<PAGE> 1
EXHIBIT 99.2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholder of
Peoples Gas Company:
We have audited the accompanying balance sheets of Peoples Gas Company (a
Florida corporation and wholly-owned subsidiary of TECO Energy, Inc.) as of
December 31, 1999 and 1998, and the related statements of operations and
retained earnings and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peoples Gas Company as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
-----------------------
Tampa, Florida,
October 18, 2000
1
<PAGE> 2
PEOPLES GAS COMPANY
BALANCE SHEETS -- DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
ASSETS ------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 21 $ 116
Accounts receivable, net of allowance of $75 and $50
at December 31, 1999 and 1998, respectively 5,224 3,173
Inventories 1,384 956
Prepaid expenses 14 65
Total current assets 6,643 4,310
------- -------
PROPERTY, PLANT AND EQUIPMENT, net 36,063 32,095
INTANGIBLES AND OTHER ASSETS, net 1,018 801
------- -------
Total assets $43,724 $37,206
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable to related companies $16,315 $10,251
Accounts payable 2,072 1,561
Accrued and other current liabilities 1,774 1,859
------- -------
Total current liabilities 20,161 13,671
------- -------
DEFERRED TAX LIABILITIES 8,456 7,939
------- -------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDER'S EQUITY:
Common stock, no par value; 60 shares issued and
outstanding at December 31, 1999 and 1998 -- --
Paid-in capital 5,054 5,054
Retained earnings 10,053 10,542
------- -------
Total shareholder's equity 15,107 15,596
------- -------
Total liabilities and shareholder's equity $43,724 $37,206
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE> 3
PEOPLES GAS COMPANY
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES $ 34,045 $ 30,187 $ 32,874
-------- -------- --------
COSTS AND EXPENSES:
Cost of products sold 14,849 12,283 17,063
Operating expenses 13,223 11,088 11,927
Depreciation and amortization 3,088 2,855 2,514
-------- -------- --------
Total costs and expenses 31,160 26,226 31,504
-------- -------- --------
Operating income 2,885 3,961 1,370
OTHER INCOME (EXPENSE) 10 (478) (390)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,895 3,483 980
PROVISION FOR INCOME TAXES 1,127 1,412 378
-------- -------- --------
NET INCOME $ 1,768 $ 2,071 $ 602
======== ======== ========
RETAINED EARNINGS, beginning of year $ 10,542 $ 10,442 $ 9,840
Net income 1,768 2,071 602
Dividends paid to parent (2,257) (1,971) --
-------- -------- --------
RETAINED EARNINGS, end of year $ 10,053 $ 10,542 $ 10,442
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
PEOPLES GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,768 $ 2,071 $ 602
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 3,088 2,855 2,514
Deferred income taxes 517 444 326
Changes in assets and liabilities, net of effect of acquisitions-
Accounts receivable (2,051) 698 869
Inventories (413) 255 443
Prepaid expenses 51 22 (87)
Intangibles and other assets (97) -- (95)
Accounts payable to related companies 6,064 4,226 4,546
Accounts payable 511 (300) (194)
Accrued and other current liabilities (85) (1,052) (1,242)
------- ------- -------
Net cash provided by operating activities 9,353 9,219 7,682
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (1,015) (1,719) --
Capital expenditures (6,176) (5,328) (4,497)
------- ------- -------
Net cash used in investing activities (7,191) (7,047) (4,497)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt -- (346) (7,811)
Capital contributions -- -- 4,250
Dividends paid (2,257) (1,971) --
------- ------- -------
Net cash used in financing activities (2,257) (2,317) (3,561)
------- ------- -------
DECREASE IN CASH (95) (145) (376)
CASH, beginning of year 116 261 637
------- ------- -------
CASH, end of year $ 21 $ 116 $ 261
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid to parent for income taxes under tax sharing agreement, net $ 851 $ 582 $ 403
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
PEOPLES GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. OPERATIONS AND ORGANIZATION
Peoples Gas Company (the Company) is a wholly-owned subsidiary of TECO Energy,
Inc. (the Parent Company) and is engaged in the purchase, distribution and
marketing of liquefied petroleum gas (propane). The Company has a diversified
customer base, which consists primarily of residential, commercial and
industrial customers located in Florida.
In June 1997, TECO Energy, Inc. acquired Lykes Energy, Inc. and issued
approximately 12.1 million shares of its stock for total consideration of
approximately $300 million. Prior to the merger, the Company was a wholly-owned
subsidiary of Lykes Energy, Inc. The merger was accounted for as a pooling of
interests.
The accompanying financial statements have been presented on a carve-out basis
and reflect the historical results of operations, financial position and cash
flows of the Company. As discussed further in Note 6, certain expenses in the
financial statements include allocations from the Parent Company and other
wholly-owned subsidiaries of the Parent Company (individually, a Related Company
and collectively, the Related Companies). Management believes that the
allocations were made on a reasonable basis; however, the allocations of costs
and expenses do not necessarily indicate the costs that would have been incurred
by the Company on a stand-alone basis. Also, the financial statements may not
necessarily reflect what the financial position, results of operations and cash
flows of the Company would have been if the Company had been a separate,
stand-alone company during the periods presented.
In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural
Gas Co., Inc., and AGL Resources, Inc. contributed each companies' propane
operations, Peoples Gas Company, United Cities Propane Gas, Inc., Piedmont
Propane Company and AGL Propane, Inc., respectively, to U.S. Propane L.P., (U.S.
Propane) in exchange for equity interests in U.S. Propane. The merger was
accounted for as an acquisition using the purchase method of accounting with
Peoples Gas Company being the acquirer. Accordingly, Peoples Gas Company's
assets and liabilities were recorded at historical cost and the assets and
liabilities of United Cities Propane Gas, Inc., Piedmont Propane Company and AGL
Propane, Inc. were recorded at fair market value, as determined based on a
valuation and appraisal.
In August 2000, U.S. Propane obtained control of Heritage Propane Partners, L.P.
(Heritage Propane) by acquiring Heritage Holdings, Inc., Heritage Propane's
general partner. Simultaneously, U.S. Propane transferred its propane operations
to Heritage Propane in exchange for cash, common units in Heritage Propane and a
limited partner interest in Heritage Operating, L.P. Upon closing the
transaction, which occurred in August 2000, U.S. Propane owns all of the general
partnership interest and approximately 34 percent of the limited partnership
interest in Heritage Propane.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales of propane, propane appliances, parts and fittings are recognized at the
later of the time of delivery of the product to the customer or the time of sale
or installation. Revenue from service labor is recognized upon completion of the
service, and tank rent is recognized ratably over the period it is earned.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
5
<PAGE> 6
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using weighted-average cost, while the cost of
appliances, parts and fittings is determined by the first-in, first-out method.
Inventories consisted of the following at December 31, 1999 and 1998 (amounts in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Fuel $1,315 $ 684
Appliances, parts and fittings 69 272
------ ------
$1,384 $ 956
====== ======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Expenditures for maintenance and repairs
are expensed as incurred. Additionally, the Company capitalizes certain costs
directly related to the installation of company-owned tanks, including internal
labor costs. Components and useful lives of property, plant and equipment were
as follows at December 31, 1999 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
Useful
Life
(in years) 1999 1998
---------- -------- ---------
<S> <C> <C> <C>
Land and improvements $ 719 $ 719
Buildings and improvements 20 1,673 1,651
Bulk storage, equipment and facilities 20 2,393 2,393
Tanks and other equipment 5-20 42,206 37,524
Vehicles 10 6,248 5,891
Furniture and fixtures 7-20 1,391 1,233
Other 20 522 517
-------- --------
55,152 49,928
Less-Accumulated depreciation (20,657) (18,622)
-------- --------
34,495 31,306
Plus-Construction work-in-process 1,568 789
-------- --------
$ 36,063 $ 32,095
======== ========
</TABLE>
Included within tanks and other equipment is approximately $34,627,000 and
$30,762,000 of propane equipment (principally tanks and appliances) leased to
third parties as of December 31, 1999 and 1998, respectively.
6
<PAGE> 7
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. Components and useful lives of intangibles and other
assets were as follows as of December 31, 1999 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
Useful Life
(in years) 1999 1998
----------- ------ -------
<S> <C> <C> <C>
Noncompete agreements 5 $1,295 $ 1,095
Customer lists 5 200 -
Other 81 64
------ -------
1,576 1,159
Less-Accumulated amortization (558) (358)
------ -------
$1,018 $ 801
====== =======
</TABLE>
The Company entered into noncompete agreements for five years with certain
previous owners of acquired companies and certain other outside parties. The
costs associated with these agreements are being amortized over the terms of the
agreements. Amounts payable under the noncompete obligations total $525,000 at
December 31, 1999, and are included in accrued and other current liabilities on
the accompanying balance sheet. These payments are payable in the succeeding
years and thereafter as follows (amounts in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
2000 $ 300
2001 100
2002 100
2003 25
-----
$ 525
=====
</TABLE>
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable. If such a review should indicate that the carrying amount of
long-lived assets is not recoverable, the Company reduces the carrying amount of
such assets to fair value. Based on the most recent review, the Company believes
no impairment exists at December 31, 1999 and 1998.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consisted of the following as of December
31, 1999 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Wages and payroll taxes $ 90 $ 52
Deferred tank rent 278 265
Customer deposits 800 742
Noncompete payable 525 425
Other 81 375
------ ------
$1,774 $1,859
====== ======
</TABLE>
7
<PAGE> 8
INCOME TAXES
The Company has followed the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred income taxes
are recorded based upon differences between the financial reporting and tax
basis of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the underlying assets are received and
liabilities are settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE
The carrying amount of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of December 31, 1999 and 1998, because of the relatively short maturity of these
instruments.
RECENTLY ISSUED ACCOUNTING STANDARD NOT YET ADOPTED
The Company has not yet adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 will be effective for
the Company's fiscal year ended December 31, 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 133 does not allow retroactive application to financial statements of prior
periods. The Company's management has evaluated the impact of adopting SFAS 133
and does not expect it to have a significant impact on its reported financial
condition, results of operations and cash flows.
3. ACQUISITIONS
Effective January 1998, the Company purchased substantially all of the fixed
assets of Ankney Gas, Inc. for approximately $412,000 in cash. Additionally, the
Company obtained a five-year noncompete agreement with the prior owner amounting
to $203,000, to be amortized over a five-year period.
Effective July 1998, the Company purchased substantially all of the fixed assets
of Florida Gas Service Corporation for approximately $1,307,000 in cash.
Additionally, the Company obtained a five-year noncompete agreement with the
prior owners amounting to $50,000, to be amortized over a five-year period.
Effective July 1999, the Company purchased substantially all of the inventory
and fixed assets of Commercial Propane, Inc. for approximately $1,015,000 in
cash. Additionally, the Company obtained a five-year noncompete agreement with
the prior owners amounting to $200,000, to be paid in 2000 and amortized over a
five-year period.
The results of operations of the acquired entities have been included in the
Company's financial statements from the date of acquisition.
Effective January 1998, the Parent Company completed its merger with Griffis,
Inc. and U.S. Propane, Inc. and issued approximately 600,000 shares of its
common stock for total consideration of approximately $15,000,000. Concurrent
with the merger, Griffis, Inc. and U.S. Propane, Inc. were merged into Peoples
Gas Company. This merger was accounted for as a pooling of interests and,
accordingly, the Company's balance sheet as of December 31, 1998, and its
statements of operations and related earnings and cash flows for the period
ended December 31, 1998, include the results of Griffis, Inc. and U.S. Propane,
Inc. The statements of operations and retained earnings
8
<PAGE> 9
and cash flows for the year ended December 31, 1997, include the results of
Griffis, Inc. and U.S. Propane, Inc. Additionally, the Company obtained a
five-year noncompete agreement with the prior owner amounting to $500,000 to be
paid and amortized over a five-year period.
4. INCOME TAXES
The Company files a consolidated federal income tax return with the Parent
Company and, based on a tax sharing agreement, includes, in its statements of
operations, a provision for income taxes calculated on a separate return basis.
The provision for income taxes for the years ended December 31, 1999, 1998, and
1997, was comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal income taxes:
Current $ 524 $ 830 $ 45
Deferred 443 381 280
State income taxes:
Current 86 138 7
Deferred 74 63 46
------ ------ ------
Total provision for income taxes $1,127 $1,412 $ 378
====== ====== ======
</TABLE>
The income tax effect of temporary differences comprising the deferred tax
liability on the accompanying balance sheet is a result of the following at
December 31, 1999 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Depreciation and amortization $ 8,717 $ 8,093
Deferred revenue (104) (102)
Other (157) (52)
------- -------
$ 8,456 $ 7,939
======= =======
</TABLE>
Income taxes differ from amounts computed by applying the statutory rates to
pre-tax income as follows (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal income taxes at statutory rate of 35% $ 1,013 $ 1,219 $ 343
State income tax, net 104 130 35
Other, net 10 63 --
------- ------- -------
Provision for income taxes $ 1,127 $ 1,412 $ 378
======= ======= =======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases propane equipment (principally tanks and appliances) to third
parties. All existing leases are cancelable operating leases. The net book value
of total leased property amounted to $23,618,000 and $20,885,000 at December 31,
1999 and 1998, respectively.
9
<PAGE> 10
The Company leases certain operational facilities from third parties under
non-cancelable operating leases expiring in various years through 2003. Future
minimum lease payments under these leases are as follows at December 31, 1999
(amounts in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
2000 $ 108
2001 72
2002 48
2003 18
-----
$ 246
</TABLE>
Rental expense under the terms of the non-cancelable operating leases for the
years ended December 31, 1999, 1998 and 1997, totaled approximately $184,000,
$119,000 and $181,000, respectively, and has been included in operating expenses
in the accompanying statements of operations.
LITIGATION
The Company is involved in litigation arising in the normal course of business.
The Company participates in umbrella insurance coverage through a policy held by
the Parent Company. The Company pays an annual premium to the Parent Company for
the Company's portion of the policy, as allocated by the Parent Company. In
addition, the Company is allocated a portion of a self-insurance reserve
maintained by a Related Company to cover losses up to the deductible of the
insurance coverage. Amounts paid for premiums and the self-insurance reserve
were approximately $170,000, $260,000 and $290,000 in 1999, 1998 and 1997,
respectively. Under the agreement with the Related Company, the Company has no
additional liability for actual claims or losses.
PURCHASE COMMITMENTS
The Company has several non-cancelable purchase agreements with its vendors for
the purchase of propane gas inventory, which expire during fiscal 2001. The
agreements provide that the Company purchase, principally at market rates,
approximately 34,000,000 gallons during fiscal 2000 and 2001. The Company
purchases substantially all of its volumes sold through these agreements.
During 1999, the Company entered into a contract with one of its vendors to
hedge the price of propane gas purchases up to a cap of $0.45 per gallon for
1,000,000 gallons. The agreement provides for specific monthly volumes and
expired in February 2000. The Company paid approximately $18,000 for this
contract, which is included in other assets. The Company is amortizing this
amount over the actual volumes purchased under the contract, or the life of the
contract, whichever comes first.
6. RELATED-PARTY TRANSACTIONS
The Parent Company and Related Companies perform certain services for the
Company, which are billed at actual cost. In addition, common general and
administrative salary and other operating costs and expenses are allocated to
the Company based upon methods considered reasonable by management. Such charges
for employee services amounted to $2,906,000, $2,160,000 and $2,406,000 for the
years ended 1999, 1998 and 1997, respectively. Accounts payable to related
companies is non-interest bearing.
Employees of the Company participate in the non-contributory defined benefit
retirement plan and postretirement benefit plan of the Parent Company, which
cover substantially all full-time employees. The Company's share of the Parent
Company's annual pension, postretirement benefit, and medical and dental
expenses amounted to $1,067,000, $821,000 and $820,000 in 1999, 1998 and 1997,
respectively.
During the year ended December 31, 1997, the Parent Company contributed
$4,250,000 to the Company.
10
<PAGE> 11
The Company leases certain office space from an employee of the Company. Future
minimum lease payments under this lease are $18,444 and $1,537 for the years
ending December 31, 2000 and 2001, respectively.
7. SUBSEQUENT EVENT
Effective January 2000, the Company purchased substantially all of the fixed
assets of Horizon Gas, Inc., Horizon Gas of Dover, Inc., Horizon Gas of St.
Petersburg, Inc. and Horizon Gas of Tampa, Inc. for approximately $3,300,000 in
cash. Additionally, the Company obtained a five-year noncompete agreement with
the prior owners amounting to $500,000, to be amortized over a five-year period.
The transaction is being accounted for using the purchase method.
11
<PAGE> 12
PEOPLES GAS COMPANY
BALANCE SHEET -- JUNE 30, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30,
ASSETS 2000
----------
(unaudited)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11
Accounts receivable, net of allowance of $75 4,206
Inventories 1,541
Prepaid expenses 14
-------
Total current assets 5,772
PROPERTY, PLANT AND EQUIPMENT, net 40,887
INTANGIBLES AND OTHER ASSETS, net 1,284
-------
Total assets $47,943
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable to related companies $21,359
Accounts payable 1,823
Accrued and other current liabilities 1,205
-------
Total current liabilities 24,387
-------
DEFERRED TAX LIABILITIES 8,711
-------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value, 60 shares issued and
outstanding at June 30, 2000 --
Paid-in capital 5,054
Retained earnings 9,791
-------
Total shareholder's equity 14,845
-------
Total liabilities and shareholder's equity $47,943
=======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
12
<PAGE> 13
PEOPLES GAS COMPANY
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Six-month Period
Ended June 30,
------------------------
2000 1999
-------- -------
(unaudited)
<S> <C> <C>
REVENUES $ 23,747 $ 17,181
-------- --------
COSTS AND EXPENSES:
Cost of products sold 13,153 6,954
Operating expenses 6,650 6,020
Depreciation and amortization 1,665 1,525
-------- --------
Total costs and expenses 21,468 14,499
-------- --------
Operating income 2,279 2,682
-------- --------
OTHER (EXPENSE) INCOME (228) 11
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,051 2,693
PROVISION FOR INCOME TAXES 800 1,039
-------- --------
NET INCOME $ 1,251 $ 1,654
======== ========
RETAINED EARNINGS, beginning of period $ 10,053 $ 10,542
Net income 1,251 1,654
Dividends paid to parent (1,513) (1,755)
-------- --------
RETAINED EARNINGS, end of period $ 9,791 $ 10,441
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE> 14
PEOPLES GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Six-month Period
Ended June 30,
-----------------------
2000 1999
------- -------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,251 $ 1,654
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 1,665 1,525
Deferred income taxes 255 51
Changes in assets and liabilities, net of effect of acquisitions-
Accounts receivable 1,018 88
Inventories (157) 54
Prepaid expenses -- 43
Accounts payable (249) (943)
Accounts payable to related companies 5,044 1,878
Accrued and other current liabilities (569) (361)
------- -------
Net cash provided by operating activities 8,258 3,989
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition and non-compete agreement, net of cash acquired (3,785) --
Capital expenditures (2,970) (2,343)
------- -------
Net cash used in investing activities (6,755) (2,343)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to parent (1,513) (1,755)
------- -------
Net cash used in financing activities (1,513) (1,755)
------- -------
DECREASE IN CASH (10) (109)
CASH, beginning of period 21 116
------- -------
CASH, end of period $ 11 $ 7
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid to parent for income taxes under tax sharing agreement $ 1,028 $ 1,432
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE> 15
PEOPLES GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
1. OPERATIONS AND ORGANIZATION
Peoples Gas Company (the Company) is a wholly-owned subsidiary of TECO Energy,
Inc. (the Parent Company) and is engaged in the purchase, distribution and
marketing of liquefied petroleum gas (propane). The Company has a diversified
customer base, which consists primarily of residential, commercial and
industrial customers located in Florida.
In June 1997, TECO Energy, Inc. acquired Lykes Energy, Inc. and issued
approximately 12.1 million shares of its stock for total consideration of
approximately $300 million. Prior to the merger, the Company was a wholly-owned
subsidiary of Lykes Energy, Inc. The merger was accounted for as a pooling of
interests.
The accompanying financial statements have been presented on a carve-out basis
and reflect the historical results of operations, financial position and cash
flows of the Company. Certain expenses in the financial statements include
allocations from the Parent Company and other wholly-owned subsidiaries of the
Parent Company (collectively, the Related Companies). Management believes that
the allocations were made on a reasonable basis; however, the allocations of
costs and expenses do not necessarily indicate the costs that would have been
incurred by the Company on a stand-alone basis. Also, the financial statements
may not necessarily reflect what the financial position, results of operations
and cash flows of the Company would have been if the Company had been a
separate, stand-alone company during the periods presented.
In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural
Gas Co., Inc., and AGL Resources, Inc. contributed each companies' propane
operations, Peoples Gas Company, United Cities Propane Gas, Inc., Piedmont
Propane Company and AGL Propane, Inc., respectively, to U.S. Propane L.P., (U.S.
Propane) in exchange for equity interests in U.S. Propane. The merger was
accounted for as an acquisition using the purchase method of accounting with
Peoples Gas Company being the acquirer. Accordingly, Peoples Gas Company's
assets and liabilities were recorded at historical cost and the assets and
liabilities of United Cities Propane Gas, Inc., Piedmont Propane Company and AGL
Propane, Inc. were recorded at fair market value, as determined based on a
valuation and appraisal.
In August 2000, U.S. Propane obtained control of Heritage Propane Partners, L.P.
(Heritage Propane) by acquiring Heritage Holdings, Inc., Heritage Propane's
general partner. Simultaneously, U.S. Propane transferred its propane operations
to Heritage Propane in exchange for cash, common units in Heritage Propane and a
limited partner interest in Heritage Operating, L.P. Upon closing of the
transaction, which occurred in August 2000, U.S. Propane owns all of the general
partnership interest and approximately 34 percent of the limited partnership
interest in Heritage Propane.
2. INTERIM FINANCIAL INFORMATION
The interim financial statements as of June 30, 2000, and for the six-month
periods ended June 30, 2000 and 1999, are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of the Company's management, the unaudited
interim financial statements contain all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. The results
of operations for the interim periods are not necessarily indicative of the
results for the entire fiscal year.
3. ACQUISITION
Effective January 2000, the Company purchased substantially all of the fixed
assets of Horizon Gas, Inc., Horizon Gas of Dover, Inc., Horizon Gas of St.
Petersburg, Inc. and Horizon Gas of Tampa, Inc. for
15
<PAGE> 16
approximately $3.3 million in cash. Additionally, the Company obtained a
five-year noncompete agreement with the prior owners amounting to $500,000, to
be amortized over a five-year period. The transaction is being accounted for
using the purchase method.
16
<PAGE> 17
Report of Independent Auditors
Board of Directors
Atmos Energy Corporation
We have audited the accompanying balance sheets of United Cities Propane Gas,
Inc. (a Tennessee corporation and wholly owned subsidiary of Atmos Energy
Corporation) as of September 30, 1999 and 1998, and the related statements of
operations and retained earnings, and cash flows for each of the three years in
the period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform our audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Cities Propane Gas, Inc.
as of September 30, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1999,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
August 21, 2000
17
<PAGE> 18
United Cities Propane Gas, Inc.
Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,285,000 $ 2,437,000
Receivables:
Principally trade, less allowance for uncollectible accounts
of $435,000 in 1999 and $440,000 in 1998 956,000 834,000
Accrued income taxes - receivable from Parent Company 1,448,000 1,346,000
Accrued income taxes receivable 891,000 219,000
Inventories 1,465,000 2,167,000
Other current assets 60,000 388,000
------------ ------------
8,105,000 7,391,000
Property and equipment:
Land 1,767,000 1,867,000
Buildings and improvements 3,461,000 3,503,000
Furniture and fixtures 1,278,000 983,000
Propane equipment 27,317,000 27,129,000
Lease equipment 5,687,000 6,392,000
------------ ------------
39,510,000 39,874,000
Less accumulated depreciation (15,753,000) (14,086,000)
------------ ------------
23,757,000 25,788,000
Deferred charges and noncurrent assets:
Noncompetition agreements, less accumulated amortization of
$1,449,000 in 1999 and $1,188,000 in 1998 1,604,000 1,865,000
Goodwill, less accumulated amortization of $455,000 in 1999 and
$176,000 in 1998 2,721,000 2,999,000
Other assets -- 8,000
------------ ------------
Total assets $ 36,187,000 $ 38,051,000
============ ============
</TABLE>
18
<PAGE> 19
United Cities Propane Gas, Inc.
Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable:
Principally trade $ 725,000 $ 860,000
Parent Company 4,429,000 3,965,000
Current portion of long-term debt 1,465,000 2,387,000
Short-term notes - due to Parent Company 13,960,000 9,700,000
Other current liabilities 900,000 970,000
----------- -----------
21,479,000 17,882,000
Long-term debt, net of current portion 4,160,000 8,879,000
Deferred credits and other liabilities:
Obligations payable under noncompetition
agreements, net of current portion 1,254,000 1,462,000
Deferred income taxes 1,326,000 1,322,000
Other liabilities 804,000 538,000
----------- -----------
3,384,000 3,322,000
Commitments and contingencies
Shareholder's equity:
Common stock, par value $10 per share: 1,000 1,000
Authorized, issued, and outstanding
shares - 100
Paid-in capital 3,708,000 3,708,000
Retained earnings 3,455,000 4,259,000
----------- -----------
Shareholder's equity 7,164,000 7,968,000
----------- -----------
Total liabilities and shareholder's equity $36,187,000 $38,051,000
=========== ===========
</TABLE>
See accompanying notes.
19
<PAGE> 20
United Cities Propane Gas, Inc.
Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues:
Propane gas $ 19,647,000 $ 20,590,000 $ 29,550,000
Merchandise 1,178,000 1,027,000 1,560,000
Rental 1,430,000 1,199,000 1,551,000
Transport services 689,000 864,000 533,000
------------ ------------ ------------
Total operating revenues 22,944,000 23,680,000 33,194,000
Operating expenses:
Cost of propane gas sold 9,627,000 11,687,000 20,244,000
Cost of merchandise sold 1,268,000 721,000 949,000
General, administrative, and selling 9,499,000 8,321,000 9,478,000
Depreciation 2,413,000 2,099,000 1,944,000
Amortization 547,000 237,000 175,000
------------ ------------ ------------
Total operating expenses 23,354,000 23,065,000 32,790,000
------------ ------------ ------------
Operating (loss) income (410,000) 615,000 404,000
Other income, net 206,000 47,000 15,000
Interest income (expense):
Interest income 260,000 143,000 144,000
Interest expense (1,338,000) (850,000) (742,000)
------------ ------------ ------------
(1,078,000) (707,000) (598,000)
------------ ------------ ------------
Loss before taxes (1,282,000) (45,000) (179,000)
Federal and state income tax benefit 478,000 13,000 90,000
------------ ------------ ------------
Net loss $ (804,000) $ (32,000) $ (89,000)
============ ============ ============
Retained earnings, beginning of year $ 4,259,000 $ 4,291,000 $ 4,780,000
Less:
Net loss (804,000) (32,000) (89,000)
Dividends paid -- -- (400,000)
------------ ------------ ------------
Retained earnings, end of year $ 3,455,000 $ 4,259,000 $ 4,291,000
============ ============ ============
</TABLE>
See accompanying notes.
20
<PAGE> 21
United Cities Propane Gas, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (804,000) $ (32,000) $ (89,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 2,413,000 2,099,000 1,944,000
Amortization 547,000 237,000 175,000
Deferred income taxes 713,000 227,000 (123,000)
Gain on sale of property and equipment (214,000) (7,000) (1,000)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net (122,000) (293,000) 881,000
Inventories 702,000 (68,000) 18,000
Accounts payable 329,000 (1,130,000) 674,000
Noncompetition obligations (233,000) (100,000) (129,000)
Accrued taxes (774,000) (1,304,000) (534,000)
Other, net (160,000) 619,000 (151,000)
------------ ------------ ------------
Net cash provided by operating activities 2,397,000 248,000 2,665,000
INVESTING ACTIVITIES
Property and equipment additions (1,035,000) (582,000) (1,985,000)
Proceeds from retirements and other property sales 867,000 59,000 68,000
Acquisition of Harlan LP Gas, Inc. -- -- (809,000)
Acquisition of Propane Sales and Service, Inc. -- -- (231,000)
Acquisition of Ingas, Inc. -- (1,179,000) --
Acquisition of Harris Propane Gas Co., Inc. -- (177,000) --
Acquisition of E-Con Gas, Inc. -- (470,000) --
Acquisition of Massey Propane -- (393,000) --
Acquisition of Shaw L.P. Gas, Inc. -- (3,861,000) --
------------ ------------ ------------
Net cash used in investing activities (168,000) (6,603,000) (2,957,000)
FINANCING ACTIVITIES
Short-term borrowings, net 4,260,000 10,203,000 2,521,000
Payments on long-term debt (5,641,000) (1,769,000) (1,674,000)
Cash dividends paid -- -- (400,000)
------------ ------------ ------------
Net cash provided (used) by financing activities (1,381,000) 8,434,000 447,000
------------ ------------ ------------
Net increase in cash 848,000 2,079,000 155,000
Cash at beginning of year 2,437,000 358,000 203,000
------------ ------------ ------------
Cash at end of year $ 3,285,000 $ 2,437,000 $ 358,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes $ -- $ -- $ 577,000
============ ============ ============
Cash paid for interest $ 1,357,000 $ 882,000 $ 756,000
============ ============ ============
</TABLE>
See accompanying notes.
21
<PAGE> 22
United Cities Propane Gas, Inc.
Notes to Financial Statements
September 30, 1999
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
United Cities Propane Gas, Inc. (the Company) is a wholly owned subsidiary of
Atmos Energy Corporation (the Parent Company). The Company is engaged in the
retail distribution of propane gas and merchandise, the transportation of
propane gas and other companies' products as well as the leasing of appliances
and propane equipment. The Company has diversified customer classes which
consist primarily of residential, commercial, industrial, and transport
customers. The financial statements give subsequent effect to business
combinations accounted for as purchases (see Note 4).
Effective February 15, 2000, the Parent Company entered into an agreement to
form a joint venture which combines 100% of the Company's operations with the
propane operations of three other unrelated utility companies. Subsequently, the
joint venture partners agreed to sell their operations to a publicly traded
limited partnership for approximately $181,000,000 in cash and limited
partnership units. Upon closing of this transaction, which occurred in August
2000, the joint venture referred to above owns all of the general partnership
interest and approximately 34% of the limited partnership interest in the
partnership.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTANGIBLE ASSETS
The excess of cost over the fair value of the net intangible assets and
identifiable intangible assets acquired has been reflected as goodwill in the
Company's balance sheet. Amortization of goodwill is computed by the
straight-line method over 10 to 20 years.
The Company entered into noncompetition agreements for ten years with certain
previous owners of acquired properties and certain other outside parties. The
costs associated with these agreements are being amortized over the terms of the
agreements. Amounts payable under the noncompetition obligations for each of the
five succeeding years and thereafter are as follows:
<TABLE>
<S> <C>
2000 $ 202,000
2001 202,000
2002 194,000
2003 194,000
2004 162,000
Thereafter 502,000
----------
$1,456,000
==========
</TABLE>
The Company assesses the recoverability of intangible assets by determining
whether the amortization of the balances over their remaining lives can be
recovered through undiscounted future operating cash flows of the acquired
operations. Recoverability is reviewed when events or changes in circumstances
indicate that the carrying amount may exceed such cash flows.
22
<PAGE> 23
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided generally on
a straight-line basis over the estimated service lives of the respective classes
of property. The service lives used are: buildings, 20 years; furniture and
fixtures, 5 to 10 years; propane equipment on customers' premises, 5 to 20
years; storage tanks, 10 to 25 years; transportation equipment, 3 to 10 years;
rental equipment and other, 8 to 10 years. Amortization of leasehold
improvements is based upon the terms of the respective leases.
Maintenance, repairs and renewals, including replacements of minor items of
physical properties, are charged against income; major additions to physical
properties are capitalized.
INVENTORIES
Inventories are principally priced at average cost and are stated at lower of
cost or market. The components of inventories are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
---------- ----------
<S> <C> <C>
Propane gas $ 841,000 $ 771,000
Appliances 63,000 584,000
Appliance parts 561,000 812,000
---------- ----------
Total inventories $1,465,000 $2,167,000
========== ==========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, and short-term debt,
approximated fair value as of September 30, 1999 and 1998, because of the
relatively short maturity of these instruments. The carrying value of long-term
debt, including the current portion, approximated fair value as of September 30,
1999 and 1998, based upon quoted market prices for the same or similar debt
issues.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, the Company considers all liquid debt
instruments purchased with remaining maturities of three months or less to be
cash equivalents.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current year
presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
The Company has not yet adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement will be effective for the Company's fiscal year 2001. It establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities.
This Statement does not allow retroactive application to financial statements of
prior periods. The Company's management has evaluated the impact of adopting the
Statement and does not expect it to have a significant impact on its reported
financial condition, results of operations, and cash flows.
2. LONG-TERM DEBT
INTERIM FINANCING
The Company has a revolving line of credit with First American (Revolver) which
provides a total line of credit of $4,000,000 maturing on June 30, 2000, at
which time all outstanding principal and interest are due. The Revolver bears
interest at the bank's prime interest rate plus 1.75% and requires monthly
23
<PAGE> 24
payments of interest only and an annual commitment fee of 3.75% to be paid on
the committed, unused portion. The Company had no balance outstanding for this
line of credit at September 30, 1999 or 1998. The Company did not renew its
credit agreement with First American that expired June 30, 2000.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
------------ -----------
<S> <C> <C>
Bank of America credit facility, dated December 15, 1995, totaling $5,000,000,
maturing on December 15, 2002, at which time all principal and interest are
due. The note bears interest at 6.99% per annum, payable monthly.
$ -- $ 3,750,000
Notes due to third parties as the result of acquisitions. The notes have
maturities ranging from January 2000 to June 2008 with annual, semiannual, and
quarterly payments of principal and interest, ranging from 6.00% to 8.5%. The
weighted average interest rate on the long-term debt at September 30, 1999 was
7.31%. 5,625,000 7,516,000
----------- -----------
$ 5,625,000 $11,266,000
=========== ===========
</TABLE>
Future maturities of the Company's long-term debt at September 30, 1999, are as
follows:
<TABLE>
<S> <C>
2000 $1,465,000
2001 1,035,000
2002 975,000
2003 942,000
2004 409,000
Thereafter 799,000
----------
$5,625,000
==========
</TABLE>
The Company repaid its Bank of America credit facility during the year,
incurring a prepayment penalty of $63,000, which is included in General,
administrative, and selling expense on the statement of operations and retained
earnings.
3. INCOME TAXES
The Company files a consolidated federal income tax return with the Parent
Company and, based on an informal tax sharing agreement, includes in its
statements of operations a provision or benefit for income tax expense
calculated on a separate return basis.
24
<PAGE> 25
The Company's net deferred tax liability consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
------------ ------------
<S> <C> <C>
Accelerated tax depreciation and
amortization $ 1,758,000 $ 1,724,000
Accrual for legal liability (124,000) (89,000)
Accrual for uncollectible accounts (165,000) (167,000)
Other, net (143,000) (146,000)
------------ ------------
$ 1,326,000 $ 1,322,000
============ ============
</TABLE>
A detail of the federal and state income tax provision (benefit) is set forth
below:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal income taxes:
Current $ (1,139,000) $ (211,000) $ 25,000
Deferred, net 661,000 199,000 (108,000)
State income taxes:
Current (52,000) (29,000) 8,000
Deferred, net 52,000 28,000 (15,000)
------------ ------------ ------------
Total federal and state income tax benefit $ (478,000) $ (13,000) $ (90,000)
============ ============ ============
</TABLE>
Income taxes differ from amounts computed by applying the statutory rates to
pretax income as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax at statutory rate of 35% $ (448,000) $ (16,000) $ (63,000)
State income tax, net -- (1,000) (5,000)
Other, net (30,000) 4,000 (22,000)
---------- ---------- ----------
Income tax benefit $ (478,000) $ (13,000) $ (90,000)
========== ========== ==========
</TABLE>
4. ACQUISITIONS AND OTHER RELATED MATTERS
Effective May 31, 1998, the Company purchased substantially all of the assets of
Ingas, Inc. of Pulaski, Tennessee, for approximately $1,179,000 in cash for the
accounts receivable, inventory, and partial payment of the fixed assets, and
$1,000,000 in two notes payable for the balance of fixed assets. Additionally,
the Company obtained a ten year noncompetition agreement with the prior owners
amounting to $600,000, to be paid and amortized over a ten year period.
Effective July 17, 1998, the Company purchased substantially all of the assets
of Harris Propane Gas Co., Inc. of Clarksville, Tennessee, for approximately
$177,000 in cash for the accounts receivable, inventory, and partial payment of
the fixed assets, and $1,600,000 in two notes payable for the balance of fixed
assets. Additionally, the Company obtained a ten year noncompetition agreement
with the prior owners amounting to $200,000, to be paid over a ten year period.
25
<PAGE> 26
Effective August 3, 1998, the Company purchased substantially all of the assets
of E-Con Gas, Inc. of Evensville, Tennessee, for approximately $470,000 in cash
for the accounts receivable, inventory, and partial payment of the fixed assets,
and $1,345,000 in a note payable for the balance of the fixed assets.
Additionally, the Company obtained a ten year noncompetition agreement with the
prior owner amounting to $250,000, to be paid and amortized over a ten year
period.
Effective August 17, 1998, the Company purchased substantially all of the assets
of Massey Propane of Petersburg, Tennessee, for approximately $393,000 in cash
for the accounts receivable, inventory, and partial payment of the fixed assets,
and $500,000 in a note payable for the balance of the fixed assets.
Additionally, the Company obtained ten year noncompetition agreements with the
prior owners amounting to $100,000, to be paid and amortized over a ten year
period.
Effective September 4, 1998, the Company purchased all of the assets of Shaw
L.P. Gas, Inc. of Greenville, Tennessee, for approximately $3,861,000 in cash
for the accounts receivable, inventory, and fixed assets. Additionally, the
Company obtained ten year noncompetition agreements with the prior owners
amounting to $50,000, to be paid and amortized over a ten year period.
Effective February 28, 1997, the Company purchased substantially all of the
assets of Harlan LP Gas, Inc. and Propane Sales and Service, Inc. for $1,040,000
in cash for the accounts receivable, inventory, and partial payment of the fixed
assets and $1,000,000 in notes payable for the balance of the fixed assets.
Additionally, the Company obtained ten year noncompetition agreements with the
prior owners amounting to $150,000, to be paid and amortized over a ten year
period. This acquisition added approximately 3,100 customers in the Harlan,
Kentucky, and Tazewell, Tennessee, areas.
The acquisitions of Ingas, Inc., Harris Propane Gas Co., Inc., E-Con Gas, Inc.,
Massey Propane, Shaw L.P. Gas, Inc., Harlan LP Gas, Inc., and Propane Sales and
Service, Inc. have been accounted for as purchases, and the results of
operations of these companies have been included in the financial statements
subsequent to the dates indicated above. The Company recorded no excess of cost
over the fair value of assets acquired from Harris Propane Gas Co., Inc., but
recorded an excess of cost over fair value of assets acquired from Ingas, Inc.,
E-Con Gas, Inc., Massey Propane, and Shaw L.P. Gas, Inc. of $300,000, $518,000,
$341,000, and $1,100,000, respectively. The excess of cost over fair value of
assets acquired is being amortized on a straight-line basis over 20 years.
5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases propane equipment (principally tanks and appliances) to
nonaffiliated third parties. All existing leases are cancelable operating
leases. At September 30, 1999, the net book value of total leased property
amounted to $14,433,000.
The Company leases certain operational facilities from nonaffiliated third
parties under noncancelable operating leases expiring in various years through
2005. Future minimum lease payments under these leases at September 30, 1999,
for each of the five succeeding years and thereafter are as follows:
<TABLE>
<S> <C>
2000 $169,000
2001 93,000
2002 69,000
2003 29,000
2004 26,000
Thereafter 3,000
--------
Total future minimum lease payments $389,000
========
</TABLE>
26
<PAGE> 27
Rental expense under the operating leases amounted to $192,000, $235,000, and
$239,000 in 1999, 1998, and 1997, respectively. Certain operating leases provide
for renewal and/or negotiable purchase options.
Renewal options are for one and two successive five-year terms at their fair
rental value at the time of renewal.
PURCHASE COMMITMENTS
The Company has several noncancelable purchase agreements with its vendors for
the purchase of propane gas inventory, which expire during fiscal 2000. The
agreements provide that the Company purchase, primarily at market rates,
approximately 15,341,000 gallons during fiscal 2000. The Company purchases all
of its volumes sold through these agreements.
Additionally, the Company entered into two contracts with one of its vendors to
fix the price of its propane gas purchases at $.41 per gallon over 90,000
gallons, and $.51 per gallon over 2,101,000 gallons. The agreements provide for
specific monthly volumes and expire during fiscal 2000. The Company paid
approximately $50,000 for the contracts, which is included in other current
assets. The Company is amortizing the amounts over the actual volumes purchased
under the contracts, or the life of the contract, whichever comes first.
LITIGATION
The Company is a party to an action pending in the Circuit Court of Sevier
County, Tennessee. The Plaintiffs' claims arise out of injuries alleged to have
been caused by a low-level propane explosion. The Plaintiffs seek to recover
damages of $13.0 million. The Company denies any wrongdoing and intends to
vigorously defend against the Plaintiffs' claims. The Company does not expect
the final outcome of this case to have a material adverse effect on the
financial condition, the results of operations, or the net cash flows of the
Company because the Company believes that it has adequate insurance coverage for
any damages that may be ultimately awarded.
The Company is a party to other litigation matters and claims that arise out of
the ordinary business of the Company. While the results of these litigation
matters and claims cannot be predicted with certainty, the Company does not
believe the final outcome of such litigation and claims will have a material
adverse effect on the financial condition, the results of operations, or the
cash flows of the Company because the Company believes that it has adequate
insurance and reserves to cover any damages that may ultimately be awarded.
6. RELATED PARTY DATA
The Parent Company's employees perform certain services for which the Company is
billed at actual cost. In addition, common general and administrative labor and
other operating costs and expenses are allocated to the Company based upon
methods considered reasonable by management. Such charges for employee services
amounted to $468,000, $389,000, and $426,000 in 1999, 1998, and 1997,
respectively.
Interest was charged by affiliated companies to the Company on short-term notes
payable at an average rate of 5.89%, 6.69%, and 5.70% in 1999, 1998, and 1997,
respectively. Total interest expense related to these notes amounted to
$673,000, $279,000, and $26,000 in 1999, 1998, and 1997, respectively.
Employees of the Company participate in the trusteed noncontributory defined
benefit pension plan, the postretirement benefits plan, and the medical and
dental insurance plans of the Parent Company, which cover substantially all
full-time employees. The Company's share of the Parent Company's annual pension,
postretirement benefit, and medical and dental insurance expenses amounted to
$1,254,000, $634,000, and $639,000 in 1999, 1998, and 1997, respectively.
27
<PAGE> 28
7. IMPACT OF YEAR 2000 - UNAUDITED
The Company believes that the Parent Company, as operator of the Company, took
the appropriate measures to ensure that the computer systems used in the
operations of the Company were made year 2000 compliant prior to the millennium
date change. As a result of those measures, the Company experienced no
significant disruptions in mission-critical information technology and
non-information technology systems and believes those systems successfully
responded to the year 2000 date change. The Company is not aware of any material
problems resulting from year 2000 issues, either with its products, its internal
systems, or the products and services of third parties.
28
<PAGE> 29
United Cities Propane Gas, Inc.
Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
JUNE 30
2000
(UNAUDITED)
------------
<S> <C>
ASSETS
Current assets:
Cash $ 649,000
Receivables:
Principally trade, less allowance for uncollectible accounts of $397,000 576,000
Accrued income taxes - receivable from Parent Company 1,358,000
Accrued income taxes receivable 1,110,000
Inventories 1,753,000
Other current assets 39,000
------------
5,485,000
Property and equipment:
Land 1,776,000
Buildings and improvements 3,471,000
Furniture and fixtures 997,000
Propane equipment 27,825,000
Lease equipment 5,585,000
------------
39,654,000
Less accumulated depreciation (17,118,000)
------------
22,536,000
Deferred charges and noncurrent assets:
Noncompetition agreements, less accumulated
amortization of $1,556,000 1,497,000
Goodwill, less accumulated amortization
of $717,000 2,459,000
Other assets --
------------
Total assets $ 31,977,000
============
</TABLE>
29
<PAGE> 30
United Cities Propane Gas, Inc.
Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
JUNE 30
2000
(UNAUDITED)
------------
<S> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable:
Principally trade $ 97,000
Parent Company 3,676,000
Current portion of long-term debt 975,000
Short-term notes - due to Parent Company 13,162,000
Other current liabilities 1,144,000
------------
19,054,000
Long-term debt, net of current portion 3,694,000
Deferred credits and other liabilities:
Obligations payable under noncompetition
agreements, net of current portion 1,113,000
Deferred income taxes 1,330,000
Other liabilities 53,000
------------
2,496,000
Commitments and contingencies
Shareholder's equity:
Common stock, par value $10 per share: 1,000
Authorized, issued, and outstanding
shares - 100
Paid-in capital 3,708,000
Retained earnings 3,024,000
------------
Shareholder's equity 6,733,000
------------
Total liabilities and shareholder's equity $ 31,977,000
============
</TABLE>
See accompanying notes.
30
<PAGE> 31
United Cities Propane Gas, Inc.
Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30
2000 1999
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Operating revenues:
Propane gas $ 18,852,000 $ 16,237,000
Merchandise 516,000 1,012,000
Rental 1,475,000 1,298,000
Transport services 552,000 550,000
------------ ------------
Total operating revenues 21,395,000 19,097,000
Operating expenses:
Cost of propane gas sold 11,501,000 7,898,000
Cost of merchandise sold 564,000 1,199,000
General, administrative, and selling 6,965,000 7,304,000
Depreciation 1,722,000 1,813,000
Amortization 369,000 323,000
------------ ------------
Total operating expenses 21,121,000 18,537,000
------------ ------------
Operating income 274,000 560,000
Other income (expense), net (8,000) 178,000
Interest income (expense):
Interest income 190,000 216,000
Interest expense (1,112,000) (996,000)
------------ ------------
(922,000) (780,000)
------------ ------------
Loss before taxes (656,000) (42,000)
Federal and state income tax benefit 225,000 12,000
------------ ------------
Net loss $ (431,000) $ (30,000)
============ ============
Retained earnings, beginning of year $ 3,455,000 $ 4,259,000
Less:
Net loss (431,000) (30,000)
------------ ------------
Retained earnings, end of year $ 3,024,000 $ 4,229,000
============ ============
</TABLE>
See accompanying notes.
31
<PAGE> 32
United Cities Propane Gas, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30
2000 1999
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (431,000) $ (30,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 1,722,000 1,813,000
Amortization 369,000 323,000
Deferred income taxes 4,000 (1,211,000)
(Gain) loss on sale of property and equipment 23,000 (168,000)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net 380,000 886,000
Inventories (288,000) 1,072,000
Accounts payable (1,381,000) (818,000)
Noncompetition obligations (141,000) (87,000)
Accrued taxes (129,000) 1,025,000
Other, net (486,000) (253,000)
------------ ------------
Net cash provided (used) by operating activities (358,000) 2,552,000
INVESTING ACTIVITIES
Property and equipment additions (575,000) (631,000)
Proceeds from retirements and other property sales 51,000 623,000
------------ ------------
Net cash used in investing activities (524,000) (8,000)
FINANCING ACTIVITIES
Short-term borrowings, net (798,000) 3,462,000
Payments on long-term debt (956,000) (4,582,000)
------------ ------------
Net cash provided (used) by financing activities (1,754,000) (1,120,000)
------------ ------------
Net increase (decrease) in cash (2,636,000) 1,424,000
Cash at beginning of year 3,285,000 2,437,000
------------ ------------
Cash at end of year $ 649,000 $ 3,861,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes $ -- $ --
============ ============
Cash paid for interest $ 989,000 $ 978,000
============ ============
</TABLE>
See accompanying notes.
32
<PAGE> 33
UNITED CITIES PROPANE GAS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 2000
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
United Cities Propane Gas, Inc. (the Company) is a wholly owned subsidiary of
Atmos Energy Corporation (the Parent Company). The company is engaged in the
retail distribution of propane (LP) gas and merchandise, the transportation of
propane (LP) gas and other companies' products as well as the leasing of
appliances and propane equipment. The Company has diversified customer classes,
which consist primarily of residential, commercial, industrial and transport
customers.
Effective February 15, 2000, the Parent Company entered into an agreement to
form a joint venture that combines 100% of the Company's operations with the
propane operations of three other unrelated utility companies. Subsequently, the
joint venture partners agreed to sell their operations to a publicly traded
limited partnership for approximately $181,000,000 in cash and limited
partnership units. Upon closing of this transaction, which occurred in August
2000, the joint venture referred to above owns all of the general partnership
interest and approximately 34% of the limited partnership interest in the
partnership.
In the opinion of management, the unaudited financial statements included herein
reflect all normal recurring adjustments necessary for a fair statement of the
results of the interim period reflected. These interim financial statements and
notes are condensed and should be read in conjunction with the financial
statements and the notes included in the financial statements for the fiscal
year ended September 30, 1999. Due to the seasonal nature of the Company's
business, the results of operations for the nine-month period are not
necessarily indicative of results of operations for a twelve-month period.
INVENTORY
Inventories are principally priced at average cost and are stated at lower of
cost of market. The components of inventories are as follows:
<TABLE>
<S> <C>
Propane Gas $1,118
Appliances 44
Appliance parts and fittings 591
------
$1,753
======
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
The Company has not yet adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement will be effective for the Company's fiscal year 2001. It establishes
accounting and reporting Standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities.
This Statement does not allow retroactive application to financial statements of
prior periods. The Company's management has evaluated the impact of adopting the
Statement and does not expect it to have a significant impact on its reported
financial condition, results of operations, and cash flows.
33
<PAGE> 34
UNITED CITIES PROPANE GAS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to an action pending in the Circuit Court of Sevier
County, Tennessee. The Plaintiffs' claims arise out of injuries alleged to have
been caused by a low-level propane explosion. The Plaintiffs seek to recover
damages of $13.0 million. The Company denies any wrongdoing and intends to
vigorously defend against the Plaintiffs' claims. The Company does not expect
the final outcome of this case to have a material adverse effect on the
financial condition, the results of operations, or the net cash flows of the
Company because the Company believes that it has adequate insurance coverage for
any damages that may be ultimately awarded.
The Company is party to other litigation matters and claims that arise out of
the ordinary business of the Company. While the results of these litigation
matters and claims cannot be predicted with certainty, the Company does not
believe the final outcome of such litigation and claims will have a material
adverse effect on the financial condition, the results of operations, or the
cash flows of the Company because the Company believes that it has adequate
insurance and reserves to cover any damages that may ultimately be awarded.
34
<PAGE> 35
Report of Independent Auditors
Board of Directors of AGL Propane, Inc.:
We have audited the accompanying balance sheets of AGL Propane, Inc. (the
"Company") as of September 30, 1999 and 1998, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of AGL Propane, Inc. as of September 30, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1999, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche, LLP
--------------------------
October 2, 2000
35
<PAGE> 36
AGL PROPANE, INC.
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
IN THOUSANDS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,871 $ 5,001
Receivables (less allowance for uncollectible accounts
of $499 in 1999 and $505 in 1998) 2,209 2,040
Receivable due from related parties 1,650
Inventory 2,670 2,815
Other current assets 257 310
-------- --------
Total current assets 8,657 10,166
-------- --------
PROPERTY, PLANT AND EQUIPMENT 27,888 25,847
Less accumulated depreciation 5,623 3,874
-------- --------
Property, plant, and equipment - net 22,265 21,973
-------- --------
GOODWILL 6,051 7,170
-------- --------
$ 36,973 $ 39,309
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,557 $ 888
Short-term debt 572 1,485
Payable due to related parties 3,473
Other accrued liabilities 2,160 2,134
-------- --------
Total current liabilities 4,289 7,980
-------- --------
LONG-TERM LIABILITIES:
Deferred income taxes 5,075 4,954
Long-term debt 35 70
-------- --------
Total long-term liabilities 5,110 5,024
-------- --------
STOCKHOLDER'S EQUITY (see accompanying statements of stockholder's
equity) 27,574 26,305
-------- --------
$ 36,973 $ 39,309
======== ========
</TABLE>
See notes to financial statements
36
<PAGE> 37
AGL PROPANE, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
IN THOUSANDS
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING REVENUES $20,010 $23,380 $14,426
COST OF SALES 8,311 11,265 5,973
------- ------- -------
OPERATING MARGIN 11,699 12,115 8,453
------- ------- -------
OTHER OPERATING EXPENSES:
Operation 6,693 7,461 5,051
Maintenance 428 224 648
Depreciation and amortization 2,080 1,806 1,203
Taxes other than income taxes 544 680 137
------- ------- -------
Total other operating expenses 9,745 10,171 7,039
------- ------- -------
OPERATING INCOME 1,954 1,944 1,414
------- ------- -------
Other income 341 753 192
Interest expense 65 51 30
------- ------- -------
INCOME BEFORE INCOME TAXES 2,230 2,646 1,576
Income taxes 961 1,125 679
------- ------- -------
Net income $ 1,269 $ 1,521 $ 897
======= ======= =======
</TABLE>
See notes to financial statements.
37
<PAGE> 38
AGL PROPANE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
IN THOUSANDS
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
EQUITY INVESTMENT OF PARENT
Beginning of year $23,566 $23,566 $ 5,905
Acquisition of propane companies 17,661
------- ------- -------
End of year 23,566 23,566 23,566
------- ------- -------
RETAINED EARNINGS
Beginning of year 2,739 1,218 321
Net income 1,269 1,521 897
------- ------- -------
End of year 4,008 2,739 1,218
------- ------- -------
Total stockholder's equity $27,574 $26,305 $24,784
======= ======= =======
</TABLE>
See notes to financial statements.
38
<PAGE> 39
AGL PROPANE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
IN THOUSANDS
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,269 $ 1,521 $ 897
Adjustments to reconcile net income to net cash
flow from operating activities:
Depreciation and amortization 2,080 1,806 1,203
Deferred income taxes 121 219 146
Changes in assets and liabilities:
Inventory 145 1,098 442
Payables due to related parties (3,908) 600 1,350
Other -- net 419 104 899
------- ------- -------
Net cash flow from operating activities 126 5,348 4,937
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,041) (3,307) (2,728)
Loan to related party (1,215)
------- ------- -------
Net cash used in investing activities (3,256) (3,307) (2,728)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(3,130) 2,041 2,209
CASH AND CASH EQUIVALENTS AT
Beginning of period 5,001 2,960 751
------- ------- -------
End of period $ 1,871 $ 5,001 $ 2,960
======= ======= =======
CASH PAID DURING PERIOD FOR:
Income taxes $ 870 $ 1,038 $ 547
======= ======= =======
</TABLE>
See notes to financial statements.
39
<PAGE> 40
AGL PROPANE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998, AND FOR THE THREE YEARS ENDED
SEPTEMBER 30, 1999
1. ORGANIZATION
AGL Propane, Inc. ("AGL Propane" or the "Company") engages in the sale of
propane and related products and services in Georgia, Alabama, North
Carolina, and Tennessee. AGL Propane was originally incorporated on
October 6, 1964 under the name Georgia Gas Service Company. Currently, AGL
Propane is a wholly owned subsidiary of AGL Investments, Inc. ("AGLI"),
which in turn is a wholly owned subsidiary of AGL Resources Inc. ("AGL
Resources").
On August 9, 2000, assets and liabilities of AGL Propane were contributed
to AGL Propane Services, Inc. ("AGL Propane Services"), another wholly
owned subsidiary of AGLI. Subsequently, AGL Propane Services contributed
certain assets and liabilities to U.S. Propane, L.P. ("US Propane") in
exchange for a 22.36% interest in US Propane. US Propane is a joint
venture between Piedmont Natural Gas Company, Inc.; TECO Energy, Inc.;
Atmos Energy Corporation; and AGL Resources.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Sales of propane, propane appliances, parts and
fittings are recognized at the time of delivery of the product to the
customer or at the time of sale or installation. Revenue from service
labor is recognized upon completion of the service, and tank rental
revenue is recognized ratably over the period it is earned.
Income Taxes - The reporting of AGL Propane's assets and liabilities for
financial accounting purposes differs from the reporting for income tax
purposes. The tax effects of the differences in those items are reported
as deferred income tax assets or liabilities in AGL Propane's Balance
Sheet. The operating results of AGL Propane are included in the
consolidated federal income tax return of AGL Resources. The resulting
income taxes are allocated to AGL Propane as if it were a separate
taxpayer.
Evaluation of Assets for Impairment - Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"), requires AGL
Propane to review long-lived assets and certain intangibles for impairment
when events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Impairment is measured by comparing
the undiscounted cash flows generated from a long-lived asset to its
carrying value. Any impairment losses are reported in the period in which
the recognition criteria are first applied based on the fair value of the
asset. In accordance with SFAS 121, AGL Propane has evaluated its
long-lived assets for financial impairment and believes that no asset
impairments exist.
Property, Plant, and Equipment - Property, plant, and equipment are
recorded at original cost. Gains or losses from retired or
otherwise-disposed-of property, plant, and equipment are recognized for
the
40
<PAGE> 41
difference between cost and accumulated depreciation. Depreciation is
computed on a straight-line basis over the lives of various classes of
property. Property, plant, and equipment consisted of the following at
September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
USEFUL
LIVES 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Land and improvements 30 $ 1,268 $ 1,393
Buildings and improvements 30 2,432 2,096
Bulk storage, equipment, and facilities 30 2,984 3,239
Tanks and other equipment 20 14,225 13,036
Vehicles 7 5,631 4,898
Furniture and fixtures 7 731 603
Machinery and equipment 7 617 582
------------ ------------
Property, plant, and equipment 27,888 25,847
Less accumulated depreciation (5,623) (3,874)
------------ ------------
Property, plant, and equipment - net $ 22,265 $ 21,973
============ ============
</TABLE>
Statement of Cash Flows - For the reporting of cash flows, cash
equivalents are defined as highly liquid investments that mature in three
months or less.
Noncash investing and financing transactions include the following:
o Purchase of GBJ Investment Co., Inc.; Jordan Gas Company, Inc.; Good
Neighbor Gas Company, Inc.; Southern Butane Co., Inc.; Waters L.P.
Gas, Inc.; J&H Propane, Inc.; and Jordan Gas Service, Inc.
(collectively referred to as "Jordan Propane"). All the individual
Jordan Propane companies were Alabama corporations, except for Good
Neighbor Gas Company, Inc., which was a Georgia corporation. (See
Note 3, Acquisitions)
o Merger with Capitol Fuels, Inc. ("Capitol Fuels"), a Georgia
corporation. (See Note 3, Acquisitions)
o Purchase of Ocoee Gas Company, LLC ("Ocoee Gas"), a Tennessee
limited liability company. (See Note 3, Acquisitions)
Inventory - Inventory is valued at the lower of cost or market. The cost
of inventory is determined by the first-in, first-out method. Inventory
consists of the following at September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Fuel $ 1,317 1,600
Appliance, parts, and fittings 1,353 1,215
---------- ----------
Inventory $ 2,670 $ 2,815
========== ==========
</TABLE>
41
<PAGE> 42
Recently Issued Accounting Pronouncements - The Financial Accounting
Standards Board ("FASB") has issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"), as amended by Statement of Financial
Standards No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS 133 ("SFAS 137"); and
Statement of Financial Accounting Standards No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities ("SFAS No.
138"). SFAS 133 and SFAS 138 establish accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The impact of
SFAS 133 and SFAS 138 on AGL Propane's financial statements is under
review and is currently unknown. SFAS 133 is effective for AGL Propane on
October 1, 2000.
3. ACQUISITIONS
In February 1997, AGLI purchased Jordan Propane's issued and outstanding
shares of capital stock for $14,492,000, of which $13,042,000 was paid in
cash. The remaining purchase price of $1,450,000 was paid by the
deliverance of a non-negotiable promissory note. (See Note 6, Short-Term
Debt) In September 1997, AGLI purchased certain assets and liabilities of
Ocoee Gas for $274,000 in cash, plus a $175,000 noncompete agreement and a
$25,000 consulting agreement. AGLI principally financed these two
acquisitions and subsequently dividended them to AGL Propane as an equity
investment by AGLI.
In June 1997, AGL Propane merged with Capitol Fuels. The merger was
financed through AGL Resources' issuance of 200,000 shares of common stock
in the amount of $3,875,000 and was dividended to AGL Propane as an equity
investment by AGLI.
AGL Resources and AGLI incurred costs of $470,000 related to these
acquisitions which were accounted for as an additional equity investment
by AGLI.
The acquisitions have been accounted for using the purchase method and,
accordingly, the purchase prices have been allocated to assets acquired
and liabilities assumed based on the fair market values at the date of the
acquisitions. The excess of the total purchase prices over the total fair
market values of the net assets of $7,320,000, the majority of which
relates to the Jordan Propane acquisition, has been recorded as goodwill,
which is being amortized over 40 years. Amortization expense of $215,000,
$214,000, and $136,000 was recognized in the years ended September 30,
1999, 1998, and 1997, respectively.
4. INCOME TAX EXPENSE
The components of income tax expense for the years ended September 30,
1999, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 761 $ 820 $ 482
State 79 86 51
Deferred:
Federal 110 198 132
State 11 21 14
---------- ---------- ----------
Income tax expense $ 961 $ 1,125 $ 679
========== ========== ==========
</TABLE>
For the three years in the period ended September 30, 1999, the provision
for income taxes differs from the amount of income taxes determined by
applying the applicable U.S. statutory federal income tax rate to income
before taxes as a result of the following differences (in thousands):
42
<PAGE> 43
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Statutory U.S. tax rates $ 795 $ 941 $ 562
Nondeductible goodwill 82 82 56
State income taxes 84 99 59
Other 3 2
---------- ---------- ----------
Total $ 961 $ 1,125 $ 679
========== ========== ==========
</TABLE>
The tax effect of temporary differences that give rise to the deferred
income tax assets and liabilities at September 30, 1999 and 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Current deferred tax asset:
Allowance for doubtful accounts $ 164 $ 166
Other 25 44
Long-term deferred tax liability:
Property, plant, and equipment (5,264) (5,164)
---------- ----------
Net long-term deferred tax liability $ (5,075) $ (4,954)
========== ==========
</TABLE>
5. EMPLOYEE BENEFIT PLANS
Substantially all of AGL Propane's employees are eligible to participate
in its employee benefit plans.
Employee Savings Plan Benefits - AGL Propane participates in a defined
contribution plan, the Retirement Savings Plus Plan, which is sponsored by
AGL Resources. AGL Propane made matching contributions to participant
accounts in the following amounts:
o $75,000 for fiscal 1999;
o $143,000 for fiscal 1998; and
o $60,000 for fiscal 1997
6. SHORT-TERM DEBT
In conjunction with the acquisition of Jordan Propane in February 1997,
AGL Propane issued to Jordan's shareholders a non-negotiable promissory
note for $1,450,000 with an interest rate of 9.25%, which was guaranteed
by AGL Propane's parent, AGLI. (See Note 3, Acquisitions) The promissory
note's maturity date was the eighteen-month anniversary of the closing
date or August 1998. Therefore, as of September 30, 1998, the promissory
note was classified as short-term debt. In 1999, AGL Propane fully settled
the debt with a payment to the Jordan family in the amount of $538,000.
The reduction in the promissory note was due to the resolution of certain
contingencies and was accounted for as a reduction in goodwill.
43
<PAGE> 44
7. COMMITMENTS AND CONTINGENCIES
Total rental expense for property and equipment was as follows:
o $15,000 for fiscal 1999;
o $45,000 for fiscal 1998; and
o No rental expense for fiscal 1997
Minimum annual rentals under noncancelable operating leases are as
follows:
o Fiscal 2000 - $22,000;
o Fiscal 2001 - $18,000;
o Fiscal 2002 - $17,000; and
o Fiscal 2003 - $4,000
8. RELATED PARTIES
Payables Due to Related Parties - consists primarily of amounts due to AGL
Resources for current income taxes.
Receivables Due from Related Parties - consists of $1,215,000 payable from
Utilipro, Inc., a wholly owned subsidiary of AGL Resources Inc., in
accordance with a Note Agreement dated April 16, 1999. Interest accrues at
a rate of 8.075% annually with a maturity date of June 1, 2000. Interest
income recognized during 1999 was $33,000. All interest was accrued and
unreceived as of September 30, 1999. The remaining receivable due from
related parties is associated with excess cash advanced to AGL Resources.
9. LONG-TERM DEBT
In conjunction with the acquisition of Capitol Fuels in June 1997, AGL
Propane entered into a non-compete agreement for $175,000, payable over a
five-year period. Amounts payable related to this agreement at September
30, 1999 are as follows:
o Fiscal 2000 - $35,000
o Fiscal 2001 - $35,000
44
<PAGE> 45
AGL PROPANE, INC.
BALANCE SHEETS (UNAUDITED)
JUNE 30, 2000
IN THOUSANDS
<TABLE>
<CAPTION>
2000
-------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,480
Receivables (less allowance for uncollectible accounts
of $723) 1,398
Inventory 1,594
Other current assets 264
-------
Total current assets 4,736
-------
PROPERTY, PLANT AND EQUIPMENT 28,858
Less accumulated depreciation 6,922
-------
Property, plant, and equipment -- net 21,936
-------
GOODWILL 5,866
-------
$32,538
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade $ 182
Short-term debt 35
Payable due to related parties 133
Other accrued liabilities 1,526
-------
Total current liabilities 1,876
-------
LONG-TERM LIABILITIES:
Deferred income taxes 4,980
-------
Total long-term liabilities 4,980
-------
STOCKHOLDER'S EQUITY 25,682
-------
$32,538
=======
</TABLE>
See notes to financial statements
45
<PAGE> 46
AGL PROPANE, INC.
STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
IN THOUSANDS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
OPERATING REVENUES $ 19,183 $ 16,142
COST OF SALES 9,948 6,456
-------- --------
OPERATING MARGIN 9,235 9,686
-------- --------
OTHER OPERATING EXPENSES:
Operation 5,139 5,480
Maintenance 398 214
Depreciation and amortization 1,611 1,566
Taxes other than income taxes 487 438
-------- --------
Total other operating expenses 7,635 7,698
-------- --------
OPERATING INCOME 1,600 1,988
-------- --------
Other income 253 236
Interest expense (5) (46)
-------- --------
INCOME BEFORE INCOME TAXES 1,848 2,178
Income taxes 739 871
-------- --------
Net income $ 1,109 $ 1,307
======== ========
</TABLE>
See notes to financial statements.
46
<PAGE> 47
AGL PROPANE, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
IN THOUSANDS
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,109 $ 1,307
Adjustments to reconcile net income to net cash
flow from operating activities:
Depreciation and amortization 1,611 1,566
Deferred income taxes (95) 248
Changes in assets and liabilities:
Inventory 1,076 312
Payables due to related parties 567 (2,645)
Other -- net (1,331) (436)
------- -------
Net cash flow from operating activities 2,937 352
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt (572)
------- -------
Net cash used in financing activities (572)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (971) (1,960)
Repayment of loan to related party 1,215 (1,215)
Dividend paid to parent (3,000)
------- -------
Net cash used in investing activities (2,756) (3,175)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS
(391) (2,823)
CASH AND CASH EQUIVALENTS AT
Beginning of period 1,871 5,001
------- -------
End of period $ 1,480 $ 2,178
======= =======
CASH PAID DURING PERIOD FOR:
Income taxes $ 450 $ 839
======= =======
</TABLE>
See notes to financial statements.
47
<PAGE> 48
AGL PROPANE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
1. ORGANIZATION
AGL Propane, Inc. ("AGL Propane") engages in the sale of propane and
related products and services in Georgia, Alabama, North Carolina and
Tennessee. AGL Propane was originally incorporated on October 6, 1964
under the name Georgia Gas Service Company. Currently, AGL Propane is a
wholly owned subsidiary of AGL Investments, Inc, ("AGLI"), which in turn
is a wholly owned subsidiary of AGL Resources, Inc. ("AGL Resources").
On August 9, 2000, assets and liabilities of AGL Propane were contributed
to AGL Propane Services, Inc. ("AGL Propane Services"), another
wholly-owned subsidiary of AGLI. Subsequently, AGL Propane Services
contributed certain assets and liabilities to U.S. Propane, L. P. ("US
Propane") in exchange for a 22.36% interest in US Propane. US Propane is a
joint venture between Piedmont Natural Gas Company, Inc., TECO Energy,
Inc., Atmos Energy Corporation and AGL Resources.
2. SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the unaudited financial statements included
herein reflect all normal recurring adjustments necessary for a fair
statement of the results of the interim period reflected. These interim
financial statements and notes are condensed and should be read in
conjunction with the financial statements and the notes included in the
financial statements for the fiscal year ended September 30, 1999. Due to
the seasonal nature of AGL Propane's business, the results of operations
for the nine-month period are not necessarily indicative of results of
operations for a twelve-month period.
Recently Issued Accounting Pronouncements - The Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
No. 133"), as amended by Statement of Financial Standards No. 137 ("SFAS
137") and Statement of Financial Accounting Standards No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities ("SFAS
No. 138"). SFAS 133 and SFAS 138 establish accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
impact of SFAS 133 and SFAS 138 on AGL Propane's financial statements is
currently unknown.
48
<PAGE> 49
Property, Plant and Equipment - Property, plant and equipment is recorded
at original cost. Gains or losses from retired or otherwise-disposed-of
property, plant and equipment are recognized for the difference between
cost and accumulated depreciation. Depreciation is computed on a
straight-line basis over the lives of various classes of property.
Property, plant and equipment consisted of the following at June 30, 2000:
<TABLE>
<S> <C>
Land and improvements $ 1,471
Buildings and improvements 2,442
Bulk storage, equipment, and facilities 3,078
Tanks and other equipment 14,788
Vehicles 5,657
Furniture and fixtures 787
Machinery and equipment 635
--------
Property, plant, and equipment 28,858
Less accumulated depreciation (6,922)
--------
Property, plant, and equipment - net $ 21,936
========
</TABLE>
Inventory - Inventories are valued at the lower of cost or market. The
cost of fuel inventories and appliances is determined by the first-in,
first-out method. Inventories consist of the following at June 30, 2000:
<TABLE>
<S> <C>
Fuel $ 439
Appliance, parts, and fittings 1,155
--------
Inventory $ 1,594
========
</TABLE>
49
<PAGE> 50
Report of Independent Auditors
We have audited the accompanying balance sheets of Piedmont Propane Company (the
Company) as of October 31, 1999 and 1998, and the related statements of income
and retained earnings and of cash flows for each of the three years in the
period ended October 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at October 31, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended October 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte and Touche
-----------------------
October 6, 2000
50
<PAGE> 51
PIEDMONT PROPANE COMPANY
BALANCE SHEETS
OCTOBER 31, 1998 AND 1999 AND JULY 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31,
2000
(UNAUDITED) 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,508,082 $ 1,907,650 $ 837,684
Accounts receivable, less allowance for doubtful
accounts of $416,479 in 2000, $248,952 in 1999 and
$280,902 in 1998 1,538,180 2,134,740 1,378,517
Inventories:
Liquid propane 2,619,306 2,640,267 1,790,868
Materials, supplies and other 756,155 1,055,915 997,929
Prepaid Expenses:
Liquid propane inventory 2,789,265 2,704,340 2,719,250
Insurance 24,235 34,802 --
Other 1,087 10,423 3,918
----------- ----------- -----------
Total current assets 9,236,310 10,488,137 7,728,166
----------- ----------- -----------
Property, Plant and Equipment, less accumulated
depreciation of $19,424,668 in 2000, $17,911,237 in
1999 and $16,459,609 in 1998 23,910,058 24,862,765 25,352,929
Due From Parent 21,881,801 16,571,896 15,924,688
Deferred Charges and Other Assets:
Organization costs -- 8,164 8,164
Goodwill, less accumulated amortization of $776,366
in 2000, $712,968 in 1999 and $628,438 in 1998 2,799,350 2,862,748 2,947,279
Covenants not to compete, less accumulated
amortization of $497,839 in 2000, $443,521 in 1999
and $391,215 in 1998 78,161 75,337 42,503
Deferred expenses -- -- 9,524
----------- ----------- -----------
Total deferred charges and other assets 2,877,511 2,946,249 3,007,470
----------- ----------- -----------
Total Assets $57,905,680 $54,869,047 $52,013,253
=========== =========== ===========
</TABLE>
See notes to financial statements.
51
<PAGE> 52
PIEDMONT PROPANE COMPANY
BALANCE SHEETS
OCTOBER 31, 1998 AND 1999 AND JULY 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31,
2000 1999 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Liabilities:
Accounts payable - trade $ 2,607,552 $ 2,279,643 $ 1,516,972
Accounts payable - parent 3,819,984 1,106,495 795,837
Accrued liquid propane inventory 701,205 1,270,324 292,629
Unearned finance charges 20,859 22,456 22,149
Accrued insurance 214,509 411,863 512,559
General taxes payable 207,954 142,745 155,585
Income taxes payable 338,979 526,914 583,629
Other 71,925 149,151 115,186
----------- ----------- -----------
Total current liabilities 7,982,967 5,909,591 3,994,546
----------- ----------- -----------
Deferred Credits and Other Liabilities:
Deferred income taxes 8,295,687 8,027,515 7,759,343
Customer deposits 161,606 166,284 166,328
Escheats payable 74,389 74,389 85,534
Other -- 1,995 --
----------- ----------- -----------
Total deferred credits and other liabilities 8,531,682 8,270,183 8,011,205
----------- ----------- -----------
Shareholder's Equity:
Common stock, par value $10 per share, 10,000 shares
authorized, 101 shares outstanding 1,010 1,010 1,010
Additional paid-in capital 16,270,647 16,270,647 16,270,647
Retained earnings 25,119,374 24,417,616 23,735,845
----------- ----------- -----------
Total shareholder's equity 41,391,031 40,689,273 40,007,502
----------- ----------- -----------
Total Liabilities and Shareholder's Equity $57,905,680 $54,869,047 $52,013,253
=========== =========== ===========
</TABLE>
See notes to financial statements.
52
<PAGE> 53
PIEDMONT PROPANE COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 AND THE NINE MONTHS
ENDED JULY 31, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31 YEARS ENDED OCTOBER 31,
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Propane $28,488,591 $19,838,621 $26,265,628 $29,072,079 $34,897,661
Appliance sales 607,248 538,013 826,917 693,850 758,287
Service work 548,249 489,639 730,599 636,458 704,901
Tank rentals 288,399 266,667 419,237 371,530 392,252
Miscellaneous 34,949 3,500 7,002 14,672 62,593
----------- ----------- ----------- ----------- -----------
Total revenues 29,967,436 21,136,440 28,249,383 30,788,589 36,815,694
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 18,434,261 10,305,176 14,383,088 16,436,965 21,675,118
General, administrative and selling 7,853,551 7,925,999 9,772,634 9,211,441 9,736,978
Depreciation and amortization 1,743,186 1,801,305 2,132,841 2,183,570 2,216,015
General taxes 583,449 629,386 657,324 619,346 687,722
----------- ----------- ----------- ----------- -----------
Total costs and expenses 28,614,447 20,661,866 26,945,887 28,451,322 34,315,833
----------- ----------- ----------- ----------- -----------
Operating income 1,352,989 474,574 1,303,496 2,337,267 2,499,861
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income 217,262 114,417 144,724 174,039 281,807
Interest expense (339,561) (298,995) (406,865) (614,627) (618,735)
Other, net (51,935) 72,323 109,364 54,050 62,017
----------- ----------- ----------- ----------- -----------
Total other income (expense) (174,234) (112,255) (152,777) (386,538) (274,911)
----------- ----------- ----------- ----------- -----------
Income before income taxes 1,178,755 362,319 1,150,719 1,950,729 2,224,950
----------- ----------- ----------- ----------- -----------
Income taxes:
Federal 406,592 127,019 387,085 654,304 743,455
State 70,405 23,365 81,863 136,499 154,458
----------- ----------- ----------- ----------- -----------
Total income taxes 476,997 150,384 468,948 790,803 897,913
----------- ----------- ----------- ----------- -----------
Net income 701,758 211,935 681,771 1,159,926 1,327,037
Retained earnings at beginning of period 24,417,616 23,735,845 23,735,845 22,575,919 21,248,882
----------- ----------- ----------- ----------- -----------
Retained earnings at end of period $25,119,374 $23,947,780 $24,417,616 $23,735,845 $22,575,919
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
53
<PAGE> 54
PIEDMONT PROPANE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 AND THE NINE MONTHS
ENDED JULY 31, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31, YEARS ENDED OCTOBER 31,
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 701,758 $ 211,935 $ 681,771 $ 1,159,926 $ 1,327,037
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,743,186 1,801,305 2,132,841 2,183,570 2,216,015
(Gain) loss on sale of fixed assets 18,032 (40,388) (64,774) (2,685) (9,884)
Changes in assets and liabilities:
Accounts receivable 596,560 805,192 (756,223) 568,809 664,216
Inventories 320,721 702,515 (907,385) 730,735 381,819
Prepaid expenses (65,022) 2,581,979 (26,397) (145,498) (287,817)
Other assets 60,317 (38,563) (94,323) (89,301) (107,266)
Accounts payable - trade 327,909 (990,486) 762,671 (1,019,111) 669,718
Income taxes payable (187,935) (107,106) (56,715) (372,197) (1,269,347)
Other liabilities 2,174,104 257,694 1,478,473 (538,873) (738,912)
----------- ----------- ----------- ----------- -----------
Total adjustments 4,987,872 4,972,142 2,468,168 1,315,449 1,518,542
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities 5,689,630 5,184,077 3,149,939 2,475,375 2,845,579
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (755,492) (1,127,200) (1,429,136) (983,941) (1,491,206)
Business acquisitions -- -- -- (121,054) (1,845,645)
Covenants not to compete (67,571) (51,143) (63,543) (75,143) (59,143)
Proceeds from sale of property 37,105 26,651 58,699 34,713 291,554
Excess cash, net of tax payments,
transferred (to) from the parent (5,303,240) (4,245,993) (645,993) (1,572,651) 235,164
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (6,089,198) (5,397,685) (2,079,973) (2,718,076) (2,869,276)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (399,568) (213,608) 1,069,966 (242,701) (23,697)
Cash and cash equivalents at beginning of
period 1,907,650 837,684 837,684 1,080,385 1,104,082
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,508,082 $ 624,076 $ 1,907,650 $ 837,684 $ 1,080,385
=========== =========== =========== =========== ===========
Cash Paid During the Year for income taxes $ -- $ 3,484 $ 3,484 $ 123,750 $ 346,425
</TABLE>
See notes to financial statements.
54
<PAGE> 55
PIEDMONT PROPANE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Information as of July 31, 2000, and for the nine months ended July 31, 1999
and 2000, is unaudited.)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Corporate Structure and Operations.
Piedmont Propane Company was formed in 1987 and is a wholly owned subsidiary of
Piedmont Natural Gas Company, Inc. (the Parent). Propane markets liquid propane
and propane appliances to residential, commercial and industrial customers
within and adjacent to the Parent's three-state service area. The three-state
service area consists of the Piedmont region of North Carolina and South
Carolina and the metropolitan Nashville, Tennessee, area.
The financial statements have been prepared from the separate records maintained
by us and may not necessarily be indicative of the conditions that would have
existed or the results of operations if we had been operated as an unaffiliated
company. Portions of certain income and expenses represent allocations made from
the Parent applicable to the consolidated company as a whole.
B. Long-lived Assets and Intangibles.
Property, plant and equipment is stated at cost. Expenditures for maintenance
and routine repairs are expensed as incurred. Depreciation is calculated using
the straight-line method based on estimated useful lives of the assets ranging
from five to 35 years.
Intangible assets, consisting of goodwill, covenants not to compete and
organizational costs, are stated at cost, net of amortization. Goodwill is
amortized over 40 years using the straight-line method. Amortization expense
totaled $221,817, $162,430 and $163,722 for the years ended October 31, 1997,
1998 and 1999, respectively. Noncompetition agreements with certain previous
owners of acquired properties are being amortized over the terms of the
agreements. Amounts payable under the noncompetition agreements total $73,142
for 2000, $16,000 for 2001, $10,000 for 2002 and none thereafter.
We review long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Our reviews have not resulted in a material
effect on results of operations or financial condition.
C. Inventories.
Inventories are stated at the lower of cost or market. Inventory is charged to
cost of goods sold using the weighted average cost method.
In addition to inventories on hand, we also enter into contracts to purchase
propane to meet a portion of our supply requirements. Generally, such contracts
have terms of less than one year and call for payment based on either fixed
prices or market prices at the date of delivery.
D. Operating Revenues.
We recognize revenue from liquid propane sales when the product is delivered to
customers. Service labor is recognized when the job is completed. Tank
installation revenues are recognized when the tank is installed. Tank rental
revenues are recognized on a monthly basis. Revenues from appliance sales are
recognized when the appliance is installed. For appliances that are financed,
the unearned finance revenue is recognized as the customer pays for the
appliance.
55
<PAGE> 56
E. Income Taxes.
We provide deferred income taxes for differences between the book and tax basis
of assets and liabilities, principally attributable to accelerated tax
depreciation.
F. Statement of Cash Flows.
We use the indirect method to report cash flows from operating activities, which
requires adjustments to net income to reconcile net cash flows provided by
operating activities. We consider all highly liquid debt instruments with a
maturity of three months or less as cash equivalents.
G. Business Segments.
We have no other reportable segments.
H. Use of Estimates.
We make estimates and assumptions when preparing financial statements. Those
estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from estimates.
I. Recently Issued Accounting Standards.
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133), requires all
derivative instruments to be recognized on the balance sheet at their fair
value. Changes in the fair value of derivatives are to be recorded each period
either in other comprehensive income or in current earnings depending on the use
of the derivative and whether it qualifies for hedge accounting. FAS 133, as
amended by SFAS No. 137 and No. 138 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. We are currently evaluating the
effects of FAS 133 on financial position and results of operations.
J. Unaudited Interim Results.
The accompanying balance sheet as of July 31, 2000, and the statements of income
and retained earnings and cash flows for the nine months ended July 31, 1999 and
2000, are unaudited. We have prepared these statements on the same basis as the
audited financial statements and have included all normal recurring adjustments
necessary for the fair presentation of these periods.
Our business is seasonal in nature. The results of operations for the nine-month
period ended July 31, 2000, do not necessarily reflect the results to be
expected for the full year.
56
<PAGE> 57
NOTE 2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at October 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Land and improvements $ 917,724 $ 1,023,987
Buildings and improvements 1,036,057 1,140,852
Transportation equipment 8,740,233 8,899,818
Furniture and fixtures 246,691 251,548
Storage facilities 3,164,331 3,209,795
Equipment, primarily cylinders and tanks 25,017,084 25,402,051
Refueling stations 994,486 991,486
Computer equipment 412,948 623,267
Communications equipment 276,356 315,568
Tools and other small equipment 410,835 424,804
Leased property 158,727 162,555
Other 437,066 274,124
Construction work in progress -- 54,147
----------- -----------
Gross property, plant and equipment 41,812,538 42,774,002
Less accumulated depreciation 16,459,609 17,911,237
----------- -----------
Net property, plant and equipment $25,352,929 $24,862,765
=========== ===========
</TABLE>
Depreciation expense totaled $1,994,198, $2,021,140 and $1,969,119 for the years
ended October 31, 1997, 1998 and 1999, respectively.
NOTE 3. FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE
The carrying amounts in the balance sheets of cash and cash equivalents,
receivables and accounts payable approximated their fair values due to the
short-term maturities of these financial instruments.
NOTE 4. LEASES
We lease certain propane equipment to nonaffiliated third parties. All existing
leases are cancelable operating leases.
We lease certain operational facilities from nonaffiliated third parties under
noncancelable operating leases expiring in various years through 2006. Future
minimum lease payments under these leases at October 31, 1999, for each of the
five succeeding years and thereafter are as follows:
<TABLE>
<S> <C>
2000 $ 210,352
2001 125,547
2002 88,672
2003 80,272
2004 48,602
Thereafter 7,500
----------
Total future minimum lease payments $ 560,945
==========
</TABLE>
Rental expense under the operating leases totaled $255,127, $247,012 and
$229,536 for the years ended October 31, 1997, 1998 and 1999, respectively.
Certain operating leases provide for renewal. These renewal options vary from
month-to-month renewals to one and two successive five-year terms at their fair
rental value at the time of renewal.
57
<PAGE> 58
NOTE 5. MARKET AND CREDIT RISKS
We are subject to commodity price risks to the extent that propane market prices
deviate from fixed contract settlement amounts. Because our profitability is
sensitive to changes in wholesale propane costs, we generally seek to pass on
increases in the cost of propane to customers. However, we can give no assurance
that we will always be able to pass on product cost increases fully,
particularly when product costs rise rapidly.
We have financial instruments such as trade accounts receivable which could
expose us to concentrations of credit risk. The credit risk from trade accounts
receivable is limited because of our large customer base.
NOTE 6. EMPLOYEE BENEFIT PLANS
We participate with the Parent and its affiliates in a defined-benefit pension
plan. Plan benefits are generally based on credited years of service and the
level of compensation during the five consecutive years of the last ten years
prior to retirement during which the participant received the highest
compensation. Amounts allocated to us for pension costs were $274,363, $300,528
and $341,911 for the years ended October 31, 1997, 1998 and 1999, respectively.
The Parent's policy is to fund the plan in an amount not in excess of the amount
that is deductible for income tax purposes. Plan assets consist primarily of
marketable securities and cash equivalents. As of October 31, 1998 and 1999,
with respect to the entire plan, the fair value of plan assets exceeded the
projected benefit obligation.
We participate with the Parent and its affiliates in a postretirement benefit
plan that provides health care and life insurance benefits to substantially all
full-time regular employees. Amounts allocated to us for postretirement benefit
costs were $77,053, $81,886 and $85,535 for the years ended October 31, 1997,
1998 and 1999, respectively. As of October 31, 1998 and 1999, with respect to
the entire plan, the liability associated with such benefits was funded in
irrevocable trust funds which can only be used to pay the benefits.
We participate with the Parent and its affiliates in salary investment plans,
which are profit-sharing plans under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the Tax Code), which include qualified cash or deferred
arrangements under Tax Code Section 401(k). Employees who have completed six
months of service are eligible to participate. Participants are permitted to
defer a portion of their base salary to the plans and we match a portion of the
participants' contributions. All contributions vest immediately. For the years
ended October 31, 1997, 1998 and 1999, we contributed $135,792, $152,289 and
$150,327, respectively, in matching contributions to the plans.
NOTE 7. DEBT
As of October 31, 1998 and 1999, total long-term debt, net of current
maturities, of the Parent was $371,000,000 and $423,000,000, respectively.
Interest expense is allocated to us on a monthly basis based on the level of
certain assets and at the Parent's debt to equity ratio. Amounts allocated to us
for long-term interest costs were $484,722, $409,550 and $318,150 for the years
ended October 31, 1997, 1998 and 1999, respectively. The average embedded
interest cost of long-term debt over the three-year period was 8.30%.
We also borrow money on a short-term basis at the Parent's cost of money.
Amounts allocated to us for short-term interest costs were $86,336, $158,312 and
$50,886 for the years ended October 31, 1997, 1998 and 1999, respectively.
NOTE 8. BUSINESS COMBINATIONS
On March 11, 1997, we sold our ice business and related assets known as the
Southern Ice Company for approximately $251,000.
On June 20, 1997, we purchased certain assets from Lynchburg Gas, Inc., doing
business as Lincoln-Moore County Propane, for approximately $770,000. We also
entered into noncompetition agreements with prior owners totaling $30,003 to be
paid over five years.
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On August 27, 1997, we purchased certain assets from McCombs Oil Company, Inc.,
for approximately $1,250,000, plus liquid propane inventories. We also entered
into noncompetition agreements with prior owners totaling $50,000 to be paid
over five years.
On November 13, 1997, we purchased certain assets from Metro Gas, Inc., for
approximately $160,000. We also entered into a noncompetition agreement with a
former owner for three years for $25,000 payable immediately.
NOTE 9. CONTINGENCIES AND COMMITMENTS
We have been named as a defendant in various legal actions arising in the normal
course of business. We cannot predict with certainty the final results of these
matters; however, we are of the opinion that there are no known claims that are
likely to have a material adverse effect on financial condition, results of
operations or cash flows.
During the year ended October 31, 1997, and the period November 1, 1997 through
May 31, 1998, we guaranteed up to $5,000,000 related to debt for certain working
funds and other general purposes for a joint venture of a subsidiary of the
Parent. As of June 1998, the joint venture was terminated and we no longer
guarantee this debt.
Effective July 1, 1998, a subsidiary of the Parent became a member of SouthStar
Energy Services LLC (SouthStar). Effective November 1, 1998, we agreed to
guaranty a portion of SouthStar's obligations to Atlanta Gas Light Company (AGL)
for the pipeline capacity it furnishes SouthStar in accordance with the member's
share that this subsidiary of the Parent has in SouthStar. As a condition of the
indemnification agreement, we are required to maintain stockholder's equity of
at least $30,000,000. On May 18, 2000, Dynegy Holdings Inc. agreed to guaranty
SouthStar's obligations to AGL and our indemnification agreement is now with
Dynegy Holdings Inc. We have also guaranteed up to $7,500,000 related to bank
borrowings for certain working funds and other general purposes for SouthStar.
NOTE 10. RELATED PARTY TRANSACTIONS
The Parent performs certain engineering and payroll processing services for us
for which we were billed $13,044, $10,922 and $8,442 for the years ended October
31, 1997, 1998 and 1999, respectively.
We have an agreement with the Parent to purchase, transport, store, if
necessary, and deliver propane for use by the Parent for an annual service fee
of $50,000.
The Parent purchases propane from us for operations. These purchases totaled
$483,939, $269,319 and $244,569 for the years ended October 31, 1997, 1998 and
1999, respectively.
NOTE 11. TAXES
We file a consolidated federal income tax return with the Parent. We include in
our statements of income a provision for tax expense calculated on a separate
return basis. The consolidated tax liability is allocated to us based on the
ratio of our taxable income to the total consolidated group.
Our net deferred tax liability consists primarily of accelerated tax
depreciation and amortization. The components of income tax expense for the
years ended October 31, 1997, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------- ------------------------- -------------------------
FEDERAL STATE FEDERAL STATE FEDERAL STATE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current $ 455,945 $ 90,828 $ 305,864 $ 101,389 $ 166,377 $ 34,399
Deferred 287,510 63,630 348,440 35,110 220,708 47,464
---------- ---------- ---------- ---------- ---------- ----------
Total income tax expense $ 743,455 $ 154,458 $ 654,304 $ 136,499 $ 387,085 $ 81,863
========== ========== ========== ========== ========== ==========
</TABLE>
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A reconciliation of income tax expense at the federal statutory rate to recorded
income tax expense for the years ended October 31, 1997, 1998 and 1999, is as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Federal taxes at 35% $ 778,732 $ 682,755 $ 402,752
State income taxes, net of federal benefit 101,235 92,556 49,096
Other, net 17,946 15,492 17,100
---------- ---------- ----------
Total income tax expense $ 897,913 $ 790,803 $ 468,948
========== ========== ==========
</TABLE>
NOTE 12. ENVIRONMENTAL MATTERS
Since 1967, the Parent has owned real property in Hickory, North Carolina, which
was acquired in conjunction with the acquisition of Carolina Natural Gas Company
(CNG). CNG operated a manufactured gas plant (MGP) facility at or near this
site, but at the time of the acquisition the facility was no longer being
operated. In 1982, this property was transferred to our books. The Parent has
recorded an environmental liability for this site based on a generic MGP site
study as no site-specific evaluation has been performed.
NOTE 13. SUBSEQUENT EVENTS
We signed an agreement on February 15, 2000, to form a joint venture, US
Propane, L.P., combining our propane operations with the propane operations of
three other companies. On June 15, 2000, US Propane announced that it would
combine with Heritage Holdings, Inc., the general partner of Heritage Propane
Partners, L.P. The formation of US Propane and the combination with Heritage was
complete on August 10, 2000. US Propane contributed all of its assets to
Heritage for approximately $181,000,000 in cash and limited partner units and
purchased all of the outstanding common stock of Heritage Holdings for
approximately $120,000,000. US Propane now owns all of the general partnership
interest and approximately 34% of the limited partnership interest in the
partnership
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