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FILED PURSUANT TO: RULE 424(B)(3)
REGISTRATION STATEMENT: 333-16683
LYKES ENERGY, INC.
111 EAST MADISON STREET
TAMPA, FLORIDA 33602
November 27, 1996
Dear Shareholder:
Enclosed please find the Prospectus/Proxy Statement relating to the
solicitation of written consents to approve certain actions in lieu of holding a
special meeting of the shareholders of Lykes Energy, Inc. ("LEI"). The LEI Board
of Directors is asking that you return your consents to approve and adopt the
Agreement and Plan of Merger dated as of November 21, 1996 (the "Merger
Agreement"), which provides for the merger of LEI with and into TECO Energy,
Inc. ("TECO") or, subject to certain conditions, with a wholly-owned subsidiary
of TECO (the "Merger"). Under the terms of the Merger Agreement and based on the
number of shares of LEI common stock outstanding on the date of this letter,
each outstanding share of common stock of LEI will be converted into the right
to receive between 10.3 and 12.6 shares of TECO common stock, depending on the
average of the closing prices of TECO common stock on the New York Stock
Exchange during a specified period ending prior to the effective date of the
Merger. The Merger Agreement and financial and other information concerning the
business of TECO and LEI are included in the enclosed Prospectus/Proxy
Statement. Please review the Prospectus/Proxy Statement carefully. Additionally,
you are being asked to consent to a proposal to approve certain payments and
benefits under employment and severance agreements with officers and certain
other key employees of LEI that would otherwise be subject to reduction to avoid
adverse tax treatment.
The LEI Board of Directors has fixed the close of business on November 22,
1996 as the record date for determining the shareholders entitled to consent to
the foregoing proposed actions.
Under Florida law, LEI shareholders have certain dissenters' rights of
appraisal in connection with the Merger. LEI shareholders desiring to exercise
dissenters' rights must not submit an affirmative consent to approve the Merger
Agreement. See "CONSENT SOLICITATION -- Dissenters' Rights" in the enclosed
Prospectus/Proxy Statement for details on the mechanics of exercising
dissenters' rights.
The Board of Directors believes that the Merger is in the best interest of
the shareholders of LEI and has unanimously approved the Merger Agreement. In
arriving at its decision, the Board considered a number of factors, including an
opinion from its financial advisor, CS First Boston Corporation, that the
consideration to be received in the merger by LEI shareholders is fair from a
financial point of view. The Board recommends that you take action FOR adoption
of the Merger Agreement and approval of the payments and benefits under the
employment and severance Agreements. In considering these recommendations, you
should review carefully all the information contained in the enclosed
Prospectus/Proxy Statement.
We appreciate the loyalty and support our shareholders have demonstrated
over the years. We hope that you will continue this support by providing your
consent FOR the proposals now. The affirmative action of the holders of a
majority of the outstanding shares of LEI common stock is required to approve
and adopt the Merger Agreement, so failure to consent will have the same effect
as a vote against the Merger Agreement. The affirmative action of the holders of
75% of the shares of LEI common stock is required to approve the proposal
regarding the employment and severance agreements in order to avoid certain
adverse tax consequences. For this purpose, shares actually or constructively
owned by or for the individuals entitled to payments under these agreements are
not counted. Accordingly, we urge you to complete, sign and date the enclosed
consent card and return it in the enclosed return envelope. Your vote is
important.
Sincerely,
Tom L. Rankin
Chairman and Chief Executive Officer
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PROSPECTUS AND PROXY STATEMENT
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LYKES ENERGY, INC. TECO ENERGY, INC.
111 EAST MADISON STREET 702 NORTH FRANKLIN STREET
TAMPA, FLORIDA 33602 TAMPA, FLORIDA 33602
(813) 273-0074 (813) 228-4111
PROXY STATEMENT PROSPECTUS
FOR SOLICITATION OF WRITTEN CONSENTS OF COMMON STOCK, $1.00 PAR VALUE
SHAREHOLDERS
</TABLE>
This Prospectus/Proxy Statement relates to the proposed merger of Lykes
Energy, Inc. ("LEI"), a Florida corporation, with and into TECO Energy, Inc.
("TECO"), a Florida corporation, or, subject to certain conditions, with a
wholly-owned subsidiary of TECO, pursuant to the Agreement and Plan of Merger
dated November 21, 1996 between TECO and LEI (the "Merger Agreement"). The
merger contemplated by the Merger Agreement is referred to herein as the
"Merger."
As a result of the Merger, (i) each share of common stock, $.10 par value
per share, of LEI ("LEI Common Stock") outstanding immediately prior to the
effective time of the Merger (other than LEI Common Stock held directly or
indirectly by LEI and shares for which dissenters' rights have been properly
exercised) will be converted into the right to receive between 10.3 and 12.6
shares of common stock, $1.00 par value per share, of TECO ("TECO Common
Stock"), depending on the average of the closing prices of TECO Common Stock on
the New York Stock Exchange (the "NYSE") during a twenty consecutive trading day
period ending on the third trading day prior to the closing of the Merger (the
"Merger Consideration").
This Prospectus/Proxy Statement is being furnished to holders of LEI Common
Stock in connection with the solicitation by the LEI Board of Directors (the
"LEI Board") of written consents (the "Consents") in lieu of a special meeting
of LEI shareholders (i) to approve and adopt the Merger Agreement and (ii) to
approve a proposal to make certain payments and provide other benefits under
employment and severance agreements with officers and certain other key
employees of LEI that would otherwise be subject to reduction to avoid adverse
tax treatment. This Prospectus/Proxy Statement and the accompanying form of
Consent are first being mailed to shareholders of LEI on or about November 27,
1996.
This Prospectus/Proxy Statement also constitutes a prospectus of TECO with
respect to up to 13,483,146 shares of TECO Common Stock issuable pursuant to the
Merger Agreement in exchange for currently outstanding shares of LEI Common
Stock. It is a condition to consummation of the Merger that the shares of TECO
Common Stock issuable pursuant to the Merger be approved for listing on the
NYSE, subject to official notice of issuance.
On November 20, 1996, the closing price of TECO Common Stock, as reported
on the NYSE, was $24.75.
Under Florida law, LEI shareholders have certain dissenters' rights of
appraisal in connection with the Merger. LEI shareholders desiring to exercise
dissenters' rights must not submit an affirmative consent to approve the Merger
Agreement. See "CONSENT SOLICITATION -- Dissenters' Rights" for details on the
mechanics of exercising dissenters' rights.
In connection with executing the Merger Agreement, LEI granted TECO an
option to purchase 212,664 shares of LEI Common Stock at a price per share of
$280.72. TECO's right to exercise such option is subject to the occurrence of
certain termination events under the Merger Agreement as described herein.
------------------------
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS NOVEMBER 27, 1996.
<PAGE> 3
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IN CONNECTION WITH THE OFFERING
AND SOLICITATION MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY
STATEMENT OR A SOLICITATION OF A CONSENT IN ANY JURISDICTION WHERE, OR TO OR
FROM ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN
OFFER OR CONSENT SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY
STATEMENT NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS
PROSPECTUS/PROXY STATEMENT SHALL CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF TECO OR LEI SINCE THE DATE OF THIS PROSPECTUS/PROXY
STATEMENT OR THAT THE INFORMATION IN THIS PROSPECTUS/PROXY STATEMENT OR IN THE
DOCUMENTS INCORPORATED HEREIN BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATES HEREOF OR THEREOF.
<PAGE> 4
TABLE OF CONTENTS
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SUMMARY............................................................................... 1
INTRODUCTION.......................................................................... 11
CONSENT SOLICITATION.................................................................. 11
Consent Procedure................................................................... 11
Record Date; Outstanding Securities................................................. 12
Proposals in the Consent............................................................ 12
Dissenters' Rights.................................................................. 13
Further Information................................................................. 14
THE MERGER............................................................................ 15
General............................................................................. 15
Background of the Merger............................................................ 15
TECO's Reasons for the Merger....................................................... 17
LEI's Reasons for the Merger........................................................ 17
Opinion of LEI's Financial Advisor.................................................. 18
Manner and Basis of Converting Shares............................................... 23
Escrow Agreement; Indemnification................................................... 24
Interests of Certain Persons in the Merger.......................................... 24
Effective Time...................................................................... 25
Resales of TECO Common Stock........................................................ 25
THE MERGER AGREEMENT.................................................................. 25
Representations, Warranties and Covenants........................................... 25
Conditions of Merger................................................................ 27
Termination......................................................................... 27
Waiver and Amendment................................................................ 28
No Solicitation..................................................................... 28
Termination Fees.................................................................... 28
Stock Option Agreement.............................................................. 29
Escrow and Indemnity................................................................ 30
Disposition of Certain Assets....................................................... 30
CERTAIN OTHER MATTERS RELATING TO THE MERGER.......................................... 30
Regulatory Matters.................................................................. 30
Merger of PGS into Tampa Electric................................................... 31
Lykes-Duke/Louis Drefus, Ltd........................................................ 31
Expenses............................................................................ 31
Accounting Treatment................................................................ 31
Certain Credit Agreements........................................................... 31
Management after the Merger......................................................... 32
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 39
Tax Treatment of LEI and TECO....................................................... 39
Tax Consequences to LEI's Shareholders.............................................. 39
DESCRIPTION OF TECO................................................................... 40
TECO SHARE OWNERSHIP.................................................................. 40
DESCRIPTION OF TECO COMMON STOCK...................................................... 42
Common Stock........................................................................ 42
Rights.............................................................................. 42
</TABLE>
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PAGE
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DESCRIPTION OF LEI.................................................................... 43
Overview............................................................................ 43
Business Strategy................................................................... 44
Energy Marketing.................................................................... 45
Risk Management Activities.......................................................... 49
Procurement and Distribution........................................................ 50
Joint Ventures or Partnerships...................................................... 51
Competition......................................................................... 52
Regulation.......................................................................... 53
Pricing............................................................................. 53
Environmental Matters............................................................... 55
Operational Risks and Insurance..................................................... 55
Employees........................................................................... 56
Litigation.......................................................................... 56
Offices............................................................................. 56
Market for Capital Stock; Dividends................................................. 57
LEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 58
General............................................................................. 58
Income Taxes........................................................................ 58
Significant Market Factors.......................................................... 58
Seasonality......................................................................... 59
Effects of Inflation................................................................ 59
Results of Operations............................................................... 60
Liquidity and Capital Resources..................................................... 63
LEI SHARE OWNERSHIP................................................................... 66
COMPARISON OF RIGHTS OF HOLDERS OF TECO COMMON STOCK AND LEI COMMON STOCK............. 67
LEGAL OPINIONS........................................................................ 69
EXPERTS............................................................................... 69
FINANCIAL ADVISORS.................................................................... 70
SOLICITATION COMPENSATION............................................................. 70
AVAILABLE INFORMATION................................................................. 70
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 71
INDEX TO LEI CONSOLIDATED FINANCIAL STATEMENTS..................................... F-1
ANNEX I -- Agreement and Plan of Merger
ANNEX II -- Opinion of CS First Boston Corporation
ANNEX III -- Provisions of the Florida Business Corporation Act Relating to Action
by Shareholders without a Meeting
ANNEX IV -- Provisions of the Florida Business Corporations Act Relating to
Rights of Dissenting Shareholders
ANNEX V -- TECO's Annual Report on Form 10-K for the Year ended December 31,
1995
ANNEX VI -- TECO's Quarterly Report on Form 10-Q for the Quarter ended March 31,
1996
ANNEX VII -- TECO's Quarterly Report on Form 10-Q for the Quarter ended June 30,
1996
ANNEX VIII -- TECO's Quarterly Report on Form 10-Q for the Quarter ended September
30, 1996
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Proxy Statement. Reference is made to, and this Summary is
qualified in its entirety by, the more detailed information contained in or
incorporated by reference in this Prospectus/Proxy Statement and the exhibits
attached hereto. You are urged to carefully read this Prospectus/Proxy Statement
and the exhibits hereto in their entirety. As used in this Prospectus/Proxy
Statement, unless otherwise required by the context, the term "TECO" means TECO
Energy, Inc. and its consolidated subsidiaries and the term "LEI" means Lykes
Energy, Inc. and its consolidated subsidiaries. Capitalized terms used herein
without definition are, unless otherwise indicated, defined in the Merger
Agreement and used herein with such meanings.
SUMMARY BUSINESS DESCRIPTIONS
TECO
TECO is a holding company whose largest subsidiary, Tampa Electric Company,
is an electric utility serving West Central Florida. TECO's other subsidiaries
engage in energy-related businesses. The principal executive offices of TECO, a
Florida corporation, are located at TECO Plaza, 702 North Franklin Street,
Tampa, Florida 33602, and its telephone number at such offices is (813)
228-4111.
LEI
LEI is a holding company whose two largest subsidiaries are engaged in the
businesses of selling and distributing natural gas and propane gas,
respectively. The principal executive offices of LEI, a Florida corporation, are
located at 111 East Madison Street, Tampa, Florida 33602, and its telephone
number at such offices is (813) 273-0074.
CONSENT IN LIEU OF A SPECIAL MEETING
DATE OF MAILING
The Consents are being mailed on or about November 27, 1996, from the
principal executive offices of LEI, located at 111 East Madison Street, Tampa,
Florida 33602.
PURPOSE OF CONSENTS
The purposes of the Consents are (i) to approve and adopt the Merger
Agreement and (ii) to approve certain payments and benefits under employment and
severance agreements with officers and certain other key employees (the
"Employment Agreements") that would otherwise be subject to reduction to avoid
adverse tax treatment.
RECORD DATE; SHARES ENTITLED TO CONSENT
Only holders of record of shares of LEI Common Stock at the close of
business on November 22, 1996 (the "Record Date") are entitled to execute
consents. On such date, there were 1,068,668.334 shares of LEI Common Stock
outstanding, each of which will be entitled to one vote for purposes of taking
action on the matters covered by the Consents.
CONSENTS REQUIRED
The affirmative written consent of the holders of a majority of the shares
of LEI Common Stock outstanding and entitled to consent is required to approve
and adopt the Merger Agreement. The affirmative written consent of the holders
of at least seventy-five percent (75%) of the shares of LEI Common Stock
outstanding is necessary to approve the payments and benefits under the
Employment Agreements that would otherwise be subject to reduction to avoid
adverse tax treatment. For this purpose, shares actually or
1
<PAGE> 7
constructively owned by or for the individuals entitled to payment under these
agreements are not counted. Failure to submit a written Consent will have the
effect of acting against adoption of the Merger Agreement and against approval
of the proposal regarding Employment Agreements.
SECURITY OWNERSHIP OF MANAGEMENT
As of the Record Date, the directors and executive officers of LEI and
their affiliates owned approximately 37.29% of the outstanding shares of LEI
Common Stock entitled to consent. Consents from the holders of a majority of the
shares of LEI Common Stock outstanding and entitled to consent are required to
approve and adopt the Merger Agreement.
DISSENTERS' RIGHTS
If the Merger is consummated, the holders of LEI Common Stock will have
dissenters' rights, provided that such shareholders comply with certain
statutory provisions. Failure to take any step in connection with the exercise
of such dissenters' rights in a timely manner may result in the loss or waiver
of those rights. LEI shareholders desiring to exercise dissenters' rights must
not submit an affirmative consent to approve the Merger Agreement. See "CONSENT
SOLICITATION -- Dissenters' Rights" for details on the mechanics of exercising
dissenters' rights.
THE MERGER
TERMS OF THE MERGER
At the Effective Time (as defined herein), LEI will merge with and into
TECO or, subject to certain conditions, with a wholly-owned subsidiary of TECO.
In the Merger, based on the number of LEI shares currently outstanding, each
outstanding share of LEI Common Stock (other than shares held directly or
indirectly by LEI and shares for which dissenters' rights have been properly
exercised) will be converted into the right to receive between 10.30 and 12.61
shares of TECO Common Stock, depending on the average of the closing prices as
reported on the NYSE of TECO Common Stock during the twenty consecutive trading
days ending on the third trading day prior to the Closing Date. Any resulting
fractional shares will be settled in cash. The full text of the Merger Agreement
is attached to this Prospectus/Proxy Statement as Annex I.
Based on the number of shares of TECO Common Stock and LEI Common Stock
outstanding as of the Record Date, in aggregate between 11,009,174 and
13,483,146 shares of TECO Common Stock will be issuable pursuant to the Merger
Agreement, representing between approximately 8.6% and 10.3% of the total number
of shares of TECO Common Stock to be outstanding after such issuance.
LEI'S REASONS FOR THE MERGER
LEI believes that there are significant strategic benefits to the Merger
that will further its growth. In its view, the larger combined Florida entity
that emerges from the Merger will acquire greater diversity in energy products
and corresponding supply sources, advantages through the integration of
overlapping operations and support functions, improved access to capital and
funding, and the ability to spread costs of new products, services, and research
and development over a wider customer base. See "THE MERGER -- LEI's Reasons for
the Merger."
RECOMMENDATIONS OF THE BOARD OF DIRECTORS OF LEI
THE LEI BOARD HAS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST
INTEREST OF, THE SHAREHOLDERS OF LEI AND RECOMMENDS THAT THE SHAREHOLDERS
AFFIRMATIVELY CONSENT TO APPROVE AND ADOPT THE MERGER AGREEMENT. See "THE
MERGER -- Background of the Merger" and "-- LEI's Reasons for the Merger."
THE LEI BOARD BELIEVES THAT THE APPROVAL OF THE PAYMENTS AND BENEFITS UNDER
EMPLOYMENT AGREEMENTS THAT WOULD OTHERWISE BE SUBJECT TO REDUCTION TO AVOID
ADVERSE TAX TREATMENT IS IN THE BEST INTEREST OF LEI AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
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<PAGE> 8
AFFIRMATIVELY CONSENT TO APPROVE SUCH PAYMENTS AND BENEFITS. John A. Brabson,
Jr., a recipient of such payments and benefits, is a member of the LEI Board. In
considering the recommendation of the LEI Board with respect to the Merger, LEI
shareholders should be aware that certain officers and directors of LEI have
certain interests respecting the Merger, apart from their interests as
shareholders of LEI. See "THE MERGER -- Interests of Certain Persons in the
Merger."
OPINION OF FINANCIAL ADVISOR
CS First Boston Corporation ("CS First Boston"), an internationally
recognized investment banking firm, has acted as financial advisor to LEI in
connection with the Merger and has delivered to LEI its written opinion, dated
November 21, 1996, to the LEI Board that, as of the date the LEI Board approved
the Merger, subject to the assumptions and qualifications stated by CS First
Boston therein, the proposed Merger Consideration is fair, from a financial
point of view, to LEI's shareholders. Such fairness opinion is based on
financial forecasts provided by the managements of LEI and TECO as well as
current market, economic, financial and other conditions.
The opinion of CS First Boston is attached to this Prospectus/Proxy
Statement as Annex II and you are urged to read the opinion carefully and in its
entirety. See "THE MERGER -- Opinion of Financial Advisor."
TECO'S REASONS FOR THE MERGER
TECO believes that there are significant strategic advantages to the
Merger. The Merger furthers its strategy of pursuing growth in energy related
businesses by providing new energy markets, geographic expansion in Florida and
increased investment opportunities. By enhancing its ability to meet the needs
of more customers by offering both gas and electric service, TECO also believes
that the Merger will stimulate growth in its energy services and power marketing
activities. See "THE MERGER -- TECO's Reasons for the Merger."
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of articles of merger with
the Florida Department of State (the "Effective Time"), unless the articles of
merger specify a later Effective Time. It is anticipated that the Effective Time
of the Merger will occur as soon as practicable following the satisfaction or
waiver of all conditions to the Merger contained in the Merger Agreement, which
is currently expected to occur by mid-1997.
CONDITIONS TO THE MERGER
In addition to the adoption of the Merger Agreement by the LEI
shareholders, the respective obligations of TECO and LEI to consummate the
Merger are subject to certain conditions, including that (i) all representations
and warranties contained in the Merger Agreement are accurate as of the
Effective Time; (ii) all covenants and agreements contained in the Merger
Agreement are performed or waived prior to the Effective Time; (iii) the parties
receive the legal opinions and other documents described in the Merger
Agreement; (iv) the parties receive all required governmental approvals; (v)
TECO receives letters from independent accountants indicating that the Merger
meets the requirements for pooling of interests accounting treatment; (vi) any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), has expired or terminated; and (vii) the
shares of TECO Common Stock to be issued in the Merger have been authorized for
listing on the NYSE. See "THE MERGER AGREEMENT -- Conditions of Merger."
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GOVERNMENT APPROVALS
Other than filings under the HSR Act, the filing of appropriate merger
documents with the Florida Department of State, approval, if necessary, from the
Federal Energy Regulatory Commission (the "FERC") and routine approvals and
actions required under LEI's permits and licenses to reflect the change in
control of LEI, there are no governmental approvals required to effect the
Merger. See "CERTAIN OTHER MATTERS RELATING TO THE MERGER -- Regulatory
Matters."
NO SOLICITATION
LEI has agreed not to (i) solicit, initiate or encourage discussions with
any person, other than TECO, relating to the possible acquisition of LEI or all
or a material portion of the assets or any of the capital stock of LEI or any
merger or other business combination with LEI (an "Acquisition Transaction") or
(ii) except to the extent required by fiduciary obligations under applicable law
as advised in writing by outside legal counsel, participate in any negotiations
regarding, or furnish to any other person information with respect to, any
effort or attempt by any other person to do or to seek any Acquisition
Transaction. See "THE MERGER AGREEMENT -- No Solicitation."
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated prior to the Effective Time under
certain circumstances, including at the election of the Board of Directors of
TECO (the "TECO Board") or the LEI Board, if, without fault of the terminating
party, the Closing Date (as defined herein) shall not have occurred on or before
December 31, 1997, which date may be extended by mutual consent of the parties.
See "THE MERGER AGREEMENT -- Termination."
TERMINATION FEES
If the Merger Agreement is terminated upon the occurrence of certain
events, LEI will be obligated to reimburse TECO's out-of-pocket expenses
relating to the Merger up to a maximum of $3,000,000. In addition, LEI will be
obligated to make a cash payment to TECO of $12,000,000 (less any expense
reimbursement) if the Merger Agreement is terminated under certain circumstances
and, LEI has received an acquisition proposal from a third-party which it does
not reject or enters into an acquisition agreement with a third party within 12
months (the "Termination Fee"). The Termination Fee could have the effect of
discouraging a third party from pursuing an acquisition transaction regarding
LEI because the cost of such acquisition, if successful, would be increased by
the amount of the Termination Fee. If the Merger Agreement is terminated because
of a breach by TECO, it will be obligated to reimburse LEI's out-of-pocket
expenses relating to the Merger up to a maximum of $1,800,000. See "THE MERGER
AGREEMENT -- Termination Fees."
STOCK OPTION
In connection with executing the Merger Agreement, LEI granted TECO an
option to purchase 212,664 shares of LEI Common Stock, representing 19.9% of the
LEI shares outstanding, at a price per share of $280.72. TECO's right to
exercise such option is subject to the occurrence of certain termination events
under the Merger Agreement which entitle TECO to receive the Termination Fee.
The aggregate amount payable to TECO pursuant to the Termination Fee and the
Stock Option is limited to $15,000,000. See "THE MERGER AGREEMENT -- Stock
Option."
ESCROW AGREEMENT; INDEMNIFICATION
At the Effective Time, five percent of the number of shares comprising the
Merger Consideration will be deposited in escrow under the Escrow Agreement to
satisfy certain claims for which TECO is entitled to be indemnified under the
Merger Agreement, including $5,670,000 if the cogeneration project referred to
below is disposed of, under certain circumstances, for $5,900,000 or less. See
"THE MERGER AGREEMENT -- Escrow and Indemnity."
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EXCHANGE OF LEI COMMON STOCK CERTIFICATES
Promptly after consummation of the Merger, TECO will mail a letter of
transmittal with instructions to each holder of record of LEI Common Stock
immediately before the Effective Time for use in exchanging certificates
formerly representing shares of LEI Common Stock for certificates representing
shares of TECO Common Stock and cash in lieu of any fractional shares.
Certificates should not be surrendered by the holders of LEI Common Stock until
they have received the letter of transmittal from TECO. See "THE
MERGER -- Manner and Basis of Converting Shares."
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "pooling of interests" for
financial accounting purposes. See "CERTAIN OTHER MATTERS RELATING TO THE
MERGER -- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), and should,
therefore, constitute a non-taxable transaction for holders of LEI Common Stock,
except to the extent of cash received, if any, in lieu of fractional shares of
TECO Common Stock or pursuant to the exercise of dissenters' rights. For a
discussion of these and other federal income tax considerations in connection
with the Merger, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of LEI's Board of Directors and management have certain
interests respecting the Merger separate from their interests as holders of LEI
Common Stock. In addition, officers and certain other key employees of LEI have
entered into employment or severance agreements with LEI and TECO dated November
21, 1996. See "THE MERGER -- Interests of Certain Parties in the Merger."
COMPARATIVE RIGHTS OF LEI AND TECO SHAREHOLDERS
Rights of shareholders of LEI are currently governed by Florida law, the
Articles of Incorporation of LEI (the "LEI Charter") and LEI's Bylaws. Upon
consummation of the Merger, LEI shareholders will become shareholders of TECO
and their rights as shareholders of TECO will be governed by Florida law, the
Articles of Incorporation of TECO (the "TECO Charter") and TECO's Bylaws. There
are various differences between the rights of LEI shareholders and the rights of
TECO shareholders. See "COMPARISON OF RIGHTS OF HOLDERS OF TECO COMMON STOCK AND
LEI COMMON STOCK."
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MARKET PRICE AND DIVIDEND PRICES
The TECO Common Stock is traded on the NYSE under the symbol "TE." The
following table sets forth, for the periods indicated, the range of high and low
per share sales prices for TECO Common Stock as reported on the NYSE, and the
cash dividends paid on each share of TECO Common Stock. LEI is a privately held
company and there is no public market for LEI Common Stock. Accordingly, the
following table indicates only the cash dividends paid on each share of LEI
Common Stock during the applicable periods.
<TABLE>
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TECO LEI
-------------------------- --------
HIGH LOW DIVIDEND DIVIDEND
---- ---- -------- --------
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1994*
First Quarter......................................... $22 5/8 $19 1/8 $.2400 $ .900
Second Quarter........................................ 20 7/8 18 1/4 .2525 .900
Third Quarter......................................... 21 18 1/8 .2525 .900
Fourth Quarter........................................ 21 18 1/2 .2525 1.000
1995*
First Quarter......................................... 22 1/8 20 .2525 1.000
Second Quarter........................................ 22 3/4 20 1/2 .2650 1.000
Third Quarter......................................... 23 1/2 21 1/4 .2650 1.000
Fourth Quarter........................................ 25 3/4 23 1/8 .2650 1.000
1996*
First Quarter......................................... 27 23 3/4 .2650 1.000
Second Quarter........................................ 25 1/4 23 .2800 1.125
Third Quarter......................................... 25 1/4 23 .2800 1.125
Fourth Quarter (through November 20).................. 25 3/8 23 1/4 .2800 1.125
</TABLE>
- ---------------
* Calendar quarters. TECO's fiscal year ends on December 31, and LEI's fiscal
year ends on September 30.
6
<PAGE> 12
TECO SELECTED FINANCIAL DATA
(HISTORICAL)
The following table represents selected historical financial statement data
of TECO and its consolidated subsidiaries. The balance sheet data as of December
31, 1991, 1992 and 1993 and the statement of income data for the years ended
December 31, 1991 and 1992 have been derived from TECO's audited consolidated
financial statements which are not included herein. The consolidated financial
statements as of December 31, 1994 and 1995 and for each of the years in the
three-year period ended December 31, 1995 and the report of Coopers & Lybrand
L.L.P. relating thereto are included in Exhibit E hereto and incorporated by
reference in this Prospectus/Proxy Statement, and the selected financial data
presented below are qualified in their entirety by reference thereto. The
balance sheet data as of September 30, 1995 are derived from TECO's unaudited
consolidated financial statements which are not included herein. The balance
sheet data as of September 30, 1996 and the selected statement of income data
for the nine-month periods ended September 30, 1995 and 1996 are derived from
TECO's unaudited consolidated financial statements which are included in Exhibit
H hereto and also incorporated herein by reference. In the opinion of
management, the unaudited consolidated financial statements have been prepared
on a basis consistent with the audited consolidated financial statements and
include all adjustments, none of which were other than normal and recurring,
necessary for a fair presentation of the results of operations for these
periods. The operating results for the nine months ended September 30, 1995 and
1996 are not necessarily indicative of the results that may be expected for the
entire fiscal year. The data should be read in conjunction with the historical
financial statements and notes thereto, and related Management's Discussion and
Analysis of Financial Condition and Results of Operations of TECO included in
Exhibits E and H and incorporated by reference in this Prospectus/Proxy
Statement. Amounts are in millions, except for per share amounts.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $1,154.1 $1,183.2 $1,283.9 $1,350.9 $1,392.3 $1,057.9 $1,103.5
======== ======== ======== ======== ======== ======== ========
Income before cumulative
effect of change in
accounting principle... $ 145.3 $ 149.0 $ 150.3 $ 153.2(3) $ 186.1 $ 146.1 $ 155.2
Cumulative effect of
change in accounting
principle.............. -- -- 11.2 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............... $ 145.3 $ 149.0 $ 161.5 $ 153.2(3) $ 186.1 $ 146.1 $ 155.2
======== ======== ======== ======== ======== ======== ========
Earnings per average
share outstanding:
Before cumulative
effect of change in
accounting
principle(1)........ $ 1.28 $ 1.30 $ 1.30 $ 1.32(3) $ 1.60 $ 1.26 $ 1.33
Cumulative effect of
change in accounting
principle(1)........ -- -- .10 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Earnings per average
common share
outstanding(1)...... $ 1.28 $ 1.30 $ 1.40 $ 1.32(3) $ 1.60 $ 1.26 $ 1.33
======== ======== ======== ======== ======== ======== ========
Common dividends paid per
share(1)............... $ .8475 $ .8975 $ .9475 $ .9975 $ 1.0475 $ .7825 $ .825
Total assets(2).......... 2,833.6 3,020.6 3,123.3 3,312.2 3,473.4 3,407.1 3,584.3
Long-term debt(2)........ 907.9 1,044.9 1,038.8 1,023.9 994.9 995.8 950.8
</TABLE>
- ---------------
(1) Restated to reflect a two-for-one stock split on August 30, 1993.
(2) The total asset and long-term debt balances for 1992 and 1993 have been
restated to reflect current year presentation.
(3) Includes the effect of a corporate restructuring charge which reduced net
income by $15 million and earnings per share by $.13.
7
<PAGE> 13
LEI SELECTED FINANCIAL DATA
(HISTORICAL)
The following table represents selected financial information for LEI. The
balance sheet and statement of income data presented below for each of the years
in the five-year period ended September 30, 1996 are derived from LEI's
financial statements, which have been audited by Price Waterhouse LLP,
independent accountants. The financial statements as of September 30, 1995 and
1996 and for each of the years in the three-year period ended September 30, 1996
and the report of Price Waterhouse LLP relating thereto are included elsewhere
in this Prospectus/Proxy Statement, and the selected financial data presented
below are qualified in their entirety by reference thereto. The data should be
read in conjunction with such historical financial statements and the notes
thereto and with "LEI Management's Discussion and Analysis of Financial
Condition and Results of Operations." Dollar amounts are in millions, except for
per share amounts.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $243.4 $276.2 $267.0 $254.0 $299.6
Net income............................................ $ 9.5 $ 11.2 $ 11.8 $ 12.8 $ 16.0
Earnings per average common share outstanding......... $ 8.77 $10.43 $11.02 $11.93 $14.92
Common dividend paid per share........................ $ 3.32 $ 2.49 $ 3.53 $ 4.00 $ 4.25
Total assets.......................................... $265.5 $290.7 $300.8 $312.2 $327.8
Long-term debt........................................ $118.9 $128.6 $128.3 $126.4 $121.2
</TABLE>
8
<PAGE> 14
UNAUDITED PRO FORMA SELECTED FINANCIAL INFORMATION
The following table presents certain selected unaudited pro forma financial
data of TECO after giving effect to the Merger. The unaudited pro forma annual
data represents the selected historical combined results of operations and
financial position of TECO and LEI as contemplated by the Merger based on TECO's
fiscal year ended December 31 and LEI's fiscal year ended September 30. The LEI
data for the nine-month periods ended September 30, 1995 and 1996 were derived
from LEI financial data for the years ended September 30, 1995 and 1996,
respectively, adjusted for the data related to the three-month periods ended
December 31, 1994 and 1995. This selected pro forma financial data is provided
for comparative purposes only and does not purport to be indicative of the
financial position or results of operations that would have been reported had
the transactions occurred during the periods or as of the dates for which pro
forma data are presented, or which may be reported in the future. The pro forma
condensed income statements below do not reflect any nonrecurring charges or
credits that would be directly attributable to the Merger. Amounts are in
millions, except for per share amounts.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $1,396.3 $1,426.6 $1,560.1 $1,618.0 $1,646.3 $1,247.2 $1,337.2
======== ======== ======== ======== ======== ======== ========
Income before cumulative
effect of change in
accounting principle....... $ 153.6 $ 158.5 $ 161.5 $ 165.0 $ 198.9 $ 156.2 $ 167.1
Cumulative effect of change
in accounting principle.... -- -- 11.2 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income................... $ 153.6 $ 158.5 $ 172.7 $ 165.0 $ 198.9 $ 156.2 $ 167.1
======== ======== ======== ======== ======== ======== ========
Earnings per average share
outstanding(1):
Before cumulative effect of
change in accounting
principle............... $ 1.22 $ 1.25 $ 1.26 $ 1.29 $ 1.55 $ 1.21 $ 1.29
Cumulative effect of change
in accounting
principle............... -- -- .09 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Earnings per average common
share outstanding....... $ 1.22 $ 1.25 $ 1.35 $ 1.29 $ 1.55 $ 1.21 $ 1.29
======== ======== ======== ======== ======== ======== ========
Common dividends paid per
share(1)................... $ .7942 $ .8389 $ .8772 $ .9313 $ .9808 $ .7327 $ .7736
Total assets................. 3,088.2 3,286.1 3,414.0 3,613.0 3,785.6 3,716.6 3,908.0
Long-term debt............... 1,022.8 1,163.8 1,167.4 1,152.2 1,121.3 1,122.2 1,072.0
</TABLE>
- ---------------
(1) The per share information assumes the issuance of an aggregate of 12,244,898
shares of TECO Common Stock in the Merger.
9
<PAGE> 15
COMPARATIVE PER SHARE FINANCIAL INFORMATION
The following unaudited information reflects certain comparative per share
data related to book value and income from continuing operations (i) on a
historical basis for TECO Common Stock; (ii) on a pro forma basis per share of
TECO Common Stock giving effect to the Merger; and (iii) on an equivalent pro
forma basis per share of LEI Common Stock giving effect to the Merger.
Equivalent pro forma per share amounts for LEI Common Stock are calculated
assuming that the holder of one share of LEI Common Stock would be entitled to
11.46 shares of TECO Common Stock for all periods presented.
The information shown below should be read in conjunction with the
consolidated historical financial statements delivered herewith.
<TABLE>
<CAPTION>
TECO COMMON STOCK(1) LEI COMMON STOCK
---------------------------- ----------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996
------------ ------------- ----------------
<S> <C> <C> <C>
Book Value Per Share
Historical....................................... $10.63 $ 11.20 $ 99.75
Pro Forma........................................ $10.37 $ 10.97 --
Equivalent Pro Forma............................. -- -- $ 125.72
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
----------------------------- -----------------
TECO 1993 1994 1995 1995 1996
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Primary Income Per Share from Continuing
Operations:
Historical................................. $ 1.30 $ 1.32 $ 1.60 $ 1.26 $ 1.33
Pro Forma.................................. $ 1.26 $ 1.29 $ 1.55 $ 1.21 $ 1.29
Fully Diluted Income Per Share from
Continuing Operations:
Historical................................. $ 1.30 $ 1.32 $ 1.59 $ 1.25 $ 1.32
Pro Forma.................................. $ 1.26 $ 1.29 $ 1.54 $ 1.21 $ 1.29
Common Dividends Paid Per Share:
Historical................................. $.9475 $.9975 $1.0475 $.7825 $.8250
Pro Forma.................................. $.8772 $.9313 $ .9808 $.7327 $.7736
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED SEPTEMBER 30, 30,
---------------------------- -----------------
LEI 1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Primary Income Per Common Share from
Continuing Operations:
Historical.................................. $10.43 $11.02 $11.93 $ 9.40 $11.05
Equivalent Pro Forma........................ $14.43 $14.78 $17.76 $13.86 $14.78
Fully Diluted Income Per Common Share from
Continuing Operations:
Historical.................................. $10.43 $11.02 $11.93 $ 9.40 $11.05
Equivalent Pro Forma........................ $14.43 $14.78 $17.64 $13.86 $14.78
Common Dividends Paid Per Share:
Historical.................................. $ 2.49 $ 3.53 $ 4.00 $ 3.00 $ 3.25
Equivalent Pro Forma........................ $10.05 $10.67 $11.24 $ 8.40 $ 8.87
</TABLE>
- ---------------
(1) Excludes the effects of unearned compensation related to ESOP.
10
<PAGE> 16
INTRODUCTION
This Prospectus/Proxy Statement is being furnished to the shareholders of
LEI in connection with the solicitation by the LEI Board of written consents for
action by shareholders in lieu of a special meeting. This Prospectus/Proxy
Statement is also the prospectus of TECO filed as part of the Registration
Statement related to the registration of the shares of TECO Common Stock to be
issued to holders of LEI Common Stock pursuant to the Merger Agreement.
CONSENT SOLICITATION
CONSENT PROCEDURE
The LEI Board, in lieu of calling a special meeting of the LEI shareholders
to consider the matters to which this Prospectus/Proxy Statement relates, is
asking that LEI shareholders take action by written consent without a meeting.
SHAREHOLDER CONSENT IS AUTHORIZED BY FLORIDA STATUTE SECTION 607.0704,
WHICH IS REPRINTED IN ITS ENTIRETY AS ANNEX III TO THIS PROSPECTUS/PROXY
STATEMENT. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
RELATING TO ACTIONS BY SHAREHOLDERS WITHOUT A MEETING AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO ANNEX III. THIS DISCUSSION AND ANNEX III SHOULD BE
REVIEWED CAREFULLY BY ANY HOLDER OF LEI COMMON STOCK WHO INTENDS TO COMPLETE THE
ENCLOSED CONSENT SOLICITED ON BEHALF OF THE LEI BOARD.
LEI shareholders may consent to any act which would otherwise be taken at
an annual or special meeting of the shareholders, without prior notice, and
without a vote, if the following requirements are satisfied: (1) the action is
taken by the holders of outstanding LEI Common Stock that would be necessary to
authorize or take such action at a meeting at which all voting groups and shares
entitled to vote thereon were present and voted; (2) the action is evidenced by
one or more written consents describing the action taken, dated and signed by
approving shareholders having the requisite number of votes of the LEI Common
Stock entitled to vote; (3) the written consents are delivered to David R.
Schindler, Secretary of LEI, at 111 East Madison Street, Suite 1700, Tampa,
Florida 33602 who has custody of the book in which the meetings of shareholders
are recorded; and (4) all written consents, signed by the number of holders
required to take action, are delivered to LEI, as described above, within 60
days of the date of the earliest dated written consents delivered to LEI.
ANY WRITTEN CONSENT MAY BE REVOKED PRIOR TO THE DATE THAT THE CORPORATION
RECEIVES THE REQUIRED NUMBER OF CONSENTS TO AUTHORIZE THE PROPOSED ACTION.
REVOCATION IS NOT EFFECTIVE UNLESS IT IS IN WRITING AND RECEIVED BY THE
CORPORATION AT ITS PRINCIPAL OFFICE OR RECEIVED BY THE CORPORATION SECRETARY OR
OTHER OFFICER OR AGENT OF THE CORPORATION HAVING CUSTODY OF THE BOOK IN WHICH
MEETINGS OF SHAREHOLDERS ARE RECORDED. THE WRITTEN CONSENT OF THE SHAREHOLDERS
CONSENTING TO THE ACTIONS AUTHORIZED BY THIS PROSPECTUS/PROXY STATEMENT WILL BE
FILED WITH THE MINUTES OF THE PROCEEDINGS OF SHAREHOLDERS.
LEI, within 10 days after obtaining authorization by written consent, will
give notice to those shareholders who have not consented in writing or who are
not entitled to vote on the action. The notice will summarize the material
features of the authorized action and, if the action is one where dissenters'
rights are provided under Florida law, the notice will contain a clear statement
of the right of shareholders dissenting from the action to be paid the fair
value of their shares upon compliance with the Florida Business Corporation Act
(the "FBCA") regarding the right of dissenting shareholders. See "-- Dissenters'
Rights."
A CONSENT SIGNED AS PROVIDED ABOVE HAS THE EFFECT OF A MEETING VOTE.
11
<PAGE> 17
RECORD DATE; OUTSTANDING SECURITIES
This Prospectus/Proxy Statement and enclosed form of consent are being
furnished in connection with the solicitation by the LEI Board of written
consents in lieu of a special meeting. The LEI Board has fixed the close of
business on November 22, 1996 as the Record Date for purposes of determining
shareholders entitled to execute Consents. Only the holders of shares of LEI
Common Stock of record at the close of business on the Record Date will be
entitled to execute Consents. At the Record Date, 1,068,668.334 shares of LEI
Common Stock were issued and outstanding. Each share of LEI Common Stock is
entitled to one vote on each proposal covered by the Consent. There are
approximately 186 holders of LEI Common Stock.
PROPOSALS IN THE CONSENT
Merger Agreement. In the Consent, the shareholders of LEI are being asked
to approve and adopt the Merger Agreement pursuant to which (i) the Merger and
the other transactions contemplated by the Merger Agreement are to be
consummated and (ii) holders of LEI Common Stock are to receive shares of TECO
Common Stock in exchange for the LEI Common Stock held by each of them as of the
Effective Time of the Merger.
Consents from the holders of a majority of the shares of LEI Common Stock
outstanding and entitled to consent to the adoption of the Merger Agreement are
required to approve and adopt the Merger Agreement and is a condition to both
TECO's and LEI's obligation to consummate the Merger. Shares for which consents
are not received will have the effect of negative votes.
THE LEI BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTEREST OF LEI AND
ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS CONSENT TO THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Employment Agreements. In the Consent, LEI shareholders also will be asked
to approve certain payments and benefits that would otherwise be subject to
reduction to avoid adverse tax treatment pursuant to employment agreements among
LEI, TECO and John A. Brabson, Jr., President of LEI, and Jack E. Uhl, Chief
Financial Officer of Peoples Gas System, Inc. ("PGS"), a wholly-owned subsidiary
of LEI, and pursuant to severance agreements with the following officers and key
employees of PGS: Gerald Cox, Dan Pountney, Frank Sivard, Lee Young, E. Elliott
White, G. Lamar Finley, Richard Firebaugh, Wayne Hoffman, Lance Horton, Steven
Jarboe, James Maltby, Robert Mumbauer, Joseph Riggs, Tom Stewart, William Ward,
Jr., John Wilkinson, Michael Barney, Pam Bayyat, David Brownlee, Bob Gadsen,
III, Hugh Grey, III, Bob Hill, Tim Kasprzyk, Vince Laverghetta and Robert T.
Ross.
The consent of seventy-five percent (75%) of the shares entitled to consent
is required to approve the proposal. For this purpose, shares actually or
constructively owned by or for the individuals entitled to payments under the
agreements are not counted. Shares for which consents are not received will have
the effect of negative votes.
The employment and severance agreements provide substantial cash payments,
vesting and enhancement of certain nonqualified plan benefits and health and
other insurance coverage upon consummation of the Merger or termination of
employment from TECO after the Merger. The employment and severance agreements
are described in detail under "THE MERGER -- Interests of Certain Persons in the
Merger." Benefits otherwise payable to an employee under the employment and
severance agreements are subject to reduction if any portion of the benefits
would be subject to the adverse tax treatment associated with "parachute
payments" under Section 280G of the Code. A payment under an employment or
severance agreement could be treated as a "parachute payment" if the value of
all benefits payable to the employee that are contingent on the Merger equals or
exceeds three times such employee's average annual compensation over the
preceding five calendar years. However, any payments that are approved by LEI
shareholders in accordance with the proposal are exempt from treatment as
parachute payments under Section 280G of the Code. This means that if
shareholders approve the proposal, benefits payable under the employment and
severance agreements will be made without reduction in accordance with the terms
of the agreements. See "THE MERGER -- Interests of Certain Persons in the
Merger."
12
<PAGE> 18
If the requisite Consents are received, the full amount of the Benefits
will be paid to the executives and covered employees without these adverse tax
consequences.
THE LEI BOARD BELIEVES THAT THE APPROVAL OF THE PAYMENTS AND BENEFITS UNDER
THE EMPLOYMENT AND SEVERANCE AGREEMENTS IS IN THE BEST INTEREST OF LEI AND ITS
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS CONSENT TO SUCH
ARRANGEMENTS. JOHN A. BRABSON, JR. IS A MEMBER OF THE LEI BOARD.
DISSENTERS' RIGHTS
If the Merger is consummated, holders of LEI Common Stock will be entitled
to dissenters' rights under Florida Statute Sections 607.1301-607.1320 of the
FBCA, provided that they comply with the conditions established by those
Sections.
SECTIONS 607.1301-607.1320 ARE REPRINTED IN THEIR ENTIRETY AS ANNEX IV TO
THIS PROSPECTUS/PROXY STATEMENT. THE FOLLOWING DISCUSSION IS NOT A COMPLETE
STATEMENT OF THE LAW RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO ANNEX IV. THIS DISCUSSION AND EXHIBIT D SHOULD BE
REVIEWED CAREFULLY BY ANY HOLDER OF LEI COMMON STOCK WHO WISHES TO EXERCISE
STATUTORY DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO.
FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH IN SECTIONS 607.1301-607.1320
WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
Only LEI shareholders of record at the close of business on the Record
Date, will have the right to consent to the Merger. LEI shareholders who would
like to exercise their dissenters' right under Florida law to demand that LEI
pay them in cash the fair value of their shares as of the Effective Time in lieu
of receiving the Merger Consideration (such a shareholder being hereinafter
referred to as a "Dissenting Shareholder") must not submit an affirmative
Consent to approve the Merger Agreement with respect to his shares. Fair value
is defined as the value of the shares as of the close of business on the day
prior to the date on which the LEI shareholders authorize the proposed action,
excluding any appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable.
If the LEI shareholders approve the Merger, LEI must give written notice of
such approval to each nonconsenting shareholder within ten (10) days of such
approval. Within twenty (20) days after notice from LEI, each shareholder to
whom LEI was required to give notice and who elects to dissent must file with
LEI notice of election to dissent (an "Election Notice"), stating his name and
address, the number of shares as to which he dissents and a demand for payment
of the fair value of his shares. The Dissenting Shareholder may dissent as to
less than all the shares then registered in his name. Any shareholder who fails
to file an Election Notice is bound by the terms of the Merger. A Dissenting
Shareholder must deposit his certificates with LEI simultaneously with the
filing of his Election Notice.
Holders of LEI Common Stock who intend to exercise their dissenters' rights
should bear in mind that the fair value of their shares of LEI Common Stock, for
dissenters' rights purposes, could be determined to be more than, the same as,
or less than, the consideration they would receive pursuant to the Merger. See
also "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Within ten (10) days after the expiration of the period for filing an
Election Notice or within ten (10) days after the Merger is effected, whichever
is later (but in no case later than ninety (90) days after LEI shareholders
approve the Merger), LEI must make a written offer to pay an amount that LEI
estimates to be
13
<PAGE> 19
the fair value for the shares to each Dissenting Shareholder who has filed an
Election Notice. If the Merger has not been consummated within ninety (90) days
of the date on which the LEI shareholders approved the Merger, LEI's offer of
payment may be made conditioned upon the consummation of the Merger. LEI's offer
must be accompanied by LEI's most recent balance sheet and profit and loss
statement.
Upon filing an Election Notice, a Dissenting Shareholder is only entitled
to payment as provided by Section 607.1320 of the FBCA and is not entitled to
vote or exercise other rights of a shareholder. The Dissenting Shareholder may
withdraw the Election Notice in writing at any time before LEI makes its offer
to pay for the shares. After LEI's offer, the Election Notice may be withdrawn
only if LEI consents to the withdrawal.
The right of a Dissenting Shareholder to be paid fair value of his shares
shall cease, and all his rights as a shareholder shall be reinstated, as
described in the FBCA, as of the filing of the Election Notice, if one of the
following events occurs: (i) the Election Notice is withdrawn; (ii) the Merger
is abandoned; (iii) no demand or petition for determining fair value by a court
has been made or filed within the time limits provided under Section 607.1320 of
the FBCA; or (iv) a court of competent jurisdiction determines that the
shareholder is not entitled to the relief provided by Section 607.1320 of the
FBCA.
If LEI fails to make an offer within the prescribed period or if LEI makes
the offer and any Dissenting Shareholder fails to accept the offer within a 30
day period, LEI, within 30 days after receipt of an Election Notice given within
60 days of the date on which such corporate action was effected, shall, or at
its election at any time within 60 days after the consummation of the Merger
may, petition to the Circuit Court of Hillsborough County, Florida, requesting
that the fair value of such shares be determined. The Court shall also determine
whether each Dissenting Shareholder is entitled to payment for his shares. If
LEI fails to institute the proceeding as required, any Dissenting Shareholder
may do so in the name of LEI. All Dissenting Shareholders who have not agreed to
accept LEI's offer will be made parties to the action and will be entitled to
judgment against LEI for the amount of the fair value of their shares. The Court
may appoint persons as appraisers to receive evidence and recommend a decision
on the question of fair value. LEI shall pay each Dissenting Shareholder the
amount found due to him within ten (10) days after the Court's final
determination. Upon payment of the judgment, the Dissenting Shareholder shall
cease to have any interest in such shares.
The costs and expenses of such proceeding shall be determined by the Court
and assessed against LEI. However, the Court may assess all or any part of such
costs and expenses against a Dissenting Shareholder if the Court finds that the
Dissenting Shareholder's refusal to accept LEI's offer was arbitrary, vexatious
or not in good faith. If the Court determines that the fair value of the shares
materially exceeds the amount of LEI's offer the Court may award to any
Dissenting Shareholder compensation for attorneys and experts employed by the
Dissenting Shareholder in the proceeding.
FURTHER INFORMATION
If you have any questions regarding this solicitation of shareholder
consents or require assistance, please contact David R. Schindler, Secretary of
LEI, as follows:
Lykes Energy, Inc.
111 East Madison Street
Tampa, Florida 33602
(813) 273-0074
14
<PAGE> 20
THE MERGER
The detailed terms of and conditions to the consummation of the Merger are
contained in the Merger Agreement, a conformed copy of which is attached hereto
as Annex I and incorporated herein by reference. The following discussion and
the discussion under "THE MERGER AGREEMENT" set forth a description of the
material terms and conditions of the Merger Agreement and are qualified by, and
made subject to, the more complete information set forth in the Merger
Agreement.
GENERAL
By consenting to approve and adopt the Merger Agreement, the LEI
shareholders will be approving the merger of LEI with and into TECO, with TECO
as the surviving corporation, and, alternatively, subject to certain conditions,
including that the tax treatment of receipt of the Merger Consideration would
not be adversely affected, the merger of LEI with a wholly-owned subsidiary of
TECO, with either LEI or the wholly-owned subsidiary as the surviving
corporation.
As a result of the Merger, at the Effective Time, LEI Common Stock then
outstanding will be converted as provided in the Merger Agreement into the
Merger Consideration. The Merger Consideration will be allocated among the
holders of LEI Common Stock as hereinafter described. For a description of the
procedures for exchanging LEI Common Stock for TECO Common Stock and for payment
of cash in lieu of the issuance of fractional shares, see "-- Manner and Basis
of Converting Shares."
BACKGROUND OF THE MERGER
Since its formation as a holding company in the early 1980s, TECO's
strategy for building long term value for its shareholders has been to focus on
growing closely related businesses in the energy industry. In furtherance of
this objective, TECO began in 1992 analyzing publicly available data on PGS and
its affiliates in connection with a possible acquisition. These analyses were
updated in 1994 and 1995.
In 1996, this activity was intensified and expanded. In addition to an
internal review of updated publicly available information, Morgan Stanley & Co.,
Incorporated ("Morgan Stanley") was retained as a financial advisor on a
potential merger with LEI. Legal counsel was also obtained on regulatory, tax
and corporate aspects of such a transaction.
In early October 1996, a decision was made to pursue a merger and Timothy
L. Guzzle, Chairman of the TECO Board and Chief Executive Officer of TECO, asked
DuBose Ausley, a TECO director and a long time acquaintance of LEI's Chairman
Tom L. Rankin, to call Mr. Rankin about the possibility of meeting to discuss a
potential business combination of LEI and TECO.
A meeting was subsequently scheduled for October 14, 1996 between Mr.
Guzzle and Mr. Rankin in Mr. Ausley's office in Tallahassee, Florida.
At the October 14, 1996 meeting, Mr. Guzzle delivered a written proposal to
the effect that LEI would be merged with TECO or a subsidiary of TECO in a
transaction in which the holders of LEI's outstanding shares of capital stock
would receive a number of shares of TECO Common Stock determined by dividing
$240 million by the average closing price of TECO Common Stock on the NYSE for a
twenty-day trading period preceding the closing of the merger. The written
proposal contained terms and conditions with regard to tax and accounting
treatment, timing, regulatory approvals, due diligence and confidentiality
issues. In addition to the letter proposing a merger, Mr. Guzzle delivered to
Mr. Rankin a signed confidentiality letter with a provision restricting LEI from
negotiating a change of control with another party for a thirty day period.
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Upon return to Tampa on the afternoon of October 14, 1996, Mr. Rankin
consulted with LEI's President, John A. Brabson, Jr., and legal counsel. CS
First Boston was contacted and agreed to send its representatives to Tampa to
consult with LEI in its evaluation of the TECO proposal. A special meeting of
LEI's Board of Directors to consider the TECO proposal was noticed for October
21, 1996.
On October 21, 1996, after numerous discussions between CS First Boston,
LEI, Morgan Stanley and TECO, TECO presented LEI with a letter signed by Mr.
Guzzle increasing the price of his earlier offer to $285 million.
Later on October 21, 1996, the LEI Board, at a special meeting, discussed
TECO's proposal. Presentations were made by members of TECO management, CS First
Boston, members of LEI's management and legal counsel to LEI. The LEI Board
authorized management to negotiate a definitive agreement and plan of merger
with TECO calling for the delivery to LEI's shareholders of TECO Common Stock
worth not less than $285 million and containing customary provisions, subject to
the approval of the LEI Board of Directors at a subsequent meeting. The LEI
Board further authorized the officers of LEI to execute a confidentiality
agreement with TECO granting exclusivity in negotiations for a period of not
more than 60 days. Finally, the LEI Board ratified and confirmed the engagement
of CS First Boston. LEI's management executed the proposed confidentiality
agreement and granted TECO exclusivity in negotiations for a thirty day period
to expire on November 20, 1996. On November 20, 1996, LEI extended the period
for exclusivity of negotiations until November 22, 1996.
From October 14, 1996 through November 21, 1996, the possibility of a
transaction and related matters were discussed and negotiated at various
meetings between Mr. Guzzle and Messrs. Rankin and Brabson, among other senior
officers of the two companies, between CS First Boston and Morgan Stanley and
between counsel for the two companies. During this time period, the two
companies exchanged detailed operational, financial and other business
information.
On November 14, 1996, TECO's representatives informed LEI's representatives
that TECO had substantially completed its review of relevant LEI business
information and was prepared to increase its offer to $300 million, provided the
other terms of the Merger Agreement could be agreed upon. Following meetings
between counsel on November 17 through 20, 1996, substantially complete forms of
the proposed Merger Agreement and Stock Option Agreement were made available to
the directors of each company for the November 21, 1996 board meetings.
On November 21, 1996, the LEI Board met to consider the proposed Merger. In
connection with its consideration of the proposed Merger, the LEI Board reviewed
and decided not to pursue other indications of interest previously received.
Presentations were made by management, CS First Boston and counsel. The LEI
Board reviewed and discussed the terms of the Merger and management's assessment
of the Merger from financial, strategic, operating and regulatory standpoints.
Representatives of CS First Boston presented certain financial and other
analyses and delivered CS First Boston's oral opinion, later confirmed in
writing, that as of the date of the Board meeting, the consideration to be
received by the LEI shareholders in exchange for their LEI shares was fair from
a financial point of view to such shareholders of LEI. After discussion, the LEI
Board, by a unanimous vote of those present, approved the Merger Agreement and
Stock Option Agreement and voted to recommend approval of same to LEI's
shareholders.
Also on November 21, 1996, the TECO Board met to consider the proposed
transaction. Presentations were made by management and counsel. Morgan Stanley
participated in the meeting as financial advisor to TECO and presented certain
financial and other analyses. The TECO Board reviewed and discussed the terms of
the Merger and management's assessment of the Merger from financial, strategic,
operating and regulatory standpoints. After discussion, the TECO Board by a
unanimous vote of those present approved the Merger Agreement and Stock Option
Agreement.
Later on November 21, 1996, the parties executed and delivered the Merger
Agreement and Stock Option Agreement. On the morning of Friday, November 22,
1996, the transaction was publicly announced.
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TECO'S REASONS FOR THE MERGER
In considering the Merger, after consulting with management and its
advisors, the TECO Board concluded that the Merger was in the best interest of
TECO for the reasons, among others, set forth below.
The Merger furthers TECO's strategy of pursuing growth in energy-related
businesses.
- New Energy Markets -- The Merger affords TECO the opportunity to add
retail natural gas and propane distribution and commodity sales to its
current electric wholesale and retail operations and gas production
activities.
- Geographic Expansion -- Tampa Electric's retail operations are confined
to a 2,000 square mile area in west central Florida whereas after the
Merger, TECO will be able to participate in the gas energy markets in all
of the major metropolitan areas of Florida.
- Increased Investment -- TECO has the financial strength to support
increased capital construction for PGS and its affiliates whereas TECO
believes that the growth of PGS and its affiliates has previously been
somewhat constrained by LEI's more limited financial resources.
The Merger also furthers TECO's growth strategy of better meeting its
customers' needs through increased choice and value added services.
- Full Service -- As a result of the Merger, TECO will be able to provide
wholesale customers in peninsula Florida with either gas or electric
services depending on whichever best fits their needs. The same is true
with respect to retail customers in the limited area in which Tampa
Electric and PGS service territories overlap.
- Complement to Energy Services -- TECO is expanding its energy services
offerings and expects that the Merger will stimulate further growth. The
merged companies' presence in a much larger geographic area and the
ability to provide both gas and electric energy will enhance the ability
to offer "behind the meter" consulting services and present increased
opportunities to offer TECO's residential and commercial energy
management systems.
- Power Marketing Support -- The extension of TECO's operations in the gas
industry to include distribution and gas commodity sales to energy users
should enhance its power marketing activities by broadening the scope and
range of its services.
Finally, the Merger represents an opportunity to continue to invest in
businesses that will provide meaningful long term growth for TECO stimulated by
an enhanced ability to meet the needs of its customers.
LEI'S REASONS FOR THE MERGER
LEI believes that there are significant strategic benefits to the Merger
that will further its growth. In its view, the larger combined Florida entity
that emerges from the Merger will acquire greater diversity in energy products
and corresponding supply sources, advantages through the integration of
overlapping operations and support functions, improved access to capital and
funding, and the ability to spread costs of new products, services and research
and development over a wider customer base.
In reaching the determination that the Merger is fair to and in the best
interests of LEI's shareholders, the LEI Board consulted with management as well
as with its financial and legal advisors, and considered a number of factors.
Among such factors, the LEI Board also reviewed carefully the terms and
conditions of the Merger Agreement. The LEI Board did not assign any relative or
specific weight to the factors considered. The factors considered by the LEI
Board included, but were not limited to, the following:
- Strategic alternatives to the Merger (including remaining an independent
company or entering into other business combinations), in light of the
economic conditions and prospects of LEI and the competitive environment
in the economy generally and the natural gas, propane and energy markets
specifically. The LEI Board also considered the market and credit risks
of proceeding independently,
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particularly information relating to LEI's future performance and
business strategy on a stand-alone basis and the timing of the Merger.
- The opinion of CS First Boston that as of the date of the opinion, the
Merger Consideration, taken as a whole, was fair, from a financial point
of view, to LEI's shareholders.
- The federal income tax consequences of the Merger, including the ability
of LEI's shareholders to have a tax-free exchange of their LEI Common
Stock.
- TECO's historical results of operations and other financial data, as well
as the strength of its electric utility operations, diversified
businesses, financial condition, and management team.
- A review of historical stock prices, returns to shareholders and market
performance of TECO Common Stock.
- The continuing equity interest in the combined electric, gas and
diversified energy-related operations of TECO and LEI provided by the
Merger Consideration offered to LEI's stockholders.
- The expected immediate increase in dividends that will be received by a
LEI stockholder.
- The recent substantial activity in utility restructuring, combinations
and developing convergence strategies related to the development of
energy services companies, as opposed to separate electric and gas
companies, and the size and scale requirements necessary for future
success.
- The termination rights under the Merger Agreement, including fees payable
by LEI to TECO under circumstances involving an alternative acquisition
proposal or transaction and TECO's option rights for LEI shares under
those circumstances.
- The impact of the Merger on the employees of LEI, its customers and the
communities served by LEI.
Based upon all these matters, and such other matters as the LEI Board
deemed relevant, the LEI Board unanimously approved and recommended the Merger
Agreement as being in the best interest of LEI and its shareholders.
THE LEI BOARD UNANIMOUSLY RECOMMENDS THAT LEI SHAREHOLDERS CONSENT TO THE
APPROVAL OF THE MERGER AGREEMENT.
OPINION OF LEI'S FINANCIAL ADVISOR
LEI retained CS First Boston to act as its financial advisor in connection
with the Merger. CS First Boston was selected by LEI based on CS First Boston's
experience, expertise and familiarity with LEI and its businesses. In connection
with CS First Boston's engagement, LEI requested that CS First Boston evaluate
the fairness, from a financial point of view, to LEI's stockholders of the
Merger Consideration to be received by the stockholders of LEI in connection
with the Merger. At a meeting of the LEI Board held on November 21, 1996, at
which the LEI Board approved the Merger, CS First Boston rendered to the LEI
Board an oral opinion to the effect that, as of such date and based upon and
subject to certain matters, the Merger Consideration proposed to be received by
the LEI stockholders pursuant to the Merger was fair to the LEI stockholders
from a financial point of view. CS First Boston confirmed this oral opinion by
delivery of a written opinion dated November 21, 1996.
THE FULL TEXT OF CS FIRST BOSTON'S WRITTEN OPINION TO THE LEI BOARD DATED
NOVEMBER 21, 1996, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX II TO THIS
PROSPECTUS/PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF
LEI COMMON STOCK ARE URGED TO READ THIS OPINION IN ITS ENTIRETY. THE SUMMARY OF
THE OPINION OF CS FIRST BOSTON SET FORTH IN THIS PROSPECTUS/PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
CS First Boston's opinion is addressed to the LEI Board and addresses only
the fairness to the LEI stockholders from a financial point of view of the
Merger Consideration proposed to be received by LEI's stockholders pursuant to
the Merger and does not constitute a recommendation to any LEI stockholder as to
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whether such stockholder should affirmatively consent to the approval of the
Merger. The Merger Consideration was determined through negotiations between LEI
and TECO and was approved by the LEI Board and the TECO Board. CS First Boston
provided advice to LEI during the course of such negotiations. The CS First
Boston opinion does not address the fairness of the Merger Consideration from a
financial point of view or otherwise to TECO or TECO's stockholders.
In arriving at its opinion, CS First Boston reviewed the Merger Agreement
and certain related documents, and certain publicly available business and
financial information relating to LEI and TECO. CS First Boston has not reviewed
the recently formed energy marketing joint venture between LEI and Duke/Louis
Dreyfus L.L.C. and based on discussions with senior management of LEI have not
assigned it a value in arriving at its opinion. CS First Boston also reviewed
certain other information, including financial forecasts, provided to it by LEI
and TECO and met with the respective managements of LEI and TECO to discuss the
businesses and prospects of LEI and TECO. CS First Boston evaluated the pro
forma financial impact of the Merger on TECO. CS First Boston also considered
and relied upon the views of management of, and regulatory counsel for, LEI
concerning the anticipated regulatory treatment to be accorded to the Merger. CS
First Boston also considered certain financial and stock market data of TECO and
financial data of LEI and compared such data with similar data for other
publicly held companies in businesses similar to those of LEI and TECO and
considered, to the extent publicly available, the financial terms of certain
other business combinations and other transactions which have recently been
effected. CS First Boston also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
that CS First Boston deemed relevant.
In connection with its review, CS First Boston did not assume any
responsibility for independent verification of any of the foregoing information
and relied upon its being complete and accurate in all material respects. With
respect to the financial forecasts, CS First Boston assumed that such forecasts
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of LEI and TECO as to the future
financial performance of LEI and TECO. In addition, CS First Boston has not made
an independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of LEI or TECO nor was CS First Boston furnished with any such
evaluations or appraisals. CS First Boston's opinion is necessarily based upon
financial, economic, market and other conditions as they existed and could be
evaluated on the date of its opinion. CS First Boston did not express any
opinion as to what the value of TECO Common Stock will be when issued to LEI's
stockholders pursuant to the Merger or the prices at which TECO Common Stock
will trade subsequent to the Merger. CS First Boston assumed that the Merger
will be treated as a tax-free reorganization for federal income tax purposes,
that the Merger will receive pooling of interests treatment for financial
accounting purposes and that, in the course of obtaining the necessary
regulatory and governmental approvals for the Merger, no restriction will be
imposed that will have a material adverse effect on the contemplated benefits of
the Merger. CS First Boston was not requested to, and did not, solicit third
party indications of interest in acquiring all or part of LEI.
In preparing its opinion for the LEI Board, CS First Boston performed a
variety of financial and comparative analyses and considered a variety of
factors, including those described below performed by CS First Boston in
connection with its presentation to the LEI Board on November 21, 1996. The
summary of CS First Boston's analyses set forth below does not purport to be a
complete description of the analyses underlying CS First Boston's opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. In arriving at its opinion, CS First Boston made
qualitative judgments as to the significance and relevance of each analysis and
factor that it considered. Accordingly, CS First Boston believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors, without considering all analyses and factors, could create
a misleading or incomplete view of the processes underlying such analyses and
its opinion.
In its analyses, CS First Boston made numerous assumptions with respect to
LEI, TECO, industry performance, regulatory, general business, economic, market
and financial conditions and other matters, many of which are beyond the control
of LEI and TECO. No company, transaction or business used in such
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analyses as a comparison is identical to LEI, TECO or the Merger, nor is an
evaluation of the results of such analyses entirely mathematical; rather, it
involves complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
being analyzed. The estimates contained in such analyses and the valuations
resulting from any particular analysis are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by such analyses. In addition,
analyses relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, such estimates are inherently subject to substantial
uncertainty. CS First Boston's opinion (together with the related financial
analyses) was only one of many factors considered by the LEI Board in its
evaluation of the Merger and should not be viewed as determinative of the views
of the LEI Board or management with respect to the Merger Consideration or the
Merger.
The following is a summary of the analyses performed by CS First Boston in
connection with its presentation to the LEI Board on November 21, 1996.
DISCOUNTED CASH FLOW ANALYSIS. CS First Boston calculated ranges of
enterprise value for Peoples Gas System, Inc., LEI's natural gas distribution
business ("Gas Distribution"); Peoples Gas Company, LEI's propane distribution
business ("Propane Distribution"); Peoples Cogeneration Company, through which
LEI holds its 50% interest in Pasco Cogen, Ltd., a 109 megawatt cogeneration
facility ("Cogen Investment"); and Gator Gas Marketing, which has four gas
service management contracts ("Gas Marketing") (each an "LEI Business" and
together, the "LEI Businesses"). The valuations for Gas Distribution and Propane
Distribution are based upon the net present value of each LEI Business' 10-year
stream of forecasted unlevered free cash flows and fiscal year 2006 terminal
value. The fiscal year 2006 terminal value was calculated using a range of
multiples of fiscal year 2006 operating cash flow ("EBITDA") of each LEI
Business. The range of terminal multiples was selected primarily based on the
trading multiples of companies operating in businesses similar to those of each
LEI Business. In conducting its analysis, CS First Boston relied on certain
assumptions relating to volume growth, gross margin, return on equity and
capital expenditures of the LEI Businesses provided by LEI management. For Gas
Distribution, CS First Boston applied discount rates ranging from 8.0% to 10.0%,
reflecting the weighted average cost of capital, and multiples of terminal
EBITDA ranging from 6.0x to 8.0x. For Propane Distribution, CS First Boston
applied discount rates ranging from 9.0% to 11.0%, reflecting the weighted
average cost of capital, and multiples of terminal EBITDA ranging from 7.5x to
8.5x. The valuation for the Cogen Investment was based on the forecasted levered
free cash flows from 1997 to 2009 at Pasco Cogen, Ltd., under the proposed power
purchase agreement ("PPA") settlement as represented by LEI's management. CS
First Boston applied discount rates ranging from 8.0% to 10.0% against the
levered free cash flows of the Cogen Investment as well as the estimated
terminal value, which was determined, in part, based on analyzing perpetuity
growth rates ranging from -1.0% to 3.0% on estimated cash flows after the
expiration of the PPA. For Gas Marketing, CS First Boston applied discount rates
ranging from 10.0% to 12.0% against the free cash flows from four gas service
management contracts expiring from 2008 to 2013. This analysis indicated an
enterprise valuation reference range for the LEI Businesses of approximately
$369 million to $435 million.
CS First Boston also calculated ranges of value for the electric utility
business, the transport and trade business, the coal business, the coalbed
methane business and the power services business of TECO (each a "TECO Business"
and together, the "TECO Businesses"). In conducting its analysis, CS First
Boston relied on certain assumptions relating to sales growth, operating
margins, return on equity and capital expenditures of the TECO Businesses
provided by TECO's management.
COMPARABLE COMPANIES ANALYSIS. CS First Boston reviewed and compared
certain actual and forecasted financial and operating information of the Gas
Distribution business with comparable information of the following publicly
traded companies in the natural gas distribution industry: Atmos Energy
Corporation, Energen Corporation, Laclede Gas Company, NUI Corporation, Piedmont
Natural Gas Company, Inc., and Public Service Company of North Carolina (the
"Gas Distribution Comparable Companies"). In addition, CS First Boston reviewed
and compared certain actual and forecasted financial and operating information
of the Propane Distribution business with comparable information of the
following publicly traded companies in
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the propane distribution industry: Amerigas Partners, L.P., Ferrellgas Partners,
L.P., Heritage Propane Partners, L.P., National Propane Partners, L.P., Star Gas
Partners, L.P. and Suburban Propane Partners, L.P. (the "Propane Distribution
Comparable Companies" and, together with the Gas Distribution Comparable
Companies, the "Comparable Companies").
CS First Boston selected these companies based on their activity in
businesses comparable to the LEI Gas Distribution and Propane Distribution
businesses. CS First Boston derived multiples of enterprise value relative to
EBITDA and earnings before interest and taxes ("EBIT"), and multiples of equity
value relative to net income and book value for the Comparable Companies based
on (i) the latest twelve month period ending September 30, 1996 ("LTM") and (ii)
forecasts for the 1997 calendar year ("1997E"). CS First Boston then calculated
imputed enterprise values for the Gas Distribution and Propane Distribution
businesses by applying book value as well as LTM and 1997E EBITDA, EBIT, and net
income for the Gas Distribution and Propane Distribution businesses to the
multiples derived from its analysis of the Comparable Companies. This analysis
resulted in an enterprise valuation reference range for the Gas Distribution
business of approximately $315 million to $365 million and for the Propane
Distribution business of approximately $40 million to $48 million. All
forecasted EBITDA, EBIT and net income multiples for the Comparable Companies
were based on information contained in equity research reports. The enterprise
values and equity values of the Comparable Companies used in the foregoing
analyses were based on closing stock prices as of November 15, 1996.
CS First Boston also reviewed and compared certain actual and forecasted
financial and operating information of the TECO Businesses with comparable
information of selected publicly traded companies in the electric utility
industry (the "Electric Utility Comparables"), the barge and shipping industry
(the "Trade and Transport Comparables"), the coal industry (the "Coal
Comparables"), certain oil and gas independents (the "Coalbed Methane
Comparables") and the independent power producer industry (the "Power Services
Comparables").
COMPARABLE ACQUISITIONS ANALYSIS. Using publicly available information, CS
First Boston analyzed the purchase prices and multiples paid in certain merger
and acquisition transactions in the natural gas distribution and propane
distribution industries. CS First Boston analyzed the following transactions in
the natural gas distribution industry: the proposed acquisition of Pacific
Enterprises by ENOVA Corporation, the proposed acquisition of NorAm Energy by
Houston Industries, the proposed acquisition of United Cities Gas by Atmos
Energy, the proposed acquisition of ENSERCH by Texas Utilities, the proposed
acquisition of Washington Energy by Puget Sound Power and Light, the acquisition
of Wisconsin Southern Gas by Wisconsin Energy, the acquisition of Greeley Gas by
Atmos and the acquisition of Diversified Energy by Arkla (the "Gas Distribution
Comparable Acquisitions"). CS First Boston also analyzed the purchase prices and
multiples paid in the following transactions in the propane distribution
industry: the proposed acquisition of Empire Energy by Northwestern Public
Service, the acquisition of Skelgas by Ferrellgas, the acquisition of Petrolane
by UGI Corp., the acquisition of EMRO Propane by MAPCO and the acquisition of
Star Gas by Petroleum Heat and Power (the "Propane Distribution Comparable
Acquisitions").
CS First Boston selected these acquisitions based on the activity of the
acquired companies in businesses comparable to that of the Gas Distribution and
Propane Distribution businesses. For the Gas Distribution and Propane
Distribution businesses, CS First Boston calculated the adjusted purchase price
(equity purchase price plus total assumed debt less assumed cash) as a multiple
of sales, EBITDA and EBIT of each acquired company for the latest available
twelve month period immediately preceding the announcement of the acquisition of
such company. For the Gas Distribution business, CS First Boston also calculated
the equity purchase price as a multiple of book value and net income for the
latest available twelve month period immediately preceding the announcement of
the acquisition of such company. CS First Boston then calculated imputed
enterprise values of the Gas Distribution and Propane Distribution businesses by
applying LTM sales, LTM EBITDA and LTM EBIT for each LEI Business to the
multiples derived from its analysis of the acquired companies. CS First Boston
also calculated imputed enterprise values of the Gas Distribution business by
applying book value and LTM net income for the Gas Distribution business to the
multiples derived from its analysis of the acquired companies. This analysis
resulted in an enterprise valuation reference
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range for the Gas Distribution Business of approximately $300 million to $400
million and the Propane Distribution Business of approximately $45 million to
$51 million.
CS First Boston also reviewed certain actual financial and operating
information of the TECO Businesses, and calculated imputed enterprise values by
applying this actual financial and operating information of the TECO Businesses
against multiples paid in certain merger and acquisition transactions in the
electric utility industry (the "Electric Utility Comparable Acquisitions"), the
barge and shipping industry (the "Trade and Transport Comparable Acquisitions"),
the coal industry (the "Coal Comparable Acquisitions"), the oil and gas property
market (the "Coalbed Methane Comparable Acquisitions") and the independent power
producer industry (the "Power Services Comparable Acquisitions").
REFERENCE VALUE RANGE. The results of the Discounted Cash Flow, Comparable
Companies and Comparable Acquisitions analyses for the Gas Distribution, Propane
Distribution, Cogen Investment and Gas Marketing businesses of LEI indicated an
enterprise valuation reference range of approximately $384 million to $445
million and an equity valuation reference range of approximately $249 million to
$310 million.
RELATIVE CONTRIBUTION ANALYSIS. Using 1996 actual data for LEI as of
September 30, 1996 and 1996 estimated data for TECO (for the year ended December
31, 1996 per TECO's Five Year Plan as provided by TECO management), CS First
Boston analyzed the contribution attributable to LEI to the pro forma revenues,
EBITDA, EBIT and net income of TECO following the Merger, and compared it to the
pro forma LEI ownership percentage in TECO following the Merger based on the
current market price of TECO Common Stock as of November 15, 1996 ($24.50) and
the proposed Merger Consideration of $300.0 million ("Pro Forma LEI Ownership").
CS First Boston also analyzed the contribution attributable to LEI to the pro
forma book value and total assets of TECO following the Merger, using book value
and total assets as of September 30, 1996 for both TECO and LEI, and compared it
to the Pro Forma LEI Ownership. CS First Boston calculated the Pro Forma LEI
Ownership at approximately 9%. CS First Boston calculated the contribution of
LEI to pro forma TECO net income, book value and total assets at approximately
8%, the contribution of LEI to pro forma TECO EBITDA and EBIT at approximately
10% and the contribution of LEI to pro forma revenues at approximately 17%. The
actual results achieved by the combined company may vary from forecasted
results, and the variations may be material.
PRO FORMA MERGER ANALYSIS. CS First Boston also analyzed certain pro forma
effects projected to result from the Merger, based upon financial forecasts
provided by LEI and TECO management. CS First Boston was advised by the
management of LEI and TECO that the Merger will be accounted for as a pooling of
interests under generally accepted accounting principles. This analysis
indicated that the Merger would be dilutive to the EPS of TECO for its 1997 and
1998 fiscal years. CS First Boston also reviewed certain 1997 and 1998 estimated
financial coverage ratios of the combined entity resulting from the Merger,
including EBITDA to estimated interest expense, EBIT to estimated interest
expense and estimated total debt to total book capitalization. In this analysis,
CS First Boston assumed that both LEI and TECO would perform substantially in
accordance with earnings forecasts provided to CS First Boston by LEI's and
TECO's management. The actual results achieved by the combined company may vary
from projected results and the variations may be material.
PURCHASE PRICE ANALYSIS AND STOCK TRADING HISTORY. CS First Boston
performed analyses relating to the Merger Consideration to be received by the
LEI stockholders assuming various prices for TECO Common Stock. CS First Boston
also examined the history of trading prices for TECO Common Stock and various
historical information relating to TECO.
MISCELLANEOUS. Pursuant to the terms of CS First Boston's engagement, LEI
has agreed to pay CS First Boston for its services in connection with the Merger
an aggregate transaction fee of $3.24 million, payable as follows: (i) $100,000
payable upon execution of the engagement letter (the "Financial Advisory Fee"),
(ii) a fee of $150,000 payable upon the signing of a definitive merger agreement
(the "Announcement Fee"), and (iii) a transaction fee of $2.7 million, plus 0.9%
of the aggregate consideration paid for LEI's equity in excess of $240 million
(the "Transaction Fee"), payable upon the closing of TECO's acquisition of all
or a substantial amount of the assets or capital stock of LEI, against which the
Financial Advisory Fee and the Announcement Fee are creditable. LEI has also
agreed to reimburse CS First Boston for its reasonable out-of-
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pocket expenses, including the fees and expenses of legal counsel and any other
advisor retained by CS First Boston, and to indemnify CS First Boston and
certain related entities against certain liabilities, including liabilities
under the federal securities laws.
In the ordinary course of business, CS First Boston and its affiliates may
actively trade the debt and equity securities of TECO for their own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities. CS First Boston in the past has provided
financial advisory and investment banking services to LEI unrelated to the
Merger, for which services CS First Boston has received compensation, and may
provide additional services to LEI and TECO in the future.
CS First Boston is an internationally recognized investment banking firm
and is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, each outstanding share of LEI Common Stock, other
than shares of LEI Common Stock held directly or indirectly by LEI and shares
for which dissenters' rights have been properly exercised, will be converted
into the right to receive a pro rata share of the Merger Consideration. The
Merger Consideration shall equal the number of shares (rounded down to the
nearest whole share and subject to the payment of cash for fractional shares as
described below) of TECO Common Stock determined by dividing $300,000,000 by the
average of the closing prices of TECO Common Stock as reported on the NYSE for
the 20 trading days ending on the third trading day prior to the Closing Date
(the "TECO Common Stock Market Value"), provided, however, that the TECO Common
Stock Market Value shall not exceed $27.25 nor be less than $22.25. Based upon
the current number of LEI shares currently outstanding, each exchanged share of
LEI Common Stock will, thus, be converted into the right to receive between
10.3018 and 12.6168 shares of TECO Common Stock. Appropriate adjustments shall
be made in the event of any TECO recapitalization, stock dividend or similar
capital change prior to the Closing Date. See also "THE MERGER
AGREEMENT -- Termination" for a discussion of events which may lead to a greater
or smaller number of shares of TECO Common Stock constituting the Merger
Consideration.
As soon as practicable following the Effective Time, TECO will mail to each
record holder of LEI Common Stock immediately prior to the Effective Time, a
letter of transmittal and other information advising such holder of the
consummation of the Merger and for use in exchanging LEI Common Stock
certificates for TECO Common Stock certificates and cash in lieu of fractional
shares. Letters of transmittal will also be available following the Effective
Time at the offices of TECO in Tampa, Florida. After the Effective Time, there
will be no further registration of transfers on the stock transfer books of LEI
of shares of LEI Common Stock that were outstanding immediately prior to the
Effective Time. Share certificates should not be surrendered for exchange by
shareholders of LEI prior to the Effective Time and the receipt of a letter of
transmittal.
No fractional shares of TECO Common Stock will be issued in the Merger.
Each shareholder of LEI otherwise entitled to a fractional share will receive an
amount in cash equal to the value of such fractional share based upon the TECO
Common Stock Market Value. No interest will be paid on such amount, and all
shares of LEI Common Stock held by a record holder shall be aggregated for
purpose of computing the amount of such payment.
Until so surrendered and exchanged, each certificate previously evidencing
LEI Common Stock shall represent solely the right to receive TECO Common Stock
and cash in lieu of fractional shares. Unless and until any such certificates
shall be so surrendered and exchanged, no dividends or other distributions
payable to the holders of record of TECO Common Stock as of any time on or after
the Effective Time shall be paid to the holders of such certificates previously
evidencing LEI Common Stock; provided, however, that, upon any such surrender
and exchange of such certificates, there shall be paid to the record holders of
the certificates issued and exchanged therefor (i) the amount, without interest
thereon, of dividends and other distributions, if any, with a record date on or
after the Effective Time theretofore paid with respect to such whole shares of
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TECO Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions, if any, with a record date on or after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such whole shares of TECO Common Stock.
ESCROW AGREEMENT; INDEMNIFICATION
At the Effective Time, five percent of the number of shares of TECO Common
Stock comprising the Merger Consideration shall be deposited in escrow under the
Escrow Agreement to satisfy certain claims for which TECO is entitled to be
indemnified under the Merger Agreement, including payment of $5,670,000 if the
cogeneration project referred to below is disposed of, under certain
circumstances, for $5,900,000 or less. See "THE MERGER AGREEMENT -- Escrow and
Indemnity."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In conjunction with the execution of the Merger Agreement, John A. Brabson,
Jr., President of LEI, has entered into an employment agreement with TECO and
LEI dated November 21, 1996, with an employment term commencing at the Effective
Time and expiring six months thereafter (the "Employment Term"), which may be
extended by mutual agreement. Mr. Brabson will be employed as Chairman of PGS,
which will be a division of TECO. Mr. Brabson will be paid at his current annual
base compensation rate of $265,000 for the Employment Term, plus if he remains
employed to the end of the Employment Term, continuation of his current
entitlement to a bonus of 30% of his base compensation and a contribution to his
Deferred Compensation Incentive Program account equal to 25% of base salary and
bonus. At the Effective Time, Mr. Brabson will receive a severance payment of
$539,000, a cash payment of $74,000, representing two years service credit under
the Peoples Gas System, Inc. Retirement Plan, a cash payment of $66,000
representing compensation for foregoing service credit during the Employment
Term under LEI's Supplemental Executive Retirement Plan, vesting and entitlement
to immediate distribution of all amounts credited to his account under the
Deferred Compensation Incentive Program and an increase in his benefit under the
Supplemental Executive Retirement Plan of LEI based on the assumption that Mr.
Brabson is two years older than his actual age. TECO will also arrange to
provide Mr. Brabson health insurance benefits for two years following his
termination of employment. Pursuant to the Employment Agreement, Mr. Brabson has
agreed to a two year non-compete covenant with TECO in consideration for a
$150,000 cash payment payable at the Effective Time. Additionally, TECO will
pay, until the completion of Mr. Brabson's current terms as chairman of the
American Gas Cooling Center and as a director of the American Gas and the
Southern Gas Associations, membership dues in such organizations and reasonable
expenses associated with meeting attendance and performance of responsibilities.
Jack E. Uhl, Chief Financial Officer of PGS, has entered into an employment
agreement with TECO and LEI dated November 21, 1996, with an employment term
commencing at the Effective Time and expiring six months thereafter (the
"Employment Term"), which may be extended by mutual agreement, Mr. Uhl will be
employed in a position in the PGS division of TECO commensurate with his
position with LEI before the Effective Time. Mr. Uhl will be paid at his current
annual base compensation rate of $167,400 for the Employment Term, plus if he
remains employed to the end of the Employment Term, continuation of his current
entitlement to a bonus of 30% of his base compensation and a contribution to his
Deferred Compensation Incentive Program account equal to 25% of base salary and
bonus. Upon termination of employment other than for cause or upon expiration of
the Employment Term, Mr. Uhl will receive a severance payment of $386,000, a
cash payment of $102,000, representing two years service credit under the
Peoples Gas System, Inc. Retirement Plan and vesting and entitlement to
immediate distribution of all amounts credited to his account under the Deferred
Compensation Incentive Program. TECO will also arrange to provide Mr. Uhl
continuation of health insurance benefits for two years following termination of
employment. Pursuant to this Employment Agreement, Mr. Uhl has agreed to a
two-year non-compete covenant with TECO in exchange for a $50,000 cash payment.
Each of Gerald Cox, Dan Pountney, Frank Sivard, Elliott White and Lee
Young, officers of PGS, have entered into a severance agreement with TECO and
LEI dated November 21, 1996, effective at the Effective Time and expiring two
years thereafter (the "Employment Term"). If an officer's employment is
terminated before the end of the Employment Term by TECO without cause, the
officer will receive a severance payment equal to two times the annual rate of
his base salary and target bonus amount, an increase in his benefit under
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the Supplemental Executive Retirement Plan of LEI with the assumption that the
officer is two years older than his actual age and vesting and entitlement to
immediate distribution of all amounts credited to his account under LEI's
Deferred Compensation Incentive Program. Appropriate outplacement assistance
will be provided to the officer. TECO will also arrange to provide the officer
continuation of life, disability, accident and health insurance benefits for two
years following termination of employment.
TECO has also entered into severance agreements with certain key employees
of LEI. The severance agreements for key employees provide that if an employee
is terminated within two years after the Effective Time he will receive a
payment of one time his base salary plus annual bonus, an increase in benefits
from the Supplemental Executive Retirement Plan of LEI by adding one year of age
in the benefit calculations (unless previously paid in connection with the
termination of the Supplemental Executive Retirement Plan), continuation of
life, disability accident and health insurance benefits for one year following
termination of employment and availability of appropriate outplacement services.
In the event the LEI shareholders do not approve the proposal regarding
payments under the severance and employment agreements as set forth in "CONSENT
SOLICITATION -- Proposals in the Consent," benefits payable under the agreements
are subject to reduction to the extent that any portion of such payments is not
deductible by TECO as a result of Section 280G of the Code.
EFFECTIVE TIME
It is expected that the closing contemplated by the Merger Agreement will
take place after all the conditions to the Merger have been satisfied or waived,
which is expected to be by mid-1997 (the "Closing Date").
The date and time of the filing of appropriate merger documents with the
Florida Department of State, or such later time as may be specified therein,
will be the Effective Time of the Merger. LEI and TECO will cause such merger
documents to be filed and recorded as soon as practicable on or after the
satisfaction or waiver of all conditions to the Merger. It is expected that the
merger documents will be filed on the Closing Date.
RESALES OF TECO COMMON STOCK
The shares of TECO Common Stock to be issued pursuant to the Merger
Agreement have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and may be traded without restriction by all former holders
of shares of LEI Common Stock who are not "affiliates" (as defined under the
Securities Act) of LEI ("Affiliates"). Directors, executive officers and certain
5% shareholders of LEI may be deemed to be Affiliates. It is a condition to
TECO's obligations under the Merger Agreement that each Affiliate execute and
deliver to TECO an "affiliate letter" setting forth certain restrictions on such
Affiliate's ability to sell the shares of TECO Common Stock received in the
Merger. Such restrictions arise from the applicable provisions of Rules 144 and
145 under the Securities Act and the requirements for "pooling of interest"
accounting treatment.
THE MERGER AGREEMENT
REPRESENTATIONS, WARRANTIES AND COVENANTS
LEI and TECO have made certain representations and warranties to each other
relating to, among other things, compliance with laws, preparation of financial
statements, legal actions and proceedings, the absence of undisclosed
liabilities, and capitalization and share ownership.
LEI has agreed that, except with the prior written consent of TECO and with
certain other exceptions set forth in the Merger Agreement, prior to the
consummation of the Merger it shall observe certain covenants relating to the
conduct of LEI's business, including conducting its business in the usual course
and using reasonable efforts to (i) preserve intact and keep available the
services of LEI's employees, (ii) keep in effect certain insurance policies in
coverage amounts not less than those in effect at the date of the Merger
Agreement, (iii) preserve its business, advertise, promote and market its
services, keep its properties intact
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and preserve its goodwill, and (iv) use all reasonable efforts to preserve and
protect its intellectual property rights.
LEI has also agreed that, except with the prior written consent of TECO and
with certain other exceptions set forth in the Merger Agreement, it will not
take the following actions: (i) sell or transfer, or mortgage, pledge or create
or permit to be created any security interest on, any of its assets other than
sales or transfers in the ordinary course of business; (ii) incur any obligation
or liability other than in the ordinary course of business, incur any
indebtedness for borrowed money except under existing loan agreements in the
ordinary course or enter into any other contracts or commitments involving
payments of $100,000 or more, other than purchase orders or commitments for
natural gas or propane gas in the ordinary course of business with a term not
exceeding one year; (iii) change the compensation or fringe benefits for any
officer, director, employee, or consultant, except for ordinary merit increases
for employees based on periodic reviews in accordance with past practices, or
enter into or modify any employee benefit plan or any employment, severance or
other agreement with any officer, director, employee, or consultant of LEI; (iv)
grant or accelerate the exercisability of any option, warrant, or other right to
purchase, or convert any obligation into, shares of LEI capital stock, declare
or pay any dividend or other distribution with respect to any shares of LEI
capital stock except ordinary dividends in accordance with past practice out of
current income not exceeding $1.125 per share quarterly, or issue any shares of
its capital stock; (v) amend its articles of incorporation or bylaws; (vi) make
any filings with any government authority regarding its rates or charges,
standards of service, accounting matters or services it provides, except in the
ordinary course of business consistent with past practices and not less than ten
days after having furnished a copy of such filing to TECO; or (vii) make any
material acquisition of property other than in the ordinary course of business.
TECO has agreed, with regard to the employee benefit plans that LEI
currently provides to its employees, that commencing on the Closing Date, TECO
will maintain for former LEI employees, the same, or substantially similar: (i)
insurance coverages and benefits through December 31, 1997, after which date
TECO may discontinue such coverages and benefits, in which case former LEI
employees become eligible for the same coverages and benefits generally
available to TECO employees; (ii) qualified plans through December 31, 1997,
after which date TECO may either maintain LEI's qualified plan or permit former
LEI employees to participate in TECO's retirement and retirement savings plans,
crediting for such new plans the employee's service with LEI; (iii) Supplemental
Executive Retirement Plan ("SERP") for one year, after which time TECO may
either continue the SERP, permit certain SERP participants to participate in
TECO's SERP or provide for distribution of the present value of a participant's
accrued SERP benefit (specifically with respect to LEI officers on the date of
the agreement, TECO will permit their participation in TECO's SERP); (iv)
additional salary reduction contributions to LEI's Management Deferred
Compensation Plan for two years, after which time TECO may prohibit future plan
contributions but will continue to maintain plan accounts or a similar
arrangement until amounts in the accounts are distributed; (v) LEI's Deferred
Compensation Incentive Program ("DCIP") through September 30, 1997, after which
date no further bonus credits will be made to the DCIP and TECO may either
maintain such DCIP accounts or a similar arrangement until the amounts in the
accounts are distributed; and (vi) other bonus plans with respect to services
performed though September 30, 1997. TECO may terminate, as of the Closing Date,
all LEI personnel policies and procedures, and substitute TECO policies and
procedures; provided, however, LEI employees receive credit for service with
LEI. See "THE MERGER -- Interests of Certain Persons in the Merger."
TECO has also agreed that rights to indemnification provided to officers
and directors by the bylaws and charters of LEI and its subsidiaries shall
survive the Closing Date, and TECO shall use reasonable efforts to maintain for
three years following the Closing Date LEI's current directors' and officers'
liability insurance policy (or a similar such policy) with respect to causes of
action arising from acts or omissions occurring on or before the Closing Date;
provided, however, TECO is not required to expend more than 125% of current
annual premiums paid by LEI for such insurance.
LEI and TECO have each agreed to use their respective reasonable efforts to
obtain all authorizations, consents and permits necessary to the consummation of
the transactions contemplated by the Merger Agreement, and to perform and
fulfill its obligations under the Merger Agreement, to obtain the other party's
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approval prior to issuance of any press release or other information to the
press or any third party with respect to the Merger Agreement or the
transactions contemplated thereby.
CONDITIONS OF MERGER
In addition to the adoption of the Merger Agreement by the shareholders of
LEI, the respective obligations of TECO and LEI to consummate the Merger are
subject to the following conditions, among others, unless waived by TECO and
LEI: (i) the representations and warranties contained in the Merger Agreement
must be accurate in all material respects at the Effective Time; (ii) all
covenants and agreements required by the Merger Agreement to be performed or
complied with shall have been performed or complied with in all material
respects on or prior to the Effective Time; (iii) the parties shall have
received customary legal opinions and other documents as described in the Merger
Agreement; (iv) TECO shall have received letters from Coopers & Lybrand L.L.P.
and Price Waterhouse LLP regarding pooling of interests accounting treatment
under Accounting Principles Board Opinion No. 16 if the Merger is consummated in
accordance with the Merger Agreement; (v) TECO shall have received letters from
specified Affiliates (as defined under "THE MERGER -- Resales of TECO Common
Stock" above) of LEI agreeing not to sell or transfer shares of TECO Common
Stock to be received in the Merger, except under certain circumstances or in
compliance with certain conditions; (vi) the parties shall have obtained all
approvals, consents and waivers required to be obtained in connection with the
performance of the Merger Agreement; (vii) the parties shall have entered into
an agreement governing the Merger Consideration to be held in escrow in the form
of Exhibit B to the Merger Agreement (the "Escrow Agreement"); (viii) the
Registration Statement shall have been declared effective by the Securities and
Exchange Commission (the "Commission") and no stop order suspending the
effectiveness thereof shall have been issued; (ix) any applicable waiting period
under the HSR Act shall have expired or terminated; (x) the parties shall have
received opinions of counsel to the effect that the Merger will be a tax-free
reorganization; (xi) the interest of LEI in a cogeneration project shall have
been disposed of so as to preserve "qualifying facility" status, unless
consummation of the Merger will not adversely affect such status; and (xii) the
shares of TECO Common Stock to be issued in the Merger shall have been
authorized for listing on the NYSE, subject to official notice of issuance; and
(xiii) certain related agreements shall have become effective. At any time prior
to the Effective Time, any of the parties to the Merger Agreement may waive any
conditions to its own obligation to consummate the Merger.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether prior to or after approval by LEI's shareholders, as follows: (i)
by either party, by written notice to the other, if the Effective Time shall not
have occurred by December 31, 1997 and a breach by the terminating party has not
been the cause of or resulted in the failure of the Merger to occur on or before
such date; (ii) by either party (provided that such party is not then in
material breach of any representation, warranty, covenant or other agreement in
the Merger Agreement), by written notice to the other party, if there shall have
been a material breach of any of the covenants or agreements or any of the
representations or warranties contained in the Merger Agreement on the part of
the other party, which breach is either not cured within twenty (20) days
following written notice to such other party or by its nature cannot be cured
prior to the Closing; (iii) by either party, by written notice to the other, if
any governmental entity shall have issued any injunction or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
consummation of the Merger and such injunction or other action shall have become
final and nonappealable; (iv) by either party, if the required approval of the
Merger Agreement by the shareholders of LEI shall not have been obtained within
60 days after the Registration Statement becomes effective; (v) by TECO if the
LEI Board fails to promptly commence solicitation of LEI's shareholders for
approval of the Merger Agreement, withdraws its recommendation that shareholders
consent to such approval or approves an alternative transaction; (vi) by LEI,
prior to the approval of the Merger by its shareholders, under certain limited
circumstances, if an alternative transaction is proposed; (vii) at any time with
the written consent of LEI and TECO; (viii) by LEI if the TECO Common Stock
Market Value is less than $20.50, provided that TECO may negate such termination
by notifying LEI of its intent to pay as the Merger Consideration the number of
shares of TECO Common Stock having a value, based on the average of the closing
prices of TECO Common Stock as reported by the NYSE for the 20 trading days
ending on the third trading day prior to the Closing Date, equal in value to the
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value of the Merger Consideration if the TECO Common Stock Market Value had been
$20.50; or (viii) by TECO if the TECO Common Stock Market Value is greater than
$29.00, provided that LEI may negate such termination by notifying TECO of its
intent to accept as the Merger Consideration the number of shares of TECO Common
Stock having a value, based on the average of the closing prices of TECO Common
Stock as reported by the NYSE for the 20 trading days ending on the third
trading day prior to the Closing Date, equal in value to the value of the Merger
Consideration if the TECO Common Stock Market Value had been $29.00.
The decision whether to terminate the Merger Agreement if the TECO Common
Stock Market Value is less than $20.50 or to negate any termination by TECO if
the TECO Common Stock Market Value is greater than $29.00 may be made by the LEI
Board. In making such decision, the LEI Board will take into account, consistent
with its fiduciary duties, all relevant facts and circumstances existing at the
time, including among other things the market for energy industry stocks in
general, the relative value of the TECO Common Stock in the market, the
alternatives then available to LEI, the advice of its financial advisors and
legal counsel and, in the case of a decision to terminate the Merger Agreement,
whether TECO is prepared to increase the Merger Consideration. By approving the
Merger Agreement, the LEI shareholders would be permitting the LEI Board to
determine, in the exercise of its fiduciary duties, to proceed with the Merger
even though the TECO Common Stock Market Value is less than $20.50 and there is
no increase in the number of shares of TECO Common Stock or, in the case of a
termination by TECO, to negate that termination and proceed with the Merger
accepting fewer shares of TECO Common Stock that would be equal in value to the
value of the Merger Consideration if the TECO Common Stock Market Value had been
$29.00. The LEI Board has made no decision as to the circumstances in which it
would elect not to terminate the Agreement even if the TECO Common Stock Market
Value fell below $20.50 or would elect to negate a termination by TECO if the
TECO Common Stock Market Value rose above $29.00.
WAIVER AND AMENDMENT
At any time prior to the Effective Time, (i) the parties to the Merger
Agreement may, by written agreement, waive or extend the time for performance of
any obligation under the Merger Agreement and (ii) any term or provision of the
Merger Agreement may be waived in writing by the party entitled to the benefits
thereof. After approval by the shareholders of LEI the Merger Agreement may not
be amended to change the amount or kind of Merger Consideration or in any manner
materially adverse to the LEI shareholders without their further approval.
NO SOLICITATION
LEI has agreed not to (i) solicit, initiate or encourage discussions with
any person, other than TECO, relating to the possible acquisition of LEI or all
or a material portion of the assets or any of the capital stock of LEI or any
merger or other business combination with LEI (an "Acquisition Transaction") or
(ii) except to the extent required by fiduciary obligations under applicable law
as advised in writing by outside legal counsel, participate in any negotiations
regarding, or furnish to any other person information with respect to, any
effort or attempt by any other person to do or to seek any Acquisition
Transaction. LEI has also agreed to inform TECO within one business day of
receipt of any offer, proposal or inquiry relating to any Acquisition
Transaction.
TERMINATION FEES
If the Merger Agreement is terminated as described in the next sentence,
LEI will be obligated to reimburse TECO in the amount of TECO's out-of-pocket
expenses in connection with the Merger up to a maximum of $3,000,000. Such
reimbursement will be required if the Merger Agreement is terminated by (i)
either party if the LEI shareholder action adopting the Merger Agreement is not
obtained; (ii) TECO, if it is not then in material breach of the Merger
Agreement, for a material breach by LEI of any representation, warranty,
covenant or agreement; and (iii) TECO if the LEI Board (A) withdraws its
recommendation that shareholders consent to approval of the Merger Agreement or
(B) fails promptly to solicit the written consent of its shareholders to
approval of the Merger Agreement. In addition, LEI will be required to pay TECO
a fee
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of $12,000,000 (less such expense reimbursement) if the Merger Agreement is
terminated under certain of the foregoing circumstances and LEI has received an
acquisition proposal from a third party which it does not reject or enters into
an acquisition agreement with a third party within 12 months.
If LEI terminates the Merger Agreement because of a material breach by TECO
and LEI is not then in material breach of the Merger Agreement, TECO will
reimburse LEI for its costs and expenses relating to the Merger up to
$1,800,000.
STOCK OPTION AGREEMENT
TECO and LEI have entered into a Stock Option Agreement dated November 21,
1996 (the "Stock Option Agreement") in connection with, and as a condition to,
TECO's execution of the Merger Agreement. The Stock Option Agreement is included
as an exhibit to the Merger Agreement which is included as Annex I and is
incorporated herein by reference. The following discussion sets forth a
description of the material terms of the Stock Option Agreement and is qualified
by, and made subject to, the more complete information set forth in the Stock
Option Agreement.
Under the Stock Option Agreement, LEI has granted to TECO an irrevocable
option (the "Option") to purchase up to 212,664 shares of LEI Common Stock (the
"Option Shares"), representing 19.9% of the outstanding shares, at a price per
share of $280.72, which Option is exercisable in whole or in part at any time
and from time to time after the occurrence of a Trigger Event (as defined below)
and prior to the expiration of the Option. The Option may not be exercised if
TECO is in material breach of any of its representations, warranties, covenants
or agreements contained in the Stock Option Agreement or in the Merger
Agreement.
A "Trigger Event" occurs if any person has made, or has disclosed an
intention to make, a proposal to engage in an Acquisition Transaction which has
not been rejected by LEI and the Merger Agreement is terminable by TECO because
(i) the LEI shareholders shall not have approved the Merger Agreement within
sixty days of the effective date of the Registration Statement of which this
Prospectus/Proxy Statement forms a part; (ii) the LEI Board (A) withdraws its
approval of or recommendation in favor of the Merger Agreement, or (B)
authorizes or recommends an Acquisition Transaction, or (iii) LEI materially
breaches the Merger Agreement and such breach is either not cured within 20 days
or cannot be cured prior to the Closing Date and at such time TECO is not in
material breach of the Merger Agreement.
The Option expires upon earliest of: (i) the Effective Time of the Merger,
(ii) the termination of the Merger Agreement pursuant to its terms other than
pursuant to a Trigger Event, and (iii) 180 days after the termination of the
Merger Agreement if such termination follows a Trigger Event, which period may
be extended for limited periods if exercise of the Option is then prohibited or
the Merger Agreement has terminated and a Trigger Event could occur thereafter.
Put Right. TECO may require, (x) any time during which the Option is
exercisable, LEI to repurchase from TECO all or any portion of the Option, at
the price per share equal to the difference between the "Market/Offer Price" and
the Exercise Price or (y) at any time prior to January 31, 1999, LEI to
repurchase from TECO all or any portion of the shares purchased pursuant to the
Option, at the price equal to the higher of the "Offer Price" and the Exercise
Price. The "Offer Price" shall be the highest price per share offered pursuant
to any Acquisition Transaction. The "Market/Offer Price" means, the higher of
(x) the highest price per share offered as of such date pursuant to any
Acquisition Transaction which was initiated prior to such date and not
terminated or withdrawn as of such date and (y) the Fair Market Value (as
defined below) of the LEI Common Stock as of such date. The "Fair Market Value"
of the LEI Common Stock shall mean the average of the daily closing sales prices
during the ten trading days prior to the fifth trading day preceding the date of
determination on an established national stock exchange or national inter-dealer
quotation system on which the LEI Common Stock is regularly traded or, if it is
not so traded during such period, the fair market value of the LEI Common Stock
as determined by an independent investment banking firm of nationally recognized
standing experienced in the valuation of companies in the natural gas
distribution industry.
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Registration Rights. Following termination of the Merger Agreement, to the
extent TECO owns shares of LEI Common Stock acquired pursuant to the exercise of
the Option, LEI shall at the request of TECO register under the Securities Act
all or any part of such shares; provided that LEI may elect instead to purchase
such shares at their fair market value.
Limitation on Fees. The aggregate amount payable by LEI to TECO as a
Termination Fee and under the Stock Option Agreement shall not exceed
$15,000,000. The amount deemed payable under the Stock Option Agreement for this
purpose is the amount that would be payable if TECO had exercised the put right
with respect to the Option.
ESCROW AND INDEMNITY
Pursuant to the Merger Agreement, TECO will deposit 5% of the total number
of shares of TECO Common Stock comprising the Merger Consideration with
NationsBank, N.A. (South) as escrow agent (the "Escrow Agent"), to be held for a
twelve-month period following the Effective Time and disbursed by the Escrow
Agent in accordance with the Escrow Agreement. Such shares will be deducted pro
rata from the shares allocable to each former holder of LEI Stock. While the
shares are held in escrow, the shares are voted in accordance with instructions
of the shareholder representatives appointed under the Escrow Agreement (the
"Shareholder Representatives") and all dividends paid upon such shares will be
distributed pro rata to the former holders of LEI Stock. The Escrow Agreement is
included as Exhibit B to the Merger Agreement which is included as Annex I and
is incorporated herein by reference.
The Common Stock held under the escrow agreement will be applied to
indemnify and hold harmless TECO (and its directors, officers, employees, agents
and assigns) subsequent to the Effective Time (i) from and against all losses,
liabilities, damages, deficiencies, costs or expenses, including interest and
penalties imposed or assessed by any judicial or administrative body and
reasonable attorney's fees, whether or not arising out of third party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing ("Losses"), arising out of any inaccuracy in, or breach of, any
representation, warranty or covenant of LEI contained in the Merger Agreement
and for certain other Losses specified in the Merger Agreement; and (ii) on
account of the disposition of a cogeneration project, as described under
"-- Disposition of Certain Assets." No such indemnification from escrow shall be
payable unless the amount of all claims for indemnification (other than for
disposition of the cogeneration facility) exceeds $1 million in the aggregate,
and then such indemnification shall be payable only for the amounts above $1
million.
By consenting to the Merger, an LEI shareholder is approving the terms and
conditions of the Escrow Agreement naming Joseph L. Carrere and Stella F. Thayer
as the Shareholder Representatives and thereby is agreeing to share in the
obligation to indemnify TECO under the Merger Agreement but only to the extent
of the shares deposited in escrow.
DISPOSITION OF CERTAIN ASSETS
LEI and TECO have agreed to cooperate to dispose of LEI's interest in the
cogeneration project owned by Pasco Cogen, Ltd. (the "Project"), to the extent
necessary to maintain the ownership criteria necessary to preserve the Project's
status as a "qualifying facility." LEI, furthermore, has agreed to indemnify
TECO in the amount of $5,670,000 if, under certain circumstances, the aggregate
proceeds from the disposition of such Project are $5,900,000 or less.
CERTAIN OTHER MATTERS RELATING TO THE MERGER
REGULATORY MATTERS
Each of LEI and TECO expects to file promptly a notification report under
the HSR Act with the FTC and the Department of Justice. Under the HSR Act,
certain acquisition transactions, including the Merger, may not be consummated
unless certain information has been furnished to the FTC and the Department of
Justice and certain waiting period requirements have been satisfied. The
transaction may also be reviewed by the Florida Attorney General.
30
<PAGE> 36
Other than the HSR filings, and, if necessary, any required approvals from
the FERC, the filing of appropriate merger documents with the Florida Department
of State and routine approvals and actions required under LEI's permits and
licenses to reflect the change in control of LEI, there are no governmental
approvals required to effect the Merger.
MERGER OF PGS INTO TAMPA ELECTRIC
Contemporaneously with the Merger, TECO plans to merge PGS into Tampa
Electric and operate PGS as a separate division. Accordingly, approval of the
Commission under the Public Utility Holding Company Act of 1935 will not be
required.
LYKES-DUKE/LOUIS DREYFUS, LTD.
LEI owns a 40% equity interest in Lykes-Duke/Louis Dreyfus, Ltd., a Florida
limited partnership formed in April 1996 to engage in, among other things, the
power marketing business. If LEI continues to own this partnership interest at
the time of the Merger, FERC approval will be required for the transfer of the
interest to TECO pursuant to the Merger.
EXPENSES
The Merger Agreement provides that whether or not the Merger is
consummated, TECO and LEI will bear their respective expenses incurred in
connection with the preparation, execution, and performance of the Merger
Agreement and the transactions contemplated thereby; provided the aggregate
amount of such expenses paid or incurred by LEI shall not exceed $5,000,000.
TECO will pay all fees relating to the registration and issuance of the shares
of TECO Common Stock comprising the Merger Consideration under applicable
federal and state securities laws and the pre-merger notification form under the
HSR Act. The expense of printing the Prospectus/Proxy Statement will also be
borne by TECO.
ACCOUNTING TREATMENT
TECO expects to account for the Merger as a pooling of interests. It is a
condition to TECO's obligation to consummate the Merger that (i) LEI's
independent accountants furnish a letter regarding LEI's qualification as a
combining company for pooling of interests accounting treatment and (ii) TECO
receives a letter from its independent accountants regarding the qualification
of the Merger for pooling of interests accounting treatment under Accounting
Principles Board Opinion No. 16 if the Merger is consummated in accordance with
the Merger Agreement. See "THE MERGER AGREEMENT -- Conditions of Merger."
CERTAIN CREDIT AGREEMENTS
LEI and its subsidiaries are required to obtain consents under certain
credit agreements and guarantees in order to consummate the transactions
contemplated by the Agreement. The consent of the lenders to Pasco Cogen, Ltd.
is required for the disposition of LEI's interest in that project. TECO does not
expect these consents to be an impediment to consummation of the Merger.
31
<PAGE> 37
MANAGEMENT AFTER THE MERGER
MANAGEMENT OF TECO
Directors
Following the consummation of the Merger, LEI will operate as a business
unit of TECO. At and immediately after the Effective Time, the following
individuals will be directors of TECO:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PRESENT
LAST FIVE YEARS AND DIRECTOR TERM
NAME AGE OTHER DIRECTORSHIPS HELD(1) SINCE(1) EXPIRES
- ------------------------- --- ---------------------------------------------- -------- -------
<S> <C> <C> <C> <C>
Girard F. Anderson....... 64 President and Chief Operating Officer, TECO 1994 1998
Energy, Inc.; formerly Executive Vice
President-Utility Operations, TECO Energy,
Inc. and President and Chief Operating
Officer, Tampa Electric Company
DuBose Ausley............ 59 Chairman, Ausley & McMullen (attorneys), 1992 1999
Tallahassee, Florida; formerly Chairman,
Macfarlane, Ausley, Ferguson & McMullen
(attorneys), Tallahassee, Florida; also a
director of Sprint Corporation (telephone
holding company) and Capital City Bank Group
Inc.
Sara L. Baldwin.......... 65 Private Investor; formerly Vice President 1980 1997
Baldwin & Sons, Inc. (insurance agency),
Tampa, Florida
Hugh L. Culbreath........ 75 Retired; formerly Chairman of the Board, TECO 1971 1997
Energy, Inc. and Tampa Electric Company
James L. Ferman, Jr...... 53 President, Ferman Motor Car Company, Inc. 1985 1999
(automobile dealerships), Tampa, Florida; also
a director of The Bank of Tampa and its
holding company, The Tampa Banking Company
Edward L. Flom........... 66 Retired; formerly Chairman of the Board and 1980 1997
Chief Executive Officer, Florida Steel
Corporation (production and fabrication of
steel products), Tampa, Florida; also a
director of Outback Steakhouse, Inc.
(steakhouse chain)
Henry R. Guild, Jr....... 68 President and Director, Northeast Investment 1980 1997
Management, Inc. (private trustees and family
investment advisers), Boston, Massachusetts
Timothy L. Guzzle........ 60 Chairman of the Board and Chief Executive 1988 1998
Officer, TECO Energy, Inc.; also a director of
NationsBank Corporation (bank holding company)
Dennis R. Hendrix........ 56 Chairman of the Board and formerly Chief 1995 1999
Executive Officer and President, PanEnergy
Corp. (interstate gas pipeline), Houston,
Texas; also a director of Texas Eastern
Products Pipeline Company, general partner of
TEPPCO Partners, L.P., a publicly traded
limited partnership
</TABLE>
32
<PAGE> 38
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PRESENT
LAST FIVE YEARS AND DIRECTOR TERM
NAME AGE OTHER DIRECTORSHIPS HELD(1) SINCE(1) EXPIRES
- ------------------------- --- ---------------------------------------------- -------- -------
<S> <C> <C> <C> <C>
Robert L. Ryan........... 53 Senior Vice President and Chief Financial 1991 1999
Officer, Medtronic, Inc. (medical devices
manufacturer), Minneapolis, Minnesota;
formerly Vice President- Finance, Union Texas
Petroleum Holdings, Inc. (independent oil and
gas exploration and production), Houston,
Texas; also a director of Inter- Regional
Financial Group, Inc. (investment services)
and United Healthcare Corporation
William P. Sovey......... 63 Vice Chairman and Chief Executive Officer and 1996 1997
formerly President and Chief Operating
Officer, Newell Co. (consumer products),
Freeport, Illinois; also a director of Acme
Metals, Inc. (steel and iron products)
J. Thomas Touchton....... 57 Managing Partner, The Witt-Touchton Company 1987 1998
(private investment partnership), Tampa,
Florida; also a director of 19 Merrill
Lynch-sponsored mutual funds
John A. Urquhart......... 68 President, John A. Urquhart Associates 1991 1998
(management consultants), Fairfield,
Connecticut and Vice Chairman and director of
Enron Corp. (diversified natural gas company),
Houston, Texas; also a director of Hubbel Inc.
(electric products) and Aquarion Company
(utility management; public water supply;
forest products)
James O. Welch, Jr....... 65 Retired; formerly Vice Chairman, RJR Nabisco, 1976 1999
Inc. (consumer goods) and Chairman, Nabisco
Brands, Inc. (food products); also a director
of Kmart Corporation (retail) and Vanguard
Group of Investment Companies (mutual fund
company)
</TABLE>
- ---------------
(1) All of the directors of TECO also serve as directors of Tampa Electric
Company, and the period of service shown includes service on Tampa Electric
Company's Board of Directors prior to the formation of TECO on January 15,
1981. On April 15, 1981, TECO became the corporate parent of Tampa Electric
Company as a result of a reorganization.
TECO has standing Audit and Compensation Committees of the Board of
Directors. It does not have a Nominating Committee. The Compensation Committee
is currently composed of Mrs. Baldwin and Messrs. Guild, Sovey, Urquhart and
Welch (Chairman). The Audit Committee is currently composed of Messrs. Ferman,
Flom, Hendrix, Ryan and Touchton (Chairman). Ausley & McMullen, of which Mr.
Ausley is the Chairman, renders legal services to TECO.
Compensation of Directors
Directors who are not employees or former employees of TECO or any of its
subsidiaries are paid an annual retainer of $27,000 and attendance fees of $750
for each meeting of the TECO Board, $750 for each meeting of the Board of Tampa
Electric Company and $1,000 for each meeting of a committee of the TECO Board on
which they serve. Directors may elect to defer these amounts with earnings
credited at either the 90-day U.S. Treasury bill rate or a rate equal to the
total return on TECO's Common Stock.
TECO has an agreement with Mr. Culbreath under which he agrees to provide
consulting services to TECO through December 31, 2000 for compensation at a rate
of $175,000 per year. Mr. Culbreath served as Chief Executive Officer of TECO
until April 1989 and retired as an employee in April 1990 at which time the
33
<PAGE> 39
consulting relationship commenced. The agreement provides for a severance
benefit (in the event of a termination of Mr. Culbreath's consultancy following
a change in control of TECO) equal to the total compensation that would have
been payable over the remaining term of the agreement. This benefit will be
reduced to the extent that such benefit, taking into account any other
compensation provided by TECO, would not be deductible by the Corporation
pursuant to Section 280G of the Internal Revenue Code.
1991 Director Stock Option Plan. TECO has a Director Stock Option Plan in
which all non-employee directors participate. The plan provides automatic annual
grants of options to purchase shares of TECO Common Stock to each nonemployee
director serving on the Board at the time of the grant. The exercise price is
the fair market value of the TECO Common Stock on the date of grant, payable in
whole or in part in cash or TECO Common Stock. The plan provides for an initial
grant of options for 10,000 shares to each new director and an annual grant of
options for 2,000 shares to each continuing director. Grants are made on the
first trading day of the TECO Common Stock after each annual meeting of
shareholders. The options are exercisable immediately and expire ten years after
grant or earlier as provided in the plan following termination of service on the
TECO Board.
Directors' Retirement Plan. All directors who have completed 60 months of
service as a director and who are not employees or former employees of TECO or
any of its subsidiaries are eligible to participate in a Directors' Retirement
Plan. Under this plan, a retired director or his or her surviving spouse will
receive a monthly benefit at the rate of $20,000 per year. Such payments will
continue for the lesser of the number of months the director served as a
director or 120 months, but payments will in any event cease upon the death of
the director or, if the director's spouse survives the director, the death of
the spouse.
Executive Officers
The executive officers of TECO will not change as a result of the Merger.
Biographical data for the current executive officers of TECO is contained in
TECO's annual report on Form 10-K for the year ended December 31, 1995, which is
attached hereto as Annex V and incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
34
<PAGE> 40
Compensation of TECO's Executive Officers
The following tables set forth certain compensation information for the
Chief Executive Officer of TECO and each of the four other most highly
compensated executive officers of TECO and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------- ------------------
NAME AND OTHER ANNUAL SHARES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS(#)(2) COMPENSATION(3)
- --------------------- ---- -------- -------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Timothy L. Guzzle.... 1995 $493,750 $415,000 $50,925 60,000 $31,092
Chief Executive 1994 468,750 384,000 40,000 28,703
Officer 1993 443,750 194,000 40,000 28,267
Girard F. Anderson... 1995 368,750 240,000 48,611 40,000 30,094
President and Chief 1994 320,461 275,000 24,000 25,076
Operating 1993 284,750 110,000 24,000 23,290
Officer(4)
Keith S. Surgenor.... 1995 272,500 195,000 45,664 25,000 17,994
President and Chief 1994 215,376 225,000 12,000 13,728
Operating Officer 1993 179,500 60,000 12,000 11,986
of Tampa Electric
Company(4)
Roger H. Kessel...... 1995 238,500 135,000 44,765 17,000 9,052
Senior Vice 1994 228,750 150,000 14,000 10,257
President -- General 1993 219,750 80,000 14,000 10,417
Counsel
Alan D. Oak.......... 1995 225,000 135,000 44,264 17,000 14,432
Senior Vice 1994 201,750 130,000 13,000 12,905
President -- Finance 1993 192,875 74,000 13,000 12,843
</TABLE>
- ---------------
(1) Participants in TECO's company car program received a one-time cash payment
in connection with its elimination in 1995. The amount set forth includes
this payment, which in the case of the named executive officers was
$40,890.
(2) Limited Stock appreciation rights were awarded in tandem with the options
granted. See note (2) under "Option/SAR Grants in Last Fiscal Year" below.
(3) The reported amounts for 1995 consist of $924 of premiums paid by TECO to
the Executive Supplemental Life Insurance Plan for each of the named
executive officers, with the balance in each case being employer
contributions under the TECO Energy Group Retirement Savings Plan and
Retirement Savings Excess Benefit Plan.
(4) Prior to July 19, 1994, Mr. Anderson served as Executive Vice
President -- Utility Operations and President of Tampa Electric Company and
Mr. Surgenor served as Vice President -- Human Resources.
35
<PAGE> 41
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS/SARS EXERCISE GRANT
UNDERLYING GRANTED TO OR BASE DATE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1)(2) FISCAL YEAR PER SHARE DATE VALUE(3)
- ------------------------------------- ---------------- ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Timothy L. Guzzle.................... 60,000 12.29 $ 20.75 4/03/05 $236,799
Girard F. Anderson................... 40,000 8.19 20.75 4/03/05 157,866
Keith S. Surgenor.................... 25,000 5.12 20.75 4/03/05 98,666
Roger H. Kessel...................... 17,000 3.48 20.75 4/03/05 67,093
Alan D. Oak.......................... 17,000 3.48 20.75 4/03/05 67,093
</TABLE>
- ---------------
(1) The options are exercisable beginning on the date of grant, April 3, 1995.
(2) An equal number of stock appreciation rights which can only be exercised
during limited periods following a change in control of TECO ("LSAR") were
awarded in tandem with the options granted in 1995. Upon exercise of an
LSAR, the holder is entitled to an amount based upon the highest price paid
or offered for TECO Common Stock during the 30-day period preceding a
change in control of TECO. The exercise of an option or an LSAR results in
a corresponding reduction in the other.
(3) The values shown are based on the Black-Scholes valuation model and are
stated in current annualized dollars on a present value basis. The key
assumptions used for purposes of this calculation include the following:
(a) a 7.5% discount rate; (b) a volatility factor based upon the average
trading price for the 36-month period ending December 31, 1994; (c) a
dividend factor based upon the 3-year average dividend paid for the period
ending December 31, 1994; (d) the 10-year option term; and (e) the closing
price of TECO's Common Stock on December 31, 1994. The present value of the
options reported has been calculated by multiplying $20.75, the share price
on the date of grant, by 0.1902, the Black-Scholes valuation factor, and by
the number of shares underlying the options granted. The actual value an
executive may realize will depend upon the extent to which the stock price
exceeds the exercise price on the date the option is exercised.
Accordingly, the value, if any, realized by an executive will not
necessarily be the value determined by the Black-Scholes model.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SHARES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT YEAR-END(#) AT YEAR-END
----------------- -------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------- --------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Timothy L. Guzzle....................... 0 0 220,000/0 $ 1,210,000/0
Girard F. Anderson...................... 24,000 150,000 112,000/0 548,749/0
Keith S. Surgenor....................... 0 0 91,000/0 603,563/0
Roger H. Kessel......................... 0 0 137,000/0 1,127,248/0
Alan D. Oak............................. 0 0 69,000/0 381,220/0
</TABLE>
36
<PAGE> 42
PENSION TABLE
The following table shows estimated annual benefits payable under TECO's
pension plan arrangements for the named executive officers other than Messrs.
Guzzle and Kessel:
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------
5 10 15 20 OR MORE
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Final Three Years
Average Earnings
$200,000...................... $ 30,000 $ 60,000 $ 90,000 $120,000
250,000...................... 37,500 75,000 112,500 150,000
300,000...................... 45,000 90,000 135,000 180,000
350,000...................... 52,500 105,000 157,500 210,000
400,000...................... 60,000 120,000 180,000 240,000
450,000...................... 67,500 135,000 202,500 270,000
500,000...................... 75,000 150,000 225,000 300,000
550,000...................... 82,500 165,000 247,500 330,000
600,000...................... 90,000 180,000 270,000 360,000
650,000...................... 97,500 195,000 292,500 390,000
700,000...................... 105,000 210,000 315,000 420,000
750,000...................... 112,500 225,000 337,500 450,000
</TABLE>
The annual benefits payable to each of the named executive officers are
equal to a stated percentage of such officer's average earnings for the three
years before his retirement multiplied by his number of years of service, up to
a stated maximum. The amounts shown in the table are based on 3% of such
earnings and a maximum of 20 years of service. The amounts payable to Mr. Guzzle
are based on 6% of earnings and a maximum of 10 years of service, and the
amounts payable to Mr. Kessel are based on 5% of earnings and a maximum of 9
years of services.
The earnings covered by the pension plan arrangements are the same as those
reported as salary and bonus in the summary compensation table above. Years of
service for the named executive officers are as follows: Mr. Guzzle (8 years),
Mr. Anderson (36 years), Mr. Surgenor (7 years), Mr. Kessel (6 years) and Mr.
Oak (22 years). The pension benefit is computed as a straight-life annuity
commencing at the officer's normal retirement age and is reduced by the
officer's Social Security benefits. The normal retirement age is 62 for Messrs.
Guzzle, Anderson and Kessel and 63 for Messrs. Surgenor and Oak. The pension
plan arrangements also provide death benefits to the surviving spouse of an
officer equal to 50% of the benefit payable to the officer. If the officer dies
during employment before reaching his normal retirement age, the benefit is
based on the officer's service as if his employment had continued until such
age. The death benefit is payable for the life of the spouse. If Mr. Guzzle's
employment is terminated by TECO without cause or by Mr. Guzzle for good reason
(as such terms are defined in Mr. Guzzle's employment agreement referred to
below), his age and service for purposes of determining benefits under the
pension plan arrangements are increased by two years.
Employment and Severance Agreements
TECO has severance agreements with the named executive officers under which
payments will be made under certain circumstances following a change in control
of TECO. A change in control means in general the acquisition by any person of
30% or more of TECO Common Stock, the change in a majority of the directors or
the approval by the shareholders of a merger or consolidation of TECO in which
TECO's shareholders do not have majority voting power in the surviving entity or
of the liquidation or sale of the assets of TECO. Each of these officers is
required, subject to the terms of the severance agreements, to remain in the
employ of TECO for one year following a potential change in control (as defined)
unless a change in control earlier occurs. The severance agreements provide that
in the event employment is terminated by TECO without cause (as defined) or by
one of these officers for good reason (as defined) following a change in
control, TECO will make a lump sum severance payment to the officer of three
times annual salary and bonus. Upon
37
<PAGE> 43
such termination, the severance agreements also provide for: (i) a cash payment
equal to the additional retirement benefit which would have been earned under
TECO's retirement plans if employment had continued for three years following
the date of termination and (ii) participation in the life, disability, accident
and health insurance plans of TECO for such period except to the extent such
benefits are provided by a subsequent employer. In addition, these officers will
receive a payment to compensate for the additional taxes, if any, payable on the
benefits received under the severance agreements and any other benefits
contingent on a change in control as a result of the application of the excise
tax associated with Section 280G of the Internal Revenue Code.
TECO has an employment agreement with Mr. Guzzle providing that if his
employment is terminated by TECO without cause or by Mr. Guzzle for good reason,
he will receive benefits similar to those provided under the severance
agreements described above based upon a level of two times annual salary and
bonus and a two-year benefit continuation period. Consistent with his employment
agreement, Mr. Guzzle's 1995 option grant provides for a two-year exercise
extension period in the event of such a termination. TECO also has an agreement
with Mr. Kessel providing for a minimum base salary of $189,000 and salary
continuation payments for one year in the event of termination by TECO without
cause.
MANAGEMENT OF PGS
Following the consummation of the Merger, John A. Brabson, Jr., the current
President of LEI, will become chairman of PGS for a period of six (6) months
(unless extended by the parties) to assist with the transition. He will report
to Timothy L. Guzzle, Chairman and Chief Executive Officer of TECO.
Jack E. Uhl, Chief Financial Officer of PGS, will remain employed for six
(6) months following the Closing Date and will also assist with the transition
process.
Gerald Cox, Dan Pountney, Frank Sivard, Elliott White and Lee Young,
officers of PGS, will remain employed by PGS. This management team will be
responsible for continuing the growth of PGS.
A key member of this team will be William N. Cantrell, formerly
vice-president Energy Supply for Tampa Electric and head of the merger
transition team; he will report to Girard F. Anderson, President and Chief
Operating Officer of TECO.
38
<PAGE> 44
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the principal federal income tax
consequences of the Merger. The discussion is based on current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations, current administrative rulings of the Internal Revenue
Service ("IRS") and judicial decisions, all of which are subject to change.
Moreover, this discussion does not purport to be a complete analysis of all
potential tax effects relevant to a particular LEI shareholder nor does it
address the tax consequences that may be relevant to particular categories of
shareholders subject to special treatment under certain federal income tax laws.
In addition, it does not describe any tax consequences arising under the laws of
any state, local or foreign jurisdiction. Accordingly, each LEI shareholder is
urged to consult his or her own tax advisor regarding the tax consequences of
the Merger in his or her own particular tax situation and regarding state, local
and foreign tax implications of the Merger and any tax reporting requirements of
the Merger.
As a condition to the Merger, Palmer & Dodge LLP, counsel to TECO, and
Macfarlane Ferguson & McMullen, counsel to LEI, each will deliver an opinion to
the effect that the description of the federal income tax consequences of the
Merger contained in this section fairly and accurately sets forth the material
federal income tax consequences of the Merger for LEI shareholders, assuming the
Merger is consummated in accordance with the terms of the Merger Agreement. This
summary reflects the views of such respective counsel as to the material federal
income tax consequences of the Merger. However, both the opinion and this
summary are based upon representations by the managements of LEI and TECO and
current law, and assume that the Merger is carried out as described herein. If
those representations are not accurate, if changes are made to current law or if
the Merger is not carried out as described herein, the federal income tax
consequences of the Merger may vary from those described in the opinion and in
this summary. Neither this summary nor the legal opinion is binding on the IRS,
and no rulings have been or will be requested from the IRS with respect to the
Merger.
TAX TREATMENT OF LEI AND TECO
In the opinion of Palmer & Dodge LLP and Macfarlane Ferguson & McMullen,
the Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code. Accordingly, it is anticipated that LEI and TECO will recognize no
gain or loss by reason of the Merger.
TAX CONSEQUENCES TO LEI'S SHAREHOLDERS
In the opinion of Macfarlane Ferguson & McMullen, no gain or loss will be
recognized by a LEI shareholder with respect to the receipt of TECO Common Stock
in exchange for LEI Common Stock in the Merger. The basis of TECO Common Stock
received by a LEI shareholder will be the same as the basis of the LEI Common
Stock exchanged therefore. The holding period of the TECO Common Stock,
including any fractional shares deemed received, will include the holding period
of the LEI Common Stock surrendered in exchange therefor, provided the LEI
Common Stock was a capital asset in the hands of such shareholder at the
Effective Time. A LEI shareholder will recognize gain or loss in an amount equal
to the difference between the amount of cash received in lieu of a fractional
share of TECO Common Stock and the portion of the shareholder's basis that is
allocable to the fractional share. Generally, any such gain or loss will be
capital gain or loss assuming the LEI Common Stock surrendered is held as a
capital asset at the Effective Time and will be long-term capital gain or loss
if the shareholder has held his or her LEI Common Stock for more than one year
at the Effective Time.
A LEI shareholder who exercises dissenters' rights with respect to his or
her shares will be subject to tax on the receipt of payments pursuant to the
stock redemption rules of Section 302 of the Code (taking into account the stock
attribution rules of Section 318 of the Code). In general, if a shareholder
holds his or her shares in LEI as a capital asset at the Effective Time, such
shareholder will recognize capital gain or loss measured by the difference
between the amount of cash received by such shareholder and the basis for his or
her shares.
39
<PAGE> 45
DESCRIPTION OF TECO
The business of TECO is described in TECO's annual report on Form 10-K for
the year ended December 31, 1995, which is attached hereto as Annex V and
incorporated herein by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
TECO SHARE OWNERSHIP
The following table sets forth information with respect to all persons who
are known to TECO to be the beneficial owner of more than five percent of the
outstanding TECO Common Stock as of October 31, 1996.
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES PERCENT OF CLASS
------------------------------------------------- --------- ----------------
<S> <C> <C>
Franklin Resources, Inc. ("Franklin")............ 6,410,550(1) 5.5%
777 Mariners Island Boulevard
San Mateo, California 94404
</TABLE>
- ---------------
(1) Franklin's ownership information is based on its Schedule 13G filed with the
Securities and Exchange Commission, dated February 12, 1996, which reported
that Franklin has sole voting power over 6,406,150 of these shares and
shared investment power over all of these shares.
The following table sets forth the shares of TECO Common Stock beneficially
owned as of October 31, 1996 by TECO's directors, its executive officers named
in the summary compensation table above and its directors and executive officers
as a group. Except as otherwise noted, such persons have sole investment and
voting power over the shares. The number of shares of TECO's Common Stock
beneficially owned by any director or executive officer or by all directors and
executive officers as a group does not exceed 1% of such shares outstanding as
of October 31, 1996.
<TABLE>
<CAPTION>
NAME SHARES(1)
- -------------------------- ---------
<S> <C>
Girard F. Anderson........ 157,285(2)(3)
DuBose Ausley............. 23,676
Sara L. Baldwin........... 22,918(4)
Hugh L. Culbreath......... 77,825(5)
James L. Ferman, Jr. ..... 28,201(6)
Edward L. Flom............ 24,172(7)
Henry R. Guild, Jr. ...... 123,604(8)
Timothy L. Guzzle......... 199,018(2)(9)
Dennis R. Hendrix......... 12,500
<CAPTION>
NAME SHARES(1)
- -------------------------- ---------
<S> <C>
Robert L. Ryan............ 22,000(10)
William P. Sovey.......... 11,000
J. Thomas Touchton........ 24,000(11)
John A. Urquhart.......... 23,461(12)
James O. Welch, Jr. ...... 28,600(13)
Keith S. Surgenor......... 97,814(2)(14)
Roger H. Kessel........... 145,342(2)
Alan D. Oak............... 79,098(2)(15)
All directors and
executive officers as a
group (18 persons)...... 1,070,492(2)(16)
</TABLE>
- ---------------
(1) The amounts listed include the following shares that are subject to options
granted under TECO's stock option plans: Mr. Ausley, 18,000 shares; Mrs.
Baldwin and Messrs. Culbreath, Ferman, Flom, Guild, Ryan, Touchton and
Welch, 20,000 shares each; Mr. Urquhart, 17,200 shares; Messrs. Hendrix and
Sovey, 10,000 shares each; Mr. Guzzle, 140,000 shares; Mr. Anderson,
112,000 shares; Mr. Surgenor, 77,000 shares; Mr. Kessel, 137,000 shares;
Mr. Oak, 43,000 shares; and all directors and executive officers as a
group, 739,200 shares.
(2) The amounts listed include the following shares that are held by benefit
plans of TECO for an officer's account: Mr. Guzzle, 2,018 shares; Mr.
Anderson, 8,665 shares; Mr. Surgenor, 2,612 shares; Mr. Kessel, 2,242
shares; Mr. Oak, 9,868 shares; and all directors and executive officers as
a group, 25,608 shares.
(3) Includes 800 shares owned by Mr. Anderson's wife, as to which shares he
disclaims any beneficial interest.
(4) Includes 350 shares held by a trust of which Mrs. Baldwin is a trustee.
(5) Includes 8,000 shares owned by Mr. Culbreath's wife, as to which shares he
disclaims any beneficial interest.
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<PAGE> 46
(6) Includes 2,584 shares owned jointly by Mr. Ferman and his wife. Also
includes 897 shares owned by Mr. Ferman's wife, as to which shares he
disclaims any beneficial interest.
(7) Includes 1,596 shares owned by Mr. Flom's wife, as to which shares he
disclaims any beneficial interest. Also includes 1,388 shares owned by a
Revocable Living Trust of which Mr. Flom is the sole trustee.
(8) Includes 101,204 shares held by trusts of which Mr. Guild is a trustee. Of
these shares, 49,825 are held for the benefit of Mr. Culbreath and are also
included in the number of shares beneficially owned by him.
(9) Includes 20,000 shares owned by a Revocable Living Trust of which Mr.
Guzzle is a trustee.
(10) Includes 2,000 shares owned jointly by Mr. Ryan and his wife.
(11) Includes 4,000 shares owned by a Revocable Living Trust of which Mr.
Touchton is the sole trustee.
(12) Includes 1,000 shares owned by Mr. Urquhart's wife, as to which shares he
disclaims any beneficial interest.
(13) Includes 2,000 shares owned by a charitable foundation of which Mr. Welch
is a trustee.
(14) Includes 9,298 shares owned jointly by Mr. Surgenor and his wife.
(15) Includes 20,130 shares owned by a Revocable Living Trust of which Mr. Oak's
wife is the sole trustee.
(16) Includes a total of 13,882 shares owned jointly with spouses. Also includes
a total of 12,293 shares owned by spouses, as to which shares beneficial
interest is disclaimed.
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<PAGE> 47
DESCRIPTION OF TECO COMMON STOCK
COMMON STOCK
The authorized capital stock of TECO consists of 400,000,000 shares of
common stock, $1.00 par value and 10,000,000 shares of preferred stock, $1.00
par value. Each share of TECO Common Stock is entitled to one vote on all maters
requiring a vote of TECO shareholders and, subject to the rights of any
outstanding shares of preferred stock, shall be entitled to receive such
dividends, in cash, securities or property, as may from time to time be declared
by the TECO Board. In the event of any liquidation, dissolution, or winding up
of TECO, either voluntary or involuntary, subject to the rights of the holders
of any outstanding shares of preferred stock, the holders of TECO common stock
shall be entitled to share ratably, according to the number of shares held by
them, in all remaining assets of TECO available for distribution. See
"COMPARISON OF RIGHTS OF HOLDERS OF TECO COMMON STOCK AND LEI COMMON STOCK" for
more information regarding rights of holders of TECO Common Stock.
RIGHTS
On April 27, 1989, the Board of Directors of TECO declared a dividend
distribution of one right (a "Right") for each share of TECO Common Stock
currently outstanding or issued thereafter and prior to when such Rights become
exercisable. Each Right entitles a registered holder to purchase from the TECO
one share of TECO Common Stock.
Until the Rights become exercisable, they are evidenced by certificates of
shares of TECO Common Stock and automatically trade with such TECO Common Stock.
The Rights will separate from TECO Common Stock and a distribution of Rights
certificates will occur upon the earlier of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding shares of Common Stock (the "Stock
Acquisition Date"), (ii) 10 business days following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 30% or more of such outstanding shares of TECO Common Stock or (iii)
immediately after the TECO Board shall declare any person to be an adverse
person (an "Adverse Person").
The Rights are not exercisable until the distribution date and will expire
at the close of business on May 7, 1999, unless earlier redeemed by TECO.
The Rights have certain anti-takeover effects. The Rights could cause
substantial dilution to a person or group that attempts to acquire TECO. The
Rights should not interfere with any merger or other business combination
approved by the TECO Board since the TECO Board may, at its option, at any time
until ten days following the Stock Acquisition Date or until the date the TECO
Board declares a person to be an Adverse Person redeem all but not less than all
the then outstanding Rights.
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<PAGE> 48
DESCRIPTION OF LEI
OVERVIEW
General
LEI was incorporated in Florida in 1986 as part of a restructuring in which
it became the parent corporation of its now largest subsidiary, PGS. LEI is a
public utility holding company exempt from registration under the Public Utility
Holding Company Act of 1935 ("PUHCA"). It is subject to regulation under PUHCA
with respect to the acquisition of voting securities of other public utility
companies. LEI owns no operating assets, but owns all of the common stock of PGS
and the other subsidiaries listed below.
LEI has six principal, directly owned subsidiaries:
- PGS, a Florida corporation and LEI's largest subsidiary, is a natural
gas utility that serves approximately 200,000 customers wholly within
peninsular Florida with an annual natural gas throughput (the amount
of gas delivered to its customers) in 1996 of 859,799,000 therms. See
"-- Regulation."
- Peoples Gas Company ("PGC"), a Florida corporation formed in 1950 and
formerly a subsidiary of PGS, sells liquefied petroleum gas, or
propane, to more than 35,000 customers, primarily within the areas of
peninsular Florida.
- Peoples Sales & Service ("PS&S"), a Florida corporation formed in
1989, sells, installs and services all brands of gas appliances, and
installs venting and piping for residential and commercial customers,
all within the State of Florida.
- Peoples Cogeneration Company ("Peoples Cogen"), a Florida corporation
formed in 1985, through its wholly owned subsidiary, Pas Power Co.
("Pas"), a Florida corporation formed in 1991, owns a 50% interest in
a Florida limited partnership (Pasco Cogen, Ltd.) which owns and
operates a natural gas-fired cogeneration facility located in Pasco
County, Florida, with a net generating capability of approximately 109
megawatts ("MW").
- Lykes Energy Investments, Inc. ("Lykes Investments"), and its wholly
owned subsidiary, Lykes Energy Ventures, Inc. ("Lykes Ventures"), each
a Florida corporation formed in April 1996, are engaged in making
investments in ventures which provide various forms of energy and
energy services to customers throughout Florida.
- Suwannee Gas Marketing, Inc. ("Suwannee"), a Florida corporation
formed in 1988, markets natural gas as a commodity to large commercial
and industrial customers. Suwannee is a partner with JV Trading (a
subsidiary of Southern Natural Gas Company) in Seminole Gas Marketing,
a partnership which provides for the transportation of large
quantities of natural gas into the Jacksonville market. It is also a
partner with Sonat Ventures, Inc. (also a subsidiary of Southern
Natural Gas Company) in a joint venture formed to assist in developing
the public/private infrastructure necessary to support the natural
gas-fueled vehicle market.
In addition, Gator Gas Marketing, Inc. ("Gator"), a Florida corporation
formed in 1988, a wholly owned subsidiary of Suwannee, provides acquisition
services for natural gas and temporary pipeline transportation capacity to
larger municipal, industrial and electric power generation (including
cogeneration) customers.
LEI's History
Although the reorganization that resulted in the formation of LEI as a
holding company did not occur until 1986, the initial operations of LEI's
largest subsidiary, PGS, date to 1895, when Tampa Gas Company was formed as a
corporation. Tampa Gas Company distributed gas which it manufactured from a coal
gasification process, primarily within the City of Tampa. In 1955 Tampa Gas
Company was merged into Peoples Water and Gas Company, a Florida corporation
formed in 1949. Peoples Water and Gas had earlier acquired two corporations
engaged in the distribution of manufactured gas in the cities of Fort Lauderdale
and
43
<PAGE> 49
Miami Beach in 1928 and 1929, respectively. In 1958, the name of Peoples Water
and Gas was changed to Peoples Gas System, Inc.
In 1959, PGS began its current operations as a distributor of natural gas,
first made available in Florida by the completion of Florida Gas Transmission
Company's ("FGT's") interstate natural gas pipeline. PGS purchased all of its
gas supplies from FGT, and resold such gas to municipal, industrial, commercial
and residential customers within and adjacent to Tampa, North Miami, Miami Beach
and Fort Lauderdale. By 1979, PGS' annual sales of natural gas were
approximately 135,659,000 therms. (A therm is a unit of heat equal to 100,000
British thermal units, or Btu.)
In 1979, PGS acquired the retail distribution assets of Florida Gas
Company, which had local natural gas distribution systems in and adjacent to the
cities of Jacksonville, Daytona Beach, St. Petersburg, Lakeland, Eustis,
Orlando, Avon Park, Frostproof and Miami (as well as smaller municipalities).
Following that acquisition, PGS' sales of natural gas were approximately
405,440,000 therms annually.
Since acquiring the distribution assets of Florida Gas Company, PGS has
continued to expand the scope and size of its market for natural gas through the
acquisitions, in 1990 and 1991 respectively, of the distribution assets of
Southern Gas Company, a Division of Donovan Companies, Inc. (which operated in
and adjacent to Sarasota and Bradenton), and Palm Beach County Utilities
Corporation (which operated in the Palm Beach area), as well as by expanding its
distribution system into areas adjacent to those previously served. As of the
end of the 1996 fiscal year, PGS' system throughput (sales and transportation)
of natural gas reached 859,799,000 therms on an annual basis. Since 1992, PGS
has generated in excess of 85% of LEI's net income.
LEI's natural gas operations also include the activities of its second-tier
subsidiary Gator, which -- since its formation in 1988 -- has provided
acquisition services for natural gas and temporary pipeline capacity to larger
industrial and electric power generation customers. In addition to acquiring and
reselling natural gas to its customers, Gator also provides gas management
services, acting as the agent of its customers for purposes of nominating and
scheduling deliveries of gas to the transporting interstate pipelines and to
PGS, assisting customers in their relations with gas suppliers, monitoring
imbalances between receipts and deliveries of gas for the accounts of the
customers, and consulting with such customers with respect to their operations
which consume gas.
The propane operation, PGC, dates back to the original Tampa Gas Company.
The current propane operation was formed as Peoples Gas Company in 1950. Prior
to 1979 PGC operated in the Tampa and Miami markets. Concurrent with the
acquisition of the natural gas distribution system of Florida Gas Company in
1979, the propane operation was expanded to incorporate Florida Gas Company's
propane operations.
Since that time, PGC has grown by expanding existing markets as well as
through acquisitions of existing independent propane operations. More recent
acquisitions (1991 and 1992) include independent distributors in Sarasota and
Palm Beach. The operations acquired were positioned in growth markets not
previously served by PGC. PGC is among the top 25 independent distributors
nationally and is the largest independent propane distributor in Florida.
PS&S was formed in 1989. Prior to that time, the primary activities of the
company (i.e., sales, installation and service of gas related appliances and
equipment) were reflected as part of PGS. PS&S' growth has been directly linked
to the growth and expansion of the natural gas and propane operations.
BUSINESS STRATEGY
Natural Gas. PGS' primary marketing strategy is to develop specific
marketing plans for each operating location. Target markets are identified
within each service territory and specific goals and performance expectations
are established. In the residential market, the company is currently targeting
upscale golf course communities as the primary focus for the new growth
residential market. In the commercial markets, it has established national
account programs which facilitate PGS' competitive advantage along with a strong
focus on air conditioning and desiccant cooling.
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<PAGE> 50
Concurrent with these marketing strategies, operating strategies are
developed which are directed at improving the company's overall effectiveness
and controlling unit costs. PGS currently operates at a cost per customer
comparable to 1993. Financial strategies employed by the company include
extensive focus on rate of return thresholds for all new business added to the
system. In addition, the company relies extensively on benchmarking its
operating performance in controlling costs and establishing goals for each
operating location. The company has a strategic focus on the importance of
customer satisfaction, and has in place extensive measures to evaluate customer
satisfaction throughout its system.
Propane. The marketing and operating strategies for PGC are similar to the
strategies employed by PGS in the residential and commercial segments. PGC has
executed its operating strategies to control its unit costs and is currently
operating on a cost per gallon basis comparable to that which existed in 1992.
The company is strategically located in all the primary growth markets in
Florida. Individual market plans are developed for each market, addressing the
unique characteristics and opportunities for growth within each region. PGC
recently purchased and installed a new customer billing and information system
which will permit it to leverage technology in further improving PGC's
competitiveness.
Sales and Service. The primary focus of PS&S is to help facilitate new
growth and added sales for PGS and PGC by coordinating the retail sale,
installation and servicing of gas burning appliances to PGS and PGC customers.
With respect to retail sales and installation, the business strategies of PS&S
mirror the strategies of the natural gas and propane operations. Additionally,
recent efforts reflect a strategic focus on developing the new construction and
development sector of PS&S' operations.
ENERGY MARKETING
Natural Gas. PGS is, in the terminology of the natural gas industry, a
local distribution company ("LDC"). It possesses no gas reserves, but relies on
two interstate pipelines to deliver gas to it for sale or other delivery to
customers connected to its distribution system. Currently, PGS operates a
distribution system that serves approximately 200,000 customers in areas of
peninsular Florida located primarily within or adjacent to the cities of
Jacksonville, Daytona Beach, Eustis, Orlando, Lakeland, Tampa, St. Petersburg,
Bradenton, Sarasota, Avon Park, Frostproof, Fort Lauderdale, Hollywood and
Miami, as well as smaller municipalities. The system includes more than 5,500
miles of pipe.
Pipeline Capacity. Gas is delivered by FGT through 38 interconnections
(hereafter "gate stations") serving PGS' 11 operating divisions throughout the
various areas of peninsular Florida previously mentioned. In addition, PGS'
Jacksonville Division receives gas delivered by a South Georgia Natural Gas
Company ("South Georgia") pipeline through a gate station located northwest of
Jacksonville. At each gate station location, facilities are maintained for the
purposes of measuring the deliveries received and for regulating the pressure of
the deliveries into PGS' distribution system from the high-pressure interstate
pipeline.
PGS holds contracts granting it firm transportation capacity on the FGT,
South Georgia, and Southern Natural Gas Company ("Sonat," which delivers into
the South Georgia system) pipelines in the following amounts (stated in therms
per day):
<TABLE>
<CAPTION>
PIPELINE OCTOBER NOVEMBER-MARCH APRIL MAY-SEPTEMBER
- ----------- --------- -------------- --------- -------------
<S> <C> <C> <C> <C>
FGT (FTS-1) 2,453,170 2,751,970 2,755,510 1,803,940
FGT (FTS-2) 260,000 200,000 200,000 260,000
Sonat No. 1 105,000 105,000 105,000 105,000
Sonat No. 2 252,000 252,000 252,000 252,000
S. Ga. No.
1 100,000 100,000 100,000 100,000
</TABLE>
The above firm capacity contracts have terms ending between August 2000
(the FGT FTS-1 contract) and March 2015 (the FGT FTS-2 contract), and each
contract has provisions permitting PGS to unilaterally extend the term.
Firm pipeline capacity receives priorities in terms of the right to
nominate and schedule deliveries during times when the pipeline is operating at
its maximum capacity. That is, firm deliveries take priority in
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<PAGE> 51
scheduling over interruptible deliveries. PGS presently holds sufficient firm
capacity to permit it to meet the gas requirements of its system supply
customers except during localized force majeure events affecting the PGS
distribution system, and on extremely cold days, which have historically been
rare in Florida.
Firm transportation rights on an interstate pipeline represent a right to
use the amount of the capacity reserved, for transportation of gas up to the
reserved amount, on any given day. PGS pays reservation charges on the full
amount of the reserved capacity whether or not it actually uses such capacity on
any given day. When the capacity is actually used, PGS pays a usage charge for
the amount of the capacity actually used. The levels of the reservation and
usage charges are regulated by FERC under the Natural Gas Act.
PGS recovers the charges (both reservation and usage) it pays interstate
pipelines for transportation of gas for system supply (used to serve its sales
customers) through a purchased gas adjustment charge. This charge is designed to
recover the costs incurred by PGS for purchased gas, and for holding and using
interstate pipeline capacity for the transportation of gas it sells to its
customers. Because PGS must necessarily reserve more capacity than it uses on a
day-to-day basis to meet the needs of its customers, in order to meet the peak
demands of its customers, the reservation charges associated with unused
capacity are also recovered by PGS through the purchased gas adjustment clause.
See "DESCRIPTION OF LEI -- Pricing."
A portion of the pipeline capacity summarized in the above chart has been
released temporarily by PGS to customers which, rather than purchasing gas from
PGS' system supply, purchase their supplies of gas directly from other producers
or marketers. The agreements between PGS and its customers covering such
temporary releases of capacity make the customer responsible for payment, to the
pipeline on which the capacity is released, of all charges associated with the
holding and use of the capacity during the term of the release. In some cases,
as a convenience to the customer, the agreement provides that PGS will make
payment of the pipelines charges, with the customer reimbursing PGS for the
payments it makes to the pipelines. In these cases, the customer is required to
establish credit with PGS by meeting requirements similar to those contained in
PGS' FPSC tariff. In either case, the customer to which the capacity has been
temporarily released pays (usually directly to the pipeline) all charges
associated with holding and using such capacity. The reservations charges paid
by these customers to the pipeline are credited to payment of the reservation
charges which would otherwise be payable by PGS under the firm transportation
contracts summarized above.
Until August 1990, PGS was able to purchase gas only from FGT at its
FERC-approved rates for "G", or firm service, and "I", or interruptible service.
Beginning in August 1990, PGS began obtaining a small portion of its total
requirements through transportation on FGT, and, after May 17, 1991, through
transportation on South Georgia. Each year thereafter, PGS converted an
additional portion of its firm service on FGT from sales service to
transportation service. Beginning on November 1, 1993 (when FGT implemented the
open access and unbundling requirements of the FERC's Order 636), PGS completed
that process and converted all remaining FGT sales service to transportation
service.
Since it began purchasing its gas for system supply directly from producers
or marketers, rather than from FGT, PGS has established and maintained working
relationships with a number of suppliers. PGS evaluates sources of supply on the
basis of its "best value" gas acquisition strategy. For a source of supply to be
identified as a "best value," it must offer the best combination of price,
reliability of supply and dependable operations, consistent with PGS' obligation
as a public utility to provide safe, adequate and efficient service to the
general public. Toward this end, PGS has developed, and is continuing to
enhance, a portfolio of supply sources which reflect a balance between cost,
reliability and operational flexibility. The company's supply arrangements
include various pricing mechanisms and purchase periods, and include spot, short
term and long term contracts.
There are a number of reasons PGS does not rely on only a single supplier
or a single type of purchase to meet the supply requirements of the customers it
serves. Due to operational and regulatory considerations, access to the delivery
capacities of individual receipt point interconnects among various interstate
and intrastate pipeline systems is limited. There can be significant differences
between receipt points in terms of the cost of gas, reliability of deliveries,
choice of producer or marketer, the availability of firm or interruptible
supply, and administrative considerations such as scheduling and balancing.
Purchasing supplies at multiple
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<PAGE> 52
receipt points helps to reduce the risk of loss of supply in the event of line
breaks, compressor failures, construction problems or other force majeure
events.
In addition, there can be wide variations in quality among the supply
sources themselves. Different producers and marketers offer varying degrees of
reliability, and differ in terms of cost and types of purchasing arrangements
available. Some provide additional services such as upstream pipeline
transportation arrangements, the ability to aggregate supplies from a variety of
sources and the flexibility to reroute gas to alternate receipt points when
pipeline operating problems occur. Finally, some suppliers provide better
service and responsiveness than others.
PGS' requirements for system supply gas at its gate stations vary
significantly, not only from season to season or month to month, but from day to
day as well. Often, the demand for gas on the PGS system can vary dramatically
within a month from the lowest to the highest requirement of its customers.
Since a significant portion of the total throughput volumes is received by PGS
at a uniform daily rate, PGS must often increase or decrease the purchases of
its own system supply volumes by significant increments in order to maintain a
balance between receipts and deliveries of gas each day. As a consequence, PGS
must buy a significant portion of its total system requirements in the daily
spot market, and meet extreme variations in delivered volumes by relying on
peaking gas, pipeline swing service and pipeline no-notice service at the
prevailing rates for such services.
PGS' gas acquisition personnel work constantly to make purchases at the
best possible prices consistent with the types and amounts of service required
by PGS' various customer groups and the reliability of delivery expected of PGS
as a public utility. They also work closely each day with PGS' customers and
system operating personnel to ensure that the total quantities of gas being
delivered into the distribution system match as closely as possible the
quantities being used by PGS' customers.
Delivery. PGS' transportation customers are required to notify PGS
("nominate") each day of the amount of gas that will be delivered for their
accounts into the PGS system, and of the amount they expect to use. Although
each customer intends to nominate the exact amount it intends to use on each
day, fluctuations in temperatures, production schedules and other factors
invariably result in each customer using more or less than the quantity of gas
nominated for delivery. The cumulative overage or underage in usage is treated
as an imbalance. At the end of each month, each transportation customer is
required to purchase from PGS the amount of any imbalance resulting from the
customer having used more gas than it nominated. Likewise, at the end of each
month, PGS is required to purchase from the customer the amount of any imbalance
resulting from the customer having used less gas than it nominated. PGS' tariff
approved by the FPSC contains incentives for a customer to maintain as close a
balance as possible between gas nominated and gas actually used.
PGS' sales customers (unless they also use transportation service provided
by PGS) are not required to nominate the amount of gas they require for delivery
each day. Absent an order by PGS to cease taking gas (see Periods of Peak
Demand, below), sales-only customers use the amount of gas they require in their
operations each day, and are billed monthly for the gas consumed at the rates
set forth in PGS' FPSC-approved tariff.
Periods of Peak Demand. As is customary in the gas industry, PGS on rare
occasions faces situations when the demands of all of its customers for the
delivery of gas cannot be met. The situation may be confined to a particular
portion of PGS' distribution system, or extend throughout the entire system. The
events which precipitate such a situation range from line breaks and severely
cold weather, to reduced pressures on delivering interstate pipelines resulting
from similar causes, from major construction projects, or from other force
majeure events such as hurricanes or floods. Neither PGS nor any of its
interconnected interstate pipelines has storage facilities which might assist in
providing relief in these situations.
In these instances, it is necessary that PGS interrupt or curtail
deliveries to its interruptible customers. Curtailment is generally by category
according to end-use priorities set forth in PGS' curtailment plan on file with
the FPSC. In general, the largest of PGS' industrial customers are in the
categories which are first curtailed in such situations. These large customers
are also generally transportation customers who rely on
47
<PAGE> 53
PGS to transport and deliver gas they have purchased from other suppliers. PGS'
tariff and transportation agreements with these customers give PGS the right to
divert the customers' gas to other higher priority users during the period of
curtailment or interruption. PGS pays these customers for such gas at the price
they paid their suppliers (if purchased by the customer under a contract with a
term of five years or longer), or at a published index price (if purchased by
the customer pursuant to a contract with a term less than five years), and in
either case pays the customer for charges incurred for interstate pipeline
transportation to the PGS system. In essence, gas being delivered into the PGS
system for the accounts of large-volume transportation customers who are
interrupted during these rare occasions represents a de facto form of storage on
the PGS system.
Recovery of Purchased Gas Costs. PGS recovers the cost of gas purchased
for sale to its sales customers, together with charges associated with holding
and using interstate pipeline capacity required to move such gas to the PGS
system, through a purchased gas adjustment clause approved by the FPSC. See
"DESCRIPTION OF LEI -- Pricing."
Major Markets; Sales Trends. Over the past five years, annual natural gas
throughput on PGS' system increased by over twenty percent, or nearly 150
million therms. Industrial and power generation customers consume approximately
70 percent of the company's annual sendout. Commercial customers use
approximately 26 percent with the balance consumed by residential customers.
In both natural gas and propane, the residential market represents a key
component of LEI's operations. While the residential market represents only a
small percentage of total therm sendout, residential operations generally
comprise twenty percent of total revenues. New residential gas home construction
and existing home conversions to gas have steadily increased since the late
1980's; over the past five years, PGS has added over 35,000 new residential
customers. PGS continues to focus on new customer growth and added load of
existing customers through an aggressive marketing effort and through
participation with major home builders throughout the company's service
territories. New product technology is also beginning to have a significant
impact in the residential market, primarily in gas cooling. PGS markets and
sells the York Triathlon gas-fired climate control device.
Natural and propane gas have historically been used in many traditional
industrial and commercial processing functions throughout Florida, including
production of durable products such as steel, glass, ceramic tile and food
products. Gas climate control technology is expanding throughout Florida, and
commercial/industrial customers including schools, hospitals, office complexes
and churches are utilizing this new technology in numerous gas cooling
applications.
Within the PGS operating territory, large cogeneration facilities utilize
gas technology in the production of electric power and steam. Over the past four
years, the company has transported between 300 million to over 500 million
therms annually to facilities involved in cogeneration.
The alternative fuel vehicle market has steadily developed in conjunction
with increasing demand and federal and state regulatory mandates. PGS and its
affiliated companies have participated in the development of a public/private
refueling infrastructure which currently includes over twenty compressed natural
gas refueling stations throughout the state. A PGS affiliate, Florida Natural
Fuels, offers development and construction assistance for installation of
refueling facilities for alternative fueled vehicles.
Trends for the retail sale and installation of appliances and equipment
reflect the recent advances in technology in the industry, primarily in
residential and commercial gas cooling. Recognizing the competitive aspects of
the traditional retail appliance market, PS&S is a critical element in
furthering the growth of the natural gas and propane operations.
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<PAGE> 54
Fiscal year 1996 summary sales data for PGS and PGC is as follows:
Natural Gas (PGS)
<TABLE>
<CAPTION>
THERMS REVENUE
CLASS CUSTOMERS (000S) $(000S)
-------------------------------------------- --------- ------- --------
<S> <C> <C> <C>
Residential................................. 179,246 48,555 $ 50,923
Commercial.................................. 21,397 236,631 137,017
Interruptible............................... 103 67,468 26,221
Transportation.............................. 56 507,145 37,940
------- ------- --------
Total............................. 200,802 859,799 $252,101
</TABLE>
Propane Gas (PGC)
<TABLE>
<CAPTION>
GALLONS REVENUE
CLASS DELIVERIES (000S) $(000S)
----------------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
Metered
Residential.................................. 44,325 498 $ 1,023
Commercial................................... 1,914 581 515
Bulk
Residential.................................. 71,422 4,113 6,877
Commercial................................... 68,658 13,083 11,361
Other........................................ 7,981 527 485
Wholesale...................................... 10,896 1,860 1,270
Transport...................................... 249 2,081 1,209
Cylinder....................................... 27,496 404 698
Miscellaneous.................................. -- -- 648
------- ------ -------
Total................................ 232,941 23,147 $24,086
</TABLE>
Marketing Offices. Marketing efforts for the company are conducted
throughout Florida, with fully staffed sales and administrative personnel in
each operating division. Large volume, multi-location commercial customers are
handled jointly by division and corporate staff. Contact with the company's
large volume, industrial customers and power generation customers is coordinated
primarily within various corporate functions.
RISK MANAGEMENT ACTIVITIES
PGS procures natural gas supplies using base load, spot and swing supply
contracts distributed among various vendors priced with various options. Pricing
generally takes the form of either (i) index publication prices from Inside FERC
Gas Markets and/or Natural Gas Week, (ii) fixed price at any time during the
contract term, or (iii) NYMEX pricing that could incorporate a mix of caps,
floors, and ranges.
All supply contracts currently are annual with the exception of one long
term contract which extends to the year 2002. Currently, there are no financial
hedge programs which work in tandem with the physical supply contracts, however,
there is currently a price cap in place covering approximately one-half of PGS'
base load requirements for the period from November 1996 through March 1997. The
current supply portfolio consists of 10% spot purchases, 20% swing purchases and
70% base load purchases. PGS typically recovers its costs of purchased gas
through the purchase gas adjustment clause. See "Description of LEI" -- Pricing.
Propane is purchased under short term contracts which enables the Company
to make purchases at prevailing market prices. There are no financial hedge
programs currently in place for propane purchases.
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<PAGE> 55
PROCUREMENT AND DISTRIBUTION
Procurement
PGS, because it possesses no natural gas reserves of its own, relies on
purchases of gas from a number of different suppliers depending on the needs of
its customers. The gas is delivered to the PGS distribution system, for further
delivery by PGS to its customers, through two interstate pipelines on which PGS
has reserved firm transportation capacity.
Propane gas purchases are made from a select number of major national
suppliers. PGC also acquires product off the Dixie Pipeline. Company storage
capacity is in excess of one million gallons. The bulk of PGC's storage capacity
is in South Florida, followed by Central Florida.
Delivery of propane product to customers is made primarily via rail cars
and transports. PGC owns its own rail cars and also owns transports used
throughout the northern and northeastern markets in Florida. The bulk of PGC's
distribution throughout the central and southeastern parts of the State are
handled through transports controlled by a major supplier.
Distribution
PGS' distribution system extends throughout the areas it serves in
peninsular Florida, and consists of more than 5,500 miles of various sizes of
pipe. Larger pipes are called mains and are generally from two to twelve inches
in diameter. Generally smaller diameter pipes, called service lines or services,
extend from the mains to individual customer locations. A gas meter, which
records the volume of gas delivered, is located at the point of interconnection
between PGS' service line and the piping of the customer used to move the gas to
the gas-fired appliances or other equipment on the customer's premises. In
addition to the meter, PGS installs electronic remote telemetry devices at the
point of interconnection for larger volume customers. This equipment
electronically transmits to PGS' gas control center, via a commercial voice
grade telephone line, information with respect to the gas being consumed by the
customer. This information permits PGS operating personnel to monitor flows of
gas to its larger customers in order to assess its impact on its system gas
requirements and the balance between deliveries into and out of its system
required under the tariffs of the pipelines from which it receives gas. Readings
taken from the measurement equipment installed at each customer's location is
used for purposes of customer billing each month.
In the case of larger volume customers, meter readings are adjusted for the
pressure at which the gas is delivered, for temperature, and for other factors,
in order to obtain a more exact measurement of the gas actually delivered.
Because of the smaller volumes involved, no similar adjustments are made to the
meter readings of residential and smaller commercial customers.
Because the distribution system has been installed over a period of many
years, PGS constantly monitors and maintains it and repairs and replaces
sections of pipe as required to maintain the system in a safe operating
condition. Construction, operation and maintenance of the system is subject to
the regulatory jurisdiction of the FPSC, which has in general adopted the
Minimum Federal Safety Standards and reporting requirements for pipeline
facilities and transportation of gas prescribed by the U.S. Department of
Transportation in Parts 191 and 192, Title 49, Code of Federal Regulations.
The majority of propane is delivered into tanks and containers on the
customer's premises via bulk delivery trucks. Propane block systems are also an
integral part of the company's propane distribution operations in the
residential market. Block systems are typically used in areas where natural gas
is not available, and are often converted once a natural gas distribution system
has been placed in the area. PGC believes that it is more cost effective to
utilize a block system for distribution than to install individual tanks.
PGS' capital expenditures are included in its rate base for the purpose of
determining its achieved regulatory rate of return. Capital expenditures are
primarily used for system expansion to secure new customers, maintenance of
existing assets, and purchase and replacement of tools, vehicles and other
equipment.
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<PAGE> 56
Expenditures for the propane operation relate primarily to the purchase and
installation of tanks used to secure new business, as well as the purchase and
replacement of tools, vehicles and other equipment.
A summary of capital expenditures is as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
System expansion.............................................. $16,978 $15,167 $14,122
Replacement and maintenance................................... 6,285 7,117 6,034
Other......................................................... 5,119 4,952 5,851
------- ------- -------
Total PGS expenditures........................................ $28,382 $27,236 $26,007
Total PGC and other expenditures.............................. 2,456 2,723 2,490
------- ------- -------
Total capital expenditures.................................... $30,838 $29,959 $28,497
</TABLE>
JOINT VENTURES OR PARTNERSHIPS
Certain LEI subsidiaries are general and/or limited partners in the various
joint ventures described below.
Pasco Cogen, Ltd. Pasco Cogen, Ltd. ("Pasco") is a Florida limited
partnership formed in March 1991 for the sole purpose of developing,
constructing, owning and operating a 109 MW gas-fired cogeneration facility in
Dade City (Pasco County), Florida. Pasco's general partners are Pas Power Co.
("Pas"), a wholly owned subsidiary of LEI's wholly owned subsidiary, Peoples
Cogen, and NCP Dade Power Incorporated ("NDP") each of which holds a one percent
interest in Pasco. Pas also holds a 49% limited partner interest in Pasco. The
other limited partners in Pasco are Dade Investments, Ltd. ("DIL") and Pasco
Interest Holdings, Inc. ("PIHI").
Pasco's cogeneration facility became commercially operational in July 1993,
and is a qualifying cogeneration facility ("QF") as defined in the Public
Utility Regulatory Policies Act of 1978. Pasco's QF status has been certified by
FERC.
Pasco sells electric capacity and energy to Florida Power Corporation
("FPC"), a Florida investor owned electric utility, pursuant to a power purchase
agreement with a term scheduled to expire (at the time the agreement was
executed) in July 2013. Thermal energy (in the form of steam) produced as a
byproduct of electric generation is sold to Lykes Pasco, Inc., a major processor
of citrus and other fruit juices and juice beverages, whose processing plant is
adjacent to the site on which Pasco's facility is located. Pasco leases the site
for its cogeneration facility from Lykes Pasco.
Construction financing for Pasco's facility was provided by The Prudential
Insurance Company of America ("Prudential"), and converted to a long term loan
from Prudential and The Sumitomo Trust & Banking Co., Ltd., New York Branch
("Sumitomo") following the commencement of the facility's commercial operation
in 1993.
Other subsidiaries of LEI are also involved in the Pasco project. PGS
provides firm gas transportation capacity on FGT to Pasco, and transports gas
purchased by Pasco from the PGS gate station to Pasco's facility. Gator supplies
gas for the peaking requirements of the facility. The base load gas supply for
operation of the facility is supplied by North Canadian Marketing Corporation
which, at the time the project was developed, was an affiliate of NDP and DIL.
Pasco filed suit against FPC in November 1994 as a result of changes made
by FPC in the method used to determine payments due Pasco for energy delivered
to FPC pursuant to the power purchase agreement. This litigation, although still
pending, is currently dormant, and the parties have entered into a settlement
agreement, the effectiveness of which is contingent on its approval by the FPSC
and by Pasco Cogen's lenders. The lenders approved the agreement on November 15,
1996. Pasco's management has no reason to believe that, following FPC's filing
of a petition with the FPSC, the FPSC will not approve the settlement agreement.
Upon approval of the FPSC, the litigation between Pasco and FPC will be
dismissed with prejudice.
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<PAGE> 57
Seminole Gas Marketing. Seminole Gas Marketing ("Seminole") is a
partnership formed in 1988 by LEI's subsidiary, Suwannee Gas Marketing, Inc.
("Suwannee"), and JV Trading Inc., a subsidiary of Southern Natural Gas Company.
Seminole was originally formed to provide for the transportation and sale of
large quantities of natural gas into the Jacksonville market. It is currently
inactive.
Florida Natural Fuels. Florida Natural Fuels is a joint venture
partnership between Suwannee and Sonat Ventures, Inc. (also a subsidiary of
Southern Natural Gas Company). It was formed to assist in developing the
public/private infrastructure necessary to support the natural gas-fueled
vehicle market.
Lykes-Duke/Louis Dreyfus, Ltd. Lykes-Duke/Louis Dreyfus, Ltd. is a Florida
limited partnership formed in April 1996 to engage in, among other things, the
power marketing business. Lykes Energy Ventures, Inc. and D/LD Florida
Management Corp. are general partners, and Lykes Energy Investments, Inc. and
Duke/Louis Dreyfus L.L.C. are limited partners in the venture. While the
partnership's market-based electric power sales rates have been accepted for
filing by the FERC, it is in a start-up phase, and none of the partners have
made any equity contributions.
Alcorn Partnership. LEI is a partner with Alcorn Exploration, Inc. in a
joint venture formed for the purpose of evaluating and participating in
exploration activities which currently include potential sites in the Wilcox
Trend area of South Texas. However, the partnership is not currently engaged in
any activity.
COMPETITION
Natural Gas. PGS is not currently in direct competition with any other
local distribution company with respect to its sales of gas to residential and
commercial customers. It does, however, face significant competition from
companies providing other types of energy, such as propane, fuel oil and
electricity.
Beginning in the 1980s, changes in the Federal regulatory environment
brought about by orders of the FERC heralded the beginning of increased
competition in the natural gas industry. Although PGS is not directly regulated
by the FERC, actions taken by FERC with respect to the interstate pipelines
through which PGS receives deliveries of gas have affected, and will continue to
affect PGS's operations. In 1992, FERC issued its Order 636 (and related
clarifying orders), which provided for the restructuring of the services
provided by all interstate pipelines. Such services were to be "unbundled" into
their component parts (supply, storage and transportation) and made separately
available on a nondiscriminatory basis to the pipelines' customers. FGT, through
which PGS receives a significant majority of its deliveries of gas, implemented
the requirements of Order 636 in November 1993.
The restructuring mandated by FERC made gas transportation more accessible
to users of large quantities of gas, and also reduced procedural obstacles which
had prevented such users from bypassing local distribution companies such as PGS
in terms of purchasing gas supplies directly from other suppliers and obtaining
interstate pipeline transportation capacity directly from the pipelines or
others. Because PGS' rates for sales and transportation are the same, it has
remained indifferent to whether existing customers receive sales service from
the company, or simply have the company transport supplies of gas purchased by
the customers from other suppliers.
Prior to the restructuring mandated by Order 636, however, PGS' customers
were dependent on the company for the pipeline capacity required to move gas
from the production area to the PGS system in Florida. Currently, although most
of PGS' historical customers continue to use (through PGS' release of capacity
to such customers) the capacity held by PGS on FGT and South Georgia, a number
of customers obtain capacity from others through competitive bidding procedures
mandated by Order 636. PGS has recently been required to make capacity available
to certain of its customers at a discount from the rate it pays FGT for the
capacity, and will likely continue to be faced with similar situations in the
future.
PGS had, in the 1980s, faced similar competition from alternate fuels (such
as No. 6 fuel oil) used by some of its large volume industrial customers, and
had developed rate schedules permitting it to discount its cost-based tariff
rates in order to remain competitive with alternate forms of energy, as well as
meet competition which could result in a complete bypass of the company's
distribution system. A competitive rate adjustment clause approved by the FPSC
permits PGS to recover the discounts from other classes of
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<PAGE> 58
customers whose business is not as susceptible to competition in the form of
alternate energy sources and access to pipeline capacity.
In addition, PGS has developed other new rate schedules designed to make
natural gas more competitive with alternate forms of energy and to reduce its
cost of unused interstate pipeline capacity during certain seasons. It has
obtained FPSC approval for a load enhancement schedule designed to increase
throughput, during historically low gas consumption months, for uses such as gas
air conditioning and desiccant cooling. It has also obtained approval for
offsystem sales rate schedules.
Finally, PGS has made a conscious effort, in dealing with its customers and
potential customers, to avoid being thought of as a traditional "public
utility," and to make every reasonable effort to address the legitimate
competitive concerns of its customers. In the current and future energy markets,
customer service has and will become ever more important to maintaining and
growing the company's business.
Propane. In the Florida propane market there are over thirty distributors
competing within the residential and commercial markets. Competition ranges from
a number of large, national companies to numerous local, independent operators.
Competition throughout PGC's service territories is generally stable. The
primary focus among distributors is to gain market share through new customer
growth (i.e., providing service for home construction).
PGC believes it holds distinct competitive advantages in both the
residential and commercial markets. The company's primary areas of focus are
customer service and product reliability. PGC believes the relative size and
financial strength of the company in comparison with competing propane
operations creates certain advantages when identifying and serving its customer
base. Product reliability is facilitated in part through utilization of a
sophisticated delivery system, providing accurate and timely customer usage
forecasts.
Sales and Service. PS&S sells natural gas and propane appliances in
Florida. Competition for sales volumes exists with all major merchandisers of
appliances. The Florida market for appliances and equipment is very competitive,
most notably in the areas of product selection and pricing.
Consumers' choice of appliance power source has a significant effect on the
sale of appliances offered by PS&S. PS&S primarily supports the use of natural
gas and propane in the new home construction market in regions served by PGS and
PGC. As such, competitive factors within the natural and propane gas markets
have a direct impact on PS&S.
PS&S believes that its affiliation with PGS and PGC affords PS&S a distinct
advantage over its competitors in the sale of natural gas and propane
appliances. In addition to the retail sales operation, PS&S provides
installation and repair services for its customers. The company also offers an
array of supplemental products and services including extended service
protection for residential customers and maintenance contracts on commercial
equipment.
REGULATION
The operations of PGS are regulated by the FPSC, which has jurisdiction
over rates, service, issuance of certain securities, safety, accounting and
depreciation practices and other matters.
PGS is also subject to Federal, state and local environmental laws and
regulations covering air quality, water quality, land use, noise and aesthetics,
solid waste and other environmental matters. See "-- Environmental Matters."
PRICING
In general, the FPSC's pricing objective is to set rates at a level that
allows a utility such as PGS to collect total revenues ("revenue requirements")
equal to its cost of providing service, including a reasonable return on
invested capital.
The basic costs, other than the costs of purchased gas and interstate
pipeline capacity, of providing natural gas service are recovered through base
rates, which are designed to recover the costs of owning,
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<PAGE> 59
operating and maintaining the utility system. These costs include operation and
maintenance expenses, depreciation and taxes, as well as a return on PGS'
investment in assets used and useful in providing natural gas service ("rate
base"). The rate of return on rate base, which is intended to approximate PGS'
weighted cost of capital, includes its cost for debt, deferred income taxes at a
zero cost rate, and an allowed return on common equity. Base prices are
determined in FPSC proceedings that occur at irregular intervals at the
initiative of PGS, the FPSC or other parties.
The costs of purchased gas and interstate pipeline capacity used to move
gas into PGS' distribution system for delivery to its customers are recovered
through levelized charges established pursuant to PGS' purchased gas adjustment
clause. These charges, which are reset annually in an FPSC hearing, are based on
estimated costs of purchased gas and pipeline capacity, and estimated customer
usage for a specific recovery period, with a true-up adjustment to reflect the
variance of actual costs and usage from the projected charges for prior periods.
In addition to its base rates and purchased gas adjustment clause charges
for sales customers, PGS customers (except interruptible customers) also pay a
per-therm charge for all gas consumed to recover the costs incurred by the
company in developing and implementing energy conservation programs, which are
mandated by Florida law and approved and supervised by the FPSC. These programs
result in no earnings for the company, but the company is permitted to recover,
on a dollar-for-dollar basis (with interest paid on over-recoveries and
collected on under-recoveries) expenditures made in connection with the
programs. PGS must demonstrate that the programs are cost effective for its
ratepayers in order to gain their approval by the FPSC. PGS has historically
been permitted to recover costs of environmental remediation and cleanup
associated with old manufactured gas appliance sites.
"Unbundling". In June 1996, following informal workshops held in late
1995, the FPSC initiated a proceeding for the purpose of investigating the
unbundling of natural gas services provided by PGS and other local distribution
companies ("LDCs") subject to the FPSC's regulatory jurisdiction. Although the
proceeding was initially patterned after the FERC's proceedings which culminated
in the issuance of Order 636, the staff of the FPSC have indicated that the
scope of the proceeding will be broader than those preceding Order 636.
The unbundling proceeding was commenced to analyze the merits of permitting
customers to choose from the array of services available from Florida LDCs, with
a view to selecting only those which they perceive as valuable, and paying only
for those services they choose. Issues to be addressed in the proceeding include
some (e.g., the obligation of a public utility to provide service) which are
currently an integral part of the statutory framework of utility regulation in
Florida, as well as the separation of services (sales and transportation)
provided by LDCs.
Workshops, attended by all interested parties (PGS and other LDCs,
interstate pipelines, gas producers and marketers, and LDC customers) were
conducted by the FPSC staff in August and October 1996. A third workshop is
scheduled for December 1996. Parties have been permitted to submit presentations
at each workshop, and written comments thereafter. The FPSC staff will a make
recommendation with respect to any actions to be taken by the FPSC regarding the
issues considered in the workshops which will be considered by the FPSC at a
meeting tentatively scheduled for April 1, 1997.
As is the case in any regulatory proceeding involving potential changes in
rules and policies, the outcome of the unbundling proceeding cannot be
predicted. However, it is possible that, through changes in existing rules,
policies and laws, the manner in which LDCs such as PGS are permitted or
required to conduct their businesses will be affected. PGS believes that through
monitoring and participating in the regulatory proceeding, PGS will be prepared
to react to the opportunities and challenges presented by unbundling.
Other Regulation. In addition to the economic regulation discussed above,
PGS is subject to the FPSC's safety jurisdiction, pursuant to which the FPSC
regulates the construction, operation and maintenance of PGS' distribution
system. In general, the FPSC has implemented this authority by adopting the
Minimum Federal Safety Standards and reporting requirements for pipeline
facilities and transportation of gas
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<PAGE> 60
prescribed by the U.S. Department of Transportation in Parts 191 and 192, Title
49, Code of Federal Regulations.
PGS is also subject to Federal, state and local environmental laws and
regulations pertaining to air and water quality, land use, noise and aesthetics,
solid waste and other environmental matters. See "-- Environmental Matters."
ENVIRONMENTAL MATTERS
LEI's operations are subject to extensive federal, state and local
statutes, rules and regulations relating to the discharge of materials into the
environment and to the protection of the environment that require monitoring,
permitting and ongoing expenditures. Those expenditures have not been
prohibitive in the past, but are anticipated to increase in the future with the
trend toward stricter standards, greater regulation and more extensive
permitting requirements.
The following is a general discussion of environmental regulation as it
relates to LEI; it is not intended to constitute a complete discussion of the
various federal, state, and local statutes, regulations, rules or orders to
which LEI's operations may be subject. Furthermore, LEI, without regard to
fault, could incur liability under CERCLA or its state counterparts in
connection with the disposal of, or other releases of, hazardous substances at
any facility or site connected with LEI.
LEI is subject to the environmental risks normally incident to the
operation and construction of storage facilities, pipelines, plants and other
facilities for gathering, processing, treating, storing and transporting natural
gas and other products including, but not limited to, uncontrollable flows of
natural gas, fluids and other substances into the environment, fires, pollution
and other environmental and safety risks. These activities are subject to
environmental and safety regulation by federal, state and local authorities,
including, without limitation, the EPA and the Florida Department of
Environmental Protection.
In acquiring assets from third parties, LEI has often been required to
indemnify the seller against losses arising from pre-closing environmental
liabilities, although in other instances it has been indemnified against such
losses by the seller. To minimize its exposure for such liabilities,
environmental audits of the assets it wishes to acquire are made, either by LEI
personnel, outside environmental consultants, or a combination of the two. LEI
has not heretofore incurred any material environmental liabilities arising from
its acquisition activities. The incurrence of a material environmental
liability, and/or the failure of an indemnitor to meet its indemnification
obligations with respect thereto, could have a material adverse effect on LEI's
operations and financial condition.
To LEI's knowledge, it is in substantial compliance with, and is expected
to continue to comply in all material respects with, applicable environmental
laws, regulations, orders and rules. Further, to the best of LEI's knowledge,
there are no existing, pending or threatened actions, suits, investigations,
inquiries, proceedings or clean-up obligations by or to any governmental
authority or third party relating to any violation of any environmental laws
with respect to LEI's assets that would have a material adverse effect on LEI's
operations and financial condition. Environmental laws as used above include,
without limitation, CERCLA, the Clean Air Act, the Clean Water Act, the RCRA,
the Safe Drinking Water Act, the Toxic Substances Control Act, comparable state
and local laws, and other material environmental protection laws.
OPERATIONAL RISKS AND INSURANCE
LEI's operations are subject to the usual hazards in the transmission and
distribution of natural and propane gas. These hazards can cause personal injury
and loss of life, severe damage to and destruction of property and equipment and
environmental damage. In certain instances, these potential hazards may result
in curtailment or suspension of service within the affected service area.
LEI maintains general liability, property and business interruption
insurance in amounts it considers adequate for such risks. Such insurance is
subject to deductibles the company considers reasonable and not
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<PAGE> 61
excessive. Consistent with insurance coverages generally available within the
natural and propane gas industries, LEI's insurance policies do not provide
coverage for losses or liabilities relating to pollution.
EMPLOYEES
LEI had just over 1,100 employees as of September 30, 1996. A total of 196
employees in six of the company's eleven operating divisions are represented by
various union organizations. The company enjoys generally favorable relations
with the various unions representing PGS and PGC employees. At this time, there
are no known new organizational efforts underway.
LITIGATION
LEI is involved in certain legal proceedings that have arisen in the
ordinary course of business including certain matters that are before state
regulatory agencies. Management believes that the outcome of such proceedings,
even if adversely determined, will not have a material effect on LEI's business
or financial condition.
OFFICES
LEI's principal executive and corporate office is located in Tampa,
Florida. Operating divisions are located in eleven markets throughout the State.
While many of the facilities are owned, a number of operations, storage and
administrative facilities are leased. Following is a summary of owned versus
leased property, by division:
<TABLE>
<S> <C>
Corporate Office Lease
South Florida Own
Tampa Own
St. Petersburg Own
Orlando Own; lease certain warehouse space
Eustis Own
Jacksonville Own
Lakeland Own
Daytona Lease
Avon Park Own; lease certain administrative space
Sarasota Own; lease certain warehouse space
Palm Beach Lease
</TABLE>
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<PAGE> 62
MARKET FOR CAPITAL STOCK; DIVIDENDS
LEI is a privately held company and there is no public market for its
capital stock. The following chart provides information regarding the frequency
and amount of cash dividends paid on LEI Common Stock:
<TABLE>
<CAPTION>
PAYMENT DATE DIVIDEND PER SHARE
---------------------------------------------------- ------------------
<S> <C>
November 1, 1993.................................... $0.83
February 1, 1994.................................... 0.90
May 1, 1994......................................... 0.90
August 1, 1994...................................... 0.90
------
Fiscal Year 1994 Total.............................. $3.53
November 1, 1994.................................... $1.00
February 1, 1995.................................... 1.00
May 1, 1995......................................... 1.00
August 1, 1995...................................... 1.00
------
Fiscal Year 1995 Total.............................. $4.00
November 1, 1995.................................... $1.00
February 1, 1996.................................... 1.00
May 1, 1996......................................... 1.125
August 1, 1996...................................... 1.125
------
Fiscal Year 1996 Total.............................. $4.250
November 1, 1996.................................... $1.125
</TABLE>
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LEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
LEI provides an array of energy related products and services principally
related to the natural gas industry, the propane gas industry, and the sale and
servicing of appliances.
Natural Gas. PGS is the principal subsidiary of LEI and is engaged in the
purchase, distribution and marketing of natural gas to residential, commercial,
industrial and electric power generation customers wholly within the State of
Florida. Since 1992, PGS has generated in excess of 85% of LEI's net income. PGS
is a public utility regulated by the Florida Public Service Commission ("FPSC").
PGS sells and transports natural gas at tariff rates which are approved by the
FPSC.
PGS purchases natural gas for resale to customers under a supply portfolio
which consists mostly of short term contracts of one year or less. The cost of
gas purchased and resold is recovered from customers through a purchased gas
adjustment clause in the PGS tariff which permits full recovery of these costs.
In some instances, customers may elect to purchase natural gas directly from
marketers or producers. In those cases, PGS delivers the gas to the customers
and collects a transportation charge on the deliveries. These transportation
charges are also approved by the FPSC. The tariff rate charged to customers is
currently the same whether or not the customer purchases gas from PGS or
purchases directly from a marketer or producer thus making PGS neutral to the
gas commodity transaction.
Propane. In areas where natural gas is not available, LEI markets propane
gas through its subsidiary, PGC. Earnings from this segment are based on the
difference between the cost associated with the purchase of propane (together
with the cost to deliver the product to the customer) and the revenues generated
upon the sale of the commodity. These earnings generally represent approximately
10% of LEI's total net income.
Sales and Service. Appliance service and merchandising is conducted
through a subsidiary, PS&S. Earnings from this segment are based on the
difference between the cost associated with the purchase of appliances (together
with the cost to deliver and install the product at the customer's location) and
the revenues generated upon the sale of the products. Additional earnings are
realized from the servicing of appliances and from contract work (i.e., venting
and piping). The sales and service operation serves principally to facilitate
growth in the natural gas and propane market segments.
INCOME TAXES
LEI is a corporation and files consolidated tax returns for all subsidiary
companies.
SIGNIFICANT MARKET FACTORS
LEI's businesses are generally affected by a number of market factors,
including competition, seasonality and the general economic climate. PGS and PGC
are influenced most significantly by local trends in the particular market being
served.
Historically, competition in the sale and distribution of natural gas was
limited because of the pervasive nature of federal and state regulation. As a
result, PGS's results of operations were largely determined by local factors,
including the effects of regulation. However, in recent years, regulatory and
economic developments have significantly reduced the influence of such factors.
At the federal level, regulations governing natural gas transmission have been
redesigned in order to promote intense competition between natural gas
transporters and marketers. From an economic perspective, in recent years the
energy industry, including the natural gas industry, has been characterized by a
surplus of product deliverability which has increased the level of competition.
Currently, PGS and PGC generally face competition in all aspects of their
operations, both from other companies engaged in the natural gas business and
from companies providing other energy products and services. This has an effect
both on the quantity of product and services sold by PGS and PGC and the price
58
<PAGE> 64
each receives. At all levels of the industry in which PGS and PGC were engaged,
competition generally occurs on the basis of price, the ability to meet
individual customer requirements, access to supply and reliability. In the
current environment, the ability of PGS and PGC to respond to these types of
competition is tied directly to their respective abilities to maintain
operational flexibility, low operating costs and continued access to reliable
sources of competitively priced gas.
Competition faced by PGS is most prevalent in the large commercial and
small industrial market. In recent years, these classes of customers have
increasingly become the target of other companies engaged in the natural gas
business seeking to sell gas directly or transport third-party gas to such
customers through new facilities, thereby bypassing facilities installed by PGS
to serve such customers. PGS has met such competition by adopting new programs
which, in some instances, have provided its competitors with access to its sales
customers, but through the use of PGS's facilities. PGS also faces competition
with respect to such customers from alternate fuel sources, including fuel oil,
electricity, and in certain instances, liquid petroleum gas.
PGS currently is not in direct competition with any other distributors of
natural gas ("LDC's") with respect to the small commercial and residential
segments with its service areas. However, PGS faces significant competition for
such customers from other energy suppliers. In addition, while PGS currently
holds franchises in most of the communities which it serves, such franchises
generally are not by their terms exclusive, and competition has been experienced
in certain instances as PGS has sought to extend service from existing service
areas to geographically adjacent areas.
In addition to competition, PGS' and PGC's businesses also are affected at
all levels by seasonality and general economic conditions. Because one of the
significant markets for natural gas and propane is space heating, demand for
natural gas and propane is generally seasonal in nature. Prices of natural gas
and propane have historically been and are currently seasonal as well, with
prices significantly lower in the summer than in winter.
General economic conditions also significantly influence the demand for
gas. The national demand for gas has increased in recent years and currently is
expected to continue to increase in future years. This, in turn, at certain
times and in certain market segments has influenced the price for natural gas
and gas transportation services. However, while increased demand for gas is
somewhat tied to the overall state of economic activity; there can be no
assurance that current levels of demand will continue or that, if they continue,
they will necessarily have a significant effect on the price of or demand for
PGS' products or services. Notably in the traditional LDC markets, the economic
conditions prevailing in PGS' historic service areas continue to have a
significant effect on operating results. However, notwithstanding the potential
negative impact of economic conditions, in recent years the level of economic
activity throughout the areas served by PGS has remained relatively stable.
SEASONALITY
LEI's revenues and gross profit are subject to fluctuations during the year
primarily due to the impact of seasonal factors on sales prices and sales
volumes of both natural gas and propane. In these market segments, sales volumes
are typically higher in the winter months than in the summer months, reflecting
increased demand due to greater heating requirements. This seasonal increase in
demand also typically results in higher natural gas and propane prices during
the winter months as a result of increased sales of higher margin product.
The 1995-96 winter season was one of the coldest in history with
temperatures more than 40% colder than the National Oceanic and Atmospheric
Administration ("NOAA") 30-Year average (based on heating degree days). This
resulted in record sendouts of natural gas in the residential and commercial
markets.
EFFECTS OF INFLATION
The base rates ("margin(s)") charged to PGS' firm gas customers may not be
increased without a general rate case. Accordingly, in the absence of authorized
rate increases and except for changes in the cost
59
<PAGE> 65
of gas sold, which are passed along to customers on a timely basis through a
purchased gas adjustment clause, PGS must look to performance improvement and
higher gas sales volumes to offset inflationary increases in its cost of
operations. Current rates only permit PGS to recover its historical cost of
utility plant and give no recognition to the replacement cost of these
facilities. PGS' last general rate case was filed on January 31, 1992, and the
rate adjustments approved by the FPSC as a result of that proceeding became
effective on September 11, 1992. Management continually reviews operations and
economic conditions to assess the need for filing for general rate relief.
Historically, although LEI's operations are affected by general economic trends,
LEI does not believe that inflation has had a material effect on its results of
operations in the last five years.
RESULTS OF OPERATIONS
The following table shows the results of operations and certain operating
data for LEI's primary business segments for the years ended September 30, 1994,
1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------
1994 1995 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Natural Gas Operations
Sales volumes (000 therms)....................... 819,634 980,992 859,799
Operating revenues............................... $230,891 $219,209 $261,226
Cost of product.................................. 121,296 108,309 133,629
-------- -------- --------
Gross profit(1).................................. $109,595 $110,900 $127,597
Propane Operations
Sales volumes (000 gallons)...................... 21,270 21,685 23,147
Operating revenues............................... $ 21,113 $ 21,386 $ 24,086
Cost of Product.................................. 9,042 9,571 11,061
-------- -------- --------
Gross Profit..................................... $ 12,071 $ 11,815 $ 13,025
Sales and Service Operations
Operating Revenues............................... $ 14,889 $ 13,225 $ 13,924
Cost of Product.................................. 4,390 3,572 3,425
-------- -------- --------
Gross Profit..................................... $ 10,499 $ 9,653 $ 10,499
Consolidated
Operating revenues............................... $267,071 $254,001 $299,585
Cost of Product.................................. 134,728 121,452 148,115
-------- -------- --------
Gross profit..................................... $132,343 $132,549 $151,470
Operating and maintenance expense................ 74,109 73,000 74,848
Depreciation and amortization.................... 19,170 17,847 18,871
Taxes other than income.......................... 7,946 7,657 19,157
Interest expense................................. 11,576 12,177 11,966
Other income and expenses, net................... 1,052 1,075 743
-------- -------- --------
Income before income taxes....................... 18,490 20,793 25,885
Income taxes..................................... 6,711 8,039 9,935
-------- -------- --------
Net Income....................................... $ 11,779 $ 12,754 $ 15,950
======== ======== ========
</TABLE>
- ---------------
(1) Includes Peoples Gas System, Inc., a natural gas utility and Gator Gas
Marketing, a natural gas marketing affiliate.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH SEPTEMBER 30, 1995
Consolidated Operations. Net income for the year ended September 30, 1996
was $15.9 million compared with $12.8 million for the year ended September 30,
1995. This increase was primarily due to higher
60
<PAGE> 66
sales volumes in both the natural gas and propane residential and commercial
segments due to a colder than normal winter season.
Revenue for 1996 increased 18% and gross profit increased 14% primarily as
a result of the higher residential and commercial sales volumes. Operating and
maintenance expenses were $1.8 million higher in 1996 compared to 1995 or an
increase of 2.5%. This increase is primarily related to increases in employee
incentive compensation.
Depreciation and amortization expense increased $1.0 million from $17.8
million in 1995. This increase was primarily due to additional depreciation
expense related to various plant expansion and other capital expenditures
incurred since the prior period.
Taxes other than on income increased from $7.7 million in 1995 to $19.2
million in 1996. Effective January 1996, PGS received a directive from the FPSC
regarding the presentation of certain taxes other than on income in the
financial statements. The directive stated that such taxes should be included in
both operating revenue and taxes other than on income. Historically, these taxes
have been shown net on the statement of income. In 1996, taxes totaling $11.1
million are reflected in taxes other than on income and are included in
operating revenue. Similar presentation of these taxes in 1995 would have
increased revenue and taxes other than on income by $8.6 million.
Interest expense decreased $211,000 from 1995 to 1996. This decline can be
attributed to LEI's repayment of a portion of its long-term debt during 1996 as
well as a decline in the average interest rate on outstanding credit lines from
6.5% in 1995 to 6.2% in 1996.
Other deductions decreased from $1,075,000 to $743,000, due primarily to a
reduction in the losses of a joint venture partnership which operates a
cogeneration facility.
Natural Gas Operations. Total sales volumes for the year ended September
30, 1996 were 121.2 million therms less compared to the year ended September 30,
1995. However, sales volumes in the higher margin residential and commercial
customer classes were up significantly while the decrease in sales volumes
occurred mainly in the lower margin power generation and off system sales
categories. The following table summarizes gas sales by customer class.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
-------------------
1995 1996
------- -------
(000 THERMS)
<S> <C> <C>
Residential...................................................... 40,380 48,555
Commercial....................................................... 225,609 238,322
Industrial....................................................... 267,449 262,233
Power Generation................................................. 420,699 309,708
Off System Sales................................................. 26,855 981
------- -------
Total.................................................. 980,992 859,799
======= =======
</TABLE>
The increase in sales to residential and commercial customers is primarily
a result of weather (the winter of 1995-96 was one of the coldest in recorded
history in Florida), as well as growth in the customer base. There were 8,618
heating degree days in 1996 as compared to 4,675 in 1995. The decrease in power
generation sales was the result of a decrease in usage by a municipal power
generator along with the scheduled removal of a cogeneration customer from PGS'
system. Off system sales, which are made only on an as-needed, as-available
basis, decreased by 25.9 million therms. Revenues resulting from total gas sales
increased by $42.0 million or 19.2% for the year ended September 30, 1996 as
compared to the year ended September 30, 1995. Gross profits were up $16.7
million or 15%.
Propane Operations. Propane gas sales in fiscal 1996 increased by 1.5
million gallons or 6.7% as compared to the prior year, due primarily to weather
and new customer growth. Revenues of $24.1 million in 1996 were $2.7 million
higher than 1995. The average per-gallon margin for the year ended September 30,
61
<PAGE> 67
1996 was $.563 compared to $.545 for the year ended September 30, 1995. The
resulting gross profit for 1996 was $13.0 million, a 10.2% increase over 1995.
Sales and Service Operations. Revenues from sales and service activities
were $13.9 million for the year ended September 30, 1996 compared to $13.2
million for 1995. This was primarily due to higher appliance installation
revenue, along with an increase in jobbing sales. PS&S sold 14,480 appliances in
1996 and 16,649 in 1995. Gross profit from sales and service activities amounted
to $10.5 million for 1996 compared to $9.7 million for 1995.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED WITH SEPTEMBER 30, 1994
Consolidated Operations. Net income for the year ended September 30, 1995
was $12.8 million compared with $11.8 million for the year ended September 30,
1994. The increase in net income was primarily the result of a reduction in
depreciation and amortization expense due to certain environmental remediation
costs being written off in 1994.
Revenue for 1995 decreased $13.1 million. This was caused primarily by
natural gas customers electing to procure their gas supplies directly from
producers or marketers, rather than from the company. As a result, the company
received less revenue (since it is not billing the gas commodity to the
customers) but it also incurred less cost for product (since it is not procuring
product on behalf of the customers). At the gross profit level, the company was
neutral to these shifts. Gross profit for 1995 was $132.5 million versus $132.3
million in 1994.
Operating and maintenance expenses were $1.1 million lower in 1995 compared
to 1994, or a decrease of 1.5%. This decrease is primarily the result of lower
installation costs in the sales and service operations due to sale and
installation of fewer appliances sold.
Depreciation and amortization expense decreased $1.3 million in 1995
compared to 1994. The company had previously incurred environmental remediation
costs related to old manufactured gas plant sites. These costs were being
amortized over a five year period pursuant to FPSC orders. In 1994, the company
entered into an agreement with the FPSC to amortize all remaining environmental
costs. The amortization of these costs in 1994 amounted to $2.5 million. This
decrease in amortization expense was partially offset by increases in other
depreciation and amortization expense related to normal plant expansion and
other capital expenditures.
Taxes other than on income were essentially flat during this period at $7.9
million in 1994 and $7.7 million in 1995.
Interest expense increased $601,000 from 1994 to 1995, due primarily to an
increase in the average interest rate on outstanding credit lines from 4.5% in
1994 to 6.5% in 1995.
Other deductions remained essentially constant for the years ended
September 30, 1994 and 1995.
Natural Gas Operations. Total sales volume for the year ended September
30, 1995 was 981.0 million therms compared to 819.6 million therms for the year
ended September 30, 1994. Sales to residential and commercial customers were
essentially flat during this period with the increase in sales volumes coming
primarily from power generation sales and sales to off-system customers. The
following table shows sales by customer class for the two years.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
-------------------
1994 1995
------- -------
(000 THERMS)
<S> <C> <C>
Residential...................................................... 40,338 40,380
Commercial....................................................... 225,696 225,609
Industrial....................................................... 277,738 267,449
Power Generation................................................. 275,232 420,699
Off System Sales................................................. 630 26,855
------- -------
Total.................................................. 819,634 980,992
======= =======
</TABLE>
62
<PAGE> 68
PGS experienced a 2.9% growth in residential and commercial customers from
1994 to 1995. However the growth in customers was offset by the weather being
warmer in 1995 resulting in sales volumes being flat. Growth in power generation
sales was primarily the result of increased usage by a municipal power
generator. Off system sales increased by 26.2 million therms. These sales are on
an as-needed, as-available basis. Revenue resulting from total gas sales
decreased $11.6 million from 1994 to 1995, due primarily to customers shifting
from sales service to transportation only service. The company remains neutral
to these shifts. Gross profit increased $1.3 million from 1994 to 1995.
Propane Operations. Sales of propane gas increased 2.0% in 1995, from 21.2
million gallons in 1994, to 21.7 million gallons in 1995. Sales growth was
primarily the result of new customer signings. Revenues increased from $21.1
million in 1994 to $21.4 million in 1995. The average margin per-gallon for the
year ended September 30, 1995 decreased $.023 from the prior year. This resulted
in a decline in gross profit of 2.1%, from $12.1 million in 1994 to $11.8
million in 1995.
Sales and Service Operations. Revenue from sales and service activities
decreased $1.7 million or 11.2% for the year ended September 30, 1995 compared
to September 30, 1994. The number of appliances sold decreased from 16,836 in
1994 to 16,649 in 1995. Gross profit amounted to $9.7 million for 1995 compared
to $10.5 million for 1994.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash. LEI's liquidity and capital resources have historically
been provided by cash from operating activities and borrowings under its credit
agreements. Net cash provided by operating activities was $34.8 million, $36.6
million and $38.1 million for the years ended September 30, 1994, 1995 and 1996
respectively. The primary difference between cash provided by operating
activities and net income include depreciation and amortization, deferred taxes,
and net changes in working capital components. Liquidity has also been provided
by LEI's existing credit facilities as described below. Management believes that
cash flow provided by operating activities and borrowings under existing credit
agreements is sufficient to meet its working capital, capital expenditure and
other cash needs.
Accounts Receivable. Generally, the level of LEI's accounts receivable is
affected primarily by natural gas sales volumes and prices, and to a lesser
extent by propane and sales and service activities. Given the impact of seasonal
demand factors on natural gas sales volumes, accounts receivable are typically
higher in the winter months than they are the remainder of the year. Accounts
receivable were $18.2 million at September 30, 1994, $18.0 million at September
30, 1995, and $19.1 million at September 30, 1996.
Uses of Cash. LEI's primary uses of cash are for working capital needs,
capital expenditures, debt repayments, and payment of dividends. Capital
expenditures were $30.8 million, $30.0 million and $28.5 million for the years
ended September 30, 1994, 1995 and 1996. The company makes scheduled repayments
on its long term debt in addition to borrowings and repayments under revolving
credit agreements. Net repayments of debt were $100,000 in 1994, $2.7 million in
1995, and $3.5 million in 1996. Dividend payments were $3.8 million, $4.3
million and $4.5 million for 1994, 1995 and 1996 respectively.
Capital Expenditures. LEI's capital expenditures for the years ended
September 30, 1994, 1995 and 1996 were $30.8 million, $30.0 million and $28.5
million respectively. These expenditures were used primarily for system
expansion to secure new customers, maintenance of existing assets, and purchase
and replacement of tools and equipment. Funds for these capital expenditures
were provided by a combination of cash from operating activities and borrowings
under existing credit facilities.
Rates of Return. PGS is the only regulated subsidiary of LEI and is
regulated by the FPSC. See "DESCRIPTION OF LEI -- Regulation." PGS' current
authorized rate of return on equity as established by the FPSC is in a range
from 10.25% to 12.25% with a mid-point of 11.25%. For the years ended September
30, 1994, 1995 and 1996 PGS' achieved returns on equity were 10.38%, 11.19%, and
12.95%, respectively.
PGS' 12.95% rate of return for the year ended September 30, 1996 is 70
basis points over the top of the range of rate of return authorized by the FPSC.
PGS has an understanding with the FPSC staff that any
63
<PAGE> 69
revenues contributing to a return on equity in excess of 12.25% for calendar
year 1996 may be held subject to FPSC jurisdiction and decision on disposition.
Credit Agreements and Debt.
Long-term debt at September 30, 1994, 1995 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Unsecured Senior Notes payable to an insurance
company in annual installments in varying amounts
with semi-annual interest payments:
13.75% due 1995.................................. $1,000
10.00% due through 1998.......................... 3,000 $2,500 $2,000
10.55% due through 2000.......................... 3,000 2,600 2,200
10.35% due through 2007.......................... 8,800 8,400 8,000
10.33% due through 2008.......................... 9,800 9,600 9,400
10.30% due through 2009.......................... 10,000 9,800 9,600
9.93% due through 2010........................... 10,000 10,000 9,800
8.00% due through 2012........................... 35,000 35,000 35,000
------- ------- -------
80,600 77,900 76,000
Unsecured revolving credit agreements and lines of
credit:.......................................... 50,400 50,400 48,800
------- ------- -------
131,000 128,300 124,800
Less amounts classified as current:................ 2,700 1,900 3,600
------- ------- -------
Total Long-Term Debt............................... $128,300 $126,400 $121,200
======= ======= =======
</TABLE>
The 10.00% and 10.55% senior notes are an obligation of PGC and are
guaranteed by LEI. The notes may be assumed by PGS without a prepayment premium.
The remaining senior notes are an obligation of PGS. Any of the senior notes may
be prepaid in whole or in part at any time, subject to a prepayment premium.
The senior note agreements contain various restrictive covenants, the most
significant of which include provisions relating to interest coverage, maximum
levels of debt to total capitalization, maintenance of working capital,
additional debt and limitations on dividends. Under the most restrictive of such
covenants, PGC's current assets may not be less than 85% of current liabilities.
At September 30, 1996, current assets were 89.5% of current liabilities.
Lines of credit with two major commercial banks totaling $15,000,000 are
utilized in conjunction with the revolving credit agreements discussed below. To
the extent there is outstanding capacity under the revolving credit agreements,
these lines of credit borrowings have been classified as long-term debt. Under
the terms of the revolving credit agreements with three major commercial banks,
commitments totaling $55,000,000 are available to LEI on a revolving credit
basis through May 29, 2001. Each year during the term of the agreements, the
commitments may be extended for an additional year with the concurrence of the
banks. A commitment fee of one-quarter of one percent per annum is charged on
any unused amount of the commitments. The amounts paid may be repaid and
reborrowed at any time in whole or in part. The notes under the agreements bear
interest according to various rate options (based on the LIBOR, prime rate, bank
certificates of deposit or bank money market rate) to be selected by LEI for
varying time periods.
64
<PAGE> 70
The following chart provides information with respect to notes payable to
banks under the revolving credit agreements and lines of credit discussed above:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(IN THOUSANDS EXCEPT FOR
PERCENTAGES)
<S> <C> <C> <C>
Amount outstanding at September 30.................... $50,400 $50,400 $48,800
Weighted average interest rate at September 30........ 5.5% 7.1% 6.4%
Maximum amount outstanding during year................ 57,300 58,700 60,800
Daily average amount outstanding during year.......... 45,878 45,628 44,994
Weighted average interest rate during year (computed
on a daily basis)................................... 4.5% 6.5% 6.2%
</TABLE>
The revolving credit agreements contain various restrictive covenants, the
most significant of which include provisions relating to interest coverage,
maximum levels of debt to total capitalization, maintenance of working capital,
additional debt and limitations on dividends. Under the most restrictive of such
covenants, cash dividends paid by LEI are limited to the greater of 50% of net
earnings (using the cost method for subsidiaries) or $5,000,000. For the fiscal
year ended September 30, 1996, 50% of net earnings was $5,221,000 and dividends
paid were $4,542,000.
Maturities of long-term debt for the year ending September 30, are as
follows:
<TABLE>
<S> <C>
1997................................................... $ 3,600,000
1998................................................... 4,000,000
1999................................................... 4,900,000
2000................................................... 4,700,000
2001................................................... 38,100,000
Thereafter............................................. 69,500,000
------------
$124,800,000
============
</TABLE>
LEI has a letter of credit in the amount of $1,900,000 drawn on a major
commercial bank in favor of an insurance company which is the primary carrier of
LEI's liability insurance. Amounts available to LEI under its revolving credit
agreements and lines of credit are not affected by this letter of credit.
Regulatory Environment. PGS is a natural gas utility which is regulated by
the FPSC. PGS last full rate proceeding was filed in January 1991 (Docket No.
911150-GU, Order issued September 3, 1992). In that proceeding, PGS was
authorized a return on equity in a range from 11.00% to 13.00% with a mid-point
of 12.00%. In October 1993, the FPSC initiated discussions with PGS regarding
reducing the previously authorized return on equity due to declining interest
rates. In November 1993, PGS entered into an agreement with the FPSC to reduce
the authorized return on equity to a range of 10.25% to 12.25%, with a mid-point
of 11.25%. In that agreement PGS also agreed to accelerate the amortization of
environmental remediation costs during fiscal year 1994, thereby completely
amortizing all currently incurred environmental costs. See "DESCRIPTION OF
LEI -- Regulation."
Environmental Matters. LEI is subject to certain governmental regulation
and oversight concerning certain environmental matters. See "DESCRIPTION OF
LEI -- Environmental Matters."
65
<PAGE> 71
LEI SHARE OWNERSHIP
The following table sets forth information with respect to all persons who
are known to LEI to be beneficial owner of more than five percent of the
outstanding LEI Common Stock as of October 16, 1996.
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES PERCENT OF CLASS
-------------------------------------- ----------- ----------------
<S> <C> <C>
Howell L. Ferguson.................... 74,460.837(1) 6.97%
602 Ingleside Avenue
Tallahassee, Florida 32303
Tom L. Rankin......................... 81,331.101(2) 7.61%
5324 Interbay Blvd.
Tampa, Florida 33611
Stella Ferguson Thayer................ 83,535.611(3) 7.82%
Fort King Highway
Thonotosassa, Florida 33592
</TABLE>
- ---------------
(1) Includes 50,389.116 shares held by a trust of which Mr. Ferguson is a
trustee and 1,423.000 shares owned by a minor child of Mr. Ferguson as to
which shares Mr. Ferguson disclaims any beneficial interest.
(2) Includes 38,689.841 shares held by trusts of which Mr. Rankin is the
trustee; 118.340 shares owned by Mr. Rankin's wife as to which shares Mr.
Rankin disclaims any beneficial interest; and 1,133.434 shares owned by
Lykes Bros. Inc. of which Mr. Rankin serves as president and chief executive
officer.
(3) Includes 50,389.116 shares held in a trust of which Mrs. Thayer is a
trustee; 2,491.525 shares held in a trust of which Mrs. Thayer is the
trustee; and 3,319.824 shares owned by Mrs. Thayer's husband as to which
Mrs. Thayer disclaims any beneficial interest.
The following table sets forth the shares of LEI Common Stock beneficially
owned as of October 16, 1996 by LEI's directors. Except as otherwise noted, such
persons have sole investment and voting power over the shares. The number of
shares of LEI Common Stock beneficially owned by all directors and executive
officers does not exceed 37.29% of such shares outstanding as of October 16,
1996.
<TABLE>
<CAPTION>
NAME SHARES
----------------------------------------------------- --------------
<S> <C>
Stewart T. Bertron................................... 1,582.800
John A. Brabson, Jr. ................................ 34,786.967(1)
Charles G. Burr, III................................. 31,567.249(2)
Joseph L. Carrere.................................... 51,009.545(3)
Almeria T. Cottingham................................ 16,865.083(4)
G.C. Duncan, Jr. .................................... 14,456.615(5)
Richard O. Jorgensen................................. 10,646.061(6)
Keenan C. Kelsey..................................... 31,130.937
Charles P. Lykes, Jr. ............................... 11,878.613(7)
J.T. Lykes, III...................................... 27,861.246(8)
Douglas W. Maclay, Jr. .............................. 2,965.525(9)
Tom L. Rankin........................................ 81,331.101(10)
Stella F. Thayer..................................... 83,535.611(11)
Wm. B. Wood.......................................... 0.000
All directors and executive officers as a group...... 398,483.919
</TABLE>
- ---------------
(1) Includes 33,653.533 shares held by Brabson, Ltd. of which Mr. Brabson's
wife serves as general partner and 1,133.434 shares owned by Lykes Bros.
Inc. of which Mr. Brabson serves as chairman of the board of directors.
(2) Includes 16,000.000 shares owned by Mr. Burr's wife, as to which shares he
disclaims any beneficial interest.
66
<PAGE> 72
(3) Includes 17,183.000 shares held by Keenan Capital, Ltd. of which Mr.
Carrere serves as general partner and 33,826.545 shares held by a trust of
which Mr. Carrere is a trustee.
(4) Includes 4,072.875 shares held in trusts of which Mrs. Cottingham serves as
trustee.
(5) Includes 622.000 shares owned by Mr. Duncan's minor children, as to which
shares Mr. Duncan disclaims and beneficial interest.
(6) Includes 10,646.061 shares owned by Mr. Jorgensen's wife as to which shares
Mr. Jorgensen disclaims any beneficial interest.
(7) Includes 2,550.000 shares owned by Mr. Lykes' minor children as to which
shares Mr. Lykes disclaims any beneficial interest.
(8) Includes 13,984.246 shares owned by JTL, Ltd. of which Mr. Lykes serves as
general partner and 13,877.000 shares held by a trust of which Mr. Lykes
serves as trustee.
(9) Includes 120.000 shares owned by Mr. Maclay's minor children as to which
shares Mr. Maclay disclaims any beneficial interest.
(10) Includes 38,689.841 shares held by trusts of which Mr. Rankin is the
trustee; 118.340 shares owned by Mr. Rankin's wife as to which shares Mr.
Rankin disclaims any beneficial interest; and 1,133.434 shares owned by
Lykes Bros. Inc. of which Mr. Rankin serves as president and chief
executive officer.
(11) Includes 50,389.116 shares held in a trust of which Mrs. Thayer is a
trustee; 2,491.525 shares held in a trust of which Mrs. Thayer is the
trustee; and 3,319.824 shares owned by Mrs. Thayer's husband as to which
Mrs. Thayer disclaims any beneficial interest.
COMPARISON OF RIGHTS OF HOLDERS OF TECO COMMON STOCK
AND LEI COMMON STOCK
TECO and LEI are both Florida corporations subject to the provisions of the
FBCA Act. Shareholders of LEI, whose rights are governed by the Articles and
Bylaws of LEI, will upon consummation of the Merger, become shareholders of
TECO. The rights of such shareholders as shareholders of TECO will then be
governed by the Articles and Bylaws of TECO.
Except as set forth below, there are no material differences between the
rights of a LEI shareholder under the Articles and Bylaws of LEI, on one hand,
and the rights of a TECO shareholder under the Articles and Bylaws of TECO on
the other hand. This summary does not purport to be a complete discussion of,
and is qualified in its entirety by reference to the FBCA and the Articles and
Bylaws of LEI and TECO.
Size and Classification of the Board of Directors
TECO. The Bylaws of TECO state that the size of the TECO Board is
determined by the TECO Board, provided that in no event shall the number be less
than three or more than fifteen. The TECO Board is divided into three classes,
and directors are elected for three year terms.
LEI. The Bylaws of LEI state that the size of the LEI Board is determined
by vote of the shareholders, provided that in no event shall the number be less
than three or more than twenty-five.
Removal of Directors
TECO. Directors of TECO may be removed at any time, with or without cause,
only by a majority vote of the entire TECO Board or by the affirmative vote of
holders of 80% of the combined voting power of the then outstanding shares of
stock entitled to vote generally in the election of directors, voting together
as one class.
LEI. Directors of LEI may be removed by a majority vote of the
shareholders at any shareholder meeting.
67
<PAGE> 73
Shareholder Nominations
TECO. Nominations for the election of directors may be made by the TECO
Board or a proxy committee appointed by the TECO Board or by any shareholder
entitled to vote in the election of directors generally. However, any
shareholder entitled to vote in the election of directors may nominate one or
more persons only if written notice of such shareholder's intent to make such
nomination(s) has been given to the Secretary of TECO not later than (i) with
respect to an election to be held at an annual meeting of shareholders, 90 days
in advance of the third Tuesday in April; provided, however, that in the event
the annual meeting is scheduled for a different day that is not within 10 days
of the third Tuesday in April, and notice of the date of such annual meeting is
mailed to shareholders or public disclosure of such meeting date is made less
than 100 days prior to such date, notice by the shareholder to be timely must be
so received not later than the close of business on the tenth day following the
day on which such notice was mailed or such public disclosure was made,
whichever first occurs; and (ii) with respect to an election to be held at a
special meeting of shareholders for the election of directors, the close of
business on the tenth day following the day on which notice of such special
meeting was mailed or public disclosure of such meeting was made to
shareholders. The shareholder's notice shall include: (a) the name and address
of the shareholder who intends to make the nomination and of the person or
persons to be nominated; (b) a representation that the shareholder is a holder
of record of stock and entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person(s); (c) a description
of all arrangements or understanding between the shareholder and each nominee;
(d) such other information regarding each nominee proposed by such shareholder
as would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Commission, had the nominee been nominated or intended to be
nominated, by the Board of Directors; and (e) the consent of each nominee to
serve as a director of TECO if so elected.
LEI. The Articles and Bylaws of LEI contain no provisions regarding the
ability of shareholders to nominate individuals for election to the LEI Board.
Notification of Shareholder Proposed Business
TECO. The Bylaws of TECO provide that a shareholder generally may properly
bring business before the annual meeting of shareholders only if written notice
of such shareholder's intent is delivered to the Secretary of TECO not later
than 90 days in advance of the third Tuesday in April. Furthermore, such notice
must set forth as to each item of business the shareholder proposes to bring
before the annual meeting: (a) a brief description of such business and the
reasons for conducting such business; (b) the name and record address of the
shareholder proposing such business; (c) the number of shares of capital stock
of TECO beneficially owned by the shareholder; and (d) a description of all
arrangements or understandings between the shareholder and any other person(s)
pursuant to which the proposal or proposals are to be made by the shareholder
and any material interest of the shareholder in the business being proposed.
LEI. The Articles and Bylaws of LEI contain no provisions regarding
notification of shareholder proposed business.
Meetings of Shareholders
TECO. Under the Articles of TECO, any act required or permitted to be
taken by the shareholders of TECO must be effected at a duly called annual or
special meeting of shareholders. No actions may be effected by any consent in
writing by such shareholders. Special meetings of the shareholders may be called
only by TECO's Chief Executive Officer, the President, any Vice President, the
TECO Board, or if demanded in writing by the holders of at least 50% of the
shares entitled to vote at the meeting. A meeting so demanded by shareholders
shall be called by the Secretary and held not less than 90 days after the demand
is made.
LEI. Special meetings of the shareholders may be called only by the
president, a majority of the board of directors requesting such in writing or a
majority of the shareholders requesting such in writing. Actions which may be
taken at a meeting of shareholders may also be taken by means of consents.
68
<PAGE> 74
Required Vote for Authorization of Certain Actions
TECO. The Articles of TECO were amended to require the vote of the holders
of at least 80% of the voting power of the then outstanding shares of stock of
all classes and series of the corporation entitled to vote generally in the
election of directors for approval of certain business combinations, including
certain mergers, asset sales, security issuances, recapitalization and
liquidations, involving TECO or its subsidiaries and certain acquiring persons
(namely a person, entity or specified group which beneficially owns 10% or more
of the voting power of the then outstanding shares of capital stock of TECO
entitled to vote generally in an election of directors), unless the fair market
value and other procedural requirements of the amendment are met.
LEI. The Articles and Bylaws of LEI do not contain any special provisions
relating to required votes for certain actions.
Amendment of Corporate Charter and Bylaws
TECO. The alteration, amendment, or repeal of Article VIII (Certain
Business Combinations), Article IX (Board of Directors), Article X (Shareholder
Action) and Article XI (Amendment of Articles of Incorporation and Bylaws) of
the Articles of TECO require the affirmative vote of 80% or more of the voting
power of the then outstanding shares of capital stock of TECO entitled to vote
generally in an election of directors, voting together as a single class. The
Bylaws of TECO may be amended by a majority vote of the TECO Board at any
regular or special meeting.
LEI. The Articles of LEI do not provide how they are to be amended. But
the FBCA provides that the Articles may be amended by a majority vote of the
shareholders. The Bylaws of LEI may be amended by a majority vote of the
shareholders or of the LEI Board.
State Antitakeover Statute
TECO. The FBCA contains an antitakeover statute concerning "control-share
acquisitions", which limits the voting rights of shares held by persons who have
acquired certain ranges of voting power. Under the FBCA "control shares" retain
the same voting rights existing before the "control-share acquisition" only to
the extent granted by resolution approved by the majority of all votes entitled
to be cast by each class or series entitled to vote on the proposal, excluding
the control shares. As permitted under the statute, the Bylaws of TECO provide
that the Florida control-share acquisitions statute does not apply to TECO
common stock.
LEI. The Articles and Bylaws of LEI contain no provision to "opt out" of
the FBCA on control share acquisitions.
LEGAL OPINIONS
The validity of the TECO Common Stock to be issued in connection with the
Merger will be passed upon for TECO by Palmer & Dodge LLP, Boston,
Massachusetts, counsel for TECO.
Macfarlane Ferguson & McMullen is acting as counsel for LEI in connection
with certain legal matters relating to the Merger and the transactions
contemplated thereby.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1994 and
for each of the years in the three-year period ended December 31, 1995 included
in TECO's Annual Report on Form 10-K for the year ended December 31, 1995, have
been incorporated by reference in this Prospectus/Proxy Statement in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
69
<PAGE> 75
The consolidated financial statements of LEI as of September 30, 1996 and
1995 and for each of the three years in the period ended September 30, 1996
included in this Prospectus/Proxy Statement, have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
FINANCIAL ADVISORS
CS First Boston acted as financial advisor to LEI in connection with the
Merger. Pursuant to the terms of its engagement, LEI has agreed to pay CS First
Boston a transaction fee, upon consummation of the Merger, equal to $3,240,000.
In addition, LEI has agreed to reimburse CS First Boston for its reasonable
out-of-pocket expenses, including fees and disbursements of counsel, and to
indemnify CS First Boston and certain related persons against certain
liabilities, including certain liabilities under the federal securities laws,
relating to, or arising out of, its engagement.
Morgan Stanley acted as financial advisor to TECO in connection with the
Merger. Pursuant to the terms of its engagement, TECO agreed to pay Morgan
Stanley a transaction fee, upon consummation of the Merger, equal to $2,700,000.
In addition, TECO has agreed to reimburse Morgan Stanley for its reasonable
out-of-pocket expenses, including fees and disbursements of counsel, and to
indemnify Morgan Stanley and certain related persons against certain
liabilities, including certain liabilities under the federal securities laws,
relating to, or arising out of, its engagement.
SOLICITATION COMPENSATION
LEI will bear the cost of solicitation of consents, including the charges
and expenses of brokerage firms and others of forwarding solicitation material
to beneficial owners of stock. In addition to the use of mails, consents may be
solicited by officers and employees of LEI in person or by telephone.
AVAILABLE INFORMATION
TECO is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports, proxy statements and other information with
the Commission relating to its business, financial statements and other matters.
Reports and proxy and information statements filed pursuant to Sections 14(a)
and 14(c) of the Exchange Act and other information filed with the Commission as
well as copies of the Registration Statement, of which this Prospectus/Proxy
Statement is a part, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional Offices
of the Commission: Midwest Regional Office, 500 West Madison Avenue, Suite 1400,
Chicago, Illinois 60661; and Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at its principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 or at the Commission's web site (http://www.sec.gov) and may also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
TECO has filed with the Commission a Registration Statement with respect to
the securities offered hereby. This Prospectus/Proxy Statement also constitutes
the prospectus of TECO filed as part of the Registration Statement and does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. Statements made in this
Prospectus/Proxy Statement as to the contents of any contract, agreement or
other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and any
amendments thereto, including
70
<PAGE> 76
exhibits filed or incorporated by reference as a part thereof, are available for
inspection and copying at the Commission's offices as described above. All
information included herein with respect to LEI and its shareholders has been
furnished by LEI.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by TECO with the Commission (File
No. 1-8180) under the Exchange Act are incorporated by reference herein and, as
indicated, are attached to this Prospectus/Proxy Statement:
(1) TECO's annual report on Form 10-K for the year ended December 31,
1995, filed with the Commission on March 28, 1996 (attached as Annex V).
(2) TECO's quarterly reports on Form 10-Q for the quarters ended March
31, 1996, June 30, 1996 and September 30, 1996 filed with the Commission on
May 14, 1996, August 13, 1996 and November 13, 1996, respectively (attached
as Annex VI, Annex VII and Annex VIII, respectively).
All documents filed by TECO pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Prospectus/Proxy Statement and prior
to the date the requisite consents approving the Merger are received shall be
deemed to be incorporated by reference in this Prospectus/Proxy Statement and to
be a part hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is or is deemed to be incorporated
herein by reference) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus/Proxy Statement.
71
<PAGE> 77
INDEX TO LEI CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheet as of September 30, 1996 and 1995.......................... F-3
Consolidated Statement of Income for each of the three years in the period ended
September 30, 1996.................................................................. F-4
Consolidated Statement of Stockholders' Equity for each of the three years in the
period ended September 30, 1996..................................................... F-5
Consolidated Statement of Cash Flows for each of the three years in the period ended
September 30, 1996.................................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Lykes Energy, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Lykes
Energy, Inc. and its subsidiaries at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Tampa, Florida
October 31, 1996
F-2
<PAGE> 79
LYKES ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 4,817 $ 3,544
Accounts receivable, less allowance for uncollectible accounts of $125,000
(1995 -- $125,000).............................................................. 19,099 18,025
Unbilled revenues................................................................. 6,503 5,748
Inventories....................................................................... 3,534 3,442
Prepayments and other current assets.............................................. 3,619 3,291
--------- ---------
37,572 34,050
--------- ---------
Property, plant and equipment:
Natural gas plant............................................................... 406,258 384,562
Other........................................................................... 35,608 33,862
--------- ---------
441,866 418,424
Less accumulated depreciation..................................................... (166,657) (152,841)
--------- ---------
275,209 265,583
Investment in joint ventures...................................................... 4,340 4,585
Other assets...................................................................... 10,718 7,954
--------- ---------
$ 327,839 $ 312,172
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 3,600 $ 1,900
Current portion of customer deposits.............................................. 1,966 1,910
Accounts payable.................................................................. 12,543 11,535
Income taxes payable.............................................................. 1,017 269
Other taxes payable............................................................... 5,443 5,085
Overrecovered gas costs........................................................... 3,942 2,428
Accrued interest payable.......................................................... 2,011 2,051
Other accrued liabilities......................................................... 7,814 6,691
--------- ---------
38,336 31,869
--------- ---------
Other liabilities:
Deferred income taxes............................................................. 31,677 29,312
Customer deposits, less current portion........................................... 22,108 22,724
Customer advances for construction................................................ 1,330 1,314
Other............................................................................. 6,554 5,309
--------- ---------
61,669 58,659
--------- ---------
Long-term debt, less amount due within one year..................................... 121,200 126,400
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock (2,200,000 shares authorized, 1,068,668 and 1,068,905 shares issued
and outstanding at September 30, 1996 and 1995, respectively, par $.10 per
share).......................................................................... 107 107
Class B non-voting common stock (1,000,000 shares authorized, 0 shares issued and
outstanding at September 30, 1996 and 1995, par $.10 per share).................
Additional paid in capital........................................................ 2,118 2,136
Retained earnings................................................................. 104,409 93,001
--------- ---------
Total stockholders' equity.......................................................... 106,634 95,244
--------- ---------
$ 327,839 $ 312,172
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-3
<PAGE> 80
LYKES ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Operating revenues......................................... $299,585 $254,001 $267,071
-------- -------- --------
Operating costs and expenses:
Cost of product sold..................................... 148,115 121,452 134,728
Operating expenses....................................... 69,595 67,835 68,560
Maintenance expenses..................................... 5,253 5,165 5,549
Depreciation and amortization............................ 18,871 17,847 19,170
Taxes other than on income............................... 19,157 7,657 7,946
-------- -------- --------
260,991 219,956 235,953
-------- -------- --------
Income from operations..................................... 38,594 34,045 31,118
Other deductions:
Interest expense......................................... 11,966 12,177 11,576
Other, net............................................... 743 1,075 1,052
-------- -------- --------
12,709 13,252 12,628
-------- -------- --------
Income before income taxes................................. 25,885 20,793 18,490
Provision for income taxes................................. 9,935 8,039 6,711
-------- -------- --------
Net income................................................. $ 15,950 $ 12,754 $ 11,779
======== ======== ========
Net income per share....................................... $ 14.92 $ 11.93 $ 11.02
======== ======== ========
Weighted average shares outstanding........................ 1,069 1,069 1,069
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-4
<PAGE> 81
LYKES ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK AT PAID-IN RETAINED
PAR VALUE CAPITAL EARNINGS TOTAL
--------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
September 30, 1993 balance....................... $ 107 $2,136 $ 76,517 $ 78,760
Net income..................................... 11,779 11,779
Cash dividend ($3.53 per share)................ (3,773) (3,773)
---- ------ -------- --------
September 30, 1994 balance....................... $ 107 $2,136 $ 84,523 $ 86,766
Net income..................................... 12,754 12,754
Cash dividend ($4.00 per share)................ (4,276) (4,276)
---- ------ -------- --------
September 30, 1995 balance....................... $ 107 $2,136 $ 93,001 $ 95,244
Net income..................................... 15,950 15,950
Cash dividend ($4.25 per share)................ (4,542) (4,542)
Stock repurchase............................... (18) (18)
---- ------ -------- --------
September 30, 1996 balance....................... $ 107 $2,118 $104,409 $106,634
==== ====== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-5
<PAGE> 82
LYKES ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 15,950 $ 12,754 $ 11,779
-------- -------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 18,713 17,690 16,495
Amortization.......................................... 158 157 2,675
Equity in net loss of joint venture................... 554 866 609
Deferred income taxes................................. 2,365 2,520 3,081
Changes in assets and liabilities:
Accounts receivable................................. (1,074) 218 2,435
Unbilled revenues................................... (755) 196 379
Inventories......................................... (92) 608 (177)
Prepayments and other current assets................ (328) (186) (243)
Overrecovered gas costs............................. 1,514 (735) (3,300)
Accounts payable.................................... 1,008 (985) (667)
Income taxes payable................................ 748 363 (2,134)
Other taxes payable................................. 358 (52) 135
Accrued interest payable............................ (40) (168) (279)
Customer deposits................................... (560) 824 1,961
Customer advances for construction.................. 16 179 (138)
Other, net.......................................... (396) 2,386 2,281
-------- -------- --------
Total adjustments................................ 22,189 23,881 23,113
-------- -------- --------
Net cash provided by operating activities........ 38,139 36,635 34,892
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................. 2,400
Principal payments on long-term debt, net................ (3,500) (2,700) (2,500)
Repurchase of common stock............................... (18)
Dividends paid........................................... (4,542) (4,276) (3,773)
-------- -------- --------
Net cash used in financing activities............ (8,060) (6,976) (3,873)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures..................................... (28,497) (29,959) (30,838)
Investment in joint ventures............................. (309) (204) (59)
-------- -------- --------
Net cash used in investing activities............ (28,806) (30,163) (30,897)
-------- -------- --------
Net increase (decrease) in cash............................ 1,273 (504) 122
Cash at beginning of year................................ 3,544 4,048 3,926
-------- -------- --------
Cash at end of year...................................... $ 4,817 $ 3,544 $ 4,048
======== ======== ========
Supplemental disclosures of cash information:
Cash paid during the year for:
Interest.............................................. $ 9,406 $ 10,410 $ 11,723
Income taxes.......................................... $ 6,873 $ 5,060 $ 5,311
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-6
<PAGE> 83
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the financial results of
Lykes Energy, Inc. and subsidiaries (the Company), all of which are wholly
owned. The Company's major subsidiaries are Peoples Gas System, Inc., which is
engaged in the sale and distribution of natural gas; Peoples Gas Company, which
is engaged in the sale of propane gas; and Peoples Sales & Service Company,
which is engaged in the sale and servicing of appliances. Other subsidiaries are
engaged in gas marketing and development of cogeneration projects. The Company's
largest subsidiary, Peoples Gas System, Inc. (PGS), is a public utility which is
regulated by the Florida Public Service Commission (PSC).
The Company has a 50% interest in a joint venture partnership which
developed and operates a 109 megawatt gas-fired cogeneration facility in Dade
City, Florida. The Company also has interests in other joint venture
partnerships relating to gas exploration and marketing. These investments are
accounted for under the equity method.
All significant intercompany accounts and transactions have been
eliminated.
The Company is exempt from regulation under the Public Utility Holding
Company Act of 1935 except Section 9(a)(2) thereof relating to acquisitions of
securities of other public utility companies.
Preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates.
Property, Plant and Equipment
Natural gas plant is recorded at original cost when first devoted to public
service. Other plant, which consists primarily of propane gas plant, is recorded
at cost.
Additions to and replacement of plant include the cost of materials, labor,
and certain overhead expenses. The costs of depreciable assets retired or
otherwise disposed of are removed from the related asset accounts; and such
costs, plus removal costs, less salvage receipts, are charged to accumulated
depreciation. All expenditures for maintenance and repairs are charged to
maintenance expenses as incurred.
Construction Work in Progress for PGS is included in regulatory rate base
and, accordingly, interest during construction is not capitalized. Interest
during construction of other subsidiaries and affiliates, if applicable, is
capitalized.
Depreciation
The Company provides for depreciation by the straight-line method at annual
rates that amortize the cost (less net salvage) of depreciable property over its
estimated service life. During the years ended September 30, 1996, 1995 and
1994, the provision for depreciation approximated a composite rate of 4.3%.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by an average cost method for materials and supplies, and the first-in,
first-out method for propane gas. Appliance inventories are stated at standard
cost.
Customer Deposits
In accordance with PSC rules and Company policy, customer deposits are
refunded to certain customers who have met established criteria. Deposits which
are estimated to be refunded within one year are reported as a current
liability. All other deposits are reported as other liabilities.
F-7
<PAGE> 84
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues
PGS recognizes revenue as products and services are provided and,
accordingly, includes an accrual for unbilled products and services.
Revenues include amounts resulting from a PGS purchased gas adjustment
clause which is designed to permit full recovery of these costs. Under this
clause, costs of purchased gas are billed to customers as the costs are
incurred. Any underrecovery of these costs is shown as a current asset, and any
overrecovery is shown as a current liability.
Certain PGS customers purchase gas directly from gas producers. PGS
delivers the gas to these customers and bills a transportation charge on these
deliveries. The Company's financial statements include revenues of $18,827,000,
$22,061,000 and $24,122,000 for fiscal 1996, 1995 and 1994, respectively, for
the transportation charges.
Income Taxes
The Company adopted the liability method of accounting for deferred income
taxes as required by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," as of October 1, 1993. Under the liability
method, deferred income taxes have been recorded using currently enacted tax
rates for the differences between the tax basis of assets and liabilities and
the basis reported in the financial statements. Due to the effect of regulation
on PGS, certain adjustments made to deferred income taxes to reflect the
adoption of SFAS 109 are, in turn, debited or credited to regulatory assets or
liabilities. The resulting net regulatory liability of $260,000 related to
income taxes is reported in other liabilities as of September 30, 1996, 1995 and
1994. Such adjustments had no material impact on the financial position or
results of operations of the Company.
Net Income Per Share
Net income per share is based on the weighted average number of common
shares outstanding. Reacquired common stock is accounted for as if retired.
2. OTHER ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C>
Cash surrender value of insurance policies........................ $ 7,215 $5,863
Debt issue costs.................................................. 916 1,008
Deferred environmental costs...................................... 1,767 463
Other............................................................. 820 620
------- ------
Total assets............................................ $10,718 $7,954
======= ======
</TABLE>
The Company invests in insurance policies to fund certain supplemental
employee retirement benefits. At September 30, 1996 and 1995, the accumulated
benefit liability amounted to $5,090,000 and $4,327,000, respectively, which is
included in other liabilities. Expenses of $803,000, $1,218,000 and $434,000 for
1996, 1995 and 1994, respectively, are included in operating expenses.
Included in other assets are costs which are deferred and charged to
operations upon receipt of PSC orders permitting such charges. Authorization to
commence amortization has not been issued. Debt issue expenses are being
amortized over the term of the related debt.
F-8
<PAGE> 85
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Materials and supplies............................................. $1,567 $1,652
Merchandise held for resale........................................ 1,180 1,251
Propane gas........................................................ 787 539
------ ------
$3,534 $3,442
====== ======
</TABLE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes and other long-term debt:
10% due 1997 through 1998.................................... $ 2,000 $ 2,500
10.55% due 1997 through 2000................................. 2,200 2,600
10.35% due 1997 through 2007................................. 8,000 8,400
10.33% due 1997 through 2008................................. 9,400 9,600
10.30% due 1997 through 2009................................. 9,600 9,800
9.93% due 1997 through 2010.................................. 9,800 10,000
8% due 1997 through 2012..................................... 35,000 35,000
Revolving credit agreements and lines of credit.............. 48,800 50,400
-------- --------
124,800 128,300
Less amount due within one year........................... 3,600 1,900
-------- --------
$121,200 $126,400
======== ========
</TABLE>
The long-term debt agreements contain various restrictive covenants, the
most significant of which include provisions relating to interest coverage,
maximum levels of debt to total capitalization, maintenance of working capital,
additional debt and limitations on dividends.
Lines of credit of $15,000,000 are utilized in conjunction with the
revolving credit agreements discussed below. To the extent there is outstanding
capacity under the revolving credit agreements, these lines of credit borrowings
have been classified as long-term debt. Under the terms of the revolving credit
agreements with three major commercial banks, commitments totaling $55,000,000
are available to Lykes Energy, Inc., on a revolving basis through May 29, 2001.
Each year during the term of the agreements, the commitments may be extended for
an additional year with the concurrence of the banks. A commitment fee of 1/4 of
1% per annum is charged on any unused amount of the commitments. The amounts
borrowed may be repaid according to various rate options (based on the LIBOR,
prime rate, bank certificates of deposit or bank money market rate) to be
selected by the Company for varying time periods. The interest rates at
September 30, 1996 and 1995 were 6.4% and 7.1%, respectively. Weighted average
interest rate on short-term borrowings were approximately 6.2%, 6.5% and 4.5%
for fiscal 1996, 1995 and 1994, respectively.
At September 30, 1996, the estimated fair value of long-term debt is
approximately $130,600,000. For the fixed rate long-term debt, an interest rate
of 7.75% (105 basis points over the ask/yield price for 10-year government bonds
and notes as of September 30, 1996) was used as the discount rate. For that
portion of long-term debt that reprices to market rates at intervals of six
months or less, the carrying amount has been used as a reasonable estimate of
fair value.
F-9
<PAGE> 86
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Repayment requirements applicable to long-term debt outstanding at
September 30, 1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................ $ 3,600
1998............................................................ 4,000
1999............................................................ 4,900
2000............................................................ 4,700
2001............................................................ 38,100
Thereafter...................................................... 69,500
--------
$124,800
========
</TABLE>
5. EMPLOYEE BENEFIT PLANS
PGS maintains a qualified noncontributory defined benefit pension plan
(Retirement Plan) which covers substantially all employees with benefits based
on the employee's years of service and an average of compensation during
specified years of employment. The Retirement Plan is funded annually by the
Company within the guidelines set by the Employee Retirement Income Security Act
of 1974 (ERISA) for the minimum annual contribution and the maximum allowable as
a tax deduction by the Internal Revenue Service (IRS). Plan assets are invested
primarily in a collective investment trust consisting of equity securities,
fixed income securities and cash equivalents. The total pension plan costs for
the years ended September 30, 1996, 1995 and 1994 were approximately $1,720,000,
$2,392,000 and $1,789,000, respectively.
Components of pension plan costs, as determined by actuarial valuations,
for the years ended September 30, were:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period..... $ 1,784 $ 1,703 $ 1,873
Interest cost on projected benefit obligation......... 2,812 2,579 2,412
Actual return on plan assets.......................... (4,116) (5,776) (1,032)
Net amortization and deferrals........................ 1,240 3,103 (1,464)
Voluntary employee retirement program................. 783
------- ------- -------
Net pension plan costs................................ $ 1,720 $ 2,392 $ 1,789
======= ======= =======
</TABLE>
F-10
<PAGE> 87
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of the Plan's funded status to the recorded pension
liability at September 30, was:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Plan assets at fair value...................................... $ 40,569 $ 36,256
Projected benefit obligation................................... (39,249) 35,276
-------- --------
Excess (deficiency) of plan assets over projected benefit
obligation................................................... 1,320 980
Unrecognized net loss (gain)*.................................. (4,149) (3,698)
Unrecognized prior service cost................................ 247 296
Unrecognized net transition asset (being amortized over 15
years)....................................................... (896) (1,075)
-------- --------
Accrued pension cost........................................... $ (3,478) $ (3,497)
======== ========
Actuarial present value of accumulated benefit obligation
(including vested benefit of: 1996 -- $28,075,000;
1995 -- $25,428,000)......................................... $ 28,363 $ 25,770
======== ========
</TABLE>
- ---------------
* Being amortized on remaining service period of active employees.
Actuarial rate assumptions used in determining the above valuations were:
Discount -- 7.75% for 1996, 8.25% for 1995 and 7.75% for 1994; compensation
levels -- 6.00% for 1996 and 6.50% for 1995 and 1994; and plan asset
growth -- 8% (all years).
A qualified defined contribution plan (Savings Plan) covering substantially
all employees is sponsored by the Company. Employees may contribute a portion of
their pretax and/or after tax income in accordance with specified guidelines.
The Company matches a percentage of these contributions up to certain
limitations. Such costs amounted to $1,150,000, $1,094,000 and $1,068,000 in
1996, 1995 and 1994, respectively.
Postretirement Benefits Other Than Pensions
PGS provides health care benefits to some retirees prior to their attaining
age 65 and a life insurance benefit to all retirees. In 1994, the Company
adopted SFAS 106, which requires accounting of the estimated future cost of such
benefits during the service lives of the employees. The implementation of the
standard resulted in an accumulated postretirement benefit obligation
(transition obligation) related to past employee service of $5,060,751. As
permitted, the Company elected to amortize this cost over 20 years instead of
expensing the total benefit obligation in 1994. The Company's cost under SFAS
106, including the amortization of the transition obligation, was $477,000 ,
$732,000 and $962,000 for 1996, 1995 and 1994, respectively. The following
tables set forth the status of the plan at September 30, 1996 and 1995:
Accrued postretirement benefit liability:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
(IN THOUSANDS)
Accumulated postretirement benefit obligations:
Retirees....................................................... $ 1,033 $ 1,853
Fully eligible active plan participants........................ 826 950
Other active participants...................................... 1,211 1,540
------- -------
Total accumulated postretirement benefit obligations........... 3,070 4,343
Unrecognized gain................................................ 2,251 1,259
Unrecognized net transition obligation........................... (4,157) (4,536)
------- -------
Accrued postretirement benefit liability......................... $ 1,164 $ 1,066
======= =======
</TABLE>
F-11
<PAGE> 88
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net postretirement benefit cost:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period............. $152 $220 $328
Interest cost on accumulated postretirement benefit
obligation.................................................. 230 333 381
Amortization of transition obligation......................... 95 179 253
---- ---- ----
Net postretirement benefit cost............................... $477 $732 $962
==== ==== ====
</TABLE>
The discount rates used for 1996, 1995 and 1994 were 7.75%, 8.25% and
8.25%, respectively. Under the indemnity plan, the assumed health care cost
trend rate used in measuring the accumulated postretirement benefit obligation
was 8.0% for 1996 and 7.5% for 1997, and was assumed to decrease to 5.75% by the
year 2008 and remain level thereafter. The POS plan utilized a 6.0% annual
increase for both 1996 and 1997, an ultimate trend rate of 5.0% is assumed to be
reached in year 2003. The expected health care costs under the HMO plan were
assumed to increase 4.0% for all future years. A one percentage point change in
the assumed health care cost trend rate for each year would increase the
accumulated postretirement benefit obligation by approximately $162,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost by approximately $30,000.
6. INCOME TAXES:
The net deferred income tax liability for the respective years is comprised
of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Property, plant & equipment........................... $34,039 $31,614
Investment in joint venture........................... 2,240 2,111
Other................................................. 1,067 742
------- -------
Gross deferred tax liabilities........................ 37,346 34,467
------- -------
Deferred compensation and retirement benefits......... (2,988) (2,618)
Deferred purchase gas costs........................... (1,521) (937)
Advances in aid of construction....................... (605) (590)
Accrued/other......................................... (555) (1,010)
------- -------
Gross deferred tax assets............................. (5,669) (5,155)
------- -------
$31,677 $29,312
======= =======
</TABLE>
The income tax provision for the respective years consisted of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable
Federal................................................ $6,507 $4,752 $3,586
State.................................................. 1,063 767 582
Deferred................................................. 2,365 2,520 2,543
------ ------ ------
$9,935 $8,039 $6,711
====== ====== ======
</TABLE>
The effective tax rates utilized by the Company approximates the combined
Federal and State statutory rates.
F-12
<PAGE> 89
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS:
The Company has business relationships with other entities under direct and
indirect control of management, stockholders, and/or directors of the Company.
These relationships, which are in the ordinary course of business, include
placement and administration of insurance coverage, sale of natural and propane
gas and other business-related activities. During the year ended September 30,
1996, 1995 and 1994, the Company paid approximately $2,787,000, $2,677,000 and
$3,022,000, respectively, to related parties and received approximately
$1,573,000, $1,571,000 and $1,634,000, respectively, from related parties. In
fiscal 1996, 1995 and 1994, the Company recorded approximately $5,532,000,
$5,095,000 and $4,905,000, respectively, in revenues for service provided to a
related party joint venture. Approximately $424,000 of accounts receivable at
September 30, 1996 ($469,000 in 1995) relates to this venture. The Company
recorded approximately $22,498,000, $14,403,000 and $16,602,000 in gas costs for
purchases from a related party joint venture in fiscal 1996, 1995 and 1994,
respectively. Approximately $1,422,000 and $410,000 of accounts payable at
September 30, 1996 and 1995, respectively, relates to this venture.
8. COMMITMENTS AND CONTINGENCIES:
Various legal actions, proceedings, and claims are pending or may be
instituted by or against the Company or joint ventures in which it has an
interest, including disputes with the Internal Revenue Service and those arising
out of alleged violations of environmental laws and regulations. Some of the
foregoing involve or may involve compensatory, punitive, or other damages in
substantial amounts.
The Company has received letters from the Internal Revenue Service
proposing certain adjustments to the consolidated federal tax returns totaling
approximately $10.5 million for the years ended September 30, 1988 through 1994,
relating to the treatment of Energy Conservation Program receipts. This dispute
relates primarily to the timing of tax assessments and the Company has filed a
petition in the Tax Court.
Litigation is subject to many uncertainties, and it is reasonably possible
that some of the legal actions, proceedings, or claims referred to above could
be decided unfavorably to the Company or joint venture. Although the amount of
liability, if any, at September 30, 1996 with respect to these matters could not
be ascertained, the Company believes that any resulting liability or disposition
of any claim should not materially affect the Company's financial position.
PGS has commitments for pipeline capacity with various transporters and
with various expiration dates, the latest which expires in the year 2015. These
capacity commitments, which are in the normal course of business, contain
obligations for the payment of demand charges which are recovered from customers
under PGS's purchased gas adjustment clause.
As of September 30, 1996, PGS has the following gas supply agreement plans:
Supply portfolio is comprised of 10% spot purchases, 20% swing purchases,
and 70% base load purchases. Most purchases are acquired from year to year with
one exception. PGS has one long term supply contract that carries out to the
year 2002. This long term contract has 10,888,000 MMbtus remaining to purchase
with a total cost of $23,953,600 over the remaining years. The purchase price is
$2.20 per MMbtu. When utilizing the above described supply portfolio, the annual
purchase cost, excluding the long term contract, is approximately $66 million.
The Company leases certain office facilities and data processing and other
equipment for varying periods. Rental expense under these leases was
approximately $2,614,000, $2,401,000 and $2,661,000 for fiscal 1996, 1995 and
1994, respectively. Leases on office facilities have escalation clauses which
provide for increased rentals based on the Consumer Price Index.
F-13
<PAGE> 90
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum annual rentals under these operating leases are as
follows:
<TABLE>
<S> <C>
1997................................................................ $2,668
1998................................................................ 2,491
1999................................................................ 2,114
2000................................................................ 615
2001................................................................ 70
Thereafter.......................................................... 60
------
$8,018
======
</TABLE>
The Company has a 50% interest in a joint venture partnership which
developed and operates a 109 megawatt gas-fired cogeneration facility in Dade
City, Florida. The facility's production (electricity and steam) is sold under
20-year contracts. In October 1996, the Company signed an agreement
renegotiating its electricity contract to a term of 15 years. The Company has
various commitments and contingent obligations related to the operation of the
facility including environmental indemnifications. The Company believes that any
liability resulting from the contingent obligations should not materially affect
the Company's financial position.
9. REGULATORY MATTERS:
Effective January 31, 1994, the PSC issued an order which reduced PGS's
authorized average rate of return on equity from 12.00% to 11.25% for all
regulatory purposes. In addition, the PSC ordered PGS to fully amortize its
remaining environmental remediation costs by September 30, 1994. This
accelerated amortization resulted in an additional $1,248,000 of amortization
expense in fiscal year 1994.
Pursuant to guidelines issued by the PSC in September 1995, the Company has
revised its presentation of taxes other than on income for fiscal 1996. Such
taxes for fiscal 1996, aggregating $11,148,000, are reflected in their gross
amount in the statement of income line items of revenue and taxes other than on
income, where such amount previously was shown as a net amount. Similar
presentation of these taxes in 1995 and 1994 would have increased revenues and
taxes other than on income by approximately $8,584,000 and $8,959,000,
respectively.
F-14
<PAGE> 91
LYKES ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SEGMENT INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
INCOME
FROM IDENTIFIABLE CAPITAL
REVENUES OPERATIONS DEPRECIATION ASSETS EXPENDITURES
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1996
Natural gas services.................... $ 261,729 $ 34,778 $ 16,816 $ 294,869 $ 26,007
Propane gas services.................... 24,086 4,110 1,869 26,002 2,780
Other................................... 14,273 (294) 28 6,968 (290)
Eliminations............................ (503)
-------- ------- ------- -------- -------
Consolidated............................ $ 299,585 $ 38,594 $ 18,713 $ 327,839 $ 28,497
======== ======= ======= ======== =======
1995
Natural gas services.................... $ 220,398 $ 30,672 $ 15,839 $ 279,429 $ 27,236
Propane gas services.................... 21,386 2,940 1,829 24,651 2,376
Other................................... 13,406 433 22 8,092 347
Eliminations............................ (1,189)
-------- ------- ------- -------- -------
Consolidated............................ $ 254,001 $ 34,045 $ 17,690 $ 312,172 $ 29,959
======== ======= ======= ======== =======
1994
Natural gas services.................... $ 231,311 $ 27,617 $ 14,743 $ 267,847 $ 28,386
Propane gas services.................... 21,113 3,306 1,731 24,242 2,442
Other................................... 15,067 195 21 8,714 10
Eliminations............................ (420)
-------- ------- ------- -------- -------
Consolidated............................ $ 267,071 $ 31,118 $ 16,495 $ 300,803 $ 30,838
======== ======= ======= ======== =======
</TABLE>
F-15
<PAGE> 92
LYKES ENERGY, INC.
CONSENT OF SHAREHOLDER
THIS CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Lykes Energy, Inc. (the "Company") hereby
consents to the following actions unless otherwise specified below:
<TABLE>
<S> <C> <C>
1. To approve and adopt the Agreement and Plan of Merger dated as of November 21,
1996 between TECO Energy, Inc. and the Company.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Approval of this action will become effective and irrevocable when consented to by the
holders of a majority of the outstanding shares of the Company's common stock entitled to
consent in accordance with the Florida Business Corporation Act.
2. To approve the payment of any compensation or benefits that would otherwise
constitute a "parachute payment" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended, pursuant to the employment or severance
agreements with certain officers and key employees of the Company described in the
Company's Proxy Statement dated November 27, 1996.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Approval of this action will become effective and irrevocable when consented to by the
holders of 75% of the outstanding shares of the Company's common stock entitled to consent
held by disinterested stockholders in accordance with the Florida Business Corporation
Act.
IF NO CHOICE IS INDICATED WITH RESPECT TO A MATTER, THIS CONSENT WILL BE TREATED AS A
CONSENT FOR SUCH MATTER.
</TABLE>
<TABLE>
<S> <C> <C>
Signature: ---------------------------------------- Date:
Print Name:
----------------------------------------
Signature: Date:
----------------------------------------
(if held jointly)
Print Name:
----------------------------------------
</TABLE>
NOTE: Please sign exactly as name appears on stock certificate. When shares
are held by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by
President or other authorized officer. If a partner, please sign in
partnership name by authorized person.
