267.9 274.9
Operating Income 38.4 29.5 109.4 129.6
Other Income (Loss) (1.8) (5.6) 17.5 (13.7)
Income Before Interest and Income Taxes 36.6 23.9 126.9 115.9
Interest Expense and Preferred Stock Dividends
Interest expense 13.3 12.9 37.9 40.7
Dividends on preferred stock of subsidiary 1.5 1.5 4.6 4.6
Total interest expense and preferred
stock dividends 14.8 14.4 42.5 45.3
Income Before Income Taxes 21.8 9.5 84.4 70.6
Income Taxes 7.9 2.3 30.7 23.3
Net Income $ 13.9 $ 7.2 $ 53.7 $ 47.3
Earnings per Common Share
Basic $ 0.26 $ 0.12 $ 0.97 $ 0.82
Diluted $ 0.26 $ 0.12 $ 0.97 $ 0.82
Weighted Average Number of Common
Shares Outstanding
Basic 54.2 57.4 55.5 57.5
Diluted 54.2 57.5 55.6 57.6
Cash Dividends Paid Per Share of
Common Stock $ 0.27 $ 0.27 $ 0.81 $ 0.81
</TABLE>
See notes to condensed consolidated financial statements.
Page 3 of 33 Pages
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<TABLE>
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(Unaudited)
June 30, September 30,
ASSETS 2000 1999
---- ----
<S> <C> <C>
Current Assets
Cash and cash equivalents $ - $ 32.9
Receivables (less allowance for uncollectible
accounts of $8.9 at June 30, 2000
and $4.3 at September 30, 1999) 37.1 51.8
Inventories
Natural gas stored underground 23.4 47.3
Liquefied natural gas 1.2 6.7
Materials and Supplies 6.6 9.3
Other 2.8 3.6
Other 4.0 7.0
Total current assets 75.1 158.6
Property, Plant and Equipment
Utility plant 2,362.5 2,274.3
Less accumulated depreciation 792.7 757.1
Utility plant - net 1,569.8 1,517.2
Non-utility property 111.3 116.7
Less accumulated depreciation 35.2 35.0
Non-utility property - net 76.1 81.7
Total property, plant and equipment - net 1,645.9 1,598.9
Deferred Debits and Other Assets
Unrecovered environmental response costs 151.5 150.2
Investments in joint ventures 52.4 28.2
Other 40.4 34.5
Total deferred debits and other assets 244.3 212.9
Total Assets $ 1,965.3 $ 1,970.4
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 33 Pages
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<TABLE>
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(Unaudited)
June 30, September 30,
LIABILITIES AND CAPITALIZATION 2000 1999
<S> ---- ----
Current Liabilities
<C> <C>
Accounts payable $ 30.0 $ 31.3
Short-term debt 138.5 1.5
Customer deposits 1.9 7.4
Interest 12.3 26.0
Taxes 12.6 31.2
Gas cost credits 1.3 37.9
Current portion of long-term debt 20.0 50.0
Other 27.8 38.7
Total current liabilities 244.4 224.0
Accumulated Deferred Income Taxes 240.4 211.3
Long-Term Liabilities
Accrued environmental response costs 102.4 102.4
Accrued postretirement benefits costs 32.7 32.4
Deferred credits 50.3 49.2
Other 9.7 5.3
Total long-term liabilities 195.1 189.3
Capitalization
Long-term debt 590.0 610.0
Subsidiary obligated mandatorily redeemable
preferred securities 74.3 74.3
Common stockholders' equity, $5 par value,
shares issued of 57.8 at June 30, 2000
and 57.8 at September 30, 1999 684.2 675.9
Less shares held in treasury, at cost,
3.6 at June 30, 2000 and
0.7 at September 30, 1999 (63.1) (14.4)
Total capitalization 1,285.4 1,345.8
Total Liabilities and Capitalization $ 1,965.3 $ 1,970.4
</TABLE>
See notes to condensed consolidated financial statements.
Page 5 of 33 Pages
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<TABLE>
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(IN MILLIONS)
(UNAUDITED)
Six Months
---------------------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 53.7 $ 47.3
Adjustments to reconcile net income to net
cash flow from operating activities
Depreciation and amortization 63.4 62.0
Deferred income taxes 29.1 16.0
Other (4.1) (1.0)
Changes in certain assets and liabilities
Receivables 14.7 21.6
Inventories 32.9 92.3
Accounts payable (1.3) (8.7)
Gas cost credits (36.6) 41.7
Accrued interest (13.7) (14.0)
Other current liabilities (10.3) (17.6)
Other-net (33.6) (49.5)
Net cash flow from operating
activities 94.2 190.1
Cash Flows from Financing Activities
Net borrowings of debt 87.0 (25.0)
Sale of common stock, net of expenses 0.7 0.9
Non-cash issuance of common stock and dividends 7.2 9.0
Purchase of treasury shares (56.7) (17.1)
Dividends paid on common stock (45.2) (46.8)
Net cash flow used in financing
activities (7.0) (79.0)
Cash Flows from Investing Activities
Utility plant expenditures (111.2) (82.4)
Non-utility property expenditures (8.1) (14.4)
Retirements, net of removal costs and salvage 10.9 (0.6)
Cash (provided to) received from joint ventures (10.4) 1.8
Other (1.3) (2.4)
Net cash used in investing
activities (120.1) (98.0)
Net increase (decrease) in cash
and cash equivalents (32.9) 13.1
Cash and cash equivalents at
beginning of period 32.9 0.9
Cash and cash equivalents at
end of period $ - $ 14.0
Cash Paid During the Period for
Interest $ 51.6 $ 59.5
Income taxes $ 20.2 $ 13.0
See notes to condensed consolidated financial statements.
Page 6 of 33 Pages
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AGL RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
AGL Resources Inc. is the holding company for Atlanta Gas Light Company ("AGLC")
and its wholly-owned subsidiary, Chattanooga Gas Company ("Chattanooga"), which
are both natural gas local distribution utilities. Additionally, AGL Resources
Inc. owns or has an interest in several non-utility subsidiaries and joint
ventures. AGL Resources Inc. and its subsidiaries are collectively referred to
as "AGL Resources."
In the opinion of management, the unaudited condensed consolidated financial
statements included herein reflect all normal recurring adjustments necessary
for a fair statement of the results of the interim periods reflected. These
interim financial statements and notes are condensed as permitted by the
instructions to Form 10-Q, and should be read in conjunction with the financial
statements and the notes included in the annual report on Form 10-K of AGL
Resources for the fiscal year ended September 30, 1999. Due to the seasonal
nature of a portion of AGL Resources' businesses, the results of operations for
the three-month and nine-month periods are not necessarily indicative of results
of operations for a twelve-month period.
Management makes estimates and assumptions when preparing financial statements
under generally accepted accounting principles. Those estimates and assumptions
affect various matters, including:
- Reported amounts of assets and liabilities in our Condensed
Consolidated Balance Sheets as of the dates of the financial statements;
- Disclosure of contingent assets and liabilities as of the dates of the
financial statements; and
- Reported amounts of revenues and expenses in our Condensed Statements
of Consolidated Income during the reported periods.
Those estimates involve judgments with respect to, among other things, future
economic factors that are difficult to predict and are beyond management's
control. Consequently, actual amounts could differ from our estimates.
Certain amounts in financial statements of prior years have been reclassified to
conform to the presentation of the current year.
2. Overview of the Transition from a Regulated to a Competitive Business
Environment
Pursuant to Georgia's 1997 Natural Gas Competition and Deregulation Act
("Deregulation Act"), AGLC unbundled various components of its services to
end-use customers. Historically, only large, interruptible commercial and
industrial customers had the option of purchasing natural gas from suppliers
other than AGLC and transporting such natural gas through AGLC's distribution
system for delivery. The Deregulation Act enabled AGLC to unbundle its delivery
service and other related services from the sale of natural gas for all
customers, thus allowing firm residential and small commercial customers to
purchase natural gas and other services from suppliers other than AGLC.
Effective October 1, 1999, virtually all of AGLC's 1.4 million customers in
Georgia were purchasing natural gas from marketers who were approved and
certificated ("certificated marketers") by the Georgia Public Service Commission
("GPSC"). As a result of the Deregulation Act, AGLC has become primarily a
provider of delivery service and other related services.
Page 7 of 33
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2. Overview of the Transition from a Regulated to a Competitive Business
Environment (Continued)
As a result of the transition to competition, numerous changes have occurred
with respect to the services being offered by AGLC and with respect to the
manner in which AGLC prices and accounts for those services. Consequently,
AGLC's future revenues and expenses will not follow historical patterns due to
the provision of delivery services to end-use customers which are priced based
upon straight fixed variable ("SFV") rates. The effect of SFV rates is to spread
evenly throughout the year AGLC's recovery of its delivery service costs.
Although, when compared to corresponding quarters of prior years, the effect of
SFV rates is to shift utility delivery service revenues among quarters, AGLC's
annual delivery service revenues should remain relatively consistent on a going
forward basis.
AGLC continues to provide intrastate delivery service through its existing
pipeline system to end-use customers in Georgia, but has exited the natural gas
sales function. AGLC's delivery of natural gas remains subject to the GPSC's
continued regulation of delivery rates, safety, access to AGLC's system, and
quality of service for all aspects of delivery service.
Certificated marketers, including AGL Resources' marketing affiliate, SouthStar
Energy Services LLC ("SouthStar"), compete to sell natural gas to end-use
customers at market-based prices. AGLC allocates delivery capacity to
certificated marketers in proportion to the number and size of residential and
small commercial customers served by each certificated marketer. Delivery
capacity that is not used on any day to serve residential and small commercial
customers is made available to large, interruptible commercial and industrial
customers. Similarly, AGLC has allocated to certificated marketers the majority
of the pipeline storage services that it has under contract, along with a
corresponding amount of inventory.
During the transition to competition, AGLC continued to provide gas sales
service to customers who had not yet switched to a certificated marketer.
Pursuant to a joint stipulation agreement with the GPSC, AGLC implemented a rate
structure for gas sales that ensured AGLC's recovery of its purchased gas costs
incurred from October 6, 1998 through September 30, 1999, without creating any
significant income or loss. The joint stipulation agreement provided for a
true-up for any profit or loss outside of a specified range during fiscal 1999.
During December 1999, as contemplated by the joint stipulation agreement, AGLC
paid $33 million in over-collected purchased gas costs to the GPSC. During the
second quarter of this fiscal year, the GPSC instituted a mechanism pursuant to
which certificated marketers were required to provide customers with a credit on
their bill. To be eligible for the refund credit, the customer had to have been
on AGLC's system on May 25, 1999, and still connected as of April 3, 2000.
Refund amounts were distributed by the GPSC to the marketers during the second
quarter of this fiscal year. The average refund per end-use customer was
approximately $25. (See Gas Cost Credits in the Financial Condition section
contained in Item 2 of Part I under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition.")
Also during the transition to competition, AGLC continued to bill end-use
customers who had not yet switched to certificated marketers for gas sales
service and for certain ancillary services. These ancillary services included
meter reading, billing, bill inquiry, payment processing, and collection
services. Once an end-use customer switched to a certificated marketer for gas
sales service, the Deregulation Act permitted AGLC to bill the marketer only for
the AGLC-provided ancillary services actually used by the marketer. AGLC was
unable, however, to eliminate all of the costs associated with the provision of
ancillary services as quickly as customers switched to certificated marketers
for natural gas sales, thereby creating an imbalance between revenues and
expenses.
Page 8 of 33
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2. Overview of the Transition from a Regulated to a Competitive Business
Environment (Continued)
The Deregulation Act provides marketing standards and rules of business practice
to ensure that the benefits of a competitive natural gas market are available to
all customers on AGLC's system. It imposes on certificated marketers an
obligation to serve end-use customers, and creates a universal service fund. The
universal service fund provides a method to fund the recovery of certificated
marketers' uncollectible accounts and enables AGLC to expand its facilities to
serve the public interest.
3. Earnings Per Common Share; Common Stockholders' Equity; and Share Repurchase
Program
Basic earnings per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per common share reflects the potential
dilution that could occur when common share equivalents are added to common
shares outstanding. AGL Resources' only common share equivalents are stock
options whose exercise prices were less than the average market price of the
common shares for the respective periods. As of June 30, 2000 and 1999,
respectively, there were 3,608,726 and 2,625,996 total options outstanding. Of
those options outstanding at June 30, 2000 and 1999, respectively, 3,388,659 and
2,324,024 shares of common stock were outstanding, and were not included in the
computation of diluted earnings per common share because the exercise prices of
those options were greater than the average market price of the common shares
for the respective periods.
On October 5, 1999, the Board of Directors of AGL Resources authorized a plan to
repurchase up to 3.6 million shares (6.3% of total outstanding as of September
30, 1999) of AGL Resources common stock over a period ending no later than
September 30, 2001. Open market purchases of the shares may be made from time to
time, subject to availability, and the repurchased shares will be held in
treasury. Under the share repurchase program, during the three month period
ended June 30, 2000, AGL Resources repurchased 238,000 shares of common stock
for a total of $4.0 million. During the nine month period ended June 30, 2000,
AGL Resources repurchased 3,310,500 shares of common stock for a total of $56.7
million.
During the three month period and nine month period ended June 30, 2000, AGL
Resources issued 139,653 shares and 447,578 shares of common stock,
respectively, under ResourcesDirect, a direct stock purchase and dividend
reinvestment plan; the Retirement Savings Plus Plan; the Long-Term Stock
Incentive Plan, the Long-Term Incentive Plan; and the Non-Employee Directors
Equity Compensation Plan.
4. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. AGL Resources will adopt SFAS 133 on October 1, 2000. While
the impact of SFAS 133 on AGL Resources' consolidated financial statements is
under review and is currently unknown, no material impact is expected.
Page 9 of 33
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5. Environmental Matters
Before natural gas was widely available in the Southeast, AGLC manufactured gas
from coal and other fuels. Those manufacturing operations were known as
"manufactured gas plants," or "MGPs" which AGLC ceased operating in the 1950s.
Because of recent environmental concerns, AGLC is required to investigate
possible environmental contamination at those plants and, if necessary, clean up
any contamination.
AGLC has been associated with nine MGP sites in Georgia and three in Florida.
Based on investigations to date, AGLC believes that some cleanup is likely at
most of the sites. In Georgia, the state Environmental Protection Division
supervises the investigation and cleanup of MGP sites. In Florida, the U.S.
Environmental Protection Agency has that responsibility.
For each of the MGP sites, AGLC has estimated its share of the likely costs of
investigation and cleanup. AGLC currently estimates that its total future cost
of investigating and cleaning up its MGP sites is between $102.4 million and
$148.2 million. That range does not include other potential expenses, such as
unasserted property damage or personal injury claims or legal expenses for which
AGLC may be held liable but for which neither the existence nor the amount of
such liabilities can be reasonably forecast. Within that range, AGLC cannot
identify any single number as a "better" estimate of its likely future costs
because its actual future investigation and cleanup costs will be affected by a
number of contingencies that cannot be quantified at this time. Consequently, as
of June 30, 2000, AGLC has recorded the lower end of the range, or $102.4
million, as a liability, which remains unchanged from September 30, 1999, and a
corresponding regulatory asset.
AGLC has entered into a contract with ThermoRetec Consulting Corporation
("ThermoRetec") for management of the investigation and cleanup of AGLC's MGP
sites. Under this contract, AGLC's former MGP sites are classified into two
categories. Where AGLC is not the primary responsible party, ThermoRetec will
provide management oversight and coordination between AGLC and other responsible
parties. At all other sites, ThermoRetec will provide all services that will
eventually result in cleanup and regulatory finality for those MGP sites within
specified deadlines. With respect to these latter sites, the agreement between
AGLC and ThermoRetec establishes a performance-based fee arrangement, under
which a portion of ThermoRetec's compensation is tied to the relationship
between certain specified components of the cleanup costs and specified
benchmarks for those cost components. Management does not believe the
outsourcing of the management will have a material effect on the total future
cost of investigating and cleaning up the MGP sites.
(The remainder of this page was intentionally left blank.)
Page 10 of 33
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6. Segment Information
AGL Resources is organized into two operating segments: Utility and Non-utility.
Management evaluates segment performance based on net income, which includes the
effects of corporate expense allocations. There were no material inter-segment
sales during the three-month or nine-month periods ended June 30, 2000 or 1999.
Three Months Ended June 30, 2000 June 30, 1999
-------------------------- --------------------------
(Millions of Dollars) Non- Non-
Utility Utility Total Utility Utility Total
Operating Revenues $125.6 $6.2 $131.8 $180.7 $4.9 $185.6
Depreciation
and Amortization 17.1 2.9 20.0 17.2 2.7 19.9
Interest Expense 11.1 2.2 13.3 11.3 1.6 12.9
Interest Income 0.1 - 0.1 - 0.3 0.3
Equity in the
Net Income (Loss)
of Joint Ventures - (1.9) (1.9) - (5.3) (5.3)
Income Tax
Expense (Benefit) 10.0 (2.1) 7.9 6.4 (4.1) 2.3
Net Income (Loss) 18.1 (4.2) 13.9 14.4 (7.2) 7.2
Capital Expenditures 70.5 4.6 75.1 30.0 5.0 35.0
Nine Months Ended June 30, 2000 June 30, 1999
-------------------------- -------------------------
(Millions of Dollars) Non- Non-
Utility Utility Total Utility Utility Total
Operating Revenues $442.7 $31.5 $474.2 $862.6 $22.0 $884.6
Depreciation
and Amortization 53.0 9.3 62.3 50.9 8.9 59.8
Interest Expense 34.0 3.9 37.9 35.8 4.9 40.7
Interest Income 0.3 0.2 0.5 0.1 0.4 0.5
Equity in the
Net Income (Loss)
of Joint Ventures - 13.3 13.3 - (13.7) (13.7)
Income Tax
Expense (Benefit) 29.3 1.4 30.7 31.9 (8.6) 23.3
Net Income (Loss) 52.0 1.7 53.7 61.9 (14.6) 47.3
Capital Expenditures 111.2 8.1 119.3 82.4 14.4 96.8
Balance as of June 30, 2000 September 30, 1999
-------------------------- -------------------------
(Millions of Dollars) Non- Non-
Utility Utility Total Utility Utility Total
Identifiable Assets $1,814.6 $98.3 $1,912.9 $1,799.7 $142.5 $1,942.2
Investments in
Joint Ventures 0.4 52.0 52.4 0.4 27.8 28.2
Page 11 of 33
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ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 allows public companies to
provide cautionary remarks about forward-looking statements that they make in
documents that are filed with the Securities and Exchange Commission.
Forward-looking statements in our Management's Discussion and Analysis include
statements about the following:
- Deregulation;
- Concentration of credit risk;
- Environmental investigations and cleanups; and
- Quantitative and qualitative disclosures about market risk.
Important factors that could cause our actual results to differ substantially
from those in the forward-looking statements include, but are not limited to,
the following:
- Changes in price and demand for natural gas and related products;
- Impact of changes in state and federal legislation and regulation
on both the gas and electric industries;
- Effects and uncertainties of deregulation and competition, particularly
in markets where prices and providers historically have been
regulated, unknown risks related to nonregulated businesses, and
unknown issues such as the stability of certificated marketers;
- Concentration of credit risk in certificated marketers;
- Industry consolidation;
- Impact of acquisitions and divestitures;
- Changes in accounting policies and practices;
- Interest rate fluctuations, financial market conditions,
and economic conditions, generally; and
- Uncertainties about environmental issues and the related impact
of such issues.
Nature of Our Business
AGL Resources Inc. is the holding company for:
- Atlanta Gas Light Company ("AGLC") and its wholly-owned
subsidiary, Chattanooga Gas Company ("Chattanooga"), which are
natural gas local distribution utilities;
- AGL Energy Services, Inc. ("AGLE"), a gas supply services company; and
- Several non-utility subsidiaries.
AGL Resources and its subsidiaries are collectively referred to as "AGL
Resources."
Page 12 of 33
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AGLC conducts its primary business, the distribution of natural gas, in Georgia
including Atlanta, Athens, Augusta, Brunswick, Macon, Rome, Savannah, and
Valdosta. Chattanooga distributes natural gas in the Chattanooga and Cleveland
areas of Tennessee. The Georgia Public Service Commission ("GPSC") regulates
AGLC, and the Tennessee Regulatory Authority ("TRA") regulates Chattanooga. AGLE
is a nonregulated company that bought and sold the natural gas that was supplied
to AGLC's customers during the deregulation transition period to full
competition in Georgia. Currently, AGLE buys and sells natural gas for
Chattanooga's customers.
AGLC comprises substantially all of AGL Resources' assets, revenues, and
earnings. The operations and activities of AGLC, AGLE, and Chattanooga,
collectively, are referred to as the "utility." The utility's total other
operating expenses include costs allocated from AGL Resources Inc.
As of June 30, 2000, AGL Resources owned or had an interest in the following
non-utility businesses:
- SouthStar Energy Services LLC ("SouthStar"), a joint venture
among a subsidiary of AGL Resources and subsidiaries of Dynegy
Holdings, Inc. and Piedmont Natural Gas Company. SouthStar markets
natural gas and related services to residential and small commercial
customers in Georgia and to industrial customers in the Southeast.
SouthStar began marketing natural gas to customers in Georgia during
the first quarter of fiscal 1999 under the trade name "Georgia Natural
Gas Services;"
- AGL Investments, Inc., which manages certain non-utility businesses
including:
- AGL Propane, Inc. ("Propane"), which, as of June 30, 2000,
engaged in the sale of propane and related products and services
in Georgia, Alabama, Tennessee and North Carolina. For an
update on AGL Resources' propane operations, see "Nature
of Our Business - Propane Operations;"
- Trustees Investments, Inc., which owns Trustees Gardens, a
residential and retail development located in Savannah, Georgia;
and
- Utilipro, Inc. ("Utilipro"), in which AGL Resources has an
85% ownership interest and which engages in the sale of
integrated customer care solutions and billing services to
energy marketers in the United States and Canada.
- AGL Peaking Services, Inc., which owns a 50% interest in Etowah LNG
Company LLC ("Etowah"), a joint venture with Southern Natural Gas
Company. Etowah was formed for the purpose of constructing, owning,
and operating a liquefied natural gas peaking facility.
Virginia Natural Gas, Inc.
On May 8, 2000, AGL Resources entered into a definitive agreement to purchase
Virginia Natural Gas, Inc. ("VNG"), an indirect, wholly-owned subsidiary of
Dominion Resources, Inc. ("Dominion"), for $500 million in cash. The purchase
price includes $22 million in working capital. At the option of the seller, the
parties may elect to treat the transaction as a sale of assets for tax purposes,
commonly referred to as a Section 338(h)(10) election, in which case the
purchase price will be increased to $550 million to reflect the increased value
of the transaction to AGL Resources.
Page 13 of 33
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The VNG acquisition is conditioned, among other things, upon approvals of
various regulatory agencies and is expected to close in the fourth quarter of
this calendar year. On July 28, 2000, AGL Resources received approval from the
Virginia State Corporation Commission ("VSCC") for its acquisition of VNG. Other
pending regulatory applications include: approval of AGL Resources' acquisition
of VNG by the Securities and Exchange Commission under the Public Utility
Holding Company Act of 1935 ("PUHCA"); approval of Dominion's disposition of VNG
by the Federal Trade Commission; and the VSCC's approval of AGL Resources'
filings pursuant to the Virginia Affiliates Act. AGL Resources expects to
receive the remaining required regulatory approvals in time to permit closing
the transaction by the fourth quarter of this calendar year. Upon the closing of
the transaction, AGL Resources will become a registered holding company under
PUHCA.
Propane Operations
On February 15, 2000, AGL Resources entered into a definitive agreement to
combine its propane operations, presently operated through Propane, with the
propane operations of Atmos Energy Corporation, Dallas, Texas; Piedmont Natural
Gas Company, Charlotte, North Carolina; and TECO Energy, Inc., Tampa, Florida.
The joint venture, which is called US Propane, L.L.C. ("US Propane"),
subsequently announced on June 15, 2000, that it had entered into a definitive
agreement to combine US Propane's operations with Heritage Propane Partners. The
transactions were closed on August 10, 2000. Through the series of transactions
provided for in these two agreements, US Propane acquired ownership of the
general partner, as well as certain limited partner units, in a master limited
partnership that distributes propane to over 480,000 customers in 28 states.
Under the agreements, US Propane sold its propane business to Heritage Propane
Partners for approximately $181 million in cash and limited partnership units.
US Propane purchased all of the outstanding common stock of Heritage Holdings,
the general partner of Heritage Propane Partners, for $120 million. As a result
of these transactions, US Propane, in addition to owning 100% of the general
partner, owns an approximate 34% limited partnership interest in Heritage
Propane Partners, the master limited partnership. US Propane is owned by the
four companies that formed US Propane, with AGL Resources holding a 22.36%
interest.
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Page 14 of 33
<PAGE>
Results of Operations
Three-Month Periods Ended June 30, 2000 and 1999
In this section, the results of operations for the three-month periods ended
June 30, 2000 and 1999 are compared.
Operating Margin Analysis
(Dollars in Millions)
Three Months Ended
6/30/2000 6/30/1999 Favorable/(Unfavorable)
------------- ------------- -----------------------
Operating Revenues
Utility $ 125.6 $ 180.7 $ (55.1) (30.5%)
Non-utility 6.2 4.9 1.3 26.5%
------------- ------------- -----------------------
Total $ 131.8 $ 185.6 $ (53.8) (29.0%)
============= ============= =======================
Cost of Sales
Utility $ 11.3 $ 60.3 $ 49.0 81.3%
Non-utility 0.3 0.8 0.5 62.5%
------------- ------------- -----------------------
Total $ 11.6 $ 61.1 $ 49.5 81.0%
============= ============= =======================
Operating Margin
Utility $ 114.3 $ 120.4 $ (6.1) (5.1%)
Non-utility 5.9 4.1 1.8 43.9%
------------- ------------- -----------------------
Total $ 120.2 $ 124.5 $ (4.3) (3.5%)
============= ============= =======================
Utility. Utility operating revenues decreased $55.1 million and cost of
sales decreased $49.0 million primarily due to the following factors:
- Pursuant to the Deregulation Act, Georgia customers began to
switch from AGLC to certificated marketers for natural gas purchases
beginning November 1, 1998. As of October 1, 1999, except for
isolated circumstances, all of AGLC's approximately 1.4 million
Georgia customers had switched to or had been assigned to
certificated marketers. As a result, AGLC sold less gas. The
reduction in gas sold resulted in a net decrease of $54.5 million
in operating revenues and a net decrease of $54.3 million in
the cost of gas sold to end-use customers resulting from the
effect of customer migration to certificated marketers.
Historically, AGLC recovered its actual gas costs, including
carrying costs related to storage of gas inventories, from its
customers;
- Chattanooga's operating revenues increased $5.1 million and cost of
sales increased $5.2 million as a result of higher Purchased Gas
Adjustment ("PGA") natural gas commodity costs; and
- Delivery service revenues decreased $6.2 million due to customer
migration to certificated marketers. Additionally, AGLC's late
payment fee revenue from end-use customers decreased $3.0 million.
This decrease was primarily due to the fact that AGLC is no longer
billing end-use customers.The decrease in delivery service revenue
was partially offset by revenue increases of $2.8 million related
to end-use customer growth and $1.8 million attributable to billing
for damage caused by independent contractors.
Page 15 of 33
<PAGE>
The operating margin decreased to $114.3 million for the three months ended June
30, 2000 from $120.4 million for the same period last year. The decrease of $6.1
million was the result of the factors noted above. The operating margin as a
percentage of operating revenues increased to 91.0% for the three months ended
June 30, 2000 from 66.6% for the same period last year. This increase was
primarily due to decreased revenues from gas sales and a corresponding decrease
in cost of sales resulting from deregulation.
Non-utility. Non-utility operating revenues increased to $6.2 million for the
three months ended June 30, 2000 from $4.9 million for the same period last
year. The net increase of $1.3 million was primarily due to an increase in
Utilipro's operating revenues. Utilipro engages in the sale of integrated
customer care solutions to energy marketers. Utilipro's growth in revenue over
the previous year was primarily due to increased demand for its customer care
services.
Non-utility cost of sales decreased to $0.3 million for the three months ended
June 30, 2000 from $0.8 million for the same period last year. The decrease of
$0.5 million was primarily due to a decrease in the amount of propane sold as
compared to the same period last year.
Non-utility operating margin increased to $5.9 million for the three months
ended June 30, 2000 from $4.1 million for the same period last year. The
increase of $1.8 million was the result of the factors noted above.
Total Other Operating Expenses Analysis
(Dollars in Millions)
Three Months Ended
6/30/2000 6/30/1999 Favorable/(Unfavorable)
----------- ----------- -----------------------
Total Other Operating Expenses
Utility $ 75.4 $ 88.8 $ 13.4 15.1%
Non-utility 6.4 6.2 (0.2) (3.2%)
----------- ----------- -----------------------
Total $ 81.8 $ 95.0 $ 13.2 13.9%
=========== =========== =======================
Total Other Operating Expenses
Total other operating expenses decreased to $81.8 million for the three months
ended June 30, 2000 from $95.0 million for the same period last year, a decrease
of 13.9%.
Utility. Utility total other operating expenses decreased $13.4 million as
compared with the same period last year due to the reduction in staffing levels
of 520 people, the implementation of cost controls, work management process
improvements and other operational excellence initiatives. The decrease was
primarily reflected in the following areas:
- A decrease of $5.3 million in customer service expense related to
billing, bill inquiry, payment processing and collection services
resulting from the migration of customers to certificated marketers,
and
- A decrease of $8.1 million related to maintenance and benefit
expenses as a result of reduced staffing levels as discussed above.
Page 16 of 33
<PAGE>
Non-utility. Non-utility total other operating expenses increased $0.2 million
as compared with the same period last year primarily due to an increase in
Utilipro's operating expenses caused by increased demand for its services. (See
Non-utility section under Operating Margin Analysis.)
Other Income/(Loss)
Other losses totaled $1.8 million for the three months ended June 30, 2000,
compared with other losses of $5.6 million for the same period last year. The
decrease in other losses of $3.8 million is primarily due to a decrease in AGL
Resources' portion of SouthStar's losses of $2.0 million from a loss of $5.1
million, a decrease of $3.1 million. The improved performance by SouthStar is
primarily due to an increase in customers served and lower marketing expenses,
compared to the same period last year.
Interest Expense
Interest expense increased to $13.3 million for the three months ended June 30,
2000 from $12.9 million for the same period last year. The increase of $0.4
million was primarily due to the following:
- An increase of $2.1 million resulting from increased amounts of
short-term debt outstanding during the period;
- A decrease of $1.0 million resulting from decreased amounts of
long-term debt outstanding during the period;
- A decrease of $0.4 million resulting from increased Allowance for
Funds Used During Construction ("AFUDC") due to the Pipeline
Replacement Program; and
- A decrease of approximately $0.3 million resulting from a reduction
of interest expense related to customer deposits as a result of
customer migration to certificated marketers.
Income Taxes
Income tax expense increased to $7.9 million for the three months ended June 30,
2000 from $2.3 million for the same period last year. The increase in income
taxes of $5.6 million was due primarily to an increase in income before income
taxes of $12.2 million compared to the same period last year and an increase in
the effective tax rate. The increase in the effective tax rate resulted from a
reduction in certain tax reserves related to the favorable resolution of certain
outstanding tax issues during the same period last year. The effective tax rate
(income tax expense expressed as a percentage of pretax income) for the three
months ended June 30, 2000 was 36.2% as compared to 24.2% for the same period
last year.
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Page 17 of 33
<PAGE>
Nine-Month Periods Ended June 30, 2000 and 1999
In this section, the results of operations for the nine-month periods
ended June 30, 2000 and 1999 are compared.
Operating Margin Analysis
(Dollars in Millions)
Nine Months Ended
6/30/2000 6/30/1999 Favorable/(Unfavorable)
----------- ----------- -----------------------
Operating Revenues
Utility $ 442.7.1 $ 862.6 $ (419.9) (48.7%)
Non-utility 31.5 22.0 9.5 43.2%
----------- ----------- -----------------------
Total $ 474.2 $ 884.6 $ (410.4) (46.4%)
=========== =========== =======================
Cost of Sales
Utility $ 88.1 $ 473.7 $ 385.6 81.4%
Non-utility 8.8 6.4 (2.4) (37.5%)
----------- ----------- -----------------------
Total $ 96.9 $ 480.1 $ 383.2 79.8%
=========== =========== =======================
Operating Margin
Utility $ 354.6 $ 388.9 $ (34.3) (8.8%)
Non-utility 22.7 15.6 7.1 45.5%
----------- ----------- -----------------------
Total $ 377.3 $ 404.5 $ (27.2) (6.7%)
=========== =========== =======================
Utility. Utility operating revenues decreased $419.9 million and cost of sales
decreased $385.6 million primarily due to the following factors:
- Pursuant to the Deregulation Act, Georgia customers began to switch
from AGLC to certificated marketers for natural gas purchases
beginning November 1, 1998. As of October 1, 1999, except for
isolated circumstances, all of AGLC's approximately 1.4 million
Georgia customers had switched to or had been assigned to
certificated marketers. As a result, AGLC sold less gas. The
reduction in gas sold resulted in a net decrease of $406.6 million
in operating revenues and a net decrease of $399.3 million in
the cost of gas sold to end-use customers resulting from the effect
of customer migration to certificated marketers. Historically,
AGLC recovered its actual gas costs, including carrying costs related
to storage of gas inventories, from its customers;
- Chattanooga's operating revenues increased $16.3 million and cost of
sales increased $13.7 million as a result of weather that was colder
than the prior year and as a result of higher PGA natural gas
commodity costs; and
- Delivery service revenues decreased $28.1 million due to customer
migration to certificated marketers. Additionally, AGLC's late
payment fee revenue from end-use customers decreased $13.0 million.
This decrease was primarily due to the fact that AGLC is no longer
billing end-use customers. The decrease in delivery service revenue
was partially offset by revenue increases of $7.5 million related
to end-use customer growth and $3.8 million attributable to billing
for damage caused by independent contractors.
Page 18 of 33
<PAGE>
The operating margin decreased to $354.6 million for the nine months ended June
30, 2000 from $388.9 million for the same period last year. The decrease of
$34.3 million was the result of the factors noted above. The operating margin as
a percentage of operating revenues increased to 80.1% for the nine months ended
June 30, 2000 from 45.1% for the same period last year. This increase was
primarily due to decreased revenues from gas sales and a corresponding decrease
in cost of sales resulting from deregulation.
Non-utility. Non-utility operating revenues increased to $31.5 million for the
nine months ended June 30, 2000 from $22.0 million for the same period last
year. The net increase of $9.5 million was primarily due to the following
factors:
- An increase of $7.8 million in Utilipro's operating revenues.
Utilipro's growth in revenue was primarily due to increased demand
for its customer care services;
- An increase of $2.9 million in Propane's operating revenues.The
increase was due to an increase in the selling price per gallon
compared with the same period in fiscal 1999; and
- A decrease of approximately $1.0 million due to certain discontinued
operations.
Non-utility cost of sales increased to $8.8 million for the nine months ended
June 30, 2000 from $6.4 million for the same period last year. The increase of
$2.4 million was primarily due to an increase in Propane's cost of gas resulting
from an increase in the cost per gallon as compared to the same period last
year.
Non-utility operating margin increased to $22.7 million for the nine months
ended June 30, 2000 from $15.6 million for the same period last year. The
increase of $7.1 million was the result of the factors noted above.
Total Other Operating Expenses Analysis
(Dollars in Millions)
Nine Months Ended
6/30/2000 6/30/1999 Favorable/(Unfavorable)
--------- --------- -----------------------
Total Other Operating Expenses
Utility $ 242.4 $ 260.2 $ 17.8 6.8%
Non-utility 25.5 14.7 (10.8) (73.5%)
---------- --------- -----------------------
Total $ 267.9 $ 274.9 $ 7.0 2.5%
========== ========= =======================
Total Other Operating Expenses
Total other operating expenses decreased to $267.9 million for the nine months
ended June 30, 2000 from $274.9 million for the same period last year, a
decrease of 2.5%.
Utility. Utility total other operating expenses decreased $17.8 million as
compared with the same period last year due to the reduction in staffing levels
of 520 people, the implementation of cost controls, work management process
improvements and other operational excellence initiatives. The decrease was
primarily reflected in the following areas:
Page 19 of 33
<PAGE>
- A decrease of $15.1 million in customer service expense related to
billing, bill inquiry, payment processing and collection services
resulting from the migration of customers to certificated marketers;
- A decrease of $4.8 million related to maintenance and benefit
expenses as a result of reduced staffing levels as discussed above;
and
- An increase in depreciation of $2.1 million due to the Pipeline
Replacement Program.
Non-utility. Non-utility total other operating expenses increased $10.8 million
as compared with the same period last year primarily due to an increase of $11.1
million in Utilipro's operating expenses caused by increased demand for its
services. This was partially offset by reduced expenses in AGL Investments. As a
result of slower than expected implementation of gas and electric utility
deregulation throughout North America, Utilipro's growth opportunities have been
less than originally anticipated. As a result, management continues to review
Utilipro's business model in an effort to maximize long-term shareholder value.
Other Income/(Loss)
Other income totaled $17.5 million for the nine months ended June 30, 2000,
compared with other losses of $13.7 million for the same period last year. The
increase in other income of $31.2 million was primarily due to the following
factors:
- AGL Resources' portion of SouthStar's income increased to $13.3
million from a loss of $8.4 million, an increase of $21.7 million.
The improved performance by SouthStar was primarily due to an
increase in customers served and lower marketing expenses, compared
to the same period last year; and
- During the first nine months of fiscal 1999, AGL Resources
recorded pre-tax losses related to its interests in Sonat
Marketing Company L.P. ("Sonat Marketing") and Sonat Power Marketing
L.P. ("Sonat Power Marketing") totaling approximately $8.1 million.
AGL Resources sold its interests in Sonat Marketing and Sonat
Power Marketing during the fourth quarter of fiscal 1999.
Interest Expense
Interest expense decreased to $37.9 million for the nine months ended June 30,
2000 from $40.7 million for the same period last year. The decrease of $2.8
million was primarily due to the following:
- A decrease of $2.1 million resulting from decreased amounts of
long-term debt outstanding during the period;
- A decrease of approximately $1.3 million resulting from a reduction
of interest expense related to customer deposits as a result of
customer migration to certificated marketers;
- A decrease of $1.2 million resulting from increased AFUDC due
to the Pipeline Replacement Program; and
- An increase of $1.8 million due to more short-term debt outstanding.
Income Taxes
Income tax expense increased to $30.7 million for the nine months ended June 30,
2000 from $23.3 million for the same period last year. The increase in income
taxes of $7.4 million was due to a $13.4 million increase in income before
income taxes compared to the same period last year and to an increase in the
effective tax rate. The increase in the effective tax rate resulted from a
reduction in certain tax reserves related to the favorable resolution of certain
outstanding tax issues during the same period last year. The effective tax rate
(income tax expense expressed as a percentage of pretax income) for the nine
months ended June 30, 2000 was 36.4% as compared to 33.0% for the same period
last year.
Page 20 of 33
<PAGE>
Financial Condition
Seasonality of Business
Historically, the utility business has been seasonal in nature, resulting in a
substantial increase in accounts receivable from customers from September 30 to
June 30 due to higher billings during colder weather. As a result of
deregulation and the implementation of SFV rates, the seasonality of both
expenses and revenues related to AGLC's Georgia operations has been eliminated.
However, the operations of SouthStar and Chattanooga, as well as AGL Resources'
propane operations, are seasonal, and those businesses will likely experience
greater profitability in the winter months than in the summer months. (See Note
2. Overview of the Transition from a Regulated to a Competitive Business
Environment.)
Inventory of natural gas stored underground decreased $32.9 million during the
nine months ended June 30, 2000 primarily due to the assignment of most of
AGLC's inventories to certificated marketers as a result of the Deregulation
Act. AGLC will continue to maintain small amounts of inventory of natural gas
stored underground in order to optimize the operation of its gas distribution
system.
Financing
AGL Resources historically meets its liquidity requirements through operating
cash flow and the issuance of short-term debt. Short-term lines of credit with
various banks provide for direct borrowings and are subject to annual renewal.
The aggregate borrowing capacity under the current lines of credit ranges up to
$175 million.
Short-term debt increased $137.0 million to $138.5 million as of June 30, 2000
from $1.5 million as of September 30, 1999. The increase in short-term debt was
primarily due to the repayment of $50 million of AGLC's long-term debt, which
matured during the nine months ended June 30, 2000, and the repurchase of 3.3
million shares of common stock for a total of $56.7 million. Management expects
to obtain other long-term financing in fiscal 2001 to replace the short-term
debt that was used for these purposes.
Operating cash flow decreased to $94.2 million for the nine months ended June
30, 2000 as compared to $190.1 million for the same period last year, primarily
due to a decrease in gas cost credits of $78.3 million (See Gas Cost Credits
section below), a decrease in natural gas inventories of $59.4 million due to
the assignment of inventories to the marketers, which was offset by increases in
deferred income taxes of $13.1 million and various other items.
Management believes available credit will be sufficient to meet working capital
needs both on a short and long-term basis. However, capital needs depend on many
factors and AGL Resources may seek additional financing through debt or equity
offerings in the private or public markets at any time.
Virginia Natural Gas, Inc.
On May 8, 2000, AGL Resources entered into a definitive agreement to purchase
VNG, an indirect wholly-owned subsidiary of Dominion, for $500 million in cash.
The purchase price includes $22 million in working capital. At the option of the
seller, the parties may elect to treat the transaction as a sale of assets for
tax purposes, commonly referred to as a Section 338(h)(10) election, in which
case the purchase price will be increased to $550 million to reflect the
increased value of the transaction to AGL Resources. The purchase price will be
funded from cash on hand and from short-term acquisition "bridge" financing. AGL
Resources expects that the "bridge" financing will be financed with longer-term
debt or trust preferred securities during fiscal 2001.
Page 21 of 33
<PAGE>
The VNG acquisition is conditioned, among other things, upon approvals of
various regulatory agencies and is expected to close in the fourth quarter of
this calendar year. On July 28, 2000, AGL Resources received approval from the
VSCC for its acquisition of VNG. Other pending regulatory applications include:
approval of AGL Resources' acquisition of VNG by the Securities and Exchange
Commission under PUHCA; approval of Dominion's disposition of VNG by the Federal
Trade Commission; and the VSCC's approval of AGL Resources' filings pursuant to
the Virginia Affiliates Act. AGL Resources expects to receive the remaining
required regulatory approvals in time to permit closing the transaction during
the fourth quarter of this calendar year.
Propane Operations
On February 15, 2000, AGL Resources entered into a definitive agreement to
combine its propane operations, presently operated through Propane, with the
propane operations of Atmos Energy Corporation, Dallas, Texas; Piedmont Natural
Gas Company, Charlotte, North Carolina; and TECO Energy, Inc., Tampa, Florida.
The joint venture, which is called US Propane, L.L.C. ("US Propane"),
subsequently announced on June 15, 2000, that it had entered into a definitive
agreement to combine US Propane's operations with Heritage Propane Partners. The
transactions were closed on August 10, 2000. Through the series of transactions
provided for in these two agreements, US Propane acquired ownership of the
general partner, as well as certain limited partner units, in a master limited
partnership that distributes propane to over 480,000 customers in 28 states.
Under the agreements, US Propane sold its propane business to Heritage Propane
Partners for approximately $181 million in cash and limited partnership units.
US Propane purchased all of the outstanding common stock of Heritage Holdings,
the general partner of Heritage Propane Partners, for $120 million. As a result
of these transactions, US Propane, in addition to owning 100% of the general
partner, owns an approximate 34% limited partnership interest in Heritage
Propane Partners, the master limited partnership. US Propane is owned by the
four companies that formed US Propane, with AGL Resources holding a 22.36%
interest.
Transition to Competition
The regulated rate structure under which AGLC unbundled its gas sales and
delivery service assumed that AGLC's costs associated with providing customer
service decreased each time a customer switched to a certificated marketer for
gas sales service, and such costs would be eliminated at the time the switch was
made. In fact, a significant portion of the costs associated with customer
service activities ("ancillary services"), including billing, bill inquiry,
payment processing and collection services, could not be eliminated for a period
of up to several months, during which AGLC continued to incur these expenses.
The accelerated pace of customer migration to certificated marketers also
required AGLC to incur additional customer service expenses, not originally
provided for in regulated rates, in order to maintain a high level of customer
service during the transition to competition. During the nine months ended June
30, 2000, AGLC aggressively pursued the elimination of these expenses by
implementing various cost reduction and operational excellence initiatives.
Page 22 of 33
<PAGE>
The Deregulation Act authorizes an electing distribution company, like AGLC, to
recover prudently incurred costs that are found by the GPSC to be "stranded" as
a result of the transition to competition, and necessary to provide a reasonable
rate of return. On June 25, 1999, AGLC filed a request with the GPSC for an
accounting order (the "Order"), which would allow AGLC to defer transition costs
which are considered by AGLC to be "stranded." The Order, which was approved on
October 19, 1999, allows AGLC to defer these costs if such costs are incurred
from October 1, 1999 to September 30, 2000, and recovery is necessary in order
for AGLC to earn the 11% return on common stockholders' equity approved by the
GPSC in AGLC's last rate case. In order to be deferred, the cost must also be
one that:
- AGLC is still incurring but, as a result of deregulation, is no
longer receiving revenue from the rate or rates which were set based
on that cost;
- Is prudently incurred; and
- Cannot be mitigated.
As of June 30, 2000, AGLC had deferred a net amount of approximately $7.0
million in certain assets and expenses related to deregulation and recorded a
regulatory asset in that amount.
On May 23, 2000, the staff of the GPSC filed a motion requesting that the GPSC
issue an order disallowing the deferrals made by AGLC, alleging that the
deferrals were in violation of the GPSC's Order. On August 11, 2000, AGLC and
the GPSC staff reached an oral agreement which will be reduced to writing,
pursuant to which the parties will agree that the staff's motion will be held in
abeyance until such time as recovery is requested by AGLC. Management believes
that recoverability of this asset is appropriate.
Concentration of Credit Risk
AGLC has concentration of credit risk related to the provision of services to
certificated marketers. At September 30, 1998, AGLC billed approximately 1.4
million end-use customers in Georgia for its services. In contrast, at June 30,
2000, AGLC billed 13 certificated and active marketers in Georgia for services,
who, in turn, billed end-use customers.
As of June 30, 2000, 71.7% of AGL Resources' total gas receivables were due from
three of the 13 certificated and active marketers plus two inactive marketers
and 0.2% were due from end-use customers in Georgia who migrated to certificated
marketers late in fiscal 1999 or who were randomly assigned. Beginning October
1, 1999, only gas receivables primarily attributable to Chattanooga are due from
end-use customers. As a result, in fiscal 2000, a significantly higher
percentage of AGL Resources' total gas receivables are due from Georgia
certificated marketers than was the case in prior years.
Several factors mitigate the risks to AGL Resources of the increased
concentration of credit that has resulted from deregulation. First, in order to
obtain a certificate from the GPSC, a certificated marketer must demonstrate to
the GPSC, among other things, that it possesses satisfactory financial and
technical capability to render the certificated service. Second, AGLC has
instituted certain practices and imposed certain requirements designed to reduce
credit risk. These include:
Page 23 of 33
<PAGE>
- Pursuant to AGLC's tariff, each certificated marketer is required
to maintain security for its obligations to AGLC in an amount equal
to at least two times the marketer's estimated maximum monthly
bill and in the form of a cash deposit, letter of credit, surety
bond or guaranty from a creditworthy guarantor; and
- Intrastate delivery service is billed in advance rather than in
arrears.
AGLC also faces potential credit risk in connection with assignments to
certificated marketers of interstate pipeline transportation and storage
capacity. Although AGLC has assigned this capacity to the certificated
marketers, in the event that the certificated marketers fail to pay the
interstate pipelines for the capacity, the interstate pipelines would in all
likelihood seek repayment from AGLC. This risk is mitigated somewhat by the fact
that the interstate pipelines require the certificated marketers to maintain
security for their obligations to the interstates arising out of the assigned
capacity.
On October 26, 1999, Peachtree Natural Gas, LLC ("Peachtree"), the then fifth
largest certificated marketer in Georgia based on customer count, filed for
protection under Chapter 11 of the United States Bankruptcy Code. As of the date
of Peachtree's bankruptcy filing, Peachtree owed AGLC approximately $14.3
million for pre-petition delivery service and other services and charges. AGLC
holds $11 million of surety bonds as security for Peachtree's obligations. The
amount owed to AGLC does not include amounts owed by Peachtree to interstate
pipelines for assigned capacity. Based upon proofs of claim filed by interstate
pipelines in Peachtree's bankruptcy proceeding, as of the date of Peachtree's
filing, Peachtree owed interstate pipelines approximately $2.5 million for
assigned capacity. In December 1999, Shell Energy Services Company, L.L.C. began
serving the firm customers formerly served by Peachtree. AGLC has been paid in
full for all post-petition delivery and other services provided by AGLC to
Peachtree.
On July 1, 2000, Titan Energy of Georgia, Inc. ("Titan"), the then sixth largest
certificated marketer in Georgia based on customer count, filed for protection
under Chapter 11 of the United States Bankruptcy Code. As of the date of Titan's
bankruptcy filing, Titan owed AGLC approximately $2.4 million for pre-petition
delivery service and other services and charges. Since that date, AGLC has been
paid approximately $2.3 million under letters of credit it held as security for
Titan's obligations, leaving an unpaid pre-petition claim against Titan of
approximately $0.1 million. Based upon information filed by Titan in its
bankruptcy proceeding, AGLC does not believe that Titan has any outstanding
unpaid amounts owing to any interstate pipelines. Effective July 14, 2000,
Energy America, LLC began serving the firm customers formerly served by Titan.
AGLC has been paid in full for all post-petition delivery and other services
provided by AGLC to Titan.
Page 24 of 33
<PAGE>
Capital Expenditures
Capital expenditures for construction of distribution facilities, purchase of
equipment, and other general improvements were $119.3 million for the nine-month
period ended June 30, 2000 as compared to $96.8 million for the nine-month
period ended June 30, 1999. The increase of $22.5 million is primarily
attributable to the capital expenditures incurred for the accelerated Pipeline
Replacement Program. AGLC will recover the cost of the accelerated Pipeline
Replacement Program from end-use customers through billings to certificated
marketers, net of any cost savings from the replacement program. (See State
Regulatory Activity - AGLC Pipeline Safety.) Typically, funding for capital
expenditures is provided through a combination of internal and external sources.
Common Stock
During the nine months ended June 30, 2000, AGL Resources repurchased 3,310,500
shares of common stock for a total of $56.7 million pursuant to a previously
announced stock repurchase plan. During that same period, AGL Resources issued
447,578 shares of common stock under ResourcesDirect, a direct stock purchase
and dividend reinvestment plan; the Retirement Savings Plus Plan; the Long-Term
Stock Incentive Plan, the Long-Term Incentive Plan; and the Non-Employee
Directors Equity Compensation Plan.
Ratios
As of June 30, 2000, AGL Resources' capitalization ratios consisted of:
- 45.9% long-term debt (excluding current portion);
- 5.8% preferred securities; and
- 48.3% common equity.
These ratios will change as a result of the financing required for the VNG
acquisition.
Gas Cost Credits
Gas cost credits decreased to $1.3 million as of June 30, 2000 from $37.9
million as of September 30, 1999. The decrease is primarily due to a $33 million
payment to the GPSC during December 1999, and payments totaling approximately
$2.5 million to buyout and terminate remaining long-term gas supply contracts.
In accordance with the January 26, 1999 joint stipulation agreement entered into
with the GPSC, AGLC recognized profits of $1.0 million in fiscal 1999 and
recorded a liability for the remaining over-collection of gas costs in
accordance with SFV rates. (See Note 2. Overview of the Transition from a
Regulated to a Competitive Business Environment.)
Since AGLC paid the $33 million to the GPSC, the GPSC instituted a mechanism
pursuant to which certificated marketers were required to provide customers with
a credit on their marketer's bill. To be eligible for the refund credit, the
customer had to have been on AGLC's system on May 25, 1999, and still connected
as of April 3, 2000. The average refund per customer was approximately $25.
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State Regulatory Activity
In March 2000, the GPSC approved a plan to refund approximately $33 million,
plus interest of approximately $1 million earned on such funds from the time
they were provided by AGLC to the GPSC in December, 1999, to retail end-use
customers of certificated marketers. The refund is a result of a positive
balance in AGLC's purchased gas adjustment ("PGA"), which accrued while AGLC was
still a retail provider of natural gas. The refund has no effect on AGLC's
earnings. However, AGLC was allowed to recover approximately $0.8 million from
the PGA balance prior to disbursement of refunds in order to cover bad debt
balances of certain customers who were eligible for refunds. Refunds were
disbursed to customers by retail marketers during April and May 2000.
The GPSC also approved funds totaling $0.5 million during the quarter ended June
30, 2000 from the Universal Service Fund ("USF") for system expansion projects
in AGLC's distribution system. The USF was established as a component of gas
deregulation in Georgia in order to, among other things, fund expansion of
AGLC's distribution system in areas where it would otherwise not be economically
feasible to do so. For the nine months ended June 30, 2000, USF approved
contributions totaled $1.1 million for expansion projects.
The GPSC approved the extension of AGLC's pipeline contract with Southern
Natural Gas Company ("Southern") in April. The extension settles Southern's
general rate case filing dated September 1, 1999. While the three-year extension
has no effect on the earnings of AGLC, the new contract will lower pipeline
charges to marketers who may, in turn, pass the savings on to their end-use
customers.
Please see Financial Condition, Transition to Competition, for a discussion of
the Order.
Regulatory Accounting
AGL Resources has recorded regulatory assets and liabilities in its Condensed
Consolidated Balance Sheets in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("SFAS 71").
In July 1997, the Emerging Issues Task Force ("EITF") concluded that once
legislation is passed to deregulate a segment of a utility and that legislation
includes sufficient detail for the enterprise to determine how the transition
plan will affect that segment, SFAS 71 should be discontinued for that segment
of the utility. The EITF consensus permits assets and liabilities of a
deregulated segment to be retained if they are recoverable through a segment
that remains regulated.
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AGLC Pipeline Safety
On January 8, 1998, the GPSC issued procedures and set a schedule for hearings
about alleged pipeline safety violations. On July 21, 1998, the GPSC approved a
settlement between AGLC and the staff of the GPSC that details a 10-year
replacement program for approximately 2,300 miles of cast iron and bare steel
pipe. Over that 10-year period, AGLC will recover from end-use customers,
through billings to certificated marketers, the costs related to the program net
of any cost savings from the replacement program.
During the nine months ended June 30, 2000, approximately 187 miles of pipe was
replaced pursuant to the program. During that period, AGLC's capital
expenditures and operation and maintenance expenses related to the Pipeline
Replacement Program were approximately $35.8 million and $6.6 million,
respectively. All such amounts will be recovered through a combination of SFV
rates and a regulatory mechanism. On October 1, 1999, AGLC began recovering
costs of the program through the regulatory mechanism. The amount recovered
through June 30, 2000 was approximately $1.5 million.
Environmental
AGLC has been associated with nine MGP sites in Georgia and three in Florida.
Based on investigations to date, AGLC believes that some cleanup is likely at
most of the sites. AGLC currently estimates that its total future cost of
investigating and cleaning up its MGP sites is between $102.4 million and $148.2
million. AGLC has two ways of recovering investigation and cleanup costs. First,
the GPSC has approved an "Environmental Response Cost Recovery Rider." It allows
the recovery of costs of investigation, testing, cleanup, and litigation.
Because of that rider, AGLC has recorded a regulatory asset in the same amount
as the recorded liability for investigation and cleanup. The second way AGLC can
recover costs is by exercising the legal rights AGLC believes it has to recover
a share of its costs from other potentially responsible parties, typically
former owners or operators of the MGP sites. AGLC has been actively pursuing
those recoveries. To date, AGLC has recovered $26.9 million, although there were
no material recoveries during the quarter ended June 30, 2000.
Federal Regulatory Activity
FERC Order 636: Transition Costs Settlement Agreements
The Federal Energy Regulatory Commission ("FERC") issued Order No. 637 on
February 9, 2000. The order revises the FERC's rules governing the operations of
the utility's interstate pipeline suppliers. Among other things, the FERC:
- Permitted holders of firm pipeline capacity to release the capacity
to other shippers at a price greater than the pipeline's maximum rate
for the same capacity on an experimental basis through
September 30, 2002;
- Authorized pipelines to propose different rates for services
rendered during periods of peak usage and to propose rates that would
differ based on the length of the customer's contract; and
- Declined, for the present time, to permit pipelines and their
customers to establish individually negotiated terms and conditions
of service that depart from generally applicable pipeline tariff
rules.
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AGL Resources cannot predict how these revisions may potentially affect its
utility operations.
The FERC has required the utility, as well as other interstate pipeline
customers, to pay transition costs associated with the separation of the
suppliers' transportation and gas supply services. Based on its pipeline
suppliers' filings with the FERC, the utility estimates the total portion of its
transition costs from all its pipeline suppliers will be approximately $108.5
million. As of June 30, 2000, approximately $108.1 million of those costs had
been incurred and were being recovered primarily from the utility's customers
under rates charged for the distribution of gas. AGLC's remaining costs will be
recovered from certificated marketers.
The utility continues to pay transition costs to Southern pursuant to a
restructuring settlement that resolves all transition cost issues for Southern.
Under the Southern settlement, the utility's share of Southern's transition
costs is approximately $90.3 million, of which the utility incurred $89.9
million as of June 30, 2000.
On March 10, 2000, Southern filed a settlement to resolve all issues arising out
of its September 1, 1999 general rate case filing. Among other matters, the
settlement provides for the termination of Southern's interstate pipeline
affiliate, South Georgia Natural Gas Company ("South Georgia"), as a separate
entity, with Southern absorbing South Georgia's facilities and operations. The
settlement rates would represent a decrease of approximately $6 million per year
under AGLC's existing contracts for firm interstate pipeline capacity. The FERC
has authorized Southern to implement the settlement rates on an interim basis
effective March 1, 2000, pending action by the FERC on the settlement. In return
for the rate reduction firm contract holders were required to extend their
existing contracts by three years. The utility has filed comments requesting
that the FERC approve the settlement.
AGLC is involved in three Transcontinental Gas Pipe Line Corporation ("Transco")
rate cases, which concern rates in effect since September 1, 1995, as well as
proposed changes to take effect prospectively. These rate proceedings are at
various stages of litigation before the FERC, and none of these proceedings are
final. At the present time, AGLC cannot predict the effect of these proceedings
on its rates or operations.
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<PAGE>
Environmental Matters
Before natural gas was widely available in the Southeast, AGLC manufactured gas
from coal and other fuels. Those manufacturing operations were known as
"manufactured gas plants," or "MGPs" which AGLC ceased operating in the 1950s.
Because of recent environmental concerns, AGLC is required to investigate
possible environmental contamination at those plants and, if necessary, clean up
any contamination.
AGLC has been associated with nine MGP sites in Georgia and three in Florida.
Based on investigations to date, AGLC believes that some cleanup is likely at
most of the sites. In Georgia, the state Environmental Protection Division
supervises the investigation and cleanup of MGP sites. In Florida, the U.S.
Environmental Protection Agency has that responsibility.
For each of the MGP sites, AGLC has estimated its share of the likely costs of
investigation and cleanup. AGLC currently estimates that its total future cost
of investigating and cleaning up its MGP sites is between $102.4 million and
$148.2 million. That range does not include other potential expenses, such as
unasserted property damage or personal injury claims or legal expenses for which
AGLC may be held liable but for which neither the existence nor the amount of
such liabilities can be reasonably forecast. Within that range, AGLC cannot
identify any single number as a "better" estimate of its likely future costs
because its actual future investigation and cleanup costs will be affected by a
number of contingencies that cannot be quantified at this time. Consequently, as
of June 30, 2000, AGLC has recorded the lower end of the range, or $102.4
million, as a liability, which remains unchanged from March 31, 2000, and a
corresponding regulatory asset.
AGLC has entered into a contract with ThermoRetec Consulting Corporation
("ThermoRetec") for management of the investigation and cleanup of AGLC's MGP
sites. Under this contract, AGLC's former MGP sites are classified into two
categories. Where AGLC is not the primary responsible party, ThermoRetec will
provide management oversight and coordination between AGLC and other responsible
parties. At all other sites, ThermoRetec will provide all services that will
eventually result in cleanup and regulatory finality for those MGP sites within
specified deadlines. With respect to these latter sites, the agreement between
AGLC and ThermoRetec establishes a performance-based fee arrangement, under
which a portion of ThermoRetec's compensation is tied to the relationship
between certain specified components of the cleanup costs and specified
benchmarks for those cost components. Management does not believe the
outsourcing of the management will have a material effect on the total future
cost of investigating and cleaning up the MGP sites.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
All financial instruments and positions held by AGL Resources described below
are held for purposes other than trading.
Interest Rate Risk
AGL Resources' exposure to market risk related to changes in interest rates
relates primarily to its borrowing activities. A hypothetical 10% increase or
decrease in interest rates related to AGL Resources' variable rate debt ($138.5
million outstanding as of June 30, 2000) would not have a material effect on
results of operations or financial condition over the next 12 months. The fair
value of AGL Resources' long-term debt and capital securities also are affected
by changes in interest rates. A hypothetical 10% increase or decrease in
interest rates would not have a material effect on the estimated fair value of
AGL Resources' long-term debt or capital securities. Additionally, the fair
value of outstanding long-term debt and capital securities has not materially
changed since September 30, 1999. During the nine months ended June 30, 2000,
AGL Resources repaid $50.0 million of long-term debt.
(The remainder of this page was intentionally left blank.)
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PART II -- OTHER INFORMATION
"Part II -- Other Information" is intended to supplement information contained
in the Annual Report on Form 10-K for the fiscal year ended September 30, 1999,
and should be read in conjunction therewith.
ITEM 1. LEGAL PROCEEDINGS
With regard to legal proceedings, AGL Resources is a party, as both plaintiff
and defendant, to a number of suits, claims and counterclaims on an ongoing
basis. (See State Regulatory Activity, Federal Regulatory Activity, and
Environmental Matters contained in Item 2 of Part I under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition.") Management believes that the outcome of all litigation in which it
is involved will not have a material adverse effect on the consolidated
financial statements of AGL Resources.
ITEM 5. OTHER INFORMATION
Information related to State Regulatory Activity, Federal Regulatory Activity,
and Environmental Matters is contained in Item 2 of Part I under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
(The remainder of this page was intentionally left blank.)
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Stock Purchase Agreement dated May 8, 2000 by and between AGL
Resources Inc. and Consolidated Natural Gas Company, Virginia
Natural Gas, Inc. and Dominion Resources, Inc.
10.1 Master Environmental Management Services Agreement dated April 24,
2000 by and between Atlanta Gas Light Company and ThermoRetec
Consulting Corporation. *
10.2 Form of Continuity Agreement between AGL Resources Inc. and certain
of its executive officers.
27 Financial Data Schedule.
* Confidential treatment pursuant to 17 CFR Section 200.80 (b) and 240.24b-2 has
been requested regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the Commission.
(b) Reports on Form 8-K.
On May 8, 2000, AGL Resources Inc. filed a Current Report on Form
8-K dated May 8, 2000, in connection with AGL Resources Inc.'s
agreement to acquire Virginia Natural Gas.
On June 16, 2000, AGL Resources Inc. filed a Current Report on
Form 8-K dated June 15, 2000, in connection with AGL Resources
Inc.'s participation in the US Propane merger of operations with
Heritage Holdings, Inc.
(The remainder of this page was intentionally left blank.)
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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 thereunto duly authorized.
AGL Resources Inc.
(Registrant)
Date August 14, 2000 ___/s/ Donald P. Weinstein_______
Donald P. Weinstein
Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
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