<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
TECO ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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FLORIDA 4931 59-2052286
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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TECO ENERGY, INC.
702 NORTH FRANKLIN STREET
TAMPA, FLORIDA 33602
(813) 228-4111
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICER)
------------------------
ROGER H. KESSEL
SENIOR VICE PRESIDENT -- GENERAL COUNSEL AND SECRETARY
TECO ENERGY, INC.
702 NORTH FRANKLIN STREET
TAMPA, FLORIDA 33602
(813) 228-4111
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
STANLEY KELLER, ESQ.
PALMER & DODGE LLP
ONE BEACON STREET
BOSTON, MASSACHUSETTS 02108
(617) 573-0100
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective and all other
conditions to the merger described in the enclosed Prospectus and Proxy
Statement have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO AGGREGATE OFFERING REGISTRATION
REGISTERED BE REGISTERED(1) PRICE FEE
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Common Stock,
$1.00 par value.......................... 13,483,146 shares $106,634,000(2) $32,313.33(2)
===========================================================================================================
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(1) Based upon the Registrant's estimate of the maximum number of shares that
may be issued in the Merger described herein.
(2) Estimated solely for purposes of calculating the registration fee, in
accordance with Rule 457(f) under the Securities Act of 1933, as amended.
Pursuant to Rule 457(f), the maximum aggregate offering price is equal to
the book value of shares of Lykes Energy, Inc. stock to be exchanged in the
Merger, computed as of September 30, 1996.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
<PAGE> 2
LYKES ENERGY, INC.
111 EAST MADISON STREET
TAMPA, FLORIDA 33602
November , 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 as described in the enclosed
Prospectus/Proxy Statement.
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. For this purpose, shares
actually or constructively owned by or for the individuals entitled to payments
under these agreements are not counted, in order to avoid certain adverse tax
consequences. 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
<PAGE> 3
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 .
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. See "CONSENT
SOLICITATION -- 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 , 1996.
<PAGE> 4
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> 5
TABLE OF CONTENTS
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PAGE
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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
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i
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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.................................................................... 69
SOLICITATION COMPENSATION............................................................. 70
AVAILABLE INFORMATION................................................................. 70
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 70
INDEX TO LEI CONSOLIDATED FINANCIAL STATEMENTS...................................... FS-1
EXHIBIT A -- Agreement and Plan of Merger........................................... A-1
EXHIBIT B -- Opinion of CS First Boston Corporation................................. B-1
EXHIBIT C -- Provisions of the Florida Business Corporation Act Relating to Action
by Shareholders without a Meeting...................................... C-1
EXHIBIT D -- Provisions of the Florida Business Corporations Act Relating to Rights
of Dissenting Shareholders............................................. D-1
EXHIBIT E -- TECO's Annual Report on Form 10-K for the Year ended December 31,
1995................................................................... E-1
EXHIBIT F -- TECO's Quarterly Report on Form 10-Q for the Quarter ended March 31,
1996................................................................... F-1
EXHIBIT G -- TECO's Quarterly Report on Form 10-Q for the Quarter ended June 30,
1996................................................................... G-1
EXHIBIT H -- TECO's Quarterly Report on Form 10-Q for the Quarter ended September
30, 1996............................................................... H-1
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<PAGE> 7
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 will be mailed on , 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
<PAGE> 8
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. See "CONSENT SOLICITATION -- 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 Exhibit A.
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
2
<PAGE> 9
AFFIRMATIVELY CONSENT TO APPROVE SUCH PAYMENTS AND BENEFITS. John A. Brabson,
Jr. 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 Exhibit B 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 through full gas and electric service offerings, 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."
3
<PAGE> 10
GOVERNMENT APPROVALS
Other than filings under the HSR Act, the filing of appropriate merger
documents with the Florida Department of State, approvals, 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, among other circumstances, within 12 months following
termination of the Merger Agreement, LEI receives any acquisition proposal from
a third-party which it does not reject (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 $5,650,000 if the cogeneration project referred to
below is disposed of, under certain circumstances, for $6,000,000 or less. See
"THE MERGER AGREEMENT -- Escrow and Indemnity."
4
<PAGE> 11
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."
5
<PAGE> 12
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>
<CAPTION>
TECO LEI
-------------------------- --------
HIGH LOW DIVIDEND DIVIDEND
---- ---- -------- --------
<S> <C> <C> <C> <C>
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> 13
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> 14
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> 15
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> 16
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> 17
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 EXHIBIT C 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 EXHIBIT C. THIS DISCUSSION AND EXHIBIT C 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> 18
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> 19
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 EXHIBIT D 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 EXHIBIT D. 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> 20
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
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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 Exhibit A 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
The Merger Agreement provides for the merger of LEI with and into TECO;
provided, however, that subject to certain conditions, including that the tax
treatment of receipt of the Merger Consideration would not be adversely
affected, LEI may be merged with a wholly-owned subsidiary of TECO. If the
Merger Agreement is adopted by LEI shareholders, certain additional conditions
are satisfied or waived and the Merger is consummated, LEI will either be merged
with and into TECO or become a wholly-owned subsidiary of TECO.
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, as well as, subject to satisfaction of certain
conditions contained in the Merger Agreement, the merger of LEI with a
wholly-owned subsidiary of TECO, with LEI as the surviving corporation or with
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 EXHIBIT B 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 $5,650,000 if the
cogeneration project referred to below is disposed of, under certain
circumstances, for $6,000,000 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 with 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 or enter into any other contracts or commitments
involving payments of $250,000 or more, other than purchase orders or
commitments for natural gas or propane gas for 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 practices 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. 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, but only to
the extent that such conditions are intended for its benefit.
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 to 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
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Agreement, and to perform and fulfill its obligations under the Merger
Agreement, to obtain the other party's 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 and LEI shall have received letters from Coopers & Lybrand
L.L.P. and Price Waterhouse LLP, respectively, 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 (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 project's "qualifying facility" 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.
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, provided the terminating party is
not in material breach of the Merger Agreement, by written notice to the other,
if the required approval of the Merger Agreement by the shareholders of LEI
shall not have been obtained the required approval of the shareholders of LEI;
(v) by LEI, prior to the approval of the Merger by its shareholders, under
certain limited circumstances, if an alternative transaction is proposed; (vi)
at any time with the written consent of LEI and TECO; (vii) 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 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
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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.
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 their
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 TECO is not in material breach of any
representation, warranty, covenant or agreement contained in the Merger
Agreement and the Merger Agreement is terminated by (i) either party if the LEI
shareholder action adopting the Merger Agreement is not obtained; (ii) TECO 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 act in favor of the Merger Agreement or (B) for any reason fails to
solicit the written consent of its shareholders to the Merger for the purpose of
adopting the Merger Agreement. In addition, LEI will be required to pay TECO a
fee of $12,000,000 (less such expense reimbursement) if TECO has terminated the
Merger Agreement under certain of the foregoing circumstances and LEI receives
an acquisition proposal from a third party which it does not reject.
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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 Exhibit A 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 Date (as defined below). 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 term "Expiration Date" means the 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) the passage of 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.
Put Right. TECO may require, (x) at 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 "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.
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.
29
<PAGE> 36
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 an exhibit to the Merger Agreement which is Exhibit A 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 $5,650,000 if, under certain circumstances, the aggregate
proceeds from the disposition of such Project are $6,000,000 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.
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
30
<PAGE> 37
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> 38
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> 39
<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> 40
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 Exhibit E and incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
34
<PAGE> 41
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> 42
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> 43
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> 44
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.
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<PAGE> 45
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.
The following discussion may not be applicable with respect to LEI Common
Stock received pursuant to the exercise of employee stock options or otherwise
as compensation.
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> 46
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 Exhibit E 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> 47
(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.
41
<PAGE> 48
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 will automatically trade with such TECO Common
Stock. The Rights will separate from the 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 Common Stock or
(iii) immediately after the Board of Directors of the TECO shall declare any
person to be 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 will cause
substantial dilution to a person or group that attempts to acquire TECO in a
manner which causes the Rights to become discount Rights unless the offer is
conditional on a substantial number of Rights being acquired. The Rights,
however, should not affect any prospective offeror willing to make an offer at a
fair price and otherwise in the best interests of TECO and its stockholders as
determined by a majority of the Continuing Directors who are not officers of
TECO, or willing to negotiate with the Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors since the Board of Directors may, at its option, at any time until ten
days following the Stock Acquisition Date or until the date the Board declares a
person to be an Adverse Person redeem all but not less than all the then
outstanding Rights at the Redemption Price.
42
<PAGE> 49
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 non-public utility 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> 50
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> 51
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
45
<PAGE> 52
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> 53
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
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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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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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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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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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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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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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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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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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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>
56
<PAGE> 63
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>
57
<PAGE> 64
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> 65
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> 66
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> 67
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,
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<PAGE> 68
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> 69
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> 70
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.
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<PAGE> 71
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> 72
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> 73
(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> 74
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 person 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.
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. The Articles of TECO also establish
certain procedures for giving notice of the meeting to shareholders.
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.
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 more than
10% 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.
68
<PAGE> 75
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, that
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.
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.
69
<PAGE> 76
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 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 Exhibit E).
70
<PAGE> 77
(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 Exhibits F, G and H, 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> 78
INDEX TO LEI CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................... FS-2
Consolidated Balance Sheet as of September 30, 1996 and 1995.......................... FS-3
Consolidated Statement of Income for each of the three years in the period ended
September 30, 1996.................................................................. FS-4
Consolidated Statement of Stockholders' Equity for each of the three years in the
period ended September 30, 1996..................................................... FS-5
Consolidated Statement of Cash Flows for each of the three years in the period ended
September 30, 1996.................................................................. FS-6
Notes to Consolidated Financial Statements............................................ FS-7
</TABLE>
FS-1
<PAGE> 79
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
FS-2
<PAGE> 80
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.
FS-3
<PAGE> 81
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.
FS-4
<PAGE> 82
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.
FS-5
<PAGE> 83
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.
FS-6
<PAGE> 84
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.
FS-7
<PAGE> 85
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.
FS-8
<PAGE> 86
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.
FS-9
<PAGE> 87
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>
FS-10
<PAGE> 88
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>
FS-11
<PAGE> 89
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>
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.
FS-12
<PAGE> 90
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.
FS-13
<PAGE> 91
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.
FS-14
<PAGE> 92
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>
FS-15
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
TECO's Bylaws provided that any person who was or is a party to any
threatened, pending or completed proceeding, because such person is or was a
director or officer of TECO or is or was serving at the request of TECO as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise shall be indemnified by TECO to the full extent permitted by
law against expenses and liabilities. The indemnification provided for in TECO's
bylaws is expressly not exclusive of all other rights to which such director or
officer may be entitled as a matter of law.
Section 607.0850 of the Florida Business Corporation Act grants TECO the
power to indemnify each person who was or is a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that he is or was a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against liability, expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of TECO, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful;
provided, however, no indemnification shall be made in connection with any
proceeding brought by or in the right of TECO where the person involved is
adjudged to be liable to TECO, except to the extent approved by a court.
TECO maintains an insurance policy on behalf of itself and its
subsidiaries, and on behalf of the Directors and officers thereof, covering
certain liabilities which may arise as a result of the actions of the Directors
and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
2.1 Conformed copy of Agreement and Plan of Merger dated as of November 21, 1996,
between TECO and LEI. Filed herewith as Exhibit A to the Prospectus/Proxy
Statement. Pursuant to Item 601(b)(2) of Regulation S-K, certain exhibits and
schedules referred to in the Agreement and Plan of Merger are omitted. The
Registrant hereby undertakes to furnish supplementarily a copy of any omitted
exhibit or schedule to the Commission upon request.
2.2 Conformed copy of Stock Option Agreement dated November 21, 1996 between LEI and
TECO -- filed herewith as an exhibit to Exhibit A to the Prospectus/Proxy
Statement.
*3.1 Articles of Incorporation, as amended on April 20, 1993 (Exhibit 3, Form 10-Q
for the quarter ended March 31, 1993 of TECO Energy, Inc.).
*3.2 Bylaws of the Company, as amended effective July 18, 1995 (Exhibit 3, Form 10-Q
for the quarter ended June 30, 1995 of TECO Energy, Inc.).
*4.1 Indenture of Mortgage among Tampa Electric Company, State Street Trust Company
and First Savings & Trust Company of Tampa, dated as of Aug. 1, 1946 (Exhibit
7-A to Registration Statement No. 2-6693).
*4.2 Ninth Supplemental Indenture, dated as of April 1, 1966, to Exhibit 4.1 (Exhibit
4-k, Registration Statement No. 2-28417).
*4.3 Thirteenth Supplemental Indenture dated as of Jan. 1, 1974, to Exhibit 4.1
(Exhibit 2-g-1, Registration Statement No. 2-51204).
</TABLE>
II-1
<PAGE> 94
<TABLE>
<C> <S>
*4.4 Sixteenth Supplemental Indenture, dated as of Oct. 30, 1992, to Exhibit 4.1
(Exhibit 4.1, Form 10-Q for the quarter ended Sept. 30, 1992 of TECO Energy,
Inc.).
*4.5 Eighteenth Supplemental Indenture, dated as of May 1, 1993, to Exhibit 4.1
(Exhibit 4.1, Form 10-Q for the quarter ended June 30, 1993 of TECO Energy,
Inc.).
*4.6 Installment Purchase and Security Contract between the Hillsborough County
Industrial Development Authority and Tampa Electric Company, dated as of March
1, 1972 (Exhibit 4.9, Form 10-K for 1986 of TECO Energy, Inc.).
*4.7 First Supplemental Installment Purchase and Security Contract, dated as of Dec.
1, 1974 (Exhibit 4.10, Form 10-K for 1986 of TECO Energy, Inc.).
*4.8 Third Supplemental Installment Purchase Contract, dated as of May 1, 1976
(Exhibit 4.12, Form 10-K for 1986 of TECO Energy, Inc.).
*4.9 Installment Purchase Contract between the Hillsborough County Industrial
Development Authority and Tampa Electric Company, dated as of Aug. 1, 1981
(Exhibit 4.13, Form 10-K for 1986 of TECO Energy, Inc.).
*4.10 Amendment to Exhibit A of Installment Purchase Contract, dated April 7, 1983
(Exhibit 4.14, Form 10-K for 1989 of TECO Energy, Inc.).
*4.11 Second Supplemental Installment Purchase Contract, dated as of June 1, 1983
(Exhibit 4.11, Form 10-K for 1994 of TECO Energy, Inc.).
*4.12 Third Supplemental Installment Purchase Contract, dated as of Aug. 1, 1989
(Exhibit 4.16, Form 10-K for 1989 of TECO Energy, Inc.).
*4.13 Installment Purchase Contract between the Hillsborough County Industrial
Development Authority and Tampa Electric Company, dated as of Jan. 31, 1984
(Exhibit 4.13, Form 10-K for 1993 of TECO Energy, Inc.).
*4.14 First Supplemental Installment Purchase Contract, dated as of Aug. 2, 1984
(Exhibit 4.14, Form 10-K for 1994 of TECO Energy, Inc.).
*4.15 Second Supplemental Installment Purchase Contract, dated as of July 1, 1993
(Exhibit 4.3, Form 10-Q for the quarter ended June 30, 1993 of TECO Energy,
Inc.).
*4.16 Loan and Trust Agreement among the Hillsborough County Industrial Development
Authority, Tampa Electric Company and NCNB National Bank of Florida, as trustee,
dated as of Sept. 24, 1990 (Exhibit 4.1, Form 10-Q for the quarter ended Sept.
30, 1990 for TECO Energy, Inc.).
*4.17 Loan and Trust Agreement, dated as of Oct. 26, 1992 among the Hillsborough
County Industrial Development Authority, Tampa Electric Company and NationsBank
of Florida, N.A., as trustee (Exhibit 4.2, Form 10-Q for the quarter ended Sept.
30, 1992 of TECO Energy, Inc.).
*4.18 Loan and Trust Agreement, dated as of June 23, 1993, among the Hillsborough
County Industrial Development Authority, Tampa Electric Company and NationsBank
of Florida, N.A., as trustee (Exhibit 4.2, Form 10-Q for the quarter ended June
30, 1993 of TECO Energy, Inc.).
*4.19 Installment Sales Agreement between the Plaquemines Port, Harbor and Terminal
District (Louisiana) and Electro-Coal Transfer Corporation, dated as of Sept. 1,
1985 (Exhibit 4.19, Form 10-K for 1986 of TECO Energy, Inc.).
*4.20 Reimbursement Agreement between TECO Energy, Inc. and Electro-Coal Transfer
Corporation, dated as of March 22, 1989 (Exhibit 4.19, Form 10-K for 1988 of
TECO Energy, Inc.).
*4.21 Rights Agreement between TECO Energy, Inc. and The First National Bank of
Boston, as Rights Agent, dated as of April 27, 1989 (Exhibit 4, Form 8-K, dated
as of May 2, 1989 of TECO Energy, Inc.).
</TABLE>
II-2
<PAGE> 95
<TABLE>
<C> <S>
*4.22 Amendment No. 1 to Rights Agreement dated as of July 20, 1993 between TECO
Energy, Inc. and The First National Bank of Boston, as Rights Agent (Exhibit
1.2, Form 8-A/A, dated as of July 27, 1993 of TECO Energy, Inc.).
5 Form of opinion of Palmer & Dodge LLP (filed herewith).
8.1 Form of opinion of Macfarlane Ferguson & McMullen with respect to certain
federal income tax matters (filed herewith).
8.2 Form of opinion of Palmer & Dodge LLP with respect to certain federal income tax
matters (filed herewith).
*10.1 1980 Stock Option and Appreciation Rights Plan, as amended on July 18, 1989
(Exhibit 28.1, Form 10-Q for quarter ended June 30, 1989 of TECO Energy, Inc.).
*10.2 Directors' Retirement Plan, as amended effective July 1, 1995 (Exhibit 10.1,
Form 10-Q for quarter ended June 30, 1995 of TECO Energy, Inc.).
*10.3 Supplemental Executive Retirement Plan for H. L. Culbreath, as amended on April
27, 1989 (Exhibit 10.14, Form 10-K for 1989 of TECO Energy, Inc.).
*10.4 Supplemental Executive Retirement Plan for T. L. Guzzle, as amended on July 20,
1993 (Exhibit 10.1, Form 10-Q for the quarter ended Sept.30, 1993 of TECO
Energy, Inc.), as further amended by the First Amendment to TECO Energy Group
Supplemental Executive Retirement Plan for T.L. Guzzle, effective as of Oct. 1,
1994 (Exhibit 10.4, Form 10-K for 1994 of TECO Energy, Inc.).
*10.5 Supplemental Executive Retirement Plan for R. H. Kessel, dated as of Dec. 4,
1989 (Exhibit 10.16, Form 10-K for 1989 of TECO Energy, Inc.), as amended by the
First Amendment to TECO Energy Group Supplemental Executive Retirement Plan for
R.H. Kessel, effective as of Oct. 1, 1994 (Exhibit 10.5, Form 10-K for 1994 of
TECO Energy, Inc.).
*10.6 TECO Energy Group Supplemental Executive Retirement Plan, as amended on July 18,
1989 (Exhibit 10.17, Form 10-K for 1989 of TECO Energy, Inc.), as further
amended by the First Amendment to TECO Energy Group Supplemental Executive
Retirement Plan, effective as of Oct. 1, 1994 (Exhibit 10.6, Form 10-K for 1994
of TECO Energy, Inc.).
*10.7 TECO Energy, Inc. Group Supplemental Retirement Benefits Trust Agreement
Amendment and Restatement, effective July 17, 1995, Exhibit 10.2, Form 10-Q for
the quarter ended June 30, 1995 of TECO Energy, Inc.).
*10.8 Terms of R H. Kessel's Employment, dated as of Dec. 1, 1989 (Exhibit 10.20, Form
10-K for 1989 of TECO Energy, Inc.).
*10.9 Annual Incentive Compensation Plan for TECO Energy and subsidiaries, as revised
January 1993 (Exhibit 10.2, Form 10-Q for quarter ended March 31, 1994 of TECO
Energy, Inc.).
*10.10 TECO Energy, Inc. Group Supplemental Disability Income Plan, dated as of March
20, 1989 (Exhibit 10.22, Form 10-K for 1988 of TECO Energy, Inc.).
*10.11 Forms of Severance Agreement between TECO Energy, Inc. and certain senior
executives, as amended and restated as of March 20, 1996. (Exhibit 10.11, Form
10-K for 1995 of TECO Energy, Inc.).
*10.12 Severance Agreement between TECO Energy, Inc. and H.L. Culbreath, dated as of
April 28, 1989 (Exhibit 10.24, Form 10-K for 1989 of TECO Energy, Inc.).
*10.13 Loan and Stock Purchase Agreement between TECO Energy Inc. and Barnett Banks
Trust Company, N.A., as trustee of the TECO Energy Group Savings Plan Trust
Agreement (Exhibit 10.3, Form 10-Q for the quarter ended March 31, 1990 for TECO
Energy, Inc.).
*10.14 TECO Energy, Inc. 1990 Equity Incentive Plan (Exhibit 10.1, Form 10-Q for the
quarter ended March 31, 1990 of TECO Energy, Inc.).
*10.15 TECO Energy, Inc. 1991 Director Stock Option Plan as amended on Jan. 21, 1992
(Exhibit 10.26, Form 10-K for 1991 of TECO Energy, Inc.).
</TABLE>
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<PAGE> 96
<TABLE>
<C> <S>
*10.16 Supplemental Executive Retirement Plan for A.D. Oak, as amended on July 20, 1993
(Exhibit 10.2, Form 10-Q for the quarter ended Sept. 30, 1993 of TECO Energy,
Inc.), as further amended by the First Amendment to TECO Energy Group
Supplemental Executive Retirement Plan for A.D. Oak, effective as of Oct. 1,
1994 (Exhibit 10.16, Form 10-K for 1994 of TECO Energy, Inc.).
*10.17 Supplemental Executive Retirement Plan for K.S. Surgenor, as amended on July 20,
1993 (Exhibit 10.3, Form 10-Q for the quarter ended Sept. 30, 1993 of TECO
Energy, Inc.), as further amended by the First Amendment to TECO Energy Group
Supplemental Executive Retirement Plan for K.S. Surgenor, effective as of Oct.
1, 1994 (Exhibit 10.17, Form 10-K for 1994 of TECO Energy, Inc.).
*10.18 Terms of T.L. Guzzle's employment, dated as of July 20, 1993 (Exhibit 10, Form
10-Q for the quarter ended June 30, 1993 of TECO Energy, Inc.).
*10.19 Supplemental Executive Retirement Plan for G.F. Anderson (Exhibit 10.4, Form
10-Q for the quarter ended Sept. 30, 1993 of TECO Energy, Inc.), as amended by
the First Amendment to TECO Energy Group Supplemental Executive Retirement Plan
for G.F. Anderson, effective as of Oct. 1, 1994 (Exhibit 10.19, Form 10-K for
1994 of TECO Energy, Inc.).
*10.20 TECO Energy Directors' Deferred Compensation Plan, as amended and restated
effective April 1, 1994 (Exhibit 10.1, Form 10-Q for the quarter ended March 31,
1994 of TECO Energy, Inc.).
*10.21 TECO Energy Group Retirement Savings Excess Benefit Plan, as amended and
restated effective Aug. 1, 1994 (Exhibit 10.21, Form 10-K for 1994 of TECO
Energy, Inc.).
*10.22 Supplemental Executive Retirement Plan for R.A. Dunn, dated as of July 17, 1995
(Exhibit 10.3, Form 10-Q for the quarter ended June 30, 1995 of TECO Energy,
Inc.).
*21 Subsidiaries of the Registrant (Exhibit 21, Form 10-K for 1995 of TECO Energy,
Inc.).
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants to TECO Energy,
Inc. (filed herewith.)
23.2 Consent of Price Waterhouse LLP, independent accountants to Lykes Energy, Inc.
(filed herewith.)
23.3 Consents of Palmer & Dodge LLP (contained in Exhibits 5 and 8).
24 Power of Attorney (included in the signature page hereto).
</TABLE>
- ---------------
* Indicates exhibit previously filed with the Securities and Exchange Commission
and incorporated herein by reference. Exhibits filed with periodic reports of
TECO Energy, Inc. were filed under Commission File No. 1-8180.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibits 10.1 through 10.12 and 10.14 through 10.22 above are management
contracts or compensatory plans or arrangements in which executive officers or
directors of TECO Energy, Inc. participate.
Certain instruments defining the rights of holders of long-term debt of
TECO Energy, Inc. and its consolidated subsidiaries authorizing in each case a
total amount of securities not exceeding 10 percent of total assets on a
consolidated basis are not filed herewith. TECO Energy, Inc. will furnish copies
of such instruments to the Securities and Exchange Commission upon request.
(b) Financial Statement Schedules:
All schedules are omitted because the required information is not present
or is not present in amounts sufficient to require submission of the schedule or
because the information required is included in the financial statements or
notes thereto or the schedule is not required or inapplicable under the related
instructions.
II-4
<PAGE> 97
ITEM 22. UNDERTAKINGS
(a)(1) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporation documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the city of Tampa, state of Florida,
on November 21, 1996.
TECO ENERGY, INC.
By: /s/ T.L. GUZZLE
--------------------------------------
T.L. Guzzle, Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of TECO Energy, Inc., hereby
severally constitute and appoint Roger Kessel and David Pokross, and each of
them singly, our true and lawful attorneys, with full power to them in any and
all capacities, to sign any amendments to this Registration Statement on Form
S-4 (including Pre- and Post-Effective Amendments), and any related Rule 462(b)
registration statement or amendment thereto, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registrant
Statement has been signed by the following persons in the capacities indicated
and on November 21, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ ------------------------------
<C> <S>
/s/ T.L. GUZZLE Chairman of the Board,
- ------------------------------------------ Director and Chief Executive
T.L. Guzzle Officer (Principal Executive
Officer)
/s/ A.D. OAK Senior Vice President-Finance
- ------------------------------------------ and Chief Financial Officer
A.D. Oak (Principal Financial and
Accounting Officer)
/s/ G.F. ANDERSON President, Director and Chief
- ------------------------------------------ Operating Officer
G.F. Anderson
/s/ C.D. AUSLEY Director
- ------------------------------------------
C.D. Ausley
/s/ S.L. BALDWIN Director
- ------------------------------------------
S.L. Baldwin
/s/ H.L. CULBREATH Director
- ------------------------------------------
H.L. Culbreath
</TABLE>
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<PAGE> 99
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ ------------------------------
<C> <S>
/s/ J.L. FERMAN, JR. Director
- ------------------------------------------
J.L. Ferman, Jr.
/s/ E.L. FLOM Director
- ------------------------------------------
E.L. Flom
/s/ H.R. GUILD, JR. Director
- ------------------------------------------
H.R. Guild, Jr.
/s/ D.R. HENDRIX Director
- ------------------------------------------
D.R. Hendrix
/s/ R.L. RYAN Director
- ------------------------------------------
R.L. Ryan
/s/ W.P. SOVEY Director
- ------------------------------------------
W.P. Sovey
/s/ J.T. TOUCHTON Director
- ------------------------------------------
J.T. Touchton
/s/ J.A. URQUAHART Director
- ------------------------------------------
J.A. Urquhart
/s/ J.O. WELCH, JR. Director
- ------------------------------------------
J.O. Welch, Jr.
</TABLE>
II-7
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- --------------------------------------------------------------------- ------------
<C> <S> <C>
2.1 Conformed copy of Agreement and Plan of Merger dated as of November
21, 1996, between TECO and LEI. Filed as Exhibit A to the
Prospectus/Proxy Statement.
2.2 Conformed copy of Stock Option Agreement dated November 21, 1996
between LEI and TECO -- filed herewith as an exhibit to Exhibit A to
the Prospectus/Proxy Statement.
*3.1 Articles of Incorporation, as amended on April 20, 1993.
*3.2 Bylaws, as amended effective July 18, 1995.
*4.1 Indenture of Mortgage among Tampa Electric Company, State Street
Trust Company and First Savings & Trust Company of Tampa, dated as of
Aug. 1, 1946.
*4.2 Ninth Supplemental Indenture, dated as of April 1, 1966, to Exhibit
4.1.
*4.3 Thirteenth Supplemental Indenture dated as of Jan. 1, 1974, to
Exhibit 4.1.
*4.4 Sixteenth Supplemental Indenture, dated as of Oct. 30, 1992, to
Exhibit 4.1.
*4.5 Eighteenth Supplemental Indenture, dated as of May 1, 1993, to
Exhibit 4.1.
*4.6 Installment Purchase and Security Contract between the Hillsborough
County Industrial Development Authority and Tampa Electric Company,
dated as of March 1, 1972.
*4.7 First Supplemental Installment Purchase and Security Contract, dated
as of Dec. 1, 1974.
*4.8 Third Supplemental Installment Purchase Contract, dated as of May 1,
1976.
*4.9 Installment Purchase Contract between the Hillsborough County
Industrial Development Authority and Tampa Electric Company, dated as
of Aug. 1, 1981.
*4.10 Amendment to Exhibit A of Installment Purchase Contract, dated April
7, 1983.
*4.11 Second Supplemental Installment Purchase Contract, dated as of June
1, 1983.
*4.12 Third Supplemental Installment Purchase Contract, dated as of Aug. 1,
1989.
*4.13 Installment Purchase Contract between the Hillsborough County
Industrial Development Authority and Tampa Electric Company, dated as
of Jan. 31, 1984.
*4.14 First Supplemental Installment Purchase Contract, dated as of Aug. 2,
1984.
*4.15 Second Supplemental Installment Purchase Contract, dated as of July
1, 1993.
*4.16 Loan and Trust Agreement among the Hillsborough County Industrial
Development Authority, Tampa Electric Company and NCNB National Bank
of Florida, as trustee, dated as of Sept. 24, 1990.
*4.17 Loan and Trust Agreement, dated as of Oct. 26, 1992 among the
Hillsborough County Industrial Development Authority, Tampa Electric
Company and NationsBank of Florida, N.A., as trustee.
*4.18 Loan and Trust Agreement, dated as of June 23, 1993, among the
Hillsborough County Industrial Development Authority, Tampa Electric
Company and NationsBank of Florida, N.A., as trustee.
*4.19 Installment Sales Agreement between the Plaquemines Port, Harbor and
Terminal District (Louisiana) and Electro-Coal Transfer Corporation,
dated as of Sept. 1, 1985.
*4.20 Reimbursement Agreement between TECO Energy, Inc. and Electro-Coal
Transfer Corporation, dated as of March 22, 1989.
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- --------------------------------------------------------------------- ------------
<C> <S> <C>
*4.21 Rights Agreement between TECO Energy, Inc. and The First National
Bank of Boston, as Rights Agent, dated as of April 27, 1989.
*4.22 Amendment No. 1 to Rights Agreement dated as of July 20, 1993 between
TECO Energy, Inc. and The First National Bank of Boston, as Rights
Agent.
5 Form of opinion of Palmer & Dodge LLP.
8.1 Form of opinion of Macfarlane Ferguson & McMullen with respect to
certain federal income tax matters.
8.2 Form of opinion of Palmer & Dodge LLP with respect to certain federal
income tax matters.
*10.1 1980 Stock Option and Appreciation Rights Plan, as amended on July
18, 1989.
*10.2 Directors' Retirement Plan, as amended effective July 1, 1995.
*10.3 Supplemental Executive Retirement Plan for H. L. Culbreath, as
amended on April 27, 1989.
*10.4 Supplemental Executive Retirement Plan for T. L. Guzzle, as amended
on July 20, 1993, as further amended by the First Amendment to TECO
Energy Group Supplemental Executive Retirement Plan for T.L. Guzzle,
effective as of Oct. 1, 1994.
*10.5 Supplemental Executive Retirement Plan for R. H. Kessel, dated as of
Dec. 4, 1989, as amended by the First Amendment to TECO Energy Group
Supplemental Executive Retirement Plan for R.H. Kessel, effective as
of Oct. 1, 1994.
*10.6 TECO Energy Group Supplemental Executive Retirement Plan, as amended
on July 18, 1989, as further amended by the First Amendment to TECO
Energy Group Supplemental Executive Retirement Plan, effective as of
Oct. 1, 1994.
*10.7 TECO Energy, Inc. Group Supplemental Retirement Benefits Trust
Agreement Amendment and Restatement, effective July 17, 1995.
*10.8 Terms of R H. Kessel's Employment, dated as of Dec. 1, 1989.
*10.9 Annual Incentive Compensation Plan for TECO Energy and subsidiaries,
as revised January 1993.
*10.10 TECO Energy, Inc. Group Supplemental Disability Income Plan, dated as
of March 20, 1989.
*10.11 Forms of Severance Agreement between TECO Energy, Inc. and certain
senior executives, as amended and restated as of March 20, 1996.
*10.12 Severance Agreement between TECO Energy, Inc. and H.L. Culbreath,
dated as of April 28, 1989.
*10.13 Loan and Stock Purchase Agreement between TECO Energy Inc. and
Barnett Banks Trust Company, N.A., as trustee of the TECO Energy
Group Savings Plan Trust Agreement.
*10.14 TECO Energy, Inc. 1990 Equity Incentive Plan.
*10.15 TECO Energy, Inc. 1991 Director Stock Option Plan as amended on Jan.
21, 1992.
*10.16 Supplemental Executive Retirement Plan for A.D. Oak, as amended on
July 20, 1993, as further amended by the First Amendment to TECO
Energy Group Supplemental Executive Retirement Plan for A.D. Oak,
effective as of Oct. 1, 1994.
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- --------------------------------------------------------------------- ------------
<C> <S> <C>
*10.17 Supplemental Executive Retirement Plan for K.S. Surgenor, as amended
on July 20, 1993, as further amended by the First Amendment to TECO
Energy Group Supplemental Executive Retirement Plan for K.S.
Surgenor, effective as of Oct. 1, 1994.
*10.18 Terms of T.L. Guzzle's employment, dated as of July 20, 1993.
*10.19 Supplemental Executive Retirement Plan for G.F. Anderson, as amended
by the First Amendment to TECO Energy Group Supplemental Executive
Retirement Plan for G.F. Anderson, effective as of Oct. 1, 1994.
*10.20 TECO Energy Directors' Deferred Compensation Plan, as amended and
restated effective April 1, 1994.
*10.21 TECO Energy Group Retirement Savings Excess Benefit Plan, as amended
and restated effective Aug. 1, 1994.
*10.22 Supplemental Executive Retirement Plan for R.A. Dunn, dated as of
July 17, 1995.
*21. Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants to TECO
Energy, Inc.
23.2 Consent of Price Waterhouse LLP, independent accountants to Lykes
Energy, Inc.
23.3 Consents of Palmer & Dodge LLP.
24 Power of Attorney (included in the signature page hereto).
</TABLE>
- ---------------
* Indicates exhibit previously filed with the Securities and Exchange
Commission.
<PAGE> 103
EXHIBIT A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BETWEEN
TECO ENERGY, INC.
AND
LYKES ENERGY, INC.
----------------------------------------------
DATED AS OF NOVEMBER 21, 1996
----------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 104
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
SECTION 1 -- THE MERGER................................................................
1.1 The Merger....................................................................
1.2 Effective Time................................................................
1.3 Effects of the Merger.........................................................
1.4 Articles of Incorporation and Bylaws..........................................
1.5 Directors and Officers........................................................
1.6 Conversion of Stock...........................................................
1.7 Closing of Seller Transfer Books..............................................
1.8 Dissenting Shares.............................................................
1.9 Exchange of Certificates......................................................
1.10 No Fractional Shares..........................................................
1.11 Escrow of Shares..............................................................
1.12 Utility Merger................................................................
1.13 Alternative Structure.........................................................
SECTION 2 -- REPRESENTATIONS AND WARRANTIES OF SELLER..................................
2.1 Organization and Qualification................................................
2.2 Authority to Execute and Perform Agreements...................................
2.3 Capitalization and Title to Shares............................................
2.4 Subsidiaries and Other Affiliates.............................................
2.5 Financial Statements..........................................................
2.6 Absence of Undisclosed Liabilities............................................
2.7 No Material Adverse Change....................................................
2.8 Tax Matters...................................................................
2.9 Compliance with Laws..........................................................
2.10 No Breach.....................................................................
2.11 Actions and Proceedings.......................................................
2.12 Regulatory Proceedings........................................................
2.13 Regulation as a Utility.......................................................
2.14 Contracts.....................................................................
2.15 Properties....................................................................
2.16 Intellectual Property.........................................................
2.17 Employee Benefit Plans........................................................
2.18 Employee Relations............................................................
2.19 Transactions with Management..................................................
2.20 Brokerage.....................................................................
2.21 Environmental Matters.........................................................
2.22 Insurance.....................................................................
2.23 Registration Statement........................................................
2.24 Takeover Laws.................................................................
2.25 Fairness Opinion..............................................................
2.26 Disclosure....................................................................
SECTION 3 -- REPRESENTATIONS AND WARRANTIES OF BUYER...................................
3.1 Organization..................................................................
3.2 Authority to Execute and Perform Agreement....................................
3.3 Capitalization................................................................
</TABLE>
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<PAGE> 105
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.4 SEC Reports................................................................... 17
3.5 Financial Statements..........................................................
3.6 No Material Adverse Change....................................................
3.7 Actions and Proceedings.......................................................
3.8 No Breach.....................................................................
3.9 Registration Statement........................................................
3.10 Absence of Undisclosed Liabilities............................................
3.11 Compliance with Laws..........................................................
3.12 Disclosure....................................................................
SECTION 4 -- COVENANTS AND AGREEMENTS..................................................
4.1 Conduct of Business...........................................................
4.2 Corporate Examinations and Investigations.....................................
4.3 Expenses......................................................................
4.4 Authorization from Others.....................................................
4.5 Consummation of Agreement.....................................................
4.6 Further Assurances............................................................
4.7 Securities Law Matters........................................................
4.8 Shareholder Action............................................................
4.9 Public Announcements and Confidentiality......................................
4.10 Affiliate Letters.............................................................
4.11 No Solicitation...............................................................
4.12 Filings Under HSR Act.........................................................
4.13 Buyer SEC Filings.............................................................
4.14 Disclosure Statements.........................................................
4.15 Indemnification...............................................................
4.16 Employee Benefits Matters.....................................................
4.17 Disposition of Project........................................................
SECTION 5 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF EACH PARTY TO CONSUMMATE THE MERGER.............................................
5.1 Approvals.....................................................................
5.2 Securities Law Matters........................................................
5.3 HSR Act.......................................................................
5.4 Absence of Order..............................................................
5.5 NYSE Listing..................................................................
5.6 Disposition of Project........................................................
SECTION 6 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
BUYER TO CONSUMMATE THE MERGER.....................................................
6.1 Representations, Warranties and Covenants.....................................
6.2 Affiliate Letters.............................................................
6.3 Opinion of Counsel to Seller..................................................
6.4 Merger Documents..............................................................
6.5 Pooling of Interests..........................................................
6.6 Accountant's Letter...........................................................
6.7 Tax Opinion...................................................................
6.8 Escrow Agreement..............................................................
6.9 Certificates..................................................................
</TABLE>
(ii)
<PAGE> 106
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
6.10 Resolution of Project Disputes................................................
SECTION 7 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF
THE SELLER TO CONSUMMATE THE MERGER................................................
7.1 Representations, Warranties and Covenants.....................................
7.2 Opinion of Counsel to Buyer...................................................
7.3 Tax Opinion...................................................................
7.4 Certificates..................................................................
SECTION 8 -- TERMINATION, AMENDMENT AND WAIVER.........................................
8.1 Termination...................................................................
8.2 Effect of Termination.........................................................
8.3 Termination Fee...............................................................
8.4 Amendment.....................................................................
8.5 Waiver........................................................................
SECTION 9 -- INDEMNIFICATION...........................................................
9.1 Survival......................................................................
9.2 Obligation of Seller to Indemnify.............................................
9.3 Obligation of the Buyer to Indemnify..........................................
9.4 Limitations on Indemnification................................................
9.5 Notice and Defense of Claims..................................................
SECTION 10 -- MISCELLANEOUS............................................................
10.1 Notices.......................................................................
10.2 Entire Agreement..............................................................
10.3 Governing Law.................................................................
10.4 Binding Effect; No Assignment.................................................
10.5 Section Headings..............................................................
10.6 Counterparts..................................................................
10.7 Disclosure Schedules..........................................................
</TABLE>
EXHIBITS
<TABLE>
<S> <C> <C>
A -- Stock Option Agreement
B -- Form of Escrow Agreement
C -- Form of Affiliate Letter
D -- Form of Opinion of Seller's Counsel
E -- Form of Opinion of Buyer's Counsel
</TABLE>
(iii)
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of November 21, 1996 is between
TECO Energy, Inc. (the "Buyer"), a Florida corporation, and Lykes Energy, Inc.
(the "Seller"), a Florida corporation. The parties desire to effect the
acquisition of the Seller by the Buyer through a merger of the Seller into the
Buyer on the terms and conditions hereof. As a condition to, and concurrently
with the execution of, this Agreement, the Buyer and the Seller are entering
into the Stock Option Agreement (the "Seller Option") attached hereto as Exhibit
A granting to the Buyer an option to purchase 212,664 shares of the Common Stock
of the Seller at a price of $280.72 per share, subject to the terms and
conditions thereof. This Agreement is intended to be a "plan of reorganization"
within the meaning of sec.368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
Accordingly, in consideration of the mutual representations, warranties and
covenants contained herein, the parties hereto agree as follows:
SECTION 1 -- THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof, and
in accordance with the Florida Business Corporation Act, as amended (the
"FBCA"), the Seller shall be merged with and into the Buyer (the "Merger"). The
Merger shall occur at the Effective Time (as defined herein). Following the
Merger, the Buyer shall continue as the surviving corporation (the "Surviving
Corporation") and the separate corporate existence of the Seller shall cease.
1.2 Effective Time. As soon as practicable after satisfaction or waiver of
all conditions to the Merger, the parties shall cause articles of merger (the
"Articles of Merger") to be filed in accordance with Section 607.1105 of the
FBCA and shall take all such further actions as may be required by law to make
the Merger effective. The Merger shall be effective at such time as the Articles
of Merger are filed with the Florida Department of State in accordance with the
FBCA or at such later time as is specified by mutual agreement in the Articles
of Merger (the "Effective Time"). Immediately prior to the filing of the
Articles of Merger, a closing (the "Closing") will be held at the offices of the
Buyer, 702 North Franklin Street, Tampa, Florida (or such other place as the
parties may agree) for the purpose of confirming satisfaction or waiver of all
conditions to the Merger. The Closing shall take place within three business
days after the last to occur of:
(a) the later of (i) the day the Merger is approved by the
shareholders of the Seller pursuant to Section 4.8 and (ii) the earlier of
(A) the day the shareholders of Seller approve all payments to employees of
the Seller and its Subsidiaries so that no portion of such payments is not
deductible in whole or in part under Section 280(G) of the Code and (B)
thirty days after the Registration Statement referred to in Section 4.7 has
been declared effective by the SEC.
(b) the date of expiration or termination of any waiting period or
extension thereof applicable to the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act");
(c) the date all other conditions to the Merger (other than those than
can be satisfied by deliveries at the Closing) have been satisfied or
waived;
or on such other date as the parties may agree. The date on which the Closing
occurs is referred to herein as the "Closing Date."
1.3 Effects of the Merger. The Merger shall have the effects set forth in
Section 607.1106 of the FBCA.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation
and Bylaws of the Buyer, in each case as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation immediately after the Effective Time.
1.5 Directors and Officers. The directors and officers of the Buyer
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation immediately after the Effective Time, each to hold
office in accordance with the Articles of Incorporation and Bylaws of the
Surviving Corporation.
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1.6 Conversion of Stock.
(a) At the Effective Time, by virtue of the Merger and without any action
on the part of the Buyer or the Seller:
(i) All shares of Common Stock, $.10 par value (the "Common Stock"),
and all shares, if any, of Class A Common Stock, $.10 par value (the "Class
A Common Stock") of the Seller (the Common Stock and the Class A Common
Stock being referred to hereafter collectively as "Seller Stock")
outstanding immediately prior to the Effective Time, other than (A) shares
held by the Seller as treasury stock or shares held by any subsidiary of
the Seller and (B) Dissenting Shares (as defined in Section 1.8), shall be
converted into and become the right to receive, in the aggregate, that
number of shares (rounded down to the nearest whole share and subject to
the payment of cash for fractional shares as provided in Section 1.10) of
Common Stock, $1.00 par value, of the Buyer ("Buyer Common Stock")
determined by dividing $300,000,000 by the Market Value (as defined below)
of Buyer Common Stock (such shares of Buyer Common Stock are referred to
hereafter as the "Merger Consideration"). The Merger Consideration shall be
reduced by the consideration that would otherwise be allocable pursuant to
Section 1.6(c) to all Dissenting Shares if the holders thereof had not
properly exercised rights under Section 607.1320 of the FBCA.
(ii) All shares of Seller Stock held at the Effective Time by the
Seller as treasury stock or by a subsidiary of the Seller shall be canceled
and no payment shall be made with respect thereto.
(iii) All Dissenting Shares shall be handled in accordance with
Section 1.8.
(b) For the purpose of this Agreement, "Market Value" of Buyer Common Stock
means the average of the closing prices of Buyer Common Stock as reported on the
New York Stock Exchange (the "NYSE") for the 20 trading days ending on the third
trading day prior to the Closing Date. Notwithstanding the foregoing, (i) if the
Market Value of Buyer Common Stock computed in accordance with the previous
sentence is less than $22 1/4 per share, Market Value for purposes of Section
1.6(a)(i) shall mean $22 1/4 and (ii) if the Market Value of the Buyer Common
Stock computed in accordance with the previous sentence is greater than $27 1/4
per share, Market Value for purposes of Section 1.6(a)(i) shall mean $27 1/4.
The number of shares of Buyer Common Stock to be issued as the Merger
Consideration pursuant to clauses (i) and (ii) of the preceding sentence are
hereinafter called the "Maximum Merger Shares" and the "Minimum Merger Shares,"
respectively. Notwithstanding the foregoing, if within the period beginning 23
trading days prior to the Closing Date and ending on the Closing Date, there is
a change in the number of issued and outstanding shares of Buyer Common Stock as
the result of a reclassification, subdivision, recapitalization, combination,
exchange, stock split (including reverse stock split), stock dividend or
distribution or other similar transaction (other than the Merger), the number of
shares of Buyer Common Stock issued in the Merger shall be equitably adjusted to
eliminate the effects of such event.
(c) The Merger Consideration shall be allocated among the holders of shares
of Seller Stock outstanding immediately prior to the Effective Time by
allocating among such holders that number of shares of Buyer Common Stock
determined by multiplying the number of shares of Seller Stock held by each such
holder by the Conversion Ratio. "Conversion Ratio" means the quotient obtained
by dividing the aggregate number of shares of Buyer Common Stock delivered as
the Merger Consideration (without deduction for Dissenting Shares) by the number
of shares of Seller Stock outstanding immediately prior to the Effective Time.
1.7 Closing of Seller Transfer Books. At the Effective Time, the stock
transfer books of the Seller shall be closed and no transfer of Seller Stock
shall thereafter be made. If, after the Effective Time, certificates
representing shares of Seller Stock are presented to the Surviving Corporation,
they shall be canceled and exchanged for certificates representing Buyer Common
Stock.
1.8 Dissenting Shares.
(a) Shares of capital stock of the Seller held by a shareholder who has
properly exercised dissenter's rights with respect thereto in accordance with
Section 607.1320 of the FBCA (collectively, the "Dissenting Shares") shall not
be converted into Merger Consideration. From and after the Effective Time, a
shareholder
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who has properly exercised such dissenter's rights shall no longer retain any
rights of a shareholder of the Seller or the Surviving Corporation, except those
provided under the FBCA.
(b) The Seller shall give the Buyer (i) prompt notice of any written
notices and demands under Section 607.1320 of the FBCA with respect to any
shares of capital stock of the Seller, any withdrawal of any such demands and
any other instruments served pursuant to the FBCA and received by the Seller and
(ii) the right to participate in all negotiations and proceedings with respect
to any demands under Section 607.1320 with respect to any shares of capital
stock of the Seller. The Seller shall cooperate with the Buyer concerning, and
shall not, except with the prior written consent of the Buyer, voluntarily make
any payment with respect to, or offer to settle or settle, any such demands.
1.9 Exchange of Certificates. The Buyer shall authorize one or more
persons to act as Exchange Agent hereunder (the "Exchange Agent"). As soon as
practicable after the Effective Time, the Buyer shall cause the Exchange Agent
to mail (i) to all former holders of record of Seller Stock instructions for
surrendering their certificates representing Seller Stock in exchange for a
certificate or certificates representing shares of Buyer Common Stock. Upon
surrender of a Seller Stock certificate for cancellation to the Exchange Agent
or to such other agent or agents as may be appointed by the Buyer, the holder of
such certificate shall be entitled to receive in exchange therefor (subject to
the escrow deposit required by Section 1.11) a certificate representing that
number of whole shares of Buyer Common Stock into which the shares of Seller
Stock theretofore represented by such certificate so surrendered shall have been
converted pursuant to the provisions of this Agreement, and the certificate so
surrendered shall forthwith be canceled. Until surrendered in accordance with
the provisions of this Section, each Seller Stock certificate (other than for
shares to be canceled in accordance with Section 1.6(a)(ii) and Dissenting
Shares, if any) shall represent for all purposes the right to receive shares of
Buyer Common Stock. Buyer Common Stock into which Seller Stock shall be
converted in the Merger shall be deemed to have been issued at the Effective
Time for all purposes, including the right to receive dividends and other
distributions payable to holders of record of Buyer Common Stock after the
Effective Time, provided that no such dividend or other distribution shall be
paid to the holder of any unsurrendered certificate until the holder thereof
surrenders such certificate in accordance with this Section 1.9, whereupon the
record holder of such certificate shall be entitled to receive any such
dividends or distributions, without interest thereon, which theretofore had
become payable with respect to shares of Buyer Common Stock represented by such
certificate. If any Buyer Common Stock certificates are to be issued in a name
other than that in which the Seller Stock certificate surrendered is registered,
it shall be a condition of such exchange that the person requesting such
exchange shall deliver to the Exchange Agent all documents necessary to evidence
and effect such transfer and shall pay to the Exchange Agent any transfer or
other taxes required by reason of the issuance of certificates for such shares
of Buyer Common Stock in a name other than that of the registered holder of the
certificate surrendered or establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not applicable.
1.10 No Fractional Shares. No certificates representing fractional shares
of Buyer Common Stock shall be issued upon the surrender for exchange of Seller
Stock certificates. No fractional interest shall entitle the owner to vote or to
any rights of a security holder. In lieu of fractional shares, each holder of
shares of Seller Stock who would otherwise have been entitled to a fractional
share of Buyer Common Stock, will receive upon surrender of a Seller Stock
certificate or certificates, as the case may be, an amount in cash (without
interest) determined by multiplying such fraction by the Market Value of one
share of Buyer Common Stock (determined in accordance with Section 1.6(b)). The
Buyer shall not be liable to any holder of shares of Seller Stock for any cash
in lieu of fractional interests delivered to a public official pursuant to
applicable escheat or abandoned property laws.
1.11 Escrow of Shares. At the Effective Time, the Buyer shall deposit 5%
of the total number of shares comprising the Merger Consideration with an escrow
agent reasonably satisfactory to the Seller to be held and disbursed by such
agent in accordance with the form of escrow agreement (the "Escrow Agreement")
attached hereto as Exhibit B. Such shares shall be deducted pro rata from the
shares allocable to each former holder of Seller Stock.
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1.12 Utility Merger. The Seller will take such action as the Buyer may
reasonably request to effect the merger of their public utility subsidiaries
immediately before, concurrently with or following the Effective Time with the
objective of avoiding the acquisition by the Buyer of securities of a public
utility company in the Merger for purposes of the Public Utility Holding Company
Act of 1935, as amended ("PUHCA").
1.13 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Closing, the Buyer shall be entitled
to revise the structure of the Merger and related transactions, including
without limitation to merge the Seller and a wholly-owned subsidiary of the
Buyer, provided that each of the transactions comprising such revised structure
shall (i) not, in the opinion of Seller's counsel, subject any of the
shareholders of the Seller to adverse tax consequences or change the amount of
Merger Consideration to be received by such shareholders or otherwise materially
adversely affect the shareholders of the Seller and (ii) be capable of
consummation without material delay. This Agreement and any related documents
shall be appropriately amended in order to reflect any such revised structure.
SECTION 2 -- REPRESENTATIONS AND WARRANTIES OF SELLER
Except as set forth on the disclosure schedule delivered to the Buyer on
the date hereof (the "Seller Disclosure Schedule"), the section numbers of which
are numbered to correspond to the section numbers of this Agreement to which
they refer, the Seller represents and warrants to the Buyer as set forth below.
For purposes of this Agreement, knowledge of the Seller of a particular fact or
matter means that any officer, director, division manager or employee with the
title of director of the Seller or any of its Subsidiaries is actually aware of
such fact or matter.
2.1 Organization and Qualification.
(a) Each of the Seller and the Subsidiaries (as defined in Section 2.4) is
a corporation or other legal entity specified in the Seller Disclosure Schedule
duly organized, validly existing and in good standing under the laws of its
state or jurisdiction of incorporation or other organization with full corporate
or other power and authority to own, lease and operate its assets and properties
and to carry on its business as now being and as heretofore conducted. Each of
the Seller and the Subsidiaries is qualified or otherwise authorized to transact
business as a foreign corporation or other legal entity in all jurisdictions in
which such qualification or authorization is required by law, except for
jurisdictions in which the failure to be so qualified or authorized would not
have a material adverse effect on the assets, properties, business, results of
operations or financial condition of the Seller and the Subsidiaries taken as a
whole (the "Business of Seller").
(b) None of the Seller or the Subsidiaries files or is required to file any
franchise, income or other tax returns in any other jurisdiction (in the United
States or outside of the United States), other than its jurisdiction of
incorporation or organization, based upon the ownership or use of property
therein or the derivation of income therefrom, except for jurisdictions in which
the failure to file such returns would not have a material adverse effect on the
Business of Seller.
(c) The Seller has previously provided to the Buyer true and complete
copies of the charter and bylaws or other governing instruments of the Seller
and each Subsidiary as presently in effect, and neither the Seller nor any
Subsidiary is in default in the performance, observation or fulfillment of its
charter or bylaws or other governing instruments. The minute books of the Seller
and each of the Subsidiaries contain true and complete records of all meetings
and consents in lieu of meetings of the Board of Directors or equivalent
governing body (and any committees thereof) and of the shareholders since the
time of each such entity's incorporation or organization and accurately reflect
in all material respects all transactions referred to in such minutes and
consents in lieu of meetings. The stock books or other record of equity
interests of the Seller and each of the Subsidiaries are true and complete.
2.2 Authority to Execute and Perform Agreements. The Seller has the
corporate power and authority to enter into, execute and deliver this Agreement
and, subject to the approval of this Agreement by the Seller's shareholders, to
perform fully its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the Board of Directors of the Seller, and no other corporate
action on the part of the Seller is necessary to consummate the
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transactions contemplated hereby (other than approval by the shareholders of the
Seller of this Agreement and the transactions described herein). This Agreement
has been duly executed and delivered by the Seller and, subject to the
foregoing, constitutes a valid and binding obligation of the Seller, enforceable
against the Seller in accordance with its terms, except as may be limited by
general principles of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally.
2.3 Capitalization and Title to Shares.
(a) The Seller is authorized to issue 2,200,000 shares of Common Stock, of
which 1,068,668.334 shares are issued and outstanding, and 1,000,000 shares of
Class A Common Stock, none of which are issued or outstanding. No other class of
capital stock of the Seller is authorized or outstanding. All of the issued and
outstanding shares of the Seller's capital stock are duly authorized and are
validly issued, fully paid, nonassessable and free of preemptive rights. None of
the issued and outstanding shares of the Seller have been issued in violation of
any federal or state law or any preemptive rights or rights to subscribe for or
purchase securities.
(b) There are no outstanding rights, subscriptions, warrants, calls,
preemptive rights, options or other agreements of any kind to purchase or
otherwise receive from the Seller any shares of the capital stock or any other
security of the Seller, and there are no outstanding securities of any kind
convertible into or exchangeable for such securities. There are no shareholder
agreements, voting trusts, proxies or other agreements, instruments or
understandings with respect to the outstanding shares of capital stock of the
Seller to which the Seller is a party.
(c) The Seller does not own beneficially any shares of capital stock of the
Buyer.
2.4 Subsidiaries and Other Affiliates.
(a) Section 2.4 of the Seller Disclosure Schedule sets forth all of the
Subsidiaries and the jurisdiction in which each is incorporated or organized.
All issued and outstanding shares or other equity interest of each Subsidiary
are owned directly by the Seller free and clear of any charges, liens,
encumbrances, security interests or adverse claims. As used in this Agreement,
"Subsidiary" means any corporation or other legal entity of which the Seller or
any Subsidiary owns, directly or indirectly, 50% or more of the stock or other
equity interest entitled to vote for the election of directors.
(b) Except as set forth above, there are not as of the date hereof, and at
the Effective Time there will not be, any other shares of capital stock or other
equity interest of any Subsidiary authorized or outstanding or any
subscriptions, options, conversion or exchange rights, warrants, repurchase or
redemption agreements, or other agreements, claims or commitments of any nature
whatsoever obligating any Subsidiary to issue, transfer, deliver or sell, or
cause to be issued, transferred, delivered, sold, repurchased or redeemed,
additional shares of the capital stock or other securities or equity interests
of the Seller or any Subsidiary or obligating the Seller or any Subsidiary to
grant, extend or enter into any such agreement. There are no shareholder
agreements, voting trusts, proxies or other agreements, instruments or
understandings with respect to the capital stock of any Subsidiary.
(c) Except for the Subsidiaries, the Seller does not directly or indirectly
own or have any investment in any of the capital stock of, and is not a party to
a partnership or joint venture with, any other person.
2.5 Financial Statements. The Seller has previously delivered to the Buyer
the audited consolidated financial statements of the Seller at September 30,
1996 and for the two years then ended (the "Audited Financial Statements"). The
financial statements referred to in this section are collectively referred to
herein as the "Seller Financial Statements." The Seller Financial Statements
have been prepared from, and are in accordance with, the books and records of
the Seller and present fairly in all material respects the financial position
and the results of operations of the Seller and the Subsidiaries as of the dates
and for the periods indicated, in each case in accordance with generally
accepted accounting principles ("GAAP") consistently applied throughout the
periods involved except as otherwise stated therein.
2.6 Absence of Undisclosed Liabilities. As at September 30, 1996, the
Seller and its Subsidiaries had no material liabilities of any nature, whether
accrued, absolute, contingent or otherwise (including, without
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limitation, liabilities as guarantor or otherwise with respect to obligations of
others or liabilities for taxes due or then accrued or to become due) required
to be reflected or disclosed in the September 30, 1996 balance sheet included in
the Audited Financial Statements that were not adequately reflected or reserved
against on such balance sheet. The Seller and its Subsidiaries have no such
liabilities, other than liabilities (i) adequately reflected or reserved against
on the September 30, 1996 balance sheet (the "Seller Balance Sheet"), (ii)
incurred since September 30, 1996 in the ordinary course of business, (iii)
disclosed in this Agreement or (iv) that would not, in the aggregate, have a
material adverse effect on the Business of Seller.
2.7 No Material Adverse Change. Since September 30, 1996, except as
described in the Seller Financial Statements, there has not been:
(a) any material adverse change in the Business of Seller;
(b) any transaction, commitment, contract or agreement entered into by
the Seller or the Subsidiaries or any relinquishment by the Seller or the
Subsidiaries of any contract or other right having a value of or involving
aggregate payments in excess of $250,000;
(c) any redemption or other acquisition of any capital stock of the
Seller or the Subsidiaries or any declaration, setting aside, or payment of
any dividend or distribution of any kind with respect to any shares of
capital stock of the Seller;
(d) any increase in compensation, bonus or other benefits payable or
to become payable by the Seller and the Subsidiaries to any of their
respective directors, officers or employees, other than regularly scheduled
increases in the ordinary course of business;
(e) any entering into or granting by the Seller or the Subsidiaries of
any new employment agreement providing for annual compensation over
$100,000, any new employee benefit, deferred compensation or other similar
employee benefit arrangement, or any new consulting arrangement providing
for annual compensation over $100,000 and any grant of any severance or
termination rights to any director, officer or employee of the Seller or
its Subsidiaries or any increase in benefits payable under existing
severance or termination pay policies or employment agreements;
(f) any change in any accounting method or practice followed by the
Seller;
(g) any making by the Seller or any Subsidiary of any loan or advance
to any shareholder, officer, director or consultant (other than expense
advances made in the ordinary course of business), or any other loan or
advance otherwise than in the ordinary course of business;
(h) except for inventory or equipment acquired in the ordinary course
of business, any acquisition by the Seller or the Subsidiaries of all or
any part of the assets, properties, capital stock or business of any other
person; or
(i) except in the ordinary course of business, any sale, abandonment
or any other disposition of any of the Seller's or the Subsidiaries' assets
or properties.
2.8 Tax Matters.
(a) The Seller and its Subsidiaries have filed all tax reports and returns
required to be filed by them and have paid or will timely pay all taxes and
other charges shown as due on such reports and returns. Neither the Seller nor
any of its Subsidiaries is delinquent in the payment of any material tax
assessment or other governmental charge (including without limitation applicable
withholding taxes). Any provision for taxes reflected in the Seller Balance
Sheet is adequate for payment of any and all tax liabilities for periods ending
on or before September 30, 1996 and there are no tax liens on any assets of the
Seller or its Subsidiaries except liens for current taxes not yet due.
(b) There has not been any audit of any tax return filed by the Seller or
any of its Subsidiaries and no audit of any such tax return is in progress and
neither the Seller nor any Subsidiary has been notified by any tax authority
that any such audit is contemplated or pending. The Seller knows of no tax
deficiency or claim for additional taxes asserted or threatened to be asserted
against the Seller or any of its Subsidiaries by any
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taxing authority and the Seller knows of no grounds for any such assessment. No
extension of time with respect to any date on which a tax return was or is to be
filed by the Seller or any of its Subsidiaries is in force, and no waiver or
agreement by the Seller or any of its Subsidiaries is in force for the extension
of time for the assessment or payment of any tax. For purposes of this
Agreement, the term "tax" includes all federal, state, local and foreign taxes
or assessments, including income, sales, gross receipts, excise, use, value
added, royalty, franchise, payroll, withholding, property and import taxes,
franchise fees and any interest or penalties applicable thereto.
(c) Neither the Seller nor any of its Subsidiaries has agreed to, or is
required to, make any adjustments under Section 481(a) of the Code by reason of
a change in accounting method or otherwise.
2.9 Compliance with Laws.
(a) The Seller and its Subsidiaries have all licenses, permits,
certifications, franchises, territorial agreements, orders or approvals of any
federal, state, local or foreign governmental or regulatory body material to the
conduct of their respective businesses (collectively, "Permits"); such Permits
are in full force and effect; and no proceeding is pending or, to the knowledge
of the Seller, threatened to revoke or limit any Permit. Section 2.9 of the
Seller Disclosure Schedule contains a true and complete list of all material
Permits.
(b) The Seller and its Subsidiaries are not in violation of any applicable
law, ordinance or regulation or any order, judgment, injunction, decree or other
requirement of any court, arbitrator or governmental or regulatory body, except
for violations that would not, in the aggregate, have a material adverse effect
on the Business of Seller. During the last three years, the Seller has not
received notice of, and there has not been any citation, fine or penalty imposed
against the Seller for, any such violation or alleged violation which would,
individually or in the aggregate, have a material adverse effect on the Business
of Seller. To the knowledge of the Seller, the Seller has not received any such
notice of violation more than three years ago which has not been resolved,
except for violations that would not, individually or in the aggregate, have a
material adverse effect on the Business of the Seller.
(c) The Seller has no knowledge of any pending or proposed law, rule or
regulation that could reasonably be expected to require (i) any Permit not
reasonably expected to be issued in the ordinary course of business or (ii) any
material expenditure to effect compliance.
2.10 No Breach. Except for (a) the filing of a premerger notification form
pursuant to the HSR Act, (b) the filing of the Articles of Merger with the
Florida Department of State and (c) any required approval by the Federal Energy
Regulatory Commission ("FERC"), the execution, delivery and performance of this
Agreement by the Seller and the consummation of the transactions contemplated
hereby will not (i) violate any provision of the Articles of Incorporation or
Bylaws of the Seller, (ii) violate or result in the breach of any of the terms
or conditions of, result in modification of the effect of, or otherwise give any
other contracting party the right to terminate, or constitute (or with notice or
lapse of time or both constitute) a default under, any instrument, contract or
other agreement to which the Seller or any of its Subsidiaries is a party or to
which any of them or any of their assets or properties is bound or subject,
(iii) violate any law, ordinance or regulation or any order, judgment,
injunction, decree or other requirement of any court, arbitrator or governmental
or regulatory body applicable to the Seller or its Subsidiaries or by which any
of Seller's or its Subsidiaries' assets, properties or securities is bound, (iv)
violate any Permit, (v) require any filing with, notice to, or permit, consent
or approval of, any other governmental or regulatory body; or (vi) result in the
creation of any lien or other encumbrance on the assets, properties or
securities of the Seller or the Subsidiaries, excluding from the foregoing
clauses (ii), (iii), (iv), (v) and (vi) any exceptions to the foregoing that, in
the aggregate, would not have a material adverse effect on the Business of
Seller or on the ability of the Seller to consummate the transactions
contemplated hereby.
2.11 Actions and Proceedings. There are no outstanding orders (other than
orders of the Florida Public Service Commission relating to the routine business
of Peoples Gas System, Inc. ("PGS")), awards, judgments, injunctions or decrees
of any court, arbitrator or governmental or regulatory body against the Seller,
any Subsidiary or any of their securities, assets or properties. There are no
actions, suits, investigations or claims or legal, administrative or arbitration
proceedings pending or, to the knowledge of the Seller,
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threatened against the Seller or any Subsidiary that individually or in the
aggregate would have a material adverse effect upon the transactions
contemplated hereby or the Business of Seller. To the knowledge of the Seller,
there is no fact, event or circumstance now in existence that reasonably could
be expected to give rise to any action, suit, claim, proceeding or investigation
that individually or in the aggregate would have a material adverse effect upon
the transactions contemplated hereby or on the Business of Seller.
2.12 Regulatory Proceedings. Neither the Seller nor any of its
Subsidiaries all or part of whose rates or services are regulated by a
governmental authority has rates which have been or are being collected subject
to refund, pending final resolution of any proceeding before such authority or
on appeal to the courts or is a party to any proceeding before such authority or
on appeal from orders of such authority which could result in orders having a
material adverse effect on the Business of Seller. There is no proceeding
pending, or to the best knowledge of the Seller, threatened by the Securities
and Exchange Commission (the "SEC") to revoke or condition the Seller's
exemption from registration under PUHCA.
2.13 Regulation as a Utility.
(a) Neither the Seller nor any "subsidiary company" or "affiliate" (as such
terms are defined in PUHCA) of the Seller (i) is subject to regulation as a
public utility or public service company (or similar designation) by any state
in the United States or foreign jurisdiction, except that PGS is a public
utility regulated by the Florida Public Service Commission, (ii) is a "public
utility" within the meaning of, or subject to regulation by the FERC under, the
Federal Power Act or (iii) is a "natural gas company" within the meaning of, or
is subject to regulation under, the Natural Gas Act.
(b) The Seller is a holding company exempt from registration under Section
3(a)(1) of PUHCA. Except for PGS, no "subsidiary company" or "affiliate" (as
such terms are defined in PUHCA) of the Seller is a "public utility company," as
defined in PUHCA.
2.14 Contracts.
(a) Except as set forth in Section 2.14 of the Seller Disclosure Schedule,
neither the Seller nor any of its Subsidiaries is a party to or is bound by (i)
any material contract, including without limitation any contract having a value
of or involving aggregate payments in excess of $250,000, (ii) any contract
relating to the employment, election, retention in office or severance of any
present or former director, officer or employee of Seller or any Subsidiary,
(iii) any contract pursuant to which any payment (whether of severance pay or
otherwise) became or may become due to any director, officer or employee of
Seller or any Subsidiary upon execution of this Agreement or upon or following
consummation of the transactions contemplated hereunder or (iv) any contract
with a labor union.
(b) The Seller has furnished true and complete copies of all the contracts
(and all amendments, waivers or other modifications thereto) set forth on the
Seller Disclosure Schedule. Each of such contracts is valid, subsisting, in full
force and effect, binding upon the Seller, and to the knowledge of the Seller,
binding upon the other parties thereto in accordance with their terms, and the
Seller and its Subsidiaries are not in default under any of them, nor, to the
knowledge of the Seller, is any other party to any such contract in default
thereunder, nor does any condition exist that with notice or lapse of time or
both would constitute a default thereunder or create a right of termination in
favor of any party thereto, except, in each case, such defaults or rights of
termination as would not, individually or in the aggregate, have a material
adverse effect on the Business of Seller.
(c) For purposes of this section, "contract" means any agreement,
arrangement or undertaking, whether written or oral.
2.15 Properties.
(a) The Seller and its Subsidiaries own and have good title to all of their
assets and properties reflected as owned on the Seller Balance Sheet, free and
clear of any lien, claim or other encumbrance, except for (i) the liens, claims
or other encumbrances reflected in the Seller Financial Statements, (ii) assets
and properties disposed of, or subject to purchase or sales orders, in the
ordinary course of business since September 30, 1996, (iii) liens or other
encumbrances securing the liens of materialmen, carriers, landlords
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and like persons, all of which are not yet due and payable, (iv) liens for taxes
not yet delinquent and (v) liens, claims or other encumbrances that, in the
aggregate, are not material to the Business of Seller.
(b) The Seller and its Subsidiaries own or have a valid leasehold interest
in all of the real estate, buildings, structures, leasehold improvements,
equipment and other tangible property material to the conduct of their
respective businesses, including without limitation all equipment, pipelines,
customer hookups, meters, interconnections, switches, gathering stations and
other tangible property constituting its plant necessary for the operations of
or included in the rate base of PGS as a natural gas "public utility" under
Chapter 366, Florida Statutes, and material to the business of PGS. Seller or a
Subsidiary owns or has a valid leasehold or easement interest in or a license,
permit or franchise to use the real property upon or under which such equipment
and other tangible property is located, except where the failure to own or have
such interest in or license, permit or franchise to use such real property would
not have a material adverse effect on the business of PGS. All of such equipment
and other tangible property material to the operation of the business of PGS is
in good and sufficient operating condition and repair, ordinary wear and tear
excepted.
2.16 Intellectual Property. The Seller and its Subsidiaries own, or are
licensed to use, or otherwise have the right to use all patents, trademarks,
service marks, trade names, logos, franchises, and copyrights, and all
applications for any of the foregoing, and all technology, inventions, trade
secrets, know-how, computer software and processes material to the Business of
Seller (collectively, the "Proprietary Rights"). A list of all such copyrights,
trademarks, tradenames and patents, and all applications therefor, has been
previously delivered to the Buyer. The Seller is not aware of any claim by any
third party that the business of the Seller or its Subsidiaries as currently
conducted or proposed to be conducted infringes upon the proprietary rights of
others, nor has the Seller or its Subsidiaries received any notice or claim from
any third party of such infringement by the Seller or any of its Subsidiaries.
The Seller is not aware of any infringement by any third party on, or any
competing claim of its right to use or own any of, the Proprietary Rights of the
Seller and its Subsidiaries. The Seller and its Subsidiaries have the right to
use, free and clear of claims or rights of others, all customer lists and
computer software material to the Business of the Seller. To the knowledge of
the Seller, none of the activities of the employees of the Seller on behalf of
the Seller violates any agreements or arrangements which any such employees have
with former employers.
2.17 Employee Benefit Plans. Section 2.17 of the Seller Disclosure
Schedule sets forth a complete list of all pension, profit sharing, retirement,
deferred compensation, welfare, insurance, disability, bonus, vacation pay,
severance pay and similar plans, programs or arrangements, including without
limitation all employee benefit plans as defined in Section 3 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (the "Plans")
maintained by the Seller or its Subsidiaries. Neither the Seller nor any
Subsidiary maintains or contributes to any "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, and neither the Seller nor any Subsidiary has
incurred any material liability under Sections 4062, 4063 or 4201 of ERISA. Each
Plan maintained by the Seller or a Subsidiary which is intended to be qualified
under either Section 401(a) or 501(c)(9) of the Code ("Qualified Plans") is so
qualified. Each Plan has been administered in all material respects in
accordance with the terms of such Plan and the provisions of any and all
statutes, orders or governmental rules or regulations, including without
limitation ERISA and the Code, and to the knowledge of the Seller nothing has
been done or omitted to be done with respect to any Plan that would result in
any material liability on the part of the Seller or a Subsidiary under Title I
of ERISA or Section 4975 of the Code. All reports required to be filed with
respect to all Plans, including without limitation annual reports on Form 5500,
have been timely filed except where the failure to so file would not have a
material adverse effect on the Business of Seller. No "reportable event" as
defined at Section 4043 of ERISA, other than any such event for which the
thirty-day notice period has been waived, has occurred with respect to any
pension plan subject to Title IV of ERISA. With respect to all pension plans
subject to Title IV of ERISA, such plans have no unfunded benefit liabilities,
all contributions to such plans under the minimum funding requirements of
Section 412 of the Code have been made and all premium payments to the Pension
Benefit Guaranty Corporation with respect to such plans have been made. All
claims for benefits under any plan or arrangement providing health, disability
or death benefits incurred by employees on or before the Closing are or will be
fully covered by third-party insurance policies or programs. Except for
continuation of health coverage to the extent required under Section 4980B of
the Code or as otherwise set forth in this
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Agreement, there are no obligations under any welfare plan providing benefits
after termination of employment.
2.18 Employee Relations. The Seller and its Subsidiaries have
approximately 1,100 full-time equivalent employees and generally enjoy good
employer-employee relations. The Seller and its Subsidiaries are not delinquent
in payments to any of their respective employees or consultants for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed by them to the date hereof or amounts required to be reimbursed to
such employees. Upon termination of the employment of any employees, neither the
Seller, its Subsidiaries nor the Buyer or the Surviving Corporation will by
reason of the Merger or anything done prior to the Effective Time be liable to
any of such employees for severance pay or any other payments (other than
accrued salary, vacation or sick pay in accordance with the Seller's normal
policies). True and complete information as to all current directors, officers,
employees with base salary exceeding $47,000 a year and consultants of the
Seller and its Subsidiaries, including, in each case where applicable, name,
current job title, base salary, bonus potential, commissions and termination
obligations has been previously furnished to the Buyer.
2.19 Transactions with Management. No officer or director of the Seller or
any of its Subsidiaries has (whether directly or indirectly through another
entity in which such person has an interest, other than as the holder of less
that 1% of a class of securities of a publicly traded company) any interest in
(i) any property or assets of the Seller or any of its Subsidiaries (except as a
shareholder), (ii) any current competitor, customer or supplier of the Seller or
any of its Subsidiaries, or (iii) any person which is currently a party to any
material contract or agreement with the Seller or any of its Subsidiaries, other
than contracts with PGS at rates or charges fixed in conformity with law or
governmental authority.
2.20 Brokerage. Except as otherwise disclosed to the Buyer in writing, no
broker, finder, agent or similar intermediary has acted on behalf of the Seller
in connection with this Agreement or the transactions contemplated hereby, and
there are no brokerage commissions, finders' fees or similar fees or commissions
payable in connection herewith based on any agreement, arrangement or
understanding with the Seller.
2.21 Environmental Matters.
(a) Except as authorized by Environmental Laws, neither the Seller nor any
of its Subsidiaries has generated, used, handled or stored any Hazardous
Materials. There has been no generation, use, handling, storage or disposal of
any Hazardous Materials in violation of any Environmental Law at any site owned
or premises leased by the Seller or any of its Subsidiaries during the period of
the Seller's or such Subsidiary's ownership or lease or, to the best of Seller's
knowledge, prior thereto, nor has there been or is there threatened any release
of any Environmental Contaminants into, on, at or from any such site or
premises, including without limitation into the ambient air, groundwater,
surface water, soils or subsurface strata, during such period or, to the best of
Seller's knowledge, prior thereto in violation of any Environmental Law or which
created or will create an obligation to report or remediate such release. To the
knowledge of the Seller, there is no underground storage tank or other container
at any site owned or premises leased by the Seller or any of its Subsidiaries.
(b) Neither the Seller nor any Subsidiary has received written notification
that, and the Seller has no knowledge that, any site owned or premises leased by
the Seller or any of its Subsidiaries is the subject of any federal, state or
local civil, criminal or administrative investigation evaluating whether, or
alleging that, any remedial action is necessary to respond to a release or a
threatened release of any Environmental Contaminant into the environment. No
such site or premises is listed, or to the Seller's knowledge, proposed for
listing, on the National Priorities List or the Comprehensive Environmental
Response, Compensation, and Liability Information System, both as provided under
the federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), or any comparable state or local governmental lists. Neither the
Seller nor any Subsidiary has received written notification of, and the Seller
has no knowledge of, any potential responsibility of the Seller or any of its
Subsidiaries pursuant to the provisions of (i) Section 104(e) of CERCLA (ii) any
similar Environmental Law, or (iii) any order issued pursuant to the provisions
of any such Environmental Law with respect to Environmental Contaminants used,
manufactured, generated, stored, or
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treated at, transported from, or disposed of on, any site owned or premises
leased by the Seller or any of its Subsidiaries.
(c) The Seller has previously furnished to the Buyer copies of any
environmental audits or risk assessments, site assessments, documentation
regarding off-site disposal of Hazardous Materials or release of Environmental
Contaminant, spill control plans and material correspondence with any
governmental agency regarding the foregoing.
(d) For purposes of this Agreement,
(i) "Environmental Laws" means laws (including common law),
regulations, codes, rules, orders, ordinances, permits, requirements and
final governmental determinations pertaining to pollution or protection of
human health or the environment, as adopted or in effect in the
jurisdictions in which the applicable site or premises are located;
(ii) "Environmental Contaminant" means Hazardous Materials,
pollutants, contaminants, toxic or constituent substances or waste
radioactive substances, materials or special wastes, petroleum or petroleum
products, polychlorinated byphenals, asbestos containing materials, or any
other substance or material, in each case regulated by applicable
Environmental Laws;
(iii) "Hazardous Materials" means any "hazardous waste" as defined in
either the Federal Resource Conservation and Recovery Act or regulations
adopted pursuant to said Act, and any "hazardous substances" or "hazardous
materials" as defined in CERCLA; and
(iv) The term "release" has the meaning specified in CERCLA.
2.22 Insurance. Section 2.22 of the Seller Disclosure Schedule sets forth
a true and complete list of all insurance policies and bonds maintained by the
Seller and its Subsidiaries. All of such policies and bonds are in full force
and effect and, to the knowledge of the Seller, are valid and enforceable in
accordance with their terms. Neither Seller nor any Subsidiary has received any
notice of cancellation or amendment of any such policy or bond or is in default
thereunder, no coverage thereunder is being disputed and all material claims
thereunder have been filed in a timely fashion.
2.23 Registration Statement. The information furnished by the Seller for
inclusion in the Registration Statement referred to in Section 4.7 at the time
the Registration Statement becomes effective and at the time of approval of the
Merger by the shareholders of the Seller pursuant to Section 4.8, including in
each case any amendments or supplements thereto, will comply as to form in all
material respects with the applicable provisions of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and the Securities Act of 1933, as
amended (the "Securities Act"), respectively, and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading (subject, if
required, to a reasonable period of time for the parties hereto to take such
action as may be necessary to amend or supplement the Registration Statement).
2.24 Takeover Laws. The Seller is not subject to any "fair price,"
"business combination," "control share acquisition" or similar statute which
would apply to the transactions contemplated by this Agreement or the Seller
Option, other than Section 607.0902 of the FBCA. The Board of Directors of the
Seller has approved the transactions contemplated by this Agreement and the
Seller Option such that Section 607.0902 of the FBCA will not apply to such
transactions.
2.25 Fairness Opinion. The Board of Directors of the Seller has received
the opinion of CS First Boston Corporation ("CS First Boston") to the effect
that, as of the date on which the Board authorized this Agreement, the Merger is
fair from a financial point of view to the Seller and its shareholders, and such
opinion has not, as of the date hereof, been withdrawn.
2.26 Disclosure. The representations and warranties and statements of the
Seller contained in this Agreement do not contain any untrue statement of a
material fact, and, when taken together, do not omit to
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state any material fact necessary to make such representations, warranties and
statements, in light of the circumstances under which they are made, not
misleading.
SECTION 3 -- REPRESENTATIONS AND WARRANTIES OF BUYER
Except as set forth on the disclosure schedule delivered to the Seller on
the date hereof (the "Buyer Disclosure Schedule"), the section numbers of which
are numbered to correspond to the section numbers of this Agreement to which
they refer, the Buyer represents and warrants to the Seller as follows. For
purposes of this Agreement, knowledge of the Buyer of a particular fact or
matter means that any officer or director of the Buyer is actually aware of such
fact or matter.
3.1 Organization. The Buyer is a corporation duly organized, validly
existing and in good standing under the laws of Florida with full corporate
power and authority to own, lease and operate its assets and to carry on its
business as now being and as heretofore conducted.
3.2 Authority to Execute and Perform Agreement. The Buyer has the
corporate power and authority to enter into, execute and deliver this Agreement
and to perform fully its obligations hereunder. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by the Board of Directors of the Buyer, which is the only
required corporate action on the part of the Buyer. This Agreement has been duly
executed and delivered by the Buyer and constitutes a valid and binding
obligation of the Buyer, enforceable against the Buyer in accordance with its
terms, except as may be limited by general principles of equity and by
bankruptcy, insolvency and similar laws affecting creditors' rights and remedies
generally.
3.3 Capitalization. The Buyer is authorized to issue 400,000,000 shares of
Buyer Common Stock, of which 117,244,327 shares were issued and outstanding as
of June 30, 1996, and 10,000,000 shares of preferred stock, $1.00 par value,
issuable in series, none of which are outstanding. As of June 30, 1996, except
for an aggregate of 8,173,272 shares of Buyer Common Stock reserved for issuance
under various stock option and other stock plans of the Buyer and except for the
shares of Buyer Common Stock reserved for issuance under the Buyer's Shareholder
Rights Plan, there is no outstanding right, subscription, warrant, call,
preemptive right, option or other agreement of any kind to purchase or otherwise
to receive from the Buyer any shares of the capital stock or any other security
of the Buyer and there is no outstanding security of any kind convertible into
or exchangeable for such capital stock. When issued in accordance with the terms
of this Agreement, the Buyer Common Stock to be issued for the Merger will be
duly authorized, validly issued, fully paid, nonassessable and free of any
preemptive rights.
3.4 SEC Reports. The Buyer has previously delivered to the Seller its (i)
Annual Report on Form 10-K for the year ended December 31, 1995 (the "Buyer
10-K"), as filed with the SEC, (ii) all proxy statements relating to the Buyer's
meetings of stockholders held since December 31, 1995 and (iii) all other
periodic and current reports filed by the Buyer with the SEC under the Exchange
Act since December 31, 1995. As of their respective dates, such reports complied
in all material respects with applicable SEC requirements and did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The Buyer
has timely filed with the SEC all reports required to be filed under Sections
13, 14 or 15(d) of the Exchange Act since December 31, 1995.
3.5 Financial Statements. The consolidated financial statements contained
in the Buyer 10-K and in the Buyer's quarterly report on Form 10-Q for the
quarter ended September 30, 1996 (the "Buyer 10-Q") have been prepared from, and
are in accordance with, the books and records of the Buyer and present fairly in
all material respects the consolidated financial condition and results of
operations of the Buyer and its subsidiaries as of and for the periods presented
therein, all in conformity with GAAP applied on a consistent basis, except as
otherwise noted therein and subject (in the case of the unaudited financial
statements included in the Buyer 10-Q) to normal year-end adjustments, which are
not, in the aggregate, material.
3.6 No Material Adverse Change. Since December 31, 1995, except as
described in the Buyer 10-Q and Buyer's current reports on Form 8-K filed since
December 31, 1995 (the "Buyer 8-Ks"), there has not been
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any material adverse change in the assets, properties, business, results of
operations or financial condition of the Buyer and its subsidiaries taken as a
whole (the "Business of Buyer").
3.7 Actions and Proceedings. Except as set forth in the Buyer 10-K, 10-Q
or 8-Ks, there are no actions, suits or claims or legal, administrative or
arbitration proceedings pending or, to the knowledge of the Buyer, threatened
against the Buyer or any other corporation or legal entity of which the Buyer
owns, directly or indirectly, 50% or more of the stock or other equity interest
entitled to vote for the election of directors that individually or in the
aggregate would have a material adverse effect upon the transactions
contemplated hereby or the Business of Buyer.
3.8 No Breach. Except for (a) the registration of the Buyer Common Stock
to be issued in the Merger under the Securities Act, (b) the filing of a
premerger notification form pursuant to the HSR Act, (c) any required approval
by the FERC, (d) the filing of the Articles of Merger with the Florida
Department of State, (e) any required filings with various state "blue sky"
authorities and (f) the listing of Buyer Common Stock to be issued in the Merger
on the NYSE, the execution, delivery and performance of this Agreement and the
Escrow Agreement by the Buyer and consummation of the transactions contemplated
hereby will not (i) violate any provision of the Articles of Incorporation or
Bylaws of the Buyer, (ii) violate or result in the breach of any of the terms or
conditions of, result in modification of the effect of, or otherwise give any
other contracting party the right to terminate, or constitute (or with notice or
lapse of time or both constitute) a default under, any instrument, contract or
other agreement to which the Buyer is party or to which the Buyer or any of its
assets or properties is bound or subject, (iii) violate any law, ordinance or
regulation or any order, judgment, injunction, decree or requirement of any
court, arbitrator or governmental or regulatory body applicable to the Buyer or
by which any of its assets or properties is bound, (iv) require any filing with,
notice to, or permit, consent or approval of, any governmental or regulatory
body or (v) result in the creation of any lien or other encumbrance on the
assets or properties of the Buyer, excluding from the foregoing clauses (ii),
(iii), (iv) and (v) any exceptions to the foregoing that, in the aggregate,
would not have a material adverse effect on the Business of Buyer or on the
ability of the Buyer to consummate the transactions contemplated hereby.
3.9 Registration Statement. The information furnished by the Buyer for
inclusion in the Registration Statement referred to in Section 4.7 at the time
the Registration Statement becomes effective and at the time of approval of the
Merger by the shareholders of the Seller pursuant to Section 4.8, including in
each case any amendments or supplements thereto, will comply as to form in all
material respects with the applicable provisions of the Exchange Act and the
Securities Act, respectively, and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading (subject, if required, to a reasonable
period of time for the parties hereto to take such action as may be necessary to
amend or supplement the Registration Statement).
3.10 Absence of Undisclosed Liabilities. As of September 30, 1996, the
Buyer and its subsidiaries had no material liabilities of any nature, whether
accrued, absolute, contingent or otherwise (including without limitation,
liabilities as guarantor or otherwise with respect to obligations of others or
liabilities for taxes due or then accrued or to become due) required to be
reflected or disclosed in the September 30, 1996 balance sheet included in the
Buyer 10-Q that were not adequately reflected or reserved against on such
balance sheet. The Buyer and its subsidiaries have no such liabilities, other
than liabilities (i) adequately reflected or reserved against on such September
30, 1996 balance sheet, (ii) incurred since September 30, 1996 in the ordinary
course of business, (iii) disclosed in this Agreement or (iv) that would not, in
the aggregate, have a material adverse effect on the Business of Buyer.
3.11 Compliance with Laws.
(a) The Buyer and its subsidiaries have all licenses, permits,
certificates, franchises, territorial agreements, orders or approvals of any
federal, state, local or foreign governmental or regulatory body material to the
conduct of their respective businesses (collectively, "Permits"); such Permits
are in full force and effect; and no proceeding is pending, or, to the knowledge
of Buyer, threatened to revoke or limit any Permit.
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(b) The Buyer and its subsidiaries are not in violation of any applicable
law, ordinance or regulation or any order, judgement, injunction, decree or
other requirement of any court, arbitrator or governmental or regulatory body,
except for violations that would not, in the aggregate, have a material adverse
effect on the Business of Buyer.
3.12 Disclosure. The representations and warranties and statements of the
Buyer contained in this Agreement do not contain any untrue statements of a
material fact, and, when taken together, do not omit to state any material fact
necessary to make such representations, warranties and statements, in light of
the circumstances under which they are made, not misleading.
SECTION 4 -- COVENANTS AND AGREEMENTS
The parties covenant and agree as follows:
4.1 Conduct of Business. Except with the prior written consent of the
Buyer, which will not be unreasonably withheld, and except as otherwise
contemplated herein, during the period from the date hereof to the Closing Date,
the Seller shall observe the following covenants:
(a) Affirmative Covenants Pending Closing. The Seller will and will
cause its Subsidiaries to:
(i) Preservation of Personnel. Use all reasonable efforts to
preserve intact their business organizations and keep available the
services of present employees, in each case in accordance with past
practice, it being understood that termination of employees with poor
performance ratings shall not constitute a violation of this covenant;
(ii) Insurance. Use all reasonable efforts to keep in effect all
insurance policies in coverage amounts not less than those in effect at
the date of this Agreement;
(iii) Preservation of the Business; Maintenance of Properties,
Contracts. Use all reasonable efforts to preserve their businesses,
advertise, promote and market their products and services, keep their
properties intact, preserve their goodwill, and maintain all physical
properties in good operating condition;
(iv) Intellectual Property Rights. Use all reasonable efforts to
preserve and protect the Proprietary Rights; and
(v) Ordinary Course of Business. Operate their businesses
diligently and solely in the ordinary course.
(b) Negative Covenants Pending Closing. The Seller will not and will
cause its Subsidiaries not to:
(i) Disposition of Assets. Sell or transfer, or mortgage, pledge
or create or permit to be created any lien on, any of their assets,
other than sales or transfers in the ordinary course of business or
contemplated by this Agreement and liens existing under arrangements
disclosed herein or permitted under Section 2.15.
(ii) Liabilities. (A) Incur any obligation or liability other than
in the ordinary course of the Seller's or its Subsidiaries' business,
(B) incur any indebtedness for borrowed money, except for borrowings
under existing loan agreements in the ordinary course of business or (C)
enter into any contracts or commitments involving payments by the Seller
or its Subsidiaries 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) Compensation. (A) Change the compensation or fringe benefits
of any officer, director, employee or consultant, except for ordinary
merit increases for employees based on periodic reviews in accordance
with past practices, or (B) enter into or modify any Plan or any
employment, severance or other agreement with any officer, director,
employee or consultant of the Seller or its Subsidiaries.
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(iv) Capital Stock. (A) Grant or accelerate the exercisability of,
any option, warrant or other right to purchase, or to convert any
obligation into, shares of its capital stock, (B) declare or pay any
dividend or other distribution with respect to any shares of its capital
stock, except ordinary dividends in accordance with past practice out of
current income not exceeding $1.125 per share quarterly or (C) issue any
shares of its capital stock.
(v) Charter and Bylaws. Amend the Articles of Incorporation or
Bylaws of the Seller.
(vi) Rate Matters. 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 the Buyer.
(vii) Acquisitions. Make any material acquisition of property
other than in the ordinary course of the Seller's or its Subsidiaries'
business.
(viii) Other Material Changes. Take any affirmative action or fail
to take any reasonable action within its or their control as a result of
which any of the changes or events listed in Section 2.7 is likely to
occur.
4.2 Corporate Examinations and Investigations. Between the date hereof and
the Effective Time:
(a) The Buyer shall be entitled, through its employees and
representatives, to have such access to the assets, properties, business,
books, records and operations of the Seller and its Subsidiaries as the
Buyer shall reasonably request in connection with the Buyer's investigation
of the Seller and its Subsidiaries with respect to the transaction
contemplated hereby. Any such investigation and examination shall be
conducted at reasonable times and the Seller shall cooperate fully therein.
No investigation by the Buyer shall diminish or obviate any of the
representations, warranties, covenants or agreements of the Seller
contained in this Agreement. In order that the Buyer may have full
opportunity to make such investigation, the Seller shall furnish the
representatives of the Buyer during such period with all such information
and copies of such documents concerning the affairs of the Seller and its
Subsidiaries as such representatives may reasonably request and cause its
officers, employees, consultants, agents, accountants and attorneys to
cooperate fully with such representatives in connection with such
investigation.
(b) The Seller shall be entitled, through its officers and
representatives, to have access to the officers of the Buyer to discuss the
Buyer's business, operations and financial condition to the extent
reasonably required to confirm the accuracy of or compliance with the
representations, warranties, covenants and agreements of the Buyer
contained in this Agreement. No investigation by the Seller shall diminish
or obviate any of such representations, warranties, covenants or
agreements.
4.3 Expenses. Subject to Section 8.3, whether or not the Merger is
consummated, each of the Seller and the Buyer shall bear its own expenses
incurred in connection with the preparation, execution and performance of this
Agreement and the transactions contemplated hereby, including without limitation
all fees and expenses of agents, brokers, representatives, investment advisors,
counsel and accountants; provided, however, that the aggregate amount of such
expenses paid or incurred by the Seller shall not exceed $5,000,000 allocated as
specified in Section 4.3 of the Seller Disclosure Schedule.
4.4 Authorization from Others. Prior to the Closing Date, the parties
shall use all reasonable efforts to obtain all authorizations, consents and
permits required to permit the consummation of the transactions contemplated by
this Agreement.
4.5 Consummation of Agreement. Except as expressly provided herein, each
party shall use all reasonable efforts to perform and fulfill all conditions and
obligations to be performed and fulfilled by it under this Agreement, including
without limitation taking no action which would preclude delivery of the
opinions and letters referred to in Sections 6.5, 6.7 and 7.3, and to ensure
that to the extent within its control, no breach of any of the respective
representations, warranties and agreements hereunder occurs or exists on or
prior to the Effective Time, all to the end that the transactions contemplated
by this Agreement shall be fully carried out in a timely fashion. In connection
with the foregoing, each of the Seller and the Buyer shall provide, and
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the Seller shall use all reasonable efforts to cause its shareholders to
provide, to counsel to the Seller and counsel to the Buyer a letter setting
forth facts, assumptions and representations on which such counsel may rely in
rendering their respective opinions referred to in Sections 6.7 and 7.3.
4.6 Further Assurances. Each party shall execute such documents, further
instruments of transfer and assignment and other papers and take such further
actions as may be reasonably required or desirable to carry out the provisions
hereof and the transactions contemplated hereby.
4.7 Securities Law Matters. The Buyer shall cause to be prepared and filed
with the SEC, as soon as reasonably practical, a Registration Statement under
the Securities Act complying in form and substance in all material respects with
the requirements of applicable law for the purpose of registering the Buyer
Common Stock to be issued in the Merger and will use all reasonable efforts to
have the Registration Statement declared effective by the SEC as soon thereafter
as possible and remain effective through the Closing Date. The Seller shall
cooperate with the Buyer in the preparation and filing of the Registration
Statement and in seeking to have it declared effective, including giving to the
Buyer all information concerning the Seller which is required for inclusion in
the Registration Statement or in any amendment thereto. Prior to the Effective
Time, the Buyer shall use all reasonable efforts to qualify the shares of the
Buyer Common Stock to be issued in the Merger under the securities or "blue sky"
laws of every state of the United States, except any such state with respect to
which counsel for the Buyer has determined that such qualification is not
required under the securities or "blue sky" laws of such state, and except that
in no event shall the Buyer be obligated to qualify as a foreign corporation or
to execute a general consent to service of process in any state in which it has
not previously so qualified or has not previously so consented. The Buyer shall
make all filings with the NYSE as may be required in connection with the Merger
and the listing of the Buyer Common Stock to be issued in the Merger.
4.8 Shareholder Action.
(a) The Seller, acting through its Board of Directors, shall, in accordance
with applicable law and its Articles of Incorporation and Bylaws:
(i) within one (1) day after the Registration Statement has been
declared effective by the SEC, commence the solicitation of written
consents from its shareholders approving this Agreement;
(ii) include in the proxy statement sent to the Seller's shareholders
the recommendation of its Board of Directors that shareholders of the
Seller consent to the approval of this Agreement; and
(iii) use all reasonable efforts (A) to obtain and furnish the
information required to be included by it in the proxy statement and to
cause such information (excluding information furnished by the Buyer) not
to contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect
to any material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statement therein not
false or misleading, (B) to cause the proxy statement to be mailed to its
shareholders at the earliest practicable time after the Registration
Statement is declared effective or, at the request of the Buyer, to cause
the preliminary proxy statement and any supplements thereto to be mailed to
its shareholders at the earliest practicable time after the Registration
Statement is filed with the SEC and (C) to obtain the necessary approval by
its shareholders of this Agreement and the Merger. Such approval shall be
deemed obtained when consented to in writing by a majority of the
outstanding shares of Seller Stock in accordance with the FBCA.
Notwithstanding the foregoing, in the event of a proposed Acquisition
Transaction (as defined in Section 4.11), nothing contained in this Section
4.8(a) shall require the Board of Directors of the Seller to take any action or
refrain from taking any action with respect to such Acquisition Transaction that
the Board determines in good faith on the written advice of outside counsel
would cause it to breach its fiduciary obligations under applicable law.
(b) It shall be a condition to the obligation of the Seller to send the
proxy statement to its shareholders and to solicit the approval of its
shareholders by written consent that the opinion of CS First Boston referred to
in Section 2.25 shall not have been withdrawn.
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4.9 Public Announcements and Confidentiality. Any press release or other
information to the press or any third party with respect to this Agreement or
the transactions contemplated hereby shall require the prior approval of the
Buyer and the Seller, which approval shall not be unreasonably withheld,
provided that a party shall not be prevented from making such disclosure as it
shall be advised by counsel is required by law. Each party shall also keep
confidential and shall not use in any manner any information or documents
obtained from the other party or its representatives concerning such other
party's assets, properties, business and operations, unless readily
ascertainable from public information, already known or subsequently developed
independently, received from a third party not under an obligation to keep such
information confidential or otherwise required by law. If this Agreement
terminates all copies of any documents obtained by a party or its
representatives from the other party or its representatives will be returned,
except that one copy thereof may be retained by counsel to the party returning
such documents in order to evidence compliance hereunder. The obligations set
forth in the previous two sentences of this Section 4.9 shall survive
termination of this Agreement.
4.10 Affiliate Letters. Prior to the Closing Date, the Seller shall
identify to the Buyer all persons who, at the time the Merger is submitted to
the Seller's shareholders for approval, the Seller believes may be "affiliates"
of the Seller within the meaning of Rule 145 under the Securities Act. The
Seller shall provide the Buyer with such information as the Buyer shall
reasonably request for purposes of making its own determination of persons who
may be deemed to be affiliates of the Seller. The Seller shall use all
reasonable efforts to deliver to the Buyer prior to the Closing Date, to the
extent not provided concurrently with the execution of this Agreement, a letter
from each of the affiliates specified by the Buyer in substantially the form
attached hereto as Exhibit C (an "Affiliate Letter").
4.11 No Solicitation. The Seller will not, and will not permit any of its
directors, officers, employees, agents or other representatives or those of any
of its Subsidiaries to, (i) solicit, initiate or encourage discussions with any
person, other than the Buyer, relating to the possible acquisition of the Seller
or any Subsidiary or of all or a material portion of the assets or capital stock
of the Seller or any Subsidiary or any merger or other business combination
involving the Seller or any Subsidiary (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. The Seller agrees to inform the Buyer orally and in writing in
reasonable detail (including without limitation the applicable terms and
conditions and identity of the other person) within one business day of receipt
of any offer, proposal or inquiry relating to any Acquisition Transaction and of
any modification thereof or any proposed agreement, to promptly furnish to the
Buyer copies of any written communications or documents received with respect to
the foregoing and to promptly and fully inform the Buyer in writing of the
nature and status of any discussions or negotiations regarding the foregoing. An
Acquisition Transaction shall not include the transactions contemplated by
Section 4.17.
4.12 Filings Under HSR Act. As soon as practicable, each of the Buyer and
the Seller shall file with the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the "Antitrust Division") a
premerger notification form and any supplemental information (other than
privileged information) which may be requested in connection therewith pursuant
to the HSR Act, which filings and supplemental information will comply in all
material respects with the requirements of the HSR Act. Each of the Seller and
the Buyer shall cooperate fully with the other in connection with the
preparation of such filings and shall use best efforts to respond to any
requests for supplemental information from the FTC or the Antitrust Division and
to obtain early termination of any waiting period applicable to the Merger under
the HSR Act. Filing fees required to be paid in connection with the premerger
notification pursuant to the HSR Act shall be borne and paid by the Buyer.
4.13 Buyer SEC Filings. The Buyer shall furnish the Seller with a copy of
each periodic or current report filed by it under the Exchange Act promptly
after filing the same.
4.14 Disclosure Statements. Prior to the Closing, the Seller promptly will
supplement or amend the Seller Disclosure Schedule delivered pursuant hereto
with respect to any matter hereafter arising which, if existing, occurring or
known at the date of this Agreement, would have been required to be set forth or
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described in such Schedule or which is necessary to correct any information in
such Schedule which has been rendered materially inaccurate thereby. No
supplement or amendment to the Seller Disclosure Schedule shall affect the
conditions to the Buyer's obligation to consummate the Merger.
4.15 Indemnification. The Buyer agrees that the rights to indemnification
provided to the directors and officers of the Seller and its Subsidiaries by
such entities' charter or bylaws as in effect on the date of this Agreement and
by applicable law shall survive the Closing Date and as otherwise specified
therein. The Buyer shall use all reasonable efforts to obtain and maintain for a
period of three years after the Closing Date an endorsement extending the period
in which claims may be made under the Seller's directors' and officers'
liability insurance policy in effect on the date of this Agreement, or a policy
of such other responsible carrier as the Buyer may select, with respect to
causes of action that arise out of acts or omissions occurring on or before the
Closing Date; provided, however, that in no event shall the Buyer be required to
expend pursuant to this section more than an amount per year equal to 125% of
current annual premiums paid by the Seller for such insurance.
4.16 Employee Benefits Matters.
(a) Group Insurance and Other Welfare Benefits. For a period from the
Closing Date through December 31, 1997, the Buyer will continue to provide the
same or substantially similar insurance coverages and benefits (medical, dental,
life, accidental death and dismemberment, short-term disability, and long-term
disability) to employees who were employees of the Seller or its Subsidiaries on
the Closing Date as those covering employees of Seller and its Subsidiaries on
the date of this Agreement, except for increases in employee premiums reflecting
any increases charged by insurance carriers and any charges required by
applicable law. Thereafter, the foregoing insurance coverages provided by the
Seller or its Subsidiaries may at the option of the Buyer be discontinued, in
which case those employees who had been employees of the Seller and its
Subsidiaries will become eligible for the same insurance coverages and benefits
generally available to the other employees of the Buyer and its subsidiaries,
subject to the applicable terms and conditions of the benefit plans providing
such coverages.
(b) Personnel Policies and Procedures. The Buyer in its discretion may
terminate any or all of the personnel policies and procedures of the Seller and
its Subsidiaries as of the Closing Date and substitute in whole or in part the
human resources policies and procedures of the Buyer. In the event of any such
substitution, the employees of the Seller and its Subsidiaries will receive
credit for service with the Seller and its Subsidiaries.
(c) Qualified Retirement Plans. The Buyer will maintain the Qualified
Retirement Plans of Seller and its Subsidiaries in effect for a period from the
Closing Date through December 31, 1997. Thereafter, the Buyer will either
maintain the Qualified Retirement Plans of Seller and its Subsidiaries or permit
its employees who were employees of the Seller and its Subsidiaries on the
Closing Date to participate in the Buyer's Retirement Plan and Retirement
Savings Plan in accordance with their terms, as in effect from time to time,
once such employees have satisfied the eligibility requirements under each such
plan. If such employees are permitted to participate in such Buyer's plans, they
will receive credit in accordance with the applicable plan's terms for service
with the Seller and its Subsidiaries or for any other service credited under the
plans of Seller and its Subsidiaries for purposes of eligibility and vesting,
but not accrual of benefits under such plans. Nothing in this section or
elsewhere in this Agreement will preclude the Buyer from amending or terminating
in its discretion any employee benefit plan maintained by the Buyer.
(d) Nonqualified Plans.
(i) The Buyer will maintain the Seller's Supplemental Executive
Retirement Plan (the "SERP") in effect for one year after the Closing Date.
Thereafter (A) with respect to all retired SERP participants in pay status,
the Buyer will continue payments in accordance with the terms of the SERP,
(B) with respect to officers employed by the Buyer on such date, the Buyer
will permit such officers to participate in the Buyer's Supplemental
Executive Retirement Plan and (C) with respect to all other SERP
participants, Buyer may in its discretion continue the SERP, permit certain
SERP participants to participate in Buyer's Supplemental Executive
Retirement Plan or provide for immediate distribution of
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the present value of a participant's accrued SERP benefit with respect to
some or all of the SERP participants. To the extent certain SERP
participants participate in Buyer's Supplemental Executive Retirement Plan,
such participants will receive credit for service with the Seller and its
Subsidiaries with an appropriate offset for benefits accrued under Seller's
SERP to prevent duplication of benefits payable with respect to the same
service.
(ii) The Buyer will continue to permit additional salary reduction
contributions to Seller's Management Deferred Compensation Plan for two
years after the Closing Date. After the end of such two year period, the
Buyer may prohibit future contributions to the Management Deferred
Compensation Plan but will continue to maintain accounts under the
Management Deferred Compensation Plan or a similar arrangement until the
amounts in such accounts are distributed in accordance with its terms.
(iii) The Buyer will maintain the Seller's Deferred Compensation
Incentive Program ("DCIP") through September 30, 1997. After such date, no
further bonus credits will be made to DCIP and the Buyer may either
continue to maintain accounts under the DCIP or a similar arrangement until
the amounts in such accounts are distributed in accordance with its terms
or may terminate the DCIP. In connection with any such termination, all
participants will be fully vested and receive a distribution of all amounts
then credited to their accounts under DCIP.
(e) The Buyer will maintain Seller's bonus plans other than DCIP with
respect to services performed for the period from the Closing Date through
September 30, 1997. Bonus standards and caps for each of the plans shall remain
the same as the bonus standards and caps in effect as of the Closing Date. In
the event of termination of employment of a bonus plan participant by the Buyer
without cause before September 30, 1997, any requirement of year-end employment
will be waived and such participant will be entitled to payment of a pro rata
share of bonuses based on actual results through the end of the month in which
termination of employment occurs.
4.17 Disposition of Project. To the extent necessary to maintain the
ownership criteria necessary to preserve the Project's status as a "qualifying
facility" within the meaning of 18 C.F.R. sec.292.101(b)(1) and Florida
Administrative Code Rule 25-17.080 ("QF Status"), the Buyer and the Seller shall
cooperate with each other and take all reasonable action necessary to dispose of
the Seller's interest in the cogeneration project owned by Pasco Cogen, Ltd.
(the "Project") prior to the Effective Time, all in a manner that will not
adversely affect the qualification of the Merger for pooling of interests
accounting treatment. Such disposition shall be made at the direction of the
Buyer, subject to the approval of the Seller, which shall not unreasonably be
withheld, provided that, if the Buyer has not made firm arrangements for such
disposition within 90 days after the satisfaction of the conditions to Closing
set forth in Sections 5.1, 5.2, 5.3 or 6.10, whichever is the last to occur, and
such disposition shall be required to satisfy the condition contained in Section
5.6, the Seller shall be entitled to effect such disposition on such terms as it
may determine, provided that such disposition by the Seller shall not adversely
affect the Project's QF Status or the qualification of the Merger for pooling of
interests accounting treatment.
SECTION 5 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF EACH PARTY TO CONSUMMATE THE MERGER
The respective obligations of each party to consummate the Merger shall be
subject to the satisfaction or waiver, at or before the Effective Time, of each
of the following conditions:
5.1 Approvals. All required approvals of the shareholders of the Seller
and all consents and approvals referred to in Sections 2.10 and 3.8 of this
Agreement or in the corresponding sections of each party's Disclosure Schedule,
shall have been obtained; provided, however, that if the Buyer waives the
obtaining of any consent referred to in Section 2.10 or in the corresponding
section of the Seller Disclosure Schedule, such consent shall not be a condition
to the Seller's obligation to consummate the Merger.
5.2 Securities Law Matters. The Registration Statement covering the shares
of Buyer Common Stock to be issued as the Merger Consideration shall have been
declared effective by the SEC, shall remain effective and shall not be subject
to a stop order or any threatened stop order, and such shares shall have been
qualified
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under the securities or "blue sky" laws of each state in which such
qualification is required (unless qualification in any state has been waived by
the Buyer).
5.3 HSR Act. Any waiting period applicable to the Merger under the HSR Act
shall have expired or terminated.
5.4 Absence of Order. No restraining order or injunction of any court or
order of any governmental authority of competent jurisdiction which prevents
consummation of the Merger shall be in effect.
5.5 NYSE Listing. The shares of Buyer Common Stock to be issued in the
Merger shall have been authorized for listing on the NYSE, subject to official
notice of issuance.
5.6 Disposition of Project. The Seller's interest in the Project shall
have been disposed of as contemplated by Section 4.17, provided that this
condition shall not be applicable if consummation of the Merger would not
adversely affect the Project's QF Status in the absence of such disposition.
SECTION 6 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
BUYER TO CONSUMMATE THE MERGER
The obligation of the Buyer to consummate the Merger is subject to the
satisfaction or waiver by the Buyer, at or before the Effective Time, of the
following conditions:
6.1 Representations, Warranties and Covenants.
(a) The representations and warranties of the Seller contained in this
Agreement (without regard to any exceptions for materiality or material adverse
effect or any knowledge qualifications) shall be true and correct at and as of
the Effective Time with the same force and effect as though made on and as of
the Effective Time (with such exceptions as may be permitted under or
contemplated by this Agreement) except that any representation or warranty that
is not true shall nevertheless be deemed to be true for purposes of this section
unless the failure of the representations and warranties to be true,
individually or in the aggregate, would have a material adverse effect on the
Business of Seller; there shall not have been any material adverse change in the
Business of the Seller since the date hereof; and the Seller shall have
performed and complied in all material respects with all covenants and
agreements required by this Agreement to be performed or complied with by it at
or prior to the Effective Time; provided, however, that (i) none of the events
specified in Section 6.1 of the Seller Disclosure Schedule nor (ii) the
occurrence of any other events on or after the date hereof that, individually or
in the aggregate, could reasonably be expected to result in a loss of less than
5% of the annual consolidated operating margin of the Seller, shall constitute a
failure to satisfy any of the conditions contained in this Section 6.1(a).
"Operating margin" means operating revenues less cost of product sold. Nothing
herein shall relieve the Seller of its obligations under this Agreement to
disclose any such events.
(b) The Seller shall have delivered to the Buyer a certificate signed on
behalf of the Buyer by its Chief Executive Officer and Chief Financial Officer
stating that the conditions contained in Section 6.1(a) have been satisfied.
6.2 Affiliate Letters. The Buyer shall have received the Affiliate Letters
referred to in Section 4.10.
6.3 Opinion of Counsel to Seller. The Buyer shall have received an opinion
of Macfarlane Ferguson & McMullen, counsel to the Seller, dated the Closing
Date, substantially in the form of Exhibit D hereto.
6.4 Merger Documents. The Seller shall have executed and delivered the
Articles of Merger.
6.5 Pooling of Interests.
(a) The Buyer shall have received a letter from the independent accountants
for the Seller covering such matters relating to the Seller's meeting the
requirements applicable to a combining company for pooling of interests
accounting treatment as the independent accountants for the Buyer may reasonably
request in connection with their letter under Section 6.5(b); and
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(b) The Buyer shall have received a letter from the independent accountants
for the Buyer to the effect that the Merger will qualify for pooling of
interests accounting treatment.
6.6 Accountant's Letter. The Buyer shall have received from the
independent accountants for the Seller a letter dated the Closing Date with
respect to Seller's consolidated financial position and results of operations,
which letter shall be based upon SAS 72 and certain agreed upon procedures to be
specified by the Buyer, which procedures shall be consistent with applicable
professional standards for letters delivered by independent accountants in
connection with comparable transactions.
6.7 Tax Opinion. The Buyer shall have received an opinion of its counsel,
dated the Closing Date, substantially to the effect that, on the basis of the
facts and representations set forth in such opinion, or set forth in writing
elsewhere and referred to therein, for federal income tax purposes the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code and that no gain or loss will be recognized by and there will be no
corporate income tax liability to the Buyer or Seller by reason of the Merger.
6.8 Escrow Agreement. The Escrow Agreement, substantially in the form
attached hereto as Exhibit B, shall have been executed and delivered by all
parties thereto.
6.9 Certificates. The Seller shall have furnished the Buyer with such
certificates of public officials as may be reasonably requested by the Buyer.
6.10 Resolution of Project Disputes. The Settlement Agreement dated
October 25, 1996 relating to the Project shall have become effective and binding
upon the parties thereto in accordance with its terms, subject only to
modifications which are not materially adverse to Pasco Cogen, Ltd. or the
Seller.
SECTION 7 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF
THE SELLER TO CONSUMMATE THE MERGER
The obligation of the Seller to consummate the Merger is subject to the
satisfaction or waiver by the Seller, at or before the Effective Time, of the
following conditions:
7.1 Representations, Warranties and Covenants. The representations and
warranties of the Buyer contained in this Agreement (without regard to any
exceptions for materiality or material adverse effect or any knowledge
qualifications) shall be true and correct at and as of the Effective Time with
the same force and effect as though made on and as at the Effective Time (with
such exceptions as may be permitted under or contemplated by this Agreement)
except that any representation or warranty that is not true shall nevertheless
be deemed to be true for purposes of this section unless the failure of the
representations and warranties to be true, individually or in the aggregate,
would have a material adverse effect on the Business of Buyer. The Buyer shall
have performed and complied in all material respects with all covenants and
agreements required by this Agreement to be performed or complied with by it on
or prior to the Effective Time. The Buyer shall have delivered to the Seller a
certificate signed on behalf of the Buyer by its Chief Executive Officer and
Chief Financial Officer to the foregoing effect.
7.2 Opinion of Counsel to Buyer. The Seller shall have received an opinion
of Palmer & Dodge LLP, counsel to the Buyer, dated the Closing Date,
substantially in the form of Exhibit E attached hereto.
7.3 Tax Opinion. The Seller shall have received an opinion of its counsel,
addressed to the Seller and its shareholders and dated the Closing Date,
substantially to the effect that, on the basis of facts and representations set
forth in such opinion, or set forth in writing elsewhere and referred to
therein, for federal income tax purposes the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code and no gain or
loss will be recognized by the Seller or its shareholders by reason of the
receipt of the shares of Buyer Common Stock in the Merger (it being understood
that such opinion will not extend to cash payments in lieu of fractional share
interests and may not extend to shares of Buyer Common Stock received by the
Seller shareholders who receive their Seller Stock pursuant to stock options or
otherwise as compensation).
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7.4 Certificates. The Buyer shall have furnished the Seller with such
certificates of public officials as may be reasonably requested by the Seller.
SECTION 8 -- TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether prior to or after approval by the Seller's shareholders,
as follows:
(a) by either the Seller or the Buyer, by written notice to the other, if
the Effective Time shall not have occurred on or before December 31, 1997;
provided, however, that the right to terminate this Agreement under this Section
8.1(a) shall not be available to any party whose breach of a representation or
warranty or failure to fulfill any covenant or agreement under this Agreement
has been the cause of or resulted in the failure of the Merger to occur on or
before such date.
(b) by the Seller (provided that the Seller is not then in material breach
of any representation, warranty, covenant or other agreement contained herein),
by written notice to the Buyer, if there shall have been a material breach of
any of the covenants or agreements or any of the representations or warranties
contained in this Agreement on the part of the Buyer, which breach is either not
cured within twenty (20) days following written notice to the Buyer or by its
nature cannot be cured prior to the Closing; provided, however, that the Seller
shall not have the right to terminate this Agreement pursuant to this Section
8.1(b) because of the breach of any representation or warranty unless such
breach, together with all such other breaches, would entitle the Seller not to
consummate the transactions contemplated hereby under Section 7.1;
(c) by the Buyer (provided that the Buyer is not then in material breach of
any representation, warranty, covenant or other agreement contained herein), by
written notice to the Seller, if there shall have been a material breach of any
of the covenants or agreements or any of the representations or warranties
contained in this Agreement on the part of the Seller, which breach is either
not cured within twenty (20) days following written notice to the Seller or by
its nature cannot be cured prior to the Closing; provided, however, that the
Buyer shall not have the right to terminate this Agreement pursuant to this
Section 8.1(c) because of the breach of any representation or warranty unless
such breach, together with all such other breaches, would entitle the Buyer not
to consummate the transactions contemplated hereby under Section 6.1;
(d) by either the Buyer or the Seller, 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;
(e) by either the Buyer or the Seller, by written notice to the other, if
the required approval of the shareholders of the Seller of this Agreement shall
not have been obtained within sixty (60) days after the Registration Statement
referred to in Section 4.7 has been declared effective by the SEC;
(f) by the Buyer, by written notice to the Seller, if the Seller's Board of
Directors (i) for any reason (other than as a result of a breach by the Buyer or
a failure of the Registration Statement to become effective at least fifteen
(15) business days prior to the date of termination for reasons other than a
breach by the Seller) fails to commence solicitation of written consents of
shareholders for the purpose of approving this Agreement as provided in Section
4.8(a) or to include in the Seller proxy statement its recommendation that the
Seller's shareholders consent to the approval of this Agreement, (ii) withdraws
or modifies in a manner adverse to the Buyer its approval of or its
recommendation that shareholders consent to the approval of this Agreement or
(iii) adopts resolutions approving or otherwise authorizes or recommends an
Acquisition Transaction;
(g) by the Seller, prior to approval of the Merger by its shareholders, if
the Seller's Board of Directors shall, as a result of a possible Acquisition
Transaction that does not involve a breach of the Seller's covenant under
Section 4.11, determine in good faith that the fiduciary obligations of such
Board under applicable law
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require that such Acquisition Transaction be accepted; provided, however, that
the Seller may not effect such termination pursuant to this Section 8.1(g)
unless and until:
(i) the Seller gives the Buyer at least seven (7) days' prior written
notice of its intention to effect such termination pursuant to this Section
8.1(g);
(ii) during such period, the Seller shall, and shall cause its
respective financial and legal advisors to, negotiate in good faith with
the Buyer to make adjustments in the terms and conditions of this Agreement
as would enable the Buyer to proceed with the transactions contemplated
herein;
(iii) the Seller's Board of Directors shall have been advised in
writing by outside counsel that, notwithstanding a binding commitment to
consummate this Agreement entered into in proper exercise of their
fiduciary obligations, such fiduciary obligations would also require such
Board to reconsider and terminate such commitment as a result of such
Acquisition Transaction; and
(iv) the Seller pays the amounts required by Section 8.3(b)
concurrently with such termination; or
(h) by the Seller if the Market Value of Buyer Common Stock is less than
$20 1/2, provided that the Buyer may negate such termination by notifying the
Seller within 24 hours of receiving the Seller's notice of termination of its
election to determine the Merger Consideration by dividing (a) the product of
the Maximum Merger Shares and $20 1/2 by (b) the Market Value of Buyer Common
Stock (any notice under this clause to be given by personal delivery in writing
or by telephone communication confirmed by receipted facsimile);
(i) by the Buyer if the Market Value of Buyer Common Stock is greater than
$29, provided that the Seller may negate such termination by notifying the Buyer
within 24 hours of receiving the Buyer's notice of termination of its election
to determine the Merger Consideration by dividing (a) the product of the Minimum
Merger Shares and $29 by (b) the Market Value of Buyer Common Stock (any notice
under this clause to be given by personal delivery in writing or by telephone
communication confirmed by receipted facsimile); or
(j) At any time with the written consent of the Buyer and the Seller.
8.2 Effect of Termination. If this Agreement is terminated as provided in
Section 8.1, this Agreement shall forthwith become void and have no effect,
without liability on the part of the Buyer and the Seller and their respective
directors, officers or stockholders, except that (i) the provisions of this
Section 8.2, Section 4.3 relating to expenses, Section 4.9 relating to publicity
and confidentiality to the extent provided therein, and Section 8.3 shall
survive; and (ii) no such termination shall relieve any party from liability by
reason of any willful breach by such party of any of its representations,
warranties, covenants or agreements contained in this Agreement, except to the
extent provided in Section 8.3(f).
8.3 Termination Fee.
(a) Buyer Reimbursement. In order to induce the Buyer to enter into this
Agreement and to reimburse the Buyer for its costs and expenses related to
entering into this Agreement and seeking to consummate the transactions
contemplated by this Agreement, the Seller will make a cash payment to the Buyer
of an amount equal to all out-of-pocket expenses and fees incurred by the Buyer,
including without limitation fees and expenses payable to all legal, accounting,
financial and other professional advisors, relating to the Merger or the
transactions contemplated by this Agreement not exceeding $3,000,000 in the
aggregate if and only if:
(i) The Buyer has terminated this Agreement pursuant to 8.1(c); or
(ii) The Buyer or the Seller has terminated this Agreement pursuant to
Section 8.1(e) or the Buyer has terminated this Agreement pursuant to
Section 8.1(f)(i) or (ii).
(b) Certain Transactions. In order to induce the Buyer to enter into this
Agreement and to reimburse the Buyer for its costs and expenses related to
entering into this Agreement and seeking to consummate the
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transactions contemplated by this Agreement, the Seller will make a cash payment
to the Buyer of $12,000,000 (less any amount payable pursuant to Section 8.3(a))
if and only if:
(i) The Buyer or the Seller has terminated this Agreement pursuant to
Section 8.1(e) or the Buyer has terminated this Agreement pursuant to
Section 8.1(c) or (f), and in each case under this clause (i) at the time
of the event giving rise to such termination any person (other than the
Buyer) shall have made, or disclosed an intention to make, a proposal to
engage in an Acquisition Transaction and such proposal shall not have been
rejected in good faith by the Seller and remain so rejected for twelve (12)
months after such termination.
(ii) The Seller has terminated this Agreement pursuant to 8.1(g); or
(iii) The Buyer has terminated this Agreement pursuant to Section
8.1(c) or (f) and prior to such termination or within twelve (12) months
thereafter the Seller shall have entered into an agreement to engage in an
Acquisition Transaction.
(c) Seller Reimbursement. In order to induce the Seller to enter into this
Agreement and to reimburse the Seller for its costs and expenses related to
entering into this Agreement and seeking to consummate the transactions
contemplated by this Agreement, the Buyer will make a cash payment to the Seller
of an amount equal to all out-of-pocket expenses and fees incurred by the
Seller, including without limitation fees and expenses payable to all legal,
accounting, financial and other professional advisors, relating to the Merger or
the transactions contemplated by this Agreement not exceeding $1,800,000 in the
aggregate if and only if the Seller has terminated this Agreement pursuant to
Section 8.1(b).
(d) Limitation of Fees. Notwithstanding anything herein to the contrary,
(i) the aggregate amount payable by the Seller pursuant to Section 8.3(a),
Section 8.3(b) and the terms of the Seller Option shall not exceed $15,000,000.
For purposes of this Section 8.3(d), the amount payable pursuant to the terms of
the Seller Option shall be the amount that would be paid pursuant to Section
7(a) thereof determined as if the Buyer had exercised the "put" of the entire
Seller Option on the termination date (the "Option Value"). If the sum of the
aggregate amount payable by the Seller pursuant to Section 8.3(a) and (b) and
the Option Value exceeds $15,000,000, (i) the Buyer's out-of-pocket expenses and
fees shall be paid in full and the amount payable pursuant to Section 8.3(b) and
the Option Value shall be reduced in equal amounts so that such aggregate amount
shall be equal to $15,000,000 and (ii) the number of shares purchasable upon the
exercise of the Seller Option shall be correspondingly reduced as provided in
the Seller Option.
(e) Payments. Any payment required by this Section 8.3 will be payable by
the party liable therefor to the other party (by wire transfer of immediately
available funds to an account designated by the party entitled to such payment)
within five (5) business days after demand by such party.
(f) Enforcement. The parties agree that the agreements contained in this
Section 8.3 are an integral part of the transactions contemplated by this
Agreement. The parties acknowledge and agree that damages upon termination of
the Agreement under the circumstances referred to in Section 8.3(b) are not
reasonably ascertainable and the payment pursuant to such section constitutes
liquidated damages and not a penalty, and shall be Buyer's exclusive remedy upon
such termination. The payments pursuant to Section 8.3(a) and 8.3(c) are
intended to provide reimbursement for out-of-pocket expenses and not damages for
termination of this Agreement under the circumstances referred to therein, and
such payments shall not relieve any party from liability for the willful breach
by it of any of its representations, warranties, covenants or agreements
contained in this Agreement (it being understood that a termination pursuant to
Section 8.1(e) does not involve a willful breach) and the nonbreaching party may
pursue any remedies available to it at law or in equity, including recovery of
such damages to which it may be entitled. Notwithstanding anything to the
contrary contained in Section 8.3, if one party fails to promptly pay to the
other any amount due under Section 8.3, in addition to any amounts paid or
payable pursuant to such section, the defaulting party shall pay the costs and
expenses (including legal fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee at the publicly
announced prime rate of Barnett Bank, N.A. from the date such fee was required
to be paid.
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8.4 Amendment. This Agreement may not be amended except by an instrument
signed by each party hereto; provided, however, that after adoption of this
Agreement by the shareholders of the Seller, without the further approval of the
shareholders of the Seller, no amendment may be made that (a) alters or changes
the amount or kind of consideration to be received as provided herein or (b)
alters or changes any of the terms of this Agreement if such alteration or
change would materially adversely affect the shareholders of the Seller.
8.5 Waiver. At any time prior to the Effective Time, any party hereto may,
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreements of
any other party or any conditions to its own obligations, in each case only to
the extent such obligations, agreements and conditions are intended for its
benefit; provided that any such extension or waiver shall be binding upon a
party only if such extension or waiver is set forth in a writing executed by
such party.
SECTION 9 -- INDEMNIFICATION
9.1 Survival. Notwithstanding any right of any party to fully investigate
the affairs of the other party and notwithstanding any knowledge of facts
determined or determinable by such party pursuant to such investigation or right
of investigation, each party has the right to rely fully upon the
representations, warranties, covenants and agreements of each other party in
this Agreement or in any certificate, financial statement or other document
delivered by any party pursuant hereto. All such representations, warranties,
covenants and agreements shall survive the execution and delivery hereof and the
Closing hereunder, subject to the limitations set forth in Section 9.4. No
person shall have a right to recovery against any party (or any officer,
director, employee or agent of a party) other than through the exercise of the
indemnification rights set forth in Sections 9.2 or 9.3, which shall constitute
the sole and exclusive remedy after the Closing Date for any breach by a party
of any representation, warranty or covenant contained herein or in any
certificate or other instrument delivered pursuant hereto, other than a
fraudulent or intentional breach.
9.2 Obligation of Seller to Indemnify. Subsequent to the Effective Time,
the holders of Seller Stock outstanding immediately prior to the Effective Time,
shall, to the extent of their interest in the Escrow Account held pursuant to
the Escrow Agreement:
(a) indemnify and hold harmless the Buyer (and its directors, officers,
employees, agents, affiliates and assigns) 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 attorneys' fees, whether or not arising out of third-party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing pursuant to this Section 9 ("Losses") based upon, arising out of or
otherwise in respect of any inaccuracy in or breach of any representation or
warranty (without regard to any exceptions for materiality or material adverse
effect) or covenant of the Seller contained herein or in any certificate
delivered pursuant hereto; and
(b) indemnify and hold harmless the Buyer on account of the disposition of
the Project under Section 4.17 in a transaction providing aggregate proceeds to
the Seller (net of transaction expenses) of $5,900,000 or less, provided that
disposition of the Project at a price not exceeding $5,900,000 was required, in
the opinion of Buyer's independent accountants, to satisfy the condition
contained in Section 6.5(b), it being agreed that the amount payable pursuant to
this Section 9.2(b) is $5,670,000.
9.3 Obligation of the Buyer to Indemnify. Subsequent to the Effective
Time, the Buyer agrees to indemnify and hold harmless the holders of the Seller
Stock outstanding immediately prior to the Effective Time (and their respective
directors, officers, employees, agents, affiliates and assigns) from and against
any Losses based upon, arising out of or otherwise in respect of any inaccuracy
in or breach of any representation, warranty or covenant of the Buyer contained
herein or in any certificate delivered pursuant hereto.
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9.4 Limitations on Indemnification. Notwithstanding the foregoing, the
right to indemnification under this Section 9 shall be subject to the following
terms:
(a) No indemnification shall be payable pursuant to Section 9.2(a) or 9.3
unless the amount of all claims for indemnification pursuant to the applicable
Section exceeds $1,000,000 in the aggregate, and then such indemnification shall
be payable only for the amounts which exceed $1,000,000.
(b) No indemnification shall be payable pursuant to Section 9.2 or 9.3
after the earlier of one year after the Effective Time or the issuance of the
first audited financial statements of the combined corporation (the "Expiration
Date"), except with respect to claims made prior to the Expiration Date but not
then resolved.
(c) All indemnification claims under Section 9.2 shall be satisfied in full
from the Escrow Account held pursuant to the Escrow Agreement.
(d) The limitations of Sections 9.4(a), (b) and (c) shall not apply in the
case of a fraudulent or intentional misrepresentation or breach by any party.
(e) In determining the amount of any indemnity under Section 9.2(a) or 9.3,
there shall be taken into account any tax benefit, insurance proceeds or other
similar recovery or offset realized, directly or indirectly, by the party to be
indemnified.
9.5 Notice and Defense of Claims. Promptly after receipt of notice of any
third-party claim that could result in a Loss for which a party may seek
indemnification hereunder, such party shall give written notice thereof to the
indemnifying party (the Shareholder Representative designated in the Escrow
Agreement in the case of the holders of the Seller Stock), but such notification
shall not be a condition to indemnification hereunder except to the extent of
actual prejudice to the indemnifying party. The notice shall state the
information then available regarding the amount and nature of such claim,
liability or expense and shall specify the provision or provisions of this
Agreement under which the liability or obligation is asserted. If within 30 days
after receiving such notice the indemnifying party gives written notice to the
indemnified party stating that it intends to defend against such claim,
liability or expense at its own cost and expense, then defense of such matter,
including selection of counsel (subject to the consent of the indemnified party
which consent shall not be unreasonably withheld), shall be by the indemnifying
party and the indemnified party shall make no payment on such claim, liability
or expense as long as the indemnifying party is conducting a good faith and
diligent defense. Notwithstanding the foregoing, the indemnified party shall at
all times have the right to fully participate in such defense at its own expense
directly or through counsel; provided, however, if the named parties to the
action or proceeding include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate under applicable standards of professional conduct, the expense of
separate counsel for the indemnified party shall be paid by the indemnifying
party. If no such notice of intent to dispute and defend is given by the
indemnifying party, or if such diligent good faith defense is not being or
ceases to be conducted, the indemnified party shall, at the expense of the
indemnifying party, undertake the defense of such claim, liability or expense
with counsel selected by the indemnified party, and shall have the right to
compromise or settle the same exercising reasonable business judgment. The
indemnified party shall make available all information and assistance that the
indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense.
SECTION 10 -- MISCELLANEOUS
10.1 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when so delivered in
person, by overnight courier, by facsimile transmission (with
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receipt confirmed by telephone or by automatic transmission report) or two
business days after being sent by registered or certified mail (postage prepaid,
return receipt requested), as follows:
(i) if to the Buyer, to:
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
Fax: (813) 228-4811
Attn: Timothy L. Guzzle, Chairman
with copies to:
Roger H. Kessel, Esq.
Senior Vice President-General Counsel
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
Fax: (813) 228-4811
David R. Pokross, Jr., Esq.
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Fax: (617) 227-4420
(ii) if to the Seller, to:
Lykes Energy, Inc.
111 East Madison Street
Tampa, FL 33602
Fax: (813) 272-0275
Attn: Tom L. Rankin, Chairman
with a copy to:
Nathan B. Simpson, Esq.
Macfarlane Ferguson & McMullen
111 Madison Street
Tampa, FL 33602
Fax: (813) 273-4256
Any party may by notice given in accordance with this section to the other
parties designate another address or person for receipt of notices hereunder.
10.2 Entire Agreement. This Agreement contains the entire agreement among
the parties with respect to the Merger and related transactions, and supersedes
all prior agreements, written or oral, with respect thereto, except that the
confidentiality agreement between the parties dated October 14, 1996 shall
remain in effect.
10.3 Governing Law. This Agreement is governed by the laws of the State of
Florida without regard to its conflict of law principles.
10.4 Binding Effect; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. This Agreement is not assignable without the prior written
consent of the other party hereto.
10.5 Section Headings. The table of contents and headings contained in
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of this Agreement.
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10.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
10.7 Disclosure Schedules. The Disclosure Schedules are a part of this
Agreement as if fully set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date first stated above.
TECO ENERGY, INC.
By
------------------------------------
Timothy L. Guzzle
Chairman
LYKES ENERGY, INC.
By
--------------------------------------
Tom L. Rankin
Chairman
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EXHIBIT A
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated November 21, 1996, is between Lykes
Energy, Inc. ("Issuer"), a Florida corporation, and TECO Energy, Inc.
("Grantee"), a Florida corporation. Grantee and Issuer have concurrently with
the execution of this Agreement entered into an Agreement and Plan of Merger of
even date herewith (the "Merger Agreement"). As a condition to Grantee's
entering into the Merger Agreement and in consideration therefor, Issuer has
agreed to grant Grantee the Option (as hereinafter defined). Capitalized terms
used herein but not defined herein shall have the meanings set forth in the
Merger Agreement.
Accordingly, in consideration of the foregoing and the mutual covenants and
agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. Grant of Option.
(a) Issuer hereby grants Grantee an irrevocable option (the "Option")
to purchase up to 212,664 shares (the "Shares") of common stock, par value
$.10 per share, of Issuer (the "Common Stock") (being 19.9% of the number
of shares of Common Stock outstanding as of the date hereof) in the manner
set forth below, at a price (the "Exercise Price") per Share of $280.72,
payable in cash. The number of Shares that may be purchased upon exercise
of this Option and the Exercise Price are subject to adjustment as provided
in Section 9.
(b) Notwithstanding the foregoing, in no event shall the number of
Shares for which the Option is exercisable exceed 19.9% of the number of
issued and outstanding shares of Common Stock.
2. Exercise of Option.
(a) The Option may be exercised by Grantee, in whole or in part, at
any time or from time to time after the Merger Agreement becomes terminable
by Grantee under circumstances which could entitle Grantee to a payment
under Section 8.3(b) of the Merger Agreement, regardless of whether the
Merger Agreement is actually terminated or whether there occurs a closing
of any Acquisition Transaction (any such event by which the Merger
Agreement becomes so terminable being referred to herein as a "Trigger
Event").
(b) (i) Issuer shall notify Grantee promptly in writing of the
occurrence of any Trigger Event, it being understood that the giving of
such notice by Issuer shall not be a condition to the right of Grantee
to exercise the Option.
(ii) In the event Grantee wishes to exercise the Option, Grantee
shall deliver to Issuer written notice (an "Exercise Notice") specifying
the total number of Shares it wishes to purchase.
(iii) Upon the giving by Grantee to Issuer of the Exercise Notice
and the tender of the applicable aggregate Exercise Price and provided
that the conditions to Issuer's obligation to issue the Shares to
Grantee hereunder set forth in Section 3 have been satisfied or waived,
Grantee shall be deemed to be the holder of record of the Shares
issuable upon such exercise, notwithstanding that the stock transfer
book of Issuer shall then be closed or that certificates representing
such Shares shall not then be actually delivered to Grantee.
(iv) Each closing of a purchase of Shares (a "Closing") shall occur
at a place, on a date, and at a time designated by Grantee in an
Exercise Notice delivered at least two business days prior to the date
of the Closing.
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(c) The Option shall terminate upon the earliest to occur of:
(i) the Effective Time of the Merger;
(ii) the termination of the Merger Agreement pursuant to Section
8.1 thereof other than under circumstances which could entitle Grantee
to a payment under Section 8.3(b) of the Merger Agreement; and
(iii) 180 days following any termination of the Merger Agreement
upon or during the continuance of a Trigger Event or, if at the
expiration of such 180 day period, the Option cannot be exercised by
reason of any applicable judgment, decree, order, law or regulation,
including any applicable waiting period under the HSR Act, ten business
days after such impediment to exercise shall have been removed or shall
have become final and not subject to appeal, but in no event under this
clause (iii) later than June 30, 1998, provided that, if Sections
8.3(b)(i) or (iii) of the Merger Agreement are applicable as a result of
the termination of the Merger Agreement and a Trigger Event has not
occurred prior to 150 days following such termination, such 180 day
period shall be extended to the date which is 30 days after the Trigger
Event under Sections 8.3(b)(i) or (iii) of the Merger Agreement and the
June 30, 1998 expiration date shall not apply.
(d) Notwithstanding the foregoing, the Option may not be exercised if
Grantee is in material breach of any of its representations, warranties,
covenants or agreements contained in this Agreement or in the Merger
Agreement.
3. Conditions to Closing. The obligation of Issuer to issue the Shares to
Grantee hereunder is subject to the conditions that:
(a) any waiting period applicable to the issuance of the Shares
hereunder under the HSR Act shall have expired or terminated;
(b) all consents, approvals, orders or authorizations of, or
registrations, declarations or filings with, any federal, state or local
administrative agency or commission or other federal, state or local
governmental authority, if any, required in connection with the issuance
and acquisition of the Shares hereunder shall have been obtained or made;
and
(c) no restraining order or injunction of any court or order of any
governmental authority of competent jurisdiction which prevents such
issuance shall be in effect.
4. Closing. At any Closing,
(a) Issuer shall deliver to Grantee or its designee a single
certificate in definitive form representing the number of Shares designated
by Grantee in its Exercise Notice, such certificate to be registered in the
name of Grantee and to bear the legend set forth in Section 10;
(b) Grantee shall deliver to Issuer the aggregate price for the Shares
so designated and being purchased by wire transfer of immediately available
funds or certified check or bank check; and
(c) Issuer shall pay all expenses, and any and all United States
federal, state and local taxes, and other charges that may be payable in
connection with the preparation, issue and delivery of stock certificates
under this Section 4.
5. Representations and Warranties of Issuer. Issuer represents and warrants
to Grantee that:
(a) Issuer has the corporate power and authority to enter into,
execute and deliver this Agreement and to perform fully its obligations
hereunder;
(b) this Agreement has been duly executed and delivered by Issuer and
constitutes a valid and binding obligation of Issuer, enforceable against
Issuer in accordance with its terms, except as may be limited by general
principles of equity and by bankruptcy, insolvency and other similar laws
affecting creditors' rights and remedies generally;
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(c) Issuer has taken all necessary corporate action to authorize and
reserve for issuance and to permit it to issue, upon exercise of the
Option, and at all times from the date hereof through the expiration of the
Option will have reserved, 212,712 authorized and unissued Shares, such
amount being subject to adjustment as provided in Section 9, all of which,
upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid, nonassessable and free of
any preemptive right;
(d) upon delivery of the Shares to Grantee upon the exercise of the
Option, Grantee will acquire the Shares free and clear of all claims,
liens, charges, encumbrances and security interests of any nature
whatsoever;
(e) the execution, delivery and performance of this Agreement by
Issuer and the consummation by Issuer of the transactions contemplated
hereby will not (i) violate any provision of the Articles of Incorporation
or Bylaws of Issuer, (ii) violate or result in the breach of any of the
terms or conditions of, result in modification of the effect of, or
otherwise give any other contracting party the right to terminate, or
constitute (or with notice or lapse of time or both constitute) a default
under, any instrument, contract or other agreement to which Issuer is a
party or to which Issuer or any of its assets or properties is bound or
subject, (iii) violate any law, ordinance or regulation or any order,
judgment, injunction, decree or other requirement of any court, arbitrator
or governmental or regulatory body applicable to Issuer or by which any of
Issuer's assets, properties or securities is bound, (iv) require any filing
with, notice to, or permit, consent or approval of, any governmental or
regulatory body; or (v) result in the creation of any lien or other
encumbrance on the assets, properties or securities of Issuer, excluding
from the foregoing clauses (ii), (iii), (iv) and (v) any exceptions to the
foregoing that, in the aggregate, would not have a material adverse effect
on the Business of Issuer or on the ability of Issuer to consummate the
transaction contemplated hereby; and
(f) none of Issuer, any of its affiliates or anyone acting on its or
their behalf, has issued, sold or offered any security of Issuer to any
person under circumstances that would cause the issuance and sale of
Shares, as contemplated by this Agreement, to be subject to the
registration requirements of the Securities Act as in effect on the date
hereof, and, assuming the representations and warranties of Grantee
contained in Section 6(c) are true and correct, the issuance, sale and
delivery of the Shares hereunder would be exempt from the registration and
prospectus delivery requirements of the Securities Act, as in effect on the
date hereof (and Issuer shall not take any action which would cause the
issuance, sale, and delivery of Shares hereunder not to be exempt from such
requirements).
6. Representations and Warranties of Grantee. Grantee represents and
warrants to Issuer that:
(a) Grantee has the corporate power and authority to enter into,
execute and deliver this Agreement and to perform fully its obligations
hereunder;
(b) this Agreement has been duly executed and delivered by Grantee and
constitutes a valid and binding obligation of Grantee, enforceable against
Grantee in accordance with its terms, except as may be limited by general
principles of equity and by bankruptcy, insolvency and other similar laws
affecting creditors' rights and remedies generally; and
(c) any Shares acquired upon exercise of the Option will be acquired
for Grantee's own account for investment purposes only and will not be, and
the Option is not being, acquired by Grantee with a view to the public
distribution thereof, in violation of any applicable provision of the
Securities Act.
7. Certain Repurchases.
(a) "Put". At the request of Grantee by written notice (x) at any
time during which the Option is exercisable pursuant to Section 2 (the
"Repurchase Period"), Issuer (or any successor entity thereof) shall
repurchase from Grantee all or any portion of the Option as requested by
Grantee, at the price set forth in subparagraph (i) below or (y) at any
time prior to January 31, 1999, Issuer (or any successor
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entity thereof) shall repurchase from Grantee all or any portion of the
Shares purchased by Grantee pursuant to the Option as requested by Grantee,
at the price set forth in subparagraph (ii) below:
(i) the difference between the "Market/Offer Price" (as defined
below) for shares of Common Stock as of the date Grantee gives notice of
its intent to exercise its rights under this Section 7 and the Exercise
Price, multiplied by the number of Shares purchasable pursuant to the
Option (or portion thereof with respect to which Grantee is exercising
its rights under this Section 7), but only if the Market/Offer Price is
greater than the Exercise Price. For purposes of this subparagraph (i),
"Market/Offer Price" shall mean, as of any date, the higher of (x) the
highest price per share offered as of such date pursuant to any
Acquisition Transaction which would have entitled Grantee to a payment
under Section 8.3(b) of the Merger Agreement and 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 Common Stock as of
such date. For purposes of this Agreement, the "Fair Market Value" of
the 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 Common
Stock is regularly traded or, if it not so traded during such period,
the fair market value of the Common Stock as determined by an investment
banking firm of nationally recognized standing experienced in the
valuation of companies in the natural gas distribution industry selected
by Grantee which does not provide material services to Grantee. Grantee
may, at its option, waive a determination of Fair Market Value.
(ii) the product of (x) the sum of (A) the Exercise Price paid by
Grantee per Share acquired pursuant to the Option, and (B) the
difference between the "Offer Price" (as defined below) and the Exercise
Price, but only if the Offer Price is greater than the Exercise Price,
and (y) the number of Shares so to be repurchased pursuant to this
Section 7. For purposes of this clause (ii), the "Offer Price" shall be
the highest price per share offered pursuant to any Acquisition
Transaction during the Repurchase Period prior to the delivery by
Grantee of a notice of repurchase which would have entitled Grantee to a
payment under Section 8.3(b) of the Merger Agreement.
(b) Payment and Redelivery of Options or Shares. In the event Grantee
exercises its rights under this Section 7, Issuer shall, within ten
business days thereafter, pay the required amount to Grantee in immediately
available funds and Grantee shall surrender to Issuer the Option or the
certificate or certificates evidencing the Shares purchased by Grantee
pursuant hereto, and Grantee shall warrant that it owns the Option or such
Shares and that the Option or such Shares are then free and clear of all
liens, claims, damages, charges and encumbrances of any nature whatsoever.
(c) Repurchase Price Reduced at Grantee's Option. In the event the
repurchase price specified in Section 7(a) would subject the purchase of
the Option or the Shares purchased by Grantee pursuant to the Option to a
vote of the shareholders of Issuer pursuant to applicable law or the
Issuer's Articles, then Grantee may, at its election, reduce the repurchase
price to an amount which would permit such repurchase without the necessity
for such a shareholder vote.
8. Registration Rights.
(a) Following the termination of the Merger Agreement, Grantee, to the
extent that it owns Shares, may by written notice (the "Registration
Notice") to Issuer, request Issuer to register under the Securities Act all
or any part of the Shares beneficially owned by Grantee (the "Registrable
Securities") for sale from time to time in market transactions or pursuant
to a bona fide underwritten public offering (a "Permitted Offering").
(b) Issuer (and/or any person designated by Issuer) shall thereupon
have the option exercisable by written notice delivered to Grantee within
ten business days after the receipt of the Registration Notice, irrevocably
to agree to purchase all or any part of the Shares proposed to be so sold
for cash at a price (the "Option Price") equal to the product of (i) the
number of Shares to be so purchased by the Issuer and (ii) the then Fair
Market Value of such shares.
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(c) Any purchase of Shares by Issuer (or its designee) under Section
8(b) shall take place at a closing to be held at the principal executive
offices of Issuer or at the offices of its counsel at any reasonable date
and time designated by Issuer and/or such designee in such notice within
twenty business days after delivery of such notice, and any payment for the
shares to be so purchased shall be made by delivery at the time of such
closing in immediately available funds.
(d) If Issuer does not elect to exercise its option pursuant to this
Section 8 with respect to all Shares proposed to be so sold, it shall use
its best efforts to effect, as promptly as practicable, the registration
under the Securities Act of such unpurchased Shares; provided, however,
that:
(i) Grantee shall not be entitled to demand more than an aggregate
of two effective registration statements hereunder, and
(ii) Issuer will not be required to file any such registration
statement during any period of time (not to exceed 40 days after such
request in the case of clause (A) below or 90 days in the case of
clauses (B) and (C) below) when
(A) Issuer is in possession of material nonpublic information
which it reasonably believes would be detrimental to be disclosed at
such time and, in the opinion of counsel to Issuer, such information
would be required to be disclosed if a registration statement were
filed at that time;
(B) Issuer is required under the Securities Act to include
audited financial statements for any period in such registration
statement and such financial statements are not yet available for
inclusion in such registration statement; or
(C) Issuer determines, in its reasonable judgment, that such
registration would interfere with any financing, acquisition or other
material transaction involving Issuer or any of its affiliates.
(e) Issuer shall use its reasonable best efforts:
(i) to keep any registration effected under this Section 8
effective for a period of not less than 90 days from its effective date;
and
(ii) to cause any Shares registered pursuant to this Section 8 to
be qualified for sale under the securities or Blue Sky law of such
jurisdictions as Grantee may reasonably request and continue such
registration or qualification in effect in such jurisdiction; provided,
however, that Issuer shall not be required to qualify to do business in,
or consent to general service of process in, any jurisdiction by reason
of this provision.
(f) The registration rights set forth in this Section 8 are subject to
the condition that Grantee shall provide Issuer with such information with
respect to the Shares, the plans for the distribution thereof, and such
other information with respect to Grantee as, in the reasonable judgment of
counsel for Issuer, is necessary to enable Issuer to include in such
registration statement all material facts required to be disclosed with
respect to a registration hereunder.
(g) A registration effected under this Section 8 shall be effected at
Issuer's expense, except for underwriting discounts and commissions and the
fees and disbursements of counsel to Grantee, and Issuer shall provide to
the underwriters such documentation (including certificates, opinions of
counsel and "comfort" letters from auditors) as is customary in connection
with underwritten public offerings as such underwriters may reasonably
require.
(h) In connection with any registration effected under this Section 8,
the parties agree:
(i) to indemnify each other and the underwriters, if any, in the
customary manner;
(ii) if the offering is underwritten, to enter into an underwriting
agreement in form and substance customary for transactions of such type
with the proposed managing underwriter (the "Manager") and the other
underwriters participating in such offering; and
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(iii) to take all further actions which shall be reasonably
necessary to effect such registration and sale (including if the Manager
deems it necessary, participating in road show presentations).
(i) Issuer shall be entitled to include (at its expense) additional
shares of its Common Stock in a registration effected pursuant to this
Section 8 only if and to the extent the Manager determines that such
inclusion will not adversely affect the prospects for success of such
offering.
(j) Except as provided in Section 11(b), any subsequent holder of
Shares shall be entitled to the registration rights under this Section 8,
provided that if there is more than one holder of Shares, such rights may
be exercised only by the holders of a majority of such Shares.
9. Adjustment of Number of Shares.
(a) Without limiting any restrictions on Issuer contained in this
Agreement or in the Merger Agreement, in the event of any change in Common
Stock by reason of stock dividends, splitups, mergers (other than the
Merger), recapitalizations, combinations, exchange of shares or the like,
the type and number of shares, securities or other property subject to the
Option, and the purchase price per share provided in Section 1, shall be
adjusted appropriately to restore to Grantee its rights hereunder,
including the right to purchase from Issuer (or its successors) shares of
Common Stock (or such other shares, securities or other property into which
Common Stock has been so changed) representing 19.9% of the outstanding
Common Stock for the aggregate Exercise Price calculated as of the date of
this Agreement as provided in Section 1.
(b) If, as a result of the application of the limitations on payments
contained in Section 8.3(d) of the Merger Agreement, the maximum payment
upon the "put" of the entire Option under Section 7(a) of this Agreement is
limited, the number of shares of Common Stock shall be reduced to the
maximum number of shares that would, if the "put" of the Option provided in
Section 7(a) of this Agreement were exercised on the termination date under
the Merger Agreement, result in such maximum payment as so limited.
10. Restrictive Legends. Each certificate representing shares of Common
Stock issued to Grantee hereunder shall include a legend in substantially the
following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR
BLUE SKY LAWS, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF
AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. SUCH SECURITIES ARE
ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE
STOCK OPTION AGREEMENT, DATED AS OF NOVEMBER 21, 1996, A COPY OF WHICH
MAY BE OBTAINED FROM THE ISSUER UPON REQUEST.
It is understood and agreed that:
(i) the reference to the resale restrictions of the Securities Act
and state securities or Blue Sky laws in the foregoing legend shall be
removed by delivery of substitute certificate(s) without such reference
if Grantee shall have delivered to Issuer a copy of a letter from the
staff of the SEC, or an opinion of counsel, in form and substance
reasonably satisfactory to Issuer, to the effect that such legend is not
required for purposes of the Securities Act or such laws;
(ii) the reference to the provisions to this Agreement in the
foregoing legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and
under circumstances that do not require the retention of such reference;
and
(iii) the legend shall be removed in its entirety if the conditions
in the preceding clauses (i) and (ii) are both satisfied.
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In addition, such certificates shall bear any other legend as may be
required by law. Certificates representing shares sold in a registered public
offering pursuant to Section 8 shall not be required to bear the legend set
forth in this Section 10.
11. Binding Effect; No Assignment.
(a) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
Except as expressly provided in this Agreement or by operation of law, this
Agreement is not assignable without the prior written consent of the other
party.
(b) Any Shares sold by Grantee in compliance with the provision of
Section 8 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement, and any
transferee of such Shares shall not be entitled to the registration rights
of Grantee under this Agreement.
12. Specific Performance. The parties hereto agree that irreparable harm
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specified terms or were otherwise breached. It
is accordingly agreed that the parties hereto shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or equity.
13. Validity.
(a) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
In the event any court or other competent authority holds any provision of
this Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith the execution and delivery of an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision and the economic effects thereof.
(b) If for any reason any such court or authority determines that
Grantee is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1 hereof (as the same may be adjusted), it is the
express intention of Issuer to allow Grantee to acquire or to require
Issuer to repurchase such lesser number of shares as may be permissible
without any amendment or modification hereof.
14. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when delivered in
person, by overnight courier, by facsimile transmission (with receipt confirmed
by telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
(A) If to Grantee to:
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
Fax: (813) 228-4811
Attn: Timothy L. Guzzle, Chairman
with copies to:
Roger H. Kessel, Esq.
Senior Vice President-General Counsel
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
Fax: (813) 228-4811
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David R. Pokross, Jr., Esq.
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Fax: (617) 227-4420
(B) If to Issuer to:
Lykes Energy, Inc.
111 East Madison Street
Tampa, FL 33602
Fax: (813) 272-0275
Attn: Tom L. Rankin, Chairman
with a copy to:
Nathan B. Simpson, Esq.
Macfarlane Ferguson & McMullen
111 Madison Street
Tampa, FL 33602
Fax: (813) 273-4256
Any party may by notice given in accordance with this section to the other
party designate another address or person for receipt of notices hereunder.
15. Governing Law. This Agreement is governed by the laws of the State of
Florida without regard to its choice of law principles.
16. Section Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
18. Amendments; Waiver. This Agreement may be amended by the parties
hereto and the terms and conditions hereof may be waived only by an instrument
in writing signed on behalf of each of the parties hereto, or in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
19. Extension of Time Periods. The time periods for exercise of certain
rights under Sections 2, 6 and 7 shall be extended (i) to the extent necessary
to obtain all regulatory approvals for the exercise of such rights, and for the
expiration of all statutory waiting periods and (ii) to the extent necessary to
avoid any liability under Section 16(b) of the Exchange Act by reason of such
exercise.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first stated above.
TECO ENERGY, INC.
By:
--------------------------------------
Timothy L. Guzzle
Chairman
LYKES ENERGY, INC.
By:
------------------------------------
Tom L. Rankin
Chairman
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EXHIBIT B
ESCROW AGREEMENT
This Escrow Agreement dated , 199 is among TECO Energy, Inc.
(the "Buyer"), a Florida corporation, , as the representative of the
shareholders (the "Shareholder Representative") of Lykes Energy, Inc. (the
"Seller"), a Florida corporation, and NationsBank, N.A. (South), as escrow agent
(the "Escrow Agent").
PRELIMINARY STATEMENT
Pursuant to an Agreement and Plan of Merger dated as of November 21, 1996
(the "Merger Agreement") between the Buyer and the Seller, the Buyer is
acquiring the Seller through the merger of the Seller into the Buyer (the
"Merger"). Capitalized terms used herein and not otherwise defined have the
meanings assigned to them in the Merger Agreement.
The holders of Seller Stock outstanding immediately prior to the Merger
(the "Shareholders") will indemnify the Buyer as provided in Section 9 of the
Merger Agreement through the deposit of shares of Buyer Common Stock
(the "Escrow Shares") pursuant to Section 1.11 of the Merger Agreement. [A list
of all Shareholders and their pro rata interest in the Escrow Shares is attached
hereto as Schedule I.]
The parties hereto agree as follows:
1. Establishment of Escrow. The Buyer has delivered to the Escrow Agent
and the Escrow Agent acknowledges receipt of the Escrow Shares in the form of a
single stock certificate. The Escrow Shares shall be held in escrow in the name
of the Escrow Agent or its nominee, subject to the terms and conditions set
forth herein. Unless and until the Escrow Shares are returned to the Buyer or
delivered to the Shareholders pursuant to the terms of this Agreement, the
Escrow Agent shall vote the Escrow Shares in accordance with the written
instructions of the Shareholder Representative.
2. Amounts Earned on Escrow Shares; Tax Matters. All amounts earned on the
Escrow Shares (dividends or other distributions) shall be distributed pro rata
to the Shareholders from time to time upon the request of the Shareholder
Representative. The parties agree that to the extent permitted by applicable
law, the Shareholders will include all amounts earned on the Escrow Shares in
their gross income for federal, state and local income tax (collectively,
"income tax") purposes and pay any income tax resulting therefrom. The Escrow
Agent has been previously furnished with all information necessary to enable it
to comply with the reporting and backup withholding requirements of the Internal
Revenue Code of 1986, as amended.
3. Claims Against Escrow Shares.
(a) At any time or times prior to the Expiration Date (as defined
below), the Buyer may make claims against the Escrow Shares for amounts due
for indemnification under Section 9 of the Merger Agreement. The Buyer
shall notify the Shareholder Representative and the Escrow Agent in writing
of each such claim, including a brief description of the amount and nature
of such claim. Each such notice delivered to the Escrow Agent by the Buyer
shall contain a representation of the Buyer to the effect that the Buyer
has delivered a copy of such notice to the Shareholder Representative prior
to or simultaneously with its delivery to the Escrow Agent. In the event
that the amount subject to the claim is unliquidated, the Buyer shall make
a good faith estimate as to the amount of the claim for purposes of
determining the number of Escrow Shares, if any, to be withheld by the
Escrow Agent if such claim is not resolved or otherwise adjudicated by the
Expiration Date. If the Shareholder Representative disputes such claim, the
Shareholder Representative shall give written notice thereof to the Buyer
and to the Escrow Agent within thirty days after the date the Buyer's
notice of claim was delivered to the Shareholder Representative, in which
case the Escrow Agent shall continue to hold the Escrow Shares in
accordance with the terms of this Agreement; otherwise, such claim shall be
deemed to have been acknowledged to be payable in shares out of the Escrow
Shares in the full amount thereof as set forth in the claim and the Escrow
Agent shall pay such claim from the Escrow Shares to the Buyer as soon as
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practicable after expiration of that thirty-day period. The Escrow Agent
shall effect such payment of Escrow Shares to the Buyer by surrendering
such Escrow Shares to the Buyer's transfer agent (Bank of Boston, c/o
Boston EquiServe, L.P., Mail Stop 45-02-09, P. O. Box 644, Boston, MA
02102) for cancellation upon receipt by the Escrow Agent of a copy of a
letter from the Buyer to the Buyer's transfer agent, instructing such
transfer agent to issue a new certificate to the Escrow Agent for the
remaining Escrow Shares after giving effect to such payment. If the amount
of the claim exceeds the aggregate value of the Escrow Shares, the Escrow
Agent shall have no liability or responsibility for any deficiency. The
value per share of the Escrow Shares for purposes of this Agreement shall
be $ (1) (the "Closing Market Value"). The Escrow Agent may rely
conclusively on the per share value set forth herein for the purpose of
determining the amount of shares required to pay a claim. All claims paid
out of the Escrow Shares shall be rounded to the nearest whole share. Under
no circumstances shall the Shareholders or the Shareholder Representative
have any right to substitute other property for the Escrow Shares or to
change the per share value stated herein.
(b) If the Shareholder Representative gives notice to the Buyer and
the Escrow Agent pursuant to Section 3(a) disputing a Buyer claim, no
distribution of the Escrow Shares shall be made by the Escrow Agent to the
Buyer or to the Shareholders of the Set Aside Amount (as defined in Section
4(a)) with respect to such claim until either (i) such disputed claim has
been resolved as evidenced by a written notice executed by the Buyer and
the Shareholder Representative instructing the Escrow Agent as to the
distribution of such Set Aside Amount or portion thereof or (ii) such
dispute shall have been adjudicated in accordance with the arbitration
procedures described in Section 4(b).
4. Disputed Claims.
(a) If the Shareholder Representative disputes an indemnification
claim of the Buyer as above provided and subject to Section 3, the Escrow
Agent shall set aside a portion of the Escrow Shares equal to the amount of
the claim as set forth in the notice of the claim (the "Set Aside Amount").
In the event the Buyer notifies the Escrow Agent in writing that it has
made out-of-pocket expenditures or anticipates that it will incur legal
expenses in connection with any such disputed claim with respect to which
it is entitled to be indemnified under the Merger Agreement, a portion of
the Escrow Shares equal to such incurred or anticipated expenditures shall
also be set aside and added to and become a part of the Set Aside Amount,
provided that in the event that it shall be agreed (as evidenced by a
written notice executed by the Buyer and the Shareholder Representative as
described in Section 3(b)) or determined through an arbitration proceeding
described in Section 4(b) that the Buyer is not entitled to indemnification
with respect to such claim, the Buyer shall not be entitled to such shares.
(b) If the Escrow Agent does not receive written notice executed by
the Buyer and the Shareholder Representative within sixty days after the
Shareholder Representative sends notice of such dispute to the effect that
the disputed indemnification claim has been resolved, the indemnification
claim shall be referred to an arbitrator chosen by agreement of the
Shareholder Representative and the Buyer. If no agreement is reached
regarding selection of the arbitrator within thirty days after written
request from either party to the other, the Buyer or the Shareholder
Representative may submit the matter in dispute to the American Arbitration
Association, to be settled by arbitration in Tampa, Florida in accordance
with the commercial arbitration rules of the Association. The Buyer and the
Shareholder Representative agree to act in good faith to mutually select an
arbitrator. The fees and expenses of any arbitration shall be borne by the
Shareholders and the Buyer in such proportions as shall be determined by
the arbitrator, or if there is no such determination, then such fees and
expenses shall be borne equally by the Shareholders and the Buyer. In no
event shall the Escrow Agent or Shareholder Representative (in such
capacity) be responsible for any fees or expenses of any party to any
arbitration proceeding. The determination of the arbitrator as to the
amount, if any, of the indemnification claim that is properly allowable
shall be conclusive and binding upon the parties hereto and judgment may be
entered thereon
- ---------------
(1) Average of the closing prices of Buyer Common Stock as reported on the New
York Stock Exchange for the twenty trading days ending on the third trading day
prior to the Closing Date.
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in any court having jurisdiction in accordance with the Florida Arbitration
Code. The Escrow Agent shall make payment of such claim, as and to the
extent allowed, to the Buyer out of the Set Aside Amount as soon as
practicable following its receipt of a copy of the arbitration award
determination.
5. Termination. This Agreement shall terminate upon the earlier of (i) one
year after the Effective Time (as defined in Section 1.2 of the Merger
Agreement) and (ii) the issuance of the first combined audited financial
statements of the Buyer and Seller (the "Expiration Date"), provided that there
are no outstanding indemnification claims as to which the Escrow Agent has
received notice pursuant to Section 3 on or prior to the Expiration Date;
otherwise this Agreement shall continue in effect until the resolution of all
such indemnification claims. The Buyer shall give the Escrow Agent prompt
written notice of the occurrence of the Expiration Date. Upon receipt of such
notice or as soon thereafter as is practicable, the Escrow Agent shall
distribute the Escrow Shares less (i) the amount of any then existing Set Aside
Amounts and (ii) the amount specified in any notice of a claim delivered to the
Escrow Agent on or within thirty days prior to the Expiration Date with respect
to which no Set Aside Amount has yet been established and the Escrow Agent has
not otherwise been instructed by the Buyer and the Shareholder Representative.
At such time thereafter as any remaining indemnification claim hereunder has
been resolved and the Escrow Agent has received a written notice executed by the
Buyer and the Shareholder Representative to that effect (or a copy of an
arbitration award pursuant to Section 4(b) to that effect) and any amounts to be
distributed to the Buyer in connection therewith have been so distributed, the
Escrow Agent shall distribute any portion of the remaining Escrow Shares pro
rata to the Shareholders. Upon the resolution of all outstanding indemnification
claims hereunder, the Escrow Agent shall distribute the remaining amount, if
any, of the Escrow Shares pro rata to the Shareholders and this Agreement shall
terminate. The Buyer shall not be required to issue certificates for fractional
shares in any distribution of Escrow Shares pursuant to this Agreement, but
rather shall pay to the Escrow Agent for distribution to the Shareholders an
amount in cash (without interest) determined by multiplying each Shareholder's
fractional interest by the Closing Market Value. The Escrow Agent shall effect
such distributions of Escrow Shares as it is required to make to the
Shareholders under this Agreement by surrendering such Escrow Shares to the
Buyer's stock transfer agent for cancellation upon receipt by the Escrow Agent
of a copy of a letter from the Buyer to the Buyer's stock transfer agent,
instructing such transfer agent to issue such shares pro rata to the
Shareholders.
6. The Escrow Agent.
(a) Notwithstanding anything herein to the contrary, the Escrow Agent
shall promptly dispose of all or any part of the Escrow Shares as directed
by a writing jointly signed by the Shareholder Representative and the
Buyer. The reasonable fees and expenses of the Escrow Agent in connection
with its execution and performance of this Agreement as set forth on
Schedule 2 hereto shall be borne by the Buyer. The Escrow Agent shall not
be liable for any act or omission to act under this Agreement, including
any and all claims made against the Escrow Agent as a result of its holding
the Escrow Shares in its own name, except for its own gross negligence or
willful misconduct. The Escrow Agent shall not be liable for, and the Buyer
and the Shareholders shall jointly and severally indemnify and hold
harmless the Escrow Agent and its directors, employees, officers, agents,
successors and assigns against, any losses or claims (including reasonable
out-of-pocket expenses) arising out of any action taken or omitted in good
faith hereunder and reasonable costs of investigation and counsel fees and
expenses which may be imposed on the Escrow Agent or reasonably incurred by
it in connection with its acceptance of this appointment or performance of
its duties hereunder. The Escrow Agent may decline to act and shall not be
liable for failure to act if in doubt as to its duties under this
Agreement. The Escrow Agent may act upon any instrument or signature
believed by it to be genuine and may assume that any person purporting to
give any notice or instruction hereunder, reasonably believed by it to be
authorized, has been duly authorized to do so. The Escrow Agent's duties
shall be determined only with reference to this Agreement and applicable
law and the Escrow Agent is not charged with knowledge of or any duties or
responsibilities in connection with any other document or agreement,
including without limitation, the Merger Agreement.
(b) The Escrow Agent shall have the right at any time to resign
hereunder by giving written notice of its resignation to the parties
hereto, at the addresses set forth herein or at such other address as the
parties shall provide, at least thirty days prior to the date specified for
such resignation to take effect. In
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such event the Buyer shall appoint a successor escrow agent within that
thirty-day period; if the Buyer does not designate a successor escrow agent
within such period, the Escrow Agent may appoint a successor escrow agent.
Upon the effective date of such resignation, the Escrow Shares together
with all cash and other property then held by the Escrow Agent hereunder
shall be delivered by it to such successor escrow agent or as otherwise
shall be designated in writing by the Buyer and the Shareholder
Representative.
(c) In the event that the Escrow Agent should at any time be
confronted with inconsistent or conflicting claims or demands by the other
parties hereto, the Escrow Agent shall have the right to interplead the
parties in any court of competent jurisdiction and request that such court
determine the respective rights of the parties with respect to this
Agreement and, upon doing so, the Escrow Agent shall be released from any
obligations or liability to the other parties as a consequence of any such
claims or demands.
(d) The Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder, either directly or by or
through its agents or attorneys. Nothing in this Agreement shall be deemed
to impose upon the Escrow Agent any duty to qualify to do business or to
act as fiduciary or otherwise in any jurisdiction other than the State of
Florida. The Escrow Agent shall not be responsible for and shall not be
under a duty to examine, inquire into or pass upon the validity, binding
effect, execution or sufficiency of this Agreement or of any amendment or
supplement hereto.
7. Shareholder Representative.
(a) In the event the Shareholder Representative shall die or resign or
otherwise terminate his status as such, his successor shall be
or such other person as the Shareholder Representative
may appoint. If the successor Shareholder Representative shall die or
resign or otherwise terminate his status as such, his successor shall be
any person appointed by such successor Shareholder Representative or, in
the case of the death of the successor Shareholder Representative or his
failure to appoint a successor after a vacancy has been created, elected by
the vote or written consent of a majority in interest of the Shareholders.
All decisions of the Shareholder Representative shall be binding upon the
Shareholders. The Shareholder Representative shall keep the Shareholders
reasonably informed of his or her material decisions.
(b) The Shareholder Representative is authorized to take any action
deemed by him appropriate or necessary to carry out the provisions of, and
to determine the rights of the Shareholders under this Agreement. The
Shareholder Representative shall serve as the agent of the Shareholders for
all purposes related to this Agreement, including without limitation
service of process upon the Shareholders. By execution of this Agreement,
the Shareholder Representative accepts and agrees to diligently discharge
the duties and responsibilities of the Shareholder Representative set forth
in this Agreement. The authorization and designation of the Shareholder
Representative under this Section 7(b) shall be binding upon the successors
and assigns of each Shareholder. The Buyer and the Escrow Agent shall be
entitled to rely upon such authorization and designation and shall be fully
protected in dealing with the Shareholder Representative, and shall have no
duty to inquire into the authority of any person reasonably believed by any
of them to be the Shareholder Representative.
(c) The Shareholder Representative (i) shall not be liable to any of
the Shareholders for any error of judgment, or action taken or omitted in
good faith, or mistake of fact or law unless caused by his own gross
negligence or willful misconduct, (ii) shall be entitled to treat as
genuine any letter or other document furnished to him by the Buyer, the
Shareholders or the Escrow Agent and believed by him to be genuine and to
have been signed and presented by the proper party or parties and (iii)
shall be reimbursed from the proceeds of Escrow Shares otherwise
immediately deliverable to the Shareholders under the Escrow Agreement for
counsel fees and other out-of-pocket expenses incurred by the Shareholder
Representative in connection with this Agreement. Such reimbursement shall
be made out of the net proceeds of Escrow Shares by the Escrow Agent as
provided in Section 7(d).
B-4
<PAGE> 148
(d) The Shareholder Representative shall not be entitled to any
compensation for services hereunder. To the extent the Shareholder
Representative shall incur reasonable out-of-pocket costs in the
performance of his duties hereunder, the Shareholder Representative shall
be authorized to direct the Escrow Agent with prior notice to the Buyer to
either (i) sell in the open market that number of Escrow Shares (up to one
percent of the Escrow Shares) sufficient to generate net proceeds to
reimburse the Shareholder Representative for such out-of-pocket costs or
(ii) deliver or cause to be delivered to the Shareholder Representative
such number of Escrow Shares (up to one percent of the Escrow Shares) as
are equal to such out-of-pocket costs divided by the Closing Market Value
(rounded to the nearest whole share). The Escrow Agent shall have sole
discretion as to which of such methods it will use to effect such
reimbursement.
8. Governing Law. This Agreement is governed by the laws of the State of
Florida without regard to its conflict of law provisions, and shall inure to the
benefit of and be binding upon the successors, assigns, heirs and personal
representatives of the parties hereto.
9. Counterparts. This Agreement may be executed in two or more
counterparts, all of which documents shall be considered one and the same
document.
10. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when delivered in
person, by overnight courier, by facsimile transmission (with receipt confirmed
by telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
TO THE BUYER:
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
Fax: (813) 228-4811
Attn: Timothy L. Guzzle, Chairman
With copies to:
Roger H. Kessel, Esq.
Senior Vice President-General Counsel
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
Fax: (813) 228-4811
David R. Pokross, Jr., Esq.
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Fax: (617) 227-4420
TO THE SHAREHOLDER REPRESENTATIVE:
TO ESCROW AGENT:
Shari B. Sawyers
Private Client Group
NationsBank, N.A. (South)
400 N. Ashley Drive, 6th Floor
Tampa, FL 33602
Fax: (813) 224-3658
Any party may by notice given in accordance with this section to the other
parties designate another address or person for receipt of notices hereunder.
B-5
<PAGE> 149
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first stated above.
TECO ENERGY, INC.
By
--------------------------------------
Title:
SHAREHOLDER REPRESENTATIVE
By
--------------------------------------
NATIONSBANK, N.A. (South)
--------------------------------------
as Escrow Agent
By
--------------------------------------
Title:
B-6
<PAGE> 150
SCHEDULE I
PRO RATA INTEREST
<TABLE>
<CAPTION>
SHAREHOLDER NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
</TABLE>
B-7
<PAGE> 151
EXHIBIT C
AFFILIATE LETTER
, 1996
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
Ladies and Gentlemen:
Pursuant to the Agreement and Plan of Merger dated as of November 21, 1996
(the "Merger Agreement") among TECO Energy, Inc. ("TECO"), a Florida
corporation, and Lykes Energy, Inc. ("LEI"), a Florida corporation, providing
for the merger of LEI with and into TECO (the "Merger"), the undersigned will
receive shares of common stock of TECO (the "TECO Shares") in exchange for the
shares of common stock of LEI (the "LEI Shares") owned by the undersigned. In
connection with receipt of the TECO Shares pursuant to the Merger:
A. The undersigned represents, warrants and agrees as follows:
1. Restriction on Resale of TECO Shares.
(a) The undersigned has been advised that if the undersigned is an
"affiliate" of LEI at the time the Merger Agreement was submitted for approval
of the shareholders of LEI and a distribution by the undersigned of the TECO
Shares has not been registered under the Securities Act of 1933, as amended (the
"Act"), Rule 145 under the Act will restrict the undersigned's sales of TECO
Shares received in the Merger. The undersigned will not sell or otherwise
dispose of any TECO Shares, except pursuant to Rule 145(d) under the Act, an
effective registration statement under the Act or an exemption from the
registration requirements under the Act, provided that the undersigned may make
bona fide gifts or distributions (including, if the undersigned is a
partnership, to its partners) without consideration or transfers by operation of
law, so long as any donee or transferee agrees not to sell, transfer or
otherwise dispose of TECO Shares except as provided herein.
(b) TECO is under no obligation to register the sale, transfer or other
disposition by the undersigned of the TECO Shares or, except as provided in
Paragraph B(1) below, to take any action necessary in order to make an exemption
from registration available.
2. Pooling of Interests
(a) The undersigned will not engage and has not engaged in any sale,
exchange, transfer, pledge, disposition or any other transaction that would
result in a reduction in the risk of ownership (any such transaction, a "Sale")
with respect to the LEI Shares owned by the undersigned during the 30 days prior
to the effective date of the Merger.
(b) The undersigned will not engage in any Sale of the TECO Shares until
after such time as TECO has published financial results covering at least 30
days of combined operations of TECO and LEI after the effective date of the
Merger.
3. Continuity of Interest. The undersigned has no current plan or
intention to engage in any Sale of TECO Shares that would result in a reduction
in the risk of ownership with respect to more than 50% of the TECO Shares to be
received by the undersigned pursuant to the Merger. The undersigned knows of no
plan (written or oral) pursuant to which the holders of LEI Shares intend to
engage in Sales of a number of TECO Shares which would, in the aggregate,
constitute more than 50% of the value of the LEI Shares outstanding immediately
prior to the Merger. A Sale of TECO Shares shall include for this purpose any
Sale in contemplation of, or related or pursuant to, the Merger Agreement,
including such a Sale of LEI Shares prior to the Merger.
C-1
<PAGE> 152
4. Miscellaneous.
(a) The undersigned understands that the certificates representing the TECO
Shares will be placed on the "stop-transfer list" maintained by TECO's transfer
agent; will remain so listed so long as the restrictions imposed on the TECO
Shares under Paragraphs A(1)(a) and A(2)(b) above remain in effect; and there
will be placed on the certificates representing such shares and any certificates
delivered in substitution or exchange therefor, a legend stating in substance:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
ON TRANSFER CONTAINED IN AN AGREEMENT WITH THE ISSUER DATED
, INCLUDING WITHOUT LIMITATION A RESTRICTION THAT THESE
SHARES MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH RULE 145(D) UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR AN EFFECTIVE REGISTRATION
STATEMENT OR EXEMPTION FROM REGISTRATION UNDER THE ACT. THE ISSUER WILL
FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
(b) The undersigned has carefully read this letter, including the
limitations upon the disposition of the TECO Shares received by the undersigned
contained herein, and has obtained such advice regarding execution of this
letter as the undersigned deemed necessary.
B. TECO represents, warrants and agrees as follows:
1. For so long as and to the extent necessary to permit the undersigned to
sell the TECO Shares pursuant to Rule 145 under the Act, TECO will use
reasonable efforts to file, on a timely basis, all reports and data required to
be filed with the Securities and Exchange Commission (the "SEC") by it pursuant
to Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act") so
long as it is subject to such requirement, furnish to the undersigned upon
request a written statement as to whether TECO has complied with such reporting
requirements during the 12 months preceding any proposed sale under Rule 145 and
otherwise use reasonable efforts to permit such sales pursuant to Rule 145 and
Rule 144. TECO has filed all reports required to be filed with the SEC under
Section 13 of the Exchange Act during the preceding 12 months.
2. TECO agrees that the stop transfer instructions and legend referred to
in Paragraph A(4)(a) above shall be terminated or removed if the undersigned
shall have delivered to TECO a copy of a letter from the staff of the SEC, an
opinion of counsel in form and substance satisfactory to TECO or other evidence
satisfactory to TECO, to the effect that such instructions and legend are not
required for the purposes of the Act and, in the case of Paragraph A(2)(b),
counsel for TECO shall have determined that such instructions are no longer
necessary for purposes of such paragraph.
This letter agreement is governed by the laws of the State of Florida
without regard to its conflict of laws principles.
Very truly yours,
--------------------------------------
Name:
Address:
Accepted:
TECO ENERGY, INC.
By
----------------------------------
Title:
Dated: , 1997
--------------------------
C-2
<PAGE> 153
[CS FIRST BOSTON LETTERHEAD]
November 21, 1996
Board of Directors
Lykes Energy, Inc.
111 East Madison Street
Tampa, FL 33602
Members of the Board:
You have asked us to advise you with respect to the fairness to the
stockholders of Lykes Energy, Inc. ("Lykes") from a financial point of view of
the consideration to be received by such stockholders pursuant to the terms of
the Agreement and Plan of Merger between TECO Energy, Inc. ("TECO") and Lykes
dated as of November 21, 1996 (the "Merger Agreement"). The Merger Agreement
provides for, among other things, a business combination of Lykes and TECO (the
"Merger") which will be structured as a merger of Lykes into TECO, or an
alternative structure as contemplated by the Merger Agreement. Pursuant to the
Merger, the outstanding shares of common stock, par value $0.10 per share, of
Lykes will be converted into a number of shares of common stock, par value $1.00
per share, of TECO ("TECO Common Stock") equal to $300 million divided by the
"Market Value", which equals the average of the closing prices of TECO Common
Stock as reported on the New York Stock Exchange for the 20 trading days ending
on the third trading day prior to the consummation of the Merger (the "Merger
Consideration"). However, (i) if the Market Value (determined as specified
above) is less than $22.25 per share, the Market Value shall equal $22.25 for
the purposes of determining the Merger Consideration and (ii) if the Market
Value (determined as specified above) is greater than $27.25 per share, the
Market Value shall equal $27.25 for the purposes of determining the Merger
Consideration. Lykes has certain rights to terminate the Merger Agreement if the
Market Value (determined as specified above) is less than $20.50, and TECO has
certain rights to terminate the Merger Agreement if the Market Value (determined
as specified above) is greater than $29.00.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to Lykes and TECO, as well as the
Merger Agreement. We have also reviewed certain other information, including
financial forecasts, provided to us by Lykes and TECO, and have met with the
respective managements of Lykes and TECO to discuss the business and prospects
of Lykes and TECO. We have not reviewed the recently formed limited partnership
between Lykes and Duke/Louis Dreyfus L.L.C. and based on discussions with senior
management have not assigned it a value in arriving at our opinion.
We have also compared certain financial data of Lykes and TECO and certain
stock market data of TECO with similar data for publicly held companies in
businesses similar to those of Lykes and TECO, and we have considered, to the
extent publicly available, the financial terms of certain other business
combinations and other recent transactions which we have deemed relevant. We
also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
respective managements of Lykes and TECO as to the future financial performance
of Lykes and TECO. In addition, we have not made an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Lykes or
TECO, nor have we been furnished with any such evaluations or appraisals. Our
opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated on the date hereof. We are not
expressing any opinion as to what the value of the TECO Common Stock actually
will be when issued to Lykes' stockholders pursuant to the Merger, or the prices
at which such TECO Common Stock will trade subsequent to the Merger. We have
assumed, with your consent, that the Merger will be treated as a tax-free
reorganization for federal income tax purposes. We have assumed, with your
consent, that the Merger will be
<PAGE> 154
treated as a pooling of interests for financial accounting purposes. We were not
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of Lykes.
We have acted as financial advisor to Lykes in connection with the Merger
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger. In the past, we have performed
certain investment banking and financial advisory services for Lykes and have
received customary fees for such services. In the ordinary course of our
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.
It is understood that this letter is for the information of the Board of
Directors of Lykes in connection with its evaluation of the Merger and is not
intended to be and shall not be deemed to constitute a recommendation to any
stockholder of Lykes as to how such stockholder should vote on the proposed
Merger. This letter is not to be quoted or referred to, in whole or in part, in
any registration statement, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without CS First Boston's prior
written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received by the stockholders of Lykes in
the Merger is fair to such stockholders from a financial point of view.
Very truly yours,
CS FIRST BOSTON CORPORATION
<PAGE> 155
EXHIBIT C
PROVISION OF THE FLORIDA BUSINESS CORPORATION ACT RELATING
TO ACTION BY SHAREHOLDERS WITHOUT A MEETING
(1) Unless otherwise provided in the articles of incorporation, action
required or permitted by this act to be taken at an annual or special meeting of
shareholders may be taken without a meeting, without prior notice, and without a
vote if the action is taken by the holders of outstanding stock of each voting
group entitled to vote thereon having not less than the minimum number of votes
with respect to each voting group 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. In order to be effective the action must be
evidenced by one or more written consents describing the action taken, dated and
signed by approving shareholders having the requisite number of votes of each
voting group entitled to vote thereon, and delivered to the corporation by
delivery to its principal office in this state, its principal place of business,
the corporate secretary, or another officer or agent of the corporation having
custody of the book in which proceedings of meetings of shareholders are
recorded. No written consent shall be effective to take the corporate action
referred to therein unless, within 60 days of the date of the earliest dated
consent delivered in the manner required by this section, written consents
signed by the number of holders required to take action are delivered to the
corporation by delivery as set forth in this section.
(2) Any written consent may be revoked prior to the date that the
corporation receives the required number of consents to authorize the proposed
action. No revocation is effective unless in writing and until received by the
corporation at its principal office or received by the corporate secretary or
other officer or agent of the corporation having custody of the book in which
proceedings of meetings of shareholders are recorded.
(3) Within 10 days after obtaining such authorization by written consent,
notice must be given to those shareholders who have not consented in writing or
who are not entitled to vote on the action. The notice shall fairly summarize
the material features of the authorized action and, if the action be such for
which dissenters' rights are provided under this act, the notice shall contain a
clear statement of the right of shareholders dissenting therefrom to be paid the
fair value of their shares upon compliance with further provisions of this act
regarding the rights of dissenting shareholders.
(4) A consent signed under this section has the effect of a meeting vote
and may be described as such in any document.
(5) In the event that the action to which the shareholders consent is such
as would have required the filing of a certificate under any other section of
this act if such action had been voted on by shareholders at a meeting thereof,
the certificate filed under such other section shall state that written consent
has been given in accordance with the provisions of this section.
(6) Whenever action is taken pursuant to this section, the written consent
of the shareholders consenting thereto or the written reports of inspectors
appointed to tabulate such consents shall be filed with the minutes of
proceedings of shareholders.
<PAGE> 156
EXHIBIT D
PROVISIONS OF THE FLORIDA BUSINESS CORPORATION ACT
RELATING TO RIGHTS OF DISSENTING SHAREHOLDERS
607.1301 DISSENTERS' RIGHTS; DEFINITIONS. -- The following definitions
apply to ss. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken, the date on
which the corporation received written consents without a meeting from the
requisite number of shareholders in order to authorize the action, or, in
the case of a merger pursuant to s. 607.1104, the day prior to the date on
which a copy of the plan of merger was mailed to each shareholder of record
of the subsidiary corporation.
607.1302 RIGHT OF SHAREHOLDERS TO DISSENT. --
(1) Any shareholder of a corporation has the right to dissent from, and
obtain payment of the fair value of his shares in the event of, any of the
following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its
parent under s. 607.1104, and the shareholders would have been entitled
to vote on action taken, except for the applicability of s. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation, other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange pursuant to s. 607.1202, including a sale in dissolution but not
including a sale pursuant to court order or a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within 1 year after the date of sale;
(c) As provided in s. 607.0902(11), the approval of a control-share
acquisition;
(d) Consummation of a plan of share exchange to which the corporation
is a party as the corporation the shares of which will be acquired, if the
shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the shareholder
is entitled to vote on the amendment and if such amendment would adversely
affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of
his shares;
2. Altering or abolishing the voting rights pertaining to any of
his shares, except as such rights may be affected by the voting rights
of new shares then being authorized of any existing or new class or
series of shares;
3. Effecting an exchange, cancellation, or reclassification of any
of his shares, when such exchange, cancellation, or reclassification
would alter or abolish his voting rights or alter his percentage of
equity in the corporation, or effecting a reduction or cancellation of
accrued dividends or other arrearages in respect to such shares;
<PAGE> 157
4. Reducing the stated redemption price of any of his redeemable
shares, altering or abolishing any provision relating to any sinking
fund for the redemption or purchase of any of his shares, or making any
of his shares subject to redemption when they are not otherwise
redeemable;
5. Making noncumulative, in whole or in part, dividends of any of
his preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of his preferred
shares; or
7. Reducing any stated preferential amount payable on any of his
preferred shares upon voluntary or involuntary liquidation; or
(f) Any corporate actin taken, to the extent the articles of
incorporation provide that a voting or nonvoting shareholder is entitled to
dissent and obtain payment for his shares.
(2) A shareholder dissenting from any amendment specified in paragraph
(1)(e) has the right to dissent only as to those of his shares which are
adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares registered in
his name. In that event, his rights shall be determined as if the shares as to
which he has dissented and his other shares were registered in the names of
different shareholders.
(4) Unless the articles of incorporation otherwise provide, this section
does not apply with respect to a plan of merger or share exchange or a proposed
sale or exchange of property, to the holders of shares of any class or series
which, on the record date fixed to determine the shareholders entitled to vote
at the meeting of shareholders at which such action is to be acted upon or to
consent to any such action without a meeting, were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his shares
under this section may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
607.1320 PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS. --
(1)(a) If a proposed corporate action creating dissenters' rights under s.
607.1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights and be accompanied by a copy of ss. 607.1301, 607.1302, and 607.1320. A
shareholder who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written notice
of his intent to demand payment for his shares if the proposed action is
effectuated, and
2. Not vote his shares in favor of the proposed action. A proxy or
vote against the proposed action does not constitute such a notice of
intent to demand payment.
(b) If proposed corporate action creating dissenters' rights under s.
607.1302 is effectuated by written consent without a meeting, the corporation
shall deliver a copy of ss. 607,1301, 607.1302, and 607,1320 to each shareholder
simultaneously with any request for his written consent or, if such a request is
not made, within 10 days after the date the corporation received written
consents without a meeting from the requisite number of shareholders necessary
to authorize the action.
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his shares pursuant to paragraph
(1)(a) or, in the case of action authorized by written consent, to each
shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
<PAGE> 158
(3) Within 20 days after the giving of notice to him, any shareholder who
elects to dissent shall file with the corporation a notice of such election,
stating his name and address, the number, classes, and series of shares as to
which he dissents, and a demand for payment of the fair value of his shares. Any
shareholder failing to file such election to dissent within the period set forth
shall be bound by the terms of the proposed corporate action. Any shareholder
filing an election to dissent shall deposit has certificates for certificated
shares with the corporation simultaneously with the filing of the election to
dissent. The corporation may restrict the transfer of uncertificated shares from
the date the shareholder's election to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and shall not
be entitled to vote or to exercise any other rights of a shareholder. A notice
of election may be withdrawn in writing by the shareholder at any tine before an
offer is made by the corporation, as provided in subsection (5), to pay for his
shares. After such offer, no such notice of election may be withdrawn unless the
corporation consents thereto. However, the right of such shareholder to be paid
the fair value of his shares shall cease, and he shall be reinstated to have all
his rights as a shareholder as of the filing of his notice of election,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the
shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a
court has been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such shareholder
is not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which shareholders
may file their notices of election to dissent, or within 10 days after such
corporate action is effected, whichever is later (but in no case later than 90
days from the shareholders' authorization date), the corporation shall make a
written offer to each dissenting shareholder who has made demand as provided in
this section to pay an amount the corporation estimates to be the fair value for
such shares. If the corporate action has not been consummated before the
expiration of the 90-day period after the shareholders' authorization date, the
offer may be made conditional upon the consummation of such action. Such notice
and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the
dissenting shareholder holds, as of the latest available date and not more
than 12 months prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the 12-month
period ended on the date of such balance sheet or, if the corporation was
not in existence throughout such 12-month period, for the portion thereof
during which it was in existence.
(6) If within 30 days after the making of such offer any shareholder
accepts the same, payment for his shares shall be made within 90 days after the
making of such offer or the consummation of the proposed action, whichever is
later. Upon payment of the agreed value, the dissenting shareholder shall cease
to have any interest in such shares.
(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of 30 days
thereafter, then the corporation, within 30 days after receipt of written demand
from any dissenting shareholder given within 60 days after the date on which
such corporate action was effected, shall, or at its election at any time within
such period of 60 days may, file an action in any court of competent
jurisdiction in
<PAGE> 159
the county in this state where the registered office of the corporation is
located requesting that the fair value of such shares be determined. The court
shall also determine whether each dissenting shareholder, as to whom the
corporation requests the court to make such determination, is entitled to
receive payment for his shares. If the corporation fails to institute the
proceeding as herein provided, any dissenting shareholder may do so in the name
of the corporation. All dissenting shareholders (whether or not residents of
this state), other than shareholders who have agreed with the corporation as to
the value of their shares, shall be made parties to the proceeding as an action
against their shares. The corporation shall serve a copy of the initial pleading
in such proceeding upon each dissenting shareholder who is a resident of this
state in the manner provided by law for the service of a summons and complaint
and upon each nonresident dissenting shareholder either by registered or
certified mail and publication or in such other manner as is permitted by law.
The jurisdiction of the court is plenary and exclusive. All shareholders who are
proper parties to the proceeding are entitled to judgment against the
corporation for the amount of the fair value of their shares. The court may, if
it so elects, appoint one or more persons as appraisers to receive evidence and
recommend a decision on the question of fair value. The appraisers shall have
such power and authority as is specified in the order of their appointment or an
amendment thereof. The corporation shall pay each dissenting shareholder the
amount found to be due him within 10 days after final determination of the
proceedings. Upon payment of the judgment, the dissenting shareholder shall
cease to have any interest in such shares.
(8) The judgment may, at the discretion of the court, include a fair rate
of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by
the court and shall be assessed against the corporation, but all or any part of
such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the dissenting shareholders who are parties to
the proceeding, to whom the corporation has made an offer to pay for the shares,
if the court finds that the action of such shareholders in failing to accept
such offer was arbitrary, vexatious, or not in good faith. Such expenses shall
include reasonable compensation for, and reasonable expenses of, the appraisers,
but shall exclude the fees and expenses of counsel for, and experts employed by,
any party. If the fair value of the shares, as determined, materially exceeds
the amount which the corporation offered to pay therefor or if no offer was
made, the court in its discretion may award to any shareholder who is a party to
the proceeding such sum as the court determines to be reasonable compensation to
any attorney or expert employed by the shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed
value thereof or pursuant to payment of the judgment entered therefor, as
provided in this section, may be held and disposed of by such corporation as
authorized by unissued shares of the corporation, except that, in the case of a
merger, they may be held and disposed of as the plan of merger otherwise
provides. The share of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
<PAGE> 160
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
<TABLE>
<S> <C>
X
- --------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1995
OR
- ---------
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period to
Commission File Number 1-8180
</TABLE>
TECO ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
FLORIDA 59-2052286
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
TECO PLAZA 33602
702 N. FRANKLIN STREET (ZIP CODE)
TAMPA, FLORIDA
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
</TABLE>
Registrant's telephone number, including area code: (813) 228-4111
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
----------------------------------- -----------------------------------
<S> <C>
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
----
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 29, 1996 was $2,924,007,675.
Number of shares of the registrant's common stock outstanding as of
February 29, 1996 was 116,960,307.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement relating to the 1996 Annual
Meeting of Shareholders of the registrant are incorporated by reference into
Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 161
PART I
ITEM 1. BUSINESS.
TECO ENERGY
TECO Energy, Inc. (TECO Energy) was incorporated in Florida in 1981, as
part of a restructuring in which it became the parent corporation of Tampa
Electric Company (Tampa Electric).
TECO Energy currently owns no operating assets but holds all of the common
stock of Tampa Electric and the other subsidiaries listed below. TECO Energy is
a public utility holding company exempt from registration under the Public
Utility Holding Company Act of 1935.
TECO Energy has seven principal, directly-owned subsidiaries:
-- Tampa Electric, a Florida corporation and TECO Energy's largest
subsidiary, is an electric utility that serves more than 501,000 retail
customers in West Central Florida with a net system generating
capability of 3,404 megawatts (MWs).
-- TECO Diversified, Inc. (TECO Diversified), a Florida corporation formed
in 1987, has four subsidiaries that conduct a substantial portion of the
diversified activities of TECO Energy: TECO Coal Corporation (TECO
Coal), TECO Coalbed Methane, Inc. (TECO Coalbed Methane), TECO
Properties Corporation (TECO Properties) and TECO Transport & Trade
Corporation (TECO Transport).
-- TECO Power Services Corporation (TECO Power Services), a Florida
corporation formed in 1987, has subsidiaries that own and operate
independent power projects in Florida and in Guatemala. TECO Power
Services also seeks other opportunities both in the southeastern United
States and Latin America to develop independent power and cogeneration
projects.
-- TECO Investments, Inc. (TECO Investments), a Florida corporation formed
in 1987, invests capital in short- and long-term securities and
financial instruments.
-- TECO Finance, Inc. (TECO Finance), a Florida corporation formed in 1987,
is a source of debt capital primarily for the diversified activities of
TECO Energy.
-- TECO Gas & Oil, Inc. (TECO Gas & Oil), a Florida corporation formed in
1995, is involved in the exploration and development of conventional gas
and oil in the shallow gulf waters off Texas and Louisiana.
-- TeCom Inc. (TeCom), a Florida corporation (formerly called TECO Energy
Management Services Corporation) formed in 1994, is developing an
advanced energy management and communications system, and is currently
pilot testing this technology.
For financial information regarding TECO Energy's significant business segments
see Note J on pages 52 and 53.
TECO Energy and its subsidiaries had 4,465 employees as of Dec. 31, 1995.
TAMPA ELECTRIC
Tampa Electric was incorporated in Florida in 1899 and was reincorporated
in 1949. Tampa Electric is a public utility operating wholly within the state of
Florida and is engaged in the generation, purchase, transmission, distribution
and sale of electric energy. The retail territory served comprises an area of
about 2,000 square miles in West Central Florida, including substantially all of
Hillsborough County and parts of Polk, Pasco and Pinellas Counties, and has an
estimated population of over one million. The principal communities served are
Tampa, Winter Haven, Plant City and Dade City. In addition, the utility engages
in wholesale sales to other utilities which consist of broker economy,
requirements and other types of service of varying duration and priority. Tampa
Electric has three electric generating stations in or near Tampa and two
electric generating stations located near Sebring, a city located in Highlands
County in South Central Florida.
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<PAGE> 162
Tampa Electric had 2,836 employees as of Dec. 31, 1995, of which 1,164 were
represented by the International Brotherhood of Electrical Workers (IBEW) and
308 by the Office and Professional Employees International Union.
In 1995, approximately 48 percent of Tampa Electric's total operating
revenue was derived from residential sales, 29 percent from commercial sales, 10
percent from industrial sales and 13 percent from other sales including bulk
power sales for resale.
The sources of operating revenue for the years indicated were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
Residential.............................. $ 523.3 $ 505.5 $ 464.1
Commercial............................... 316.1 316.8 298.3
Industrial-Phosphate..................... 61.7 58.3 55.1
Industrial-Other......................... 45.0 50.0 48.9
Sales for resale......................... 80.0 70.4 76.1
Deferred revenues........................ (50.8) -- --
Other.................................... 117.0 93.9 98.8
-------- -------- --------
$1,092.3 $1,094.9 $1,041.3
======== ======== ========
</TABLE>
No material part of Tampa Electric's business is dependent upon a single
customer or a few customers, the loss of any one or more of whom would have a
significantly adverse effect on Tampa Electric, except that 8 customers in the
phosphate industry accounted for 6 percent of operating revenues in 1995.
Tampa Electric's business is not a seasonal one, but winter peak loads are
experienced due to fewer daylight hours and colder temperatures, and summer peak
loads are experienced due to use of air conditioning and other cooling
equipment.
REGULATION
The retail operations of Tampa Electric are regulated by the Florida Public
Service Commission (FPSC), which has jurisdiction over retail rates, the quality
of service, issuances of securities, planning, siting and construction of
facilities, accounting and depreciation practices and other matters.
Tampa Electric is also subject to regulation by the Federal Energy
Regulatory Commission (FERC) in various respects including wholesale power
sales, certain wholesale power purchases, transmission services and accounting
and depreciation practices.
Federal, state and local environmental laws and regulations cover air
quality, water quality, land use, power plant, substation and transmission line
siting, noise and aesthetics, solid waste and other environmental matters. See
Environmental Matters on page 7.
TECO Transport, TECO Coal and TECO Power Services' subsidiaries sell
transportation services, coal, and generating capacity and energy, respectively,
to Tampa Electric and to third parties. The transactions between Tampa Electric
and these affiliates and the prices paid by Tampa Electric are subject to
regulation by the FPSC and FERC, and any charges deemed to be imprudently
incurred may not be allowed to be billed to Tampa Electric's customers. See
Utility Regulation on pages 27 through 30. Except for transportation services
performed by TECO Transport under the U.S. bulk cargo preference program, the
prices charged by TECO Transport and TECO Coal subsidiaries to third-party
customers are not subject to regulatory oversight. See also TECO Power Services
on pages 10 and 11.
COMPETITION
Tampa Electric's retail business is substantially free from direct
competition with other electric utilities, municipalities and public agencies.
At the present time, the principal form of competition at the retail level
consists of natural gas for residences and businesses and the self-generation
option available to larger users of
3
<PAGE> 163
electric energy. Such users, and possibly commercial and residential customers
as well, may seek to expand their options through legislative and/or regulatory
initiatives that would permit competition at the retail level. Tampa Electric
intends to take all appropriate actions to retain and expand its retail
business, to control costs, and provide high quality service to retail
customers.
There is presently active competition in the wholesale power markets in
Florida, and this is increasing largely as a result of the Energy Policy Act of
1992 and related federal initiatives. This act removed certain regulatory
barriers to independent power producers and required utilities to transmit power
from such producers, utilities and others to wholesale customers under certain
circumstances. Tampa Electric continues its cost reduction efforts to increase
its wholesale business, which is dependent in part on access to transmission
systems owned by others.
In March 1995 the FERC issued its Notice Of Proposed Rulemaking on Open
Access Transmission Services (NOPR). The NOPR would require open access to
transmission systems and utilities owning transmission facilities (including
Tampa Electric) to provide services to wholesale transmission customers
comparable to those they provide to themselves on comparable terms and
conditions, including price. Among other things the NOPR would unbundle
transmission services from power sales and require owners of transmission
systems to take service under their own transmission tariffs.
In November 1995 the FERC accepted for filing Tampa Electric's open access
transmission tariffs, which conform to the pro forma tariffs contained in the
NOPR, subject to refund and the outcome of the final rule under the NOPR.
RETAIL PRICING
In general, the FPSC's pricing objective is to set rates at a level that
allows the utility 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 fuel and purchased power, of providing electric
service are recovered through base rates, which are designed to recover the
costs of owning, operating and maintaining the utility system. These costs
include operation and maintenance expenses, depreciation and taxes, as well as a
return on Tampa Electric's investment in assets used and useful in providing
electric service (rate base). The rate of return on rate base, which is intended
to approximate Tampa Electric's weighted cost of capital, includes its costs for
debt and preferred stock, deferred income taxes at a zero cost rate and an
allowed return on common equity. Base prices are determined in FPSC price
setting hearings that occur at irregular intervals at the initiative of Tampa
Electric, the FPSC or other parties.
Fuel, Clean Air Act allowances, and certain purchased power costs are
recovered through levelized monthly charges established pursuant to the FPSC's
fuel adjustment and cost recovery clauses. These charges, which are reset
semi-annually in an FPSC hearing, are based on estimated costs of fuel, Clean
Air Act allowances and purchased power, and estimated customer usage for a
specific recovery period, with a true-up adjustment to reflect the variance of
actual costs from the projected charges for prior periods.
The FPSC may disallow recovery of any costs that it considers imprudently
incurred.
4
<PAGE> 164
FUEL
About 99 percent of Tampa Electric's generation for 1995 was from its
coal-fired units. About the same level is anticipated for 1996.
Tampa Electric's average fuel cost per million BTU and average cost per ton
of coal burned have been as follows:
<TABLE>
<CAPTION>
AVERAGE COST PER MILLION BTU: 1995 1994 1993 1992 1991
-------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Coal........................................ $ 2.15 $ 2.22 $ 2.26 $ 2.23 $ 2.22
Oil......................................... $ 2.76 $ 2.49 $ 2.69 $ 2.76 $ 3.21
Gas......................................... -- -- $ 3.52 $ 2.43 $ 1.98
Composite................................... $ 2.16 $ 2.22 $ 2.27 $ 2.24 $ 2.25
Average cost per ton of coal burned......... $50.97 $53.39 $54.55 $53.65 $53.87
</TABLE>
Tampa Electric's generating stations burn fuels as follows: Gannon Station
burns low-sulfur coal; Big Bend Station burns coal of a somewhat higher sulfur
content; Hookers Point Station burns low-sulfur oil; Phillips Station burns oil
of a somewhat higher sulfur content; and Dinner Lake Station, which was placed
on long-term reserve standby in March 1994, burns natural gas and oil.
COAL. Tampa Electric burned approximately 7.4 million tons of coal during
1995 and estimates that its coal consumption will be 7.3 million tons for 1996.
During 1995, Tampa Electric purchased approximately 68 percent of its coal under
long-term contracts with six suppliers, including TECO Coal, and 32 percent of
its coal in the spot market or under intermediate-term purchase agreements.
About 23 percent of Tampa Electric's 1995 coal requirements were supplied by
TECO Coal. During December 1995, the average delivered cost of coal (including
transportation) was $47.99 per ton, or $2.01 per million BTU. Tampa Electric
expects to obtain approximately 51 percent of its coal requirements in 1996
under longterm contracts with five suppliers, including TECO Coal, and the
remaining 49 percent in the spot market.
Tampa Electric's long-term coal contracts provide for revisions in the base
price to reflect changes in a wide range of cost factors and for suspension or
reduction of deliveries if environmental regulations should prevent Tampa
Electric from burning the coal supplied, provided that a good faith effort has
been made to continue burning such coal. Tampa Electric estimates that about 19
percent of its 1996 coal requirements will be supplied by TECO Coal. For
information concerning transportation services and sales of coal by affiliated
companies to Tampa Electric, see TECO Coal on pages 8 and 9 and TECO Transport
on pages 9 and 10.
In 1995, about 81 percent of Tampa Electric's coal supply was deep-mined,
approximately 18 percent was surface-mined and 1 percent was a processed oil
by-product known as petroleum coke. Federal surface-mining laws and regulations
have not had any material adverse impact on Tampa Electric's coal supply or
results of its operations. Tampa Electric, however, cannot predict the effect on
the market price of coal of any future mining laws and regulations. Although
there are reserves of surface-mineable coal dedicated by suppliers to Tampa
Electric's account, high-quality coal reserves in Kentucky that can be
economically surface-mined are being depleted and in the future more coal will
be deep-mined. This trend is not expected to result in any significant
additional costs to Tampa Electric.
OIL. Tampa Electric has supply agreements through Dec. 31, 1996 for No. 2
fuel oil and No. 6 fuel oil for its four combustion turbine units, Polk Station,
Hookers Point Station and Phillips Station at prices based on Gulf Coast Cargo
spot prices. The price for No. 2 fuel oil deliveries taken in December 1995 was
$24.91 per barrel, or $4.29 per million BTU. The price for No. 6 fuel oil
deliveries taken in December 1995 was $17.53 per barrel, or $2.77 per million
BTU.
FRANCHISES
Tampa Electric holds franchises and other rights that, together with its
charter powers, give it the right to carry on its retail business in the
localities it serves. The franchises are irrevocable and are not subject to
amendment without the consent of Tampa Electric, although, in certain events,
they are subject to forfeiture.
5
<PAGE> 165
Florida municipalities are prohibited from granting any franchise for a
term exceeding 30 years. If a franchise is not renewed by a municipality, the
franchisee has the statutory right to require the municipality to purchase any
and all property used in connection with the franchise at a valuation to be
fixed by arbitration. In addition, all of the municipalities except for the
cities of Tampa and Winter Haven have reserved the right to purchase Tampa
Electric's property used in the exercise of its franchise, if the franchise is
not renewed.
Tampa Electric has franchise agreements with 13 incorporated municipalities
within its retail service area. These agreements have various expiration dates
ranging from December 2005 to September 2021, including the agreement with the
city of Tampa, which expires in August 2006. Tampa Electric has no reason to
believe that any of these franchises will not be renewed.
Franchise fees payable by Tampa Electric, which totaled $20.0 million in
1995, are calculated using a formula based primarily on electric revenues.
Utility operations in Hillsborough, Pasco, Pinellas and Polk Counties
outside of incorporated municipalities are conducted in each case under one or
more permits to use county rights-of-way granted by the county commissioners of
such counties. There is no law limiting the time for which such permits may be
granted by counties. There are no fixed expiration dates for the Hillsborough
County and Pinellas County agreements. The agreements covering electric
operations in Pasco and Polk counties expire in September 2033 and March 2004,
respectively.
ENVIRONMENTAL MATTERS
Tampa Electric's operations are subject to county, state and federal
environmental regulations. The Hillsborough County Environmental Protection
Commission and the Florida Environmental Regulation Commission are responsible
for promulgating environmental regulations and coordinating most of the
environmental regulation functions performed by the various departments of state
government. The Florida Department of Environmental Protection (FDEP) is
responsible for the administration and enforcement of the state regulations. The
U.S. Environmental Protection Agency (EPA) is the primary federal agency with
environmental responsibility.
Tampa Electric has all required environmental permits. In addition,
monitoring programs are in place to assure compliance with permit conditions.
Tampa Electric has been identified as one of numerous potentially responsible
parties (PRP) with respect to seven Superfund Sites. While the total costs of
remediation at these sites may be significant, Tampa Electric shares potential
liability with other PRPs, many of which have substantial assets. Tampa Electric
expects that its liability in connection with these sites will not be
significant.
EXPENDITURES. During the five years ended Dec. 31, 1995, Tampa Electric
spent $171.4 million on capital additions to meet environmental requirements,
including $117.7 million for the Polk Power Station project. Environmental
expenditures are estimated at $73 million for 1996, including $66 million for
the Polk Power Station, and $9 million in total for 1997-2000. These totals
exclude amounts required to comply with the 1990 amendments to the Clean Air
Act.
Tampa Electric is complying with the Phase I emission limitations imposed
by the Clean Air Act Amendments which became effective Jan. 1, 1995 by using
blends of lower-sulfur coal, controlling stack emissions and using purchased
emission allowances.
In 1995 Tampa Electric successfully integrated Big Bend Unit Three into the
existing scrubber on Big Bend Unit Four. This resulted in an additional scrubbed
unit at a fraction of the cost of a new scrubber. Also as part of its Phase I
compliance plan, Tampa Electric has a long-term contract for the purchase of
low-sulfur coal.
To comply with Phase II emission standards set for 2000 Tampa Electric
would potentially have to scrub additional capacity and is evaluating equipment
and technologies to accomplish compliance in the most cost-effective manner.
Absent capital expenditures for additional scrubbing, Tampa Electric expects to
spend $30 million of capital to comply with Phase II of the Clean Air Act
Amendments for nitrogen oxide reductions
6
<PAGE> 166
and emissions monitoring equipment. The cost of compliance with Phase I and
Phase II is expected to have little impact on Tampa Electric's prices.
In addition to recovering prudently incurred environmental costs through
base rates, Tampa Electric can petition the FPSC for such recoveries on a
current basis pursuant to a statutory environmental cost recovery procedure.
TECO DIVERSIFIED
TECO Diversified owns all of the common stock of TECO Coal, TECO Coalbed
Methane, TECO Properties and TECO Transport. TECO Diversified and its
subsidiaries had 1,482 employees as of Dec. 31, 1995. TECO Diversified is a
holding company that owns no operating assets.
TECO COAL
TECO Coal, a Kentucky corporation, owns no operating assets but holds all
of the common stock of Gatliff Coal Company (Gatliff), Rich Mountain Coal
Company (Rich Mountain), Clintwood Elkhorn Mining Company (Clintwood),
Pike-Letcher Land Company (Pike-Letcher) and Premier Elkhorn Coal Company
(Premier). TECO Coal's subsidiaries own and/or operate surface and underground
mines and coal processing and loading facilities in Kentucky and Tennessee.
In 1995, TECO Coal subsidiaries sold 5.3 million tons of coal, with
approximately 70 percent sold to third parties and 30 percent sold to Tampa
Electric. Rich Mountain has no reserves; it mines coal reserves owned by
Gatliff. About 68 percent of Gatliff's production and third-party purchases were
sold to Tampa Electric. This specialty coal has low-ash fusion temperature and
low-sulfur characteristics specifically suited for Tampa Electric's Gannon
Station units. The majority of production from Clintwood and Premier is sold to
third parties.
Tampa Electric is reducing its specialty coal purchases from Gatliff as a
result of its efforts to reduce costs and its successful fluxing of conventional
steam coal from other sources. TECO Coal's objective is to more than offset the
effects of this reduction by increasing the amount of coal sold to third
parties, principally from the reserves being developed by Premier.
Primary competitors of TECO Coal's subsidiaries are other coal suppliers,
many of which are located in Central Appalachia.
The operations of underground mines, including all related surface
facilities, are subject to the Federal Coal Mine Safety and Health Act of 1977.
TECO Coal's subsidiaries are also subject to various Kentucky and Tennessee
mining laws that require approval of roof control, ventilation, dust control and
other facets of the coal mining business. Federal and state inspectors inspect
the mines to ensure compliance with these laws. TECO Coal's subsidiaries are in
compliance with the standards of the various enforcement agencies. TECO Coal is
unaware of any mining laws or regulations having a prospective effective date
that would materially affect the market price of coal sold by its subsidiaries.
TECO Coal's subsidiaries have not experienced difficulty in complying with
federal, state and local air and water pollution standards in their mining
operations. In 1995, approximately $1.1 million was spent on environmental
protection and reclamation programs. TECO Coal expects to spend about $1.5
million in 1996 on these programs.
The coal mining operations are also subject to the Surface Mining Control
and Reclamation Act of 1977 which places a charge of $.15 and $.35 on every net
ton mined of underground and surface coal, respectively, to create a fund for
reclaiming land and water adversely affected by past coal mining. Other
provisions establish standards for the control of environmental effects and
reclamation of surface coal mining and the surface effects of underground coal
mining, and requirements for federal and state inspections.
7
<PAGE> 167
TECO COALBED METHANE
TECO Coalbed Methane, an Alabama corporation, participates in the
production of natural gas from coalbeds located in Alabama's Black Warrior
Basin. TECO Coalbed Methane has invested $203 million as the principal investor
in three joint ventures that control, in the aggregate, approximately 100,000
acres of lease holdings. In the fourth quarter of 1995, TECO Coalbed Methane
acquired 5 billion cubic feet of proven reserves in the Black Warrior Basin
through its purchase of royalty interests in existing holdings. At the end of
1995, TECO Coalbed Methane had interests in 754 wells that were operational and
producing gas for sale. These wells are operated by Taurus Exploration, a unit
of Energen Corporation, and, to a much lesser extent, other third-party
operators.
A non-conventional fuel tax credit is available on all production through
the year 2002. The tax credit, a major economic factor, escalates with inflation
and could be limited by domestic oil prices. In 1995, domestic oil prices would
have had to exceed $46 per barrel for this limitation to be effective.
TECO Coalbed Methane's operations are subject to federal, state and local
regulations for air, water and waste disposal. Its operations are in substantial
compliance with all applicable environmental laws and regulations.
TECO PROPERTIES
TECO Properties, a Florida corporation, has $42.7 million invested in seven
projects, solely or as a limited partner, and in undeveloped land in the Tampa
area. TECO Properties plans to continue a conservative investment approach.
TECO TRANSPORT
TECO Transport, a Florida corporation, owns all of the common stock of four
subsidiaries that transport, store and transfer coal and other dry bulk
commodities. TECO Transport currently owns no operating assets.
All of TECO Transport's subsidiaries perform substantial services for Tampa
Electric. In 1995, approximately 50 percent of TECO Transport's revenues were
from third-party customers and 50 percent were from Tampa Electric. The pricing
for services performed by TECO Transport's operating companies for Tampa
Electric is based on a fixed price per ton, adjusted quarterly for changes in
certain fuel and price indices. Most of the third-party utilization of the
ocean-going barges is for domestic phosphate movements and domestic and
international movements of other dry bulk commodities. Both the terminal and
river transport operations handle a variety of dry bulk commodities for
third-party customers.
A substantial portion of TECO Transport's business is dependent upon Tampa
Electric, industrial phosphate customers, export coal and grain customers, and
participation in the U.S. cargo preference program.
Primary competitors of TECO Transport's barge subsidiaries, Gulfcoast
Transit Company (Gulfcoast), which transports products in the Gulf of Mexico and
worldwide, and Mid-South Towing Company (Mid-South), which operates on the
Mississippi and Ohio rivers, are other barge and shipping lines and railroads.
There are a number of companies offering transportation services on the
waterways served by TECO Transport's subsidiaries. To date, physical and
technological improvements have allowed barge operators to maintain competitive
rate structures with alternate methods of transporting bulk commodities when the
origin and destination of such shipments are contiguous to navigable waterways.
Electro-Coal Transfer Corporation (Electro-Coal) operates a major transfer
and storage terminal on the Mississippi River south of New Orleans. Demand for
the use of such terminals is dependent upon customers' use of water
transportation versus alternate means of moving bulk commodities and the demand
for these commodities. Competition consists primarily of mid-stream operators
and another land-based terminal located nearby.
The business of TECO Transport's subsidiaries, taken as a whole, is not
subject to significant seasonal fluctuation.
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<PAGE> 168
The Interstate Commerce Act, as amended in December 1973, exempts from
regulation water transportation of dry bulk commodities that were transported in
bulk as of June 1, 1939. In 1995, all water transportation by TECO Transport's
subsidiaries was within this exemption.
TECO Transport's subsidiaries are also subject to the provisions of the
Clean Water Act of 1977 that authorize the Coast Guard and the EPA to assess
penalties for oil and hazardous substance discharges. Under this Act, these
agencies are also empowered to assess clean-up costs for such discharges.
Compliance with this Act has had no material effect on TECO Transport's capital
expenditures, earnings or competitive position, and no such effect is
anticipated. In 1995, TECO Transport spent $.5 million for environmental
control. Environmental expenditures are estimated at $.8 million in 1996,
primarily for work on solid waste disposal and storm water drainage at the
Electro-Coal facility in Louisiana and for fugitive dust emissions at its coal
unloading operations in Florida.
TECO POWER SERVICES
TECO Power Services, a Florida corporation, has subsidiaries that own and
operate independent power projects in Florida and in Guatemala. TECO Power
Services also seeks opportunities to develop other independent power and
cogeneration projects. TECO Power Services had 50 employees as of Dec. 31, 1995.
Hardee Power Partners Limited (Hardee Power), a Florida limited partnership
whose general and limited partners are wholly owned subsidiaries of TECO Power
Services, owns the Hardee Power Station, a 295-MW combined cycle electric
generating facility located in Hardee County, Florida, which began commercial
operation on Jan. 1, 1993. Hardee Power has 20-year power supply agreements, for
all of the capacity and energy of the Hardee Power Station, with Seminole
Electric Cooperative (Seminole Electric), a Florida electric cooperative that
provides wholesale power to 11 electric distribution cooperatives, and with
Tampa Electric. Under the Seminole Electric agreement, Hardee Power has agreed
to supply Seminole Electric with an additional 145 MWs of capacity during the
first 10 years of the contract, which it is purchasing from Tampa Electric's
coal-fired Big Bend Unit Four for resale to Seminole Electric, and at the option
of Seminole Electric, to expand the Hardee Power Station's capacity by 145 MWs
for the second 10 years of the contract. Tampa Electric also has the right under
its agreement to require the expansion of the Hardee Power Station, subordinate
to Seminole Electric's expansion option.
The Hardee Power Station is fueled by natural gas or No. 2 fuel oil. Hardee
Power has contracted for the supply and transportation of natural gas for the
Hardee Power Station through Dec. 31, 2002 with an option to extend the contract
through Dec. 31, 2012. Substantially all of Hardee Power Station's generation
for 1995 was from natural gas.
Hardee Power's average fuel cost per million BTU has been as follows:
<TABLE>
<CAPTION>
AVERAGE COST PER MILLION BTU: 1995 1994 1993
---------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Oil..................................... $4.64 $3.68 $4.86
Gas..................................... $2.70 $2.02 $2.51
Composite............................... $2.71 $2.40 $2.74
</TABLE>
The price for natural gas deliveries taken in December 1995 was $3.91 per
thousand cubic feet, or $3.73 per million BTU. The price for fuel oil deliveries
taken in August 1995 was $24.20 per barrel, or $4.15 per million BTU. There were
no fuel oil deliveries taken in the fourth quarter of 1995.
Through its ownership and operation of a wholesale generating facility in
the U.S., TECO Power Services is subject to regulation by the FERC in various
respects. Depending upon the nature of the project, FERC may regulate, among
other things, the rates, terms and conditions for the sale of electric capacity
and energy.
Like Tampa Electric, the U.S. operations of TECO Power Services are subject
to federal, state and local environmental laws and regulations covering air
quality, water quality, land use, power plant, substation and transmission line
siting, noise and aesthetics, solid waste and other environmental matters.
Tampa Centro Americana de Electricidad, Ltd. (TCAE), an entity
substantially owned by TPS Guatemala One, Inc. (TPS Guatemala One), a subsidiary
of TECO Power Services, has a U.S. dollar-denominated power sales agreement with
an electric utility in Guatemala to provide 78 MWs of capacity for
9
<PAGE> 169
15 years beginning in 1995. The project consists of two combustion turbines with
a total cost of approximately $50 million. At Dec. 31, 1995, TPS Guatemala One
owned an 87.5-percent interest in the project, and a prominent Guatemalan
business group owned the remaining 12.5-percent interest. In March 1996, TPS
Guatemala One acquired an additional interest in TCAE from the Guatemalan
business group, bringing its total interest in TCAE to 98.2 percent. TECO Power
Services has obtained insurance from the Overseas Private Investment Corporation
(OPIC), an agency of the U.S. government, for political risk, currency
inconvertibility, expropriation and political violence covering up to 90 percent
of its equity investment and economic returns.
TECO Power Services expects to obtain non-recourse project financing from
OPIC for 60 percent of the project's cost by mid-year 1996.
TCAE began commercial operation on Sept. 14, 1995. The power sales
agreement that TCAE signed with the power purchaser, Empresa Electrica de
Guatemala, S.A. (EEGSA), on Jan. 24, 1995 is primarily comprised of a capacity
charge, and operations and maintenance expense components. The capacity charge
is subject to adjustment due to output, heat rate and availability. The monthly
available capacity is paid for each month in four equal installments.
EEGSA, a private distribution and generation company formed in 1894, serves
more than 400,000 customers. Approximately 92 percent of this company is owned
by the Guatemalan central government through the Ministry of Finance, with the
remaining 8 percent owned by private Guatemalan investors. EEGSA's service
territory includes Guatemala City. EEGSA is responsible for providing the fuel
for the plant with TECO Power Services' providing assistance in fuel
administration.
TECO INVESTMENTS
TECO Investments' assets consist of short- and long-term financial
investments. The portfolio includes a continuing investment in leveraged leases
of $65 million. At Dec. 31, 1995, the net leveraged lease investment had
essentially a zero balance.
TECO FINANCE
TECO Finance raises short- and long-term debt capital primarily for the
diversified activities of TECO Energy. It has its own credit ratings, based on a
guarantee by TECO Energy. TECO Finance owns no operating assets.
TECO GAS & OIL
TECO Gas & Oil, a Florida corporation formed in 1995, has entered into
joint ventures with several partners to explore for conventional gas and oil in
the shallow gulf waters off Texas and Louisiana. The joint ventures have
successfully bid for a number of offshore lease blocks at federal auctions and
have negotiated drilling rights on other blocks. The first two exploratory wells
were successfully completed in 1995, with production facilities to be
operational in the second quarter of 1996. The company expects to invest $25 to
$30 million per year for the next few years for exploration and production.
TECOM
TeCom, formerly TECO Energy Management Services, is a Florida corporation
formed in 1994. TeCom is pilot testing an advanced energy management and
communications system for residential and commercial use and has under
development a system for industrial application. Development and testing will
continue in 1996 with pilot testing at other utilities expected. The 1996
operating expenses and capital investment for these pilot programs are not
expected to be significant.
10
<PAGE> 170
ITEM 2. PROPERTIES.
TECO Energy believes that the physical properties of its operating
companies are adequate to carry on their businesses as currently conducted. The
properties of Tampa Electric and the subsidiaries of TECO Power Services are
generally subject to liens securing long-term debt.
TAMPA ELECTRIC
At Dec. 31, 1995, Tampa Electric had four electric generating plants and
four combustion turbine units in service with a total net winter generating
capability of 3,404 MWs, including Big Bend (1,748-MW capability from four coal
units), Gannon (1,206-MW capability from six coal units), Hookers Point (212-MW
capability from five oil units), Phillips (34-MW capability from two diesel
units) and four combustion turbine units located at the Big Bend and Gannon
stations (204 MWs). Capability as used herein represents the demonstrable
dependable load carrying abilities of the generating units during winter peak
periods as proven under actual operating conditions. Units at Hookers Point went
into service from 1948 to 1955, at Gannon from 1957 to 1967, and at Big Bend
from 1970 to 1985. In 1991, Tampa Electric purchased two power plants (Dinner
Lake and Phillips) from the Sebring Utilities Commission (Sebring). Dinner Lake
(11-MW capability from one natural gas unit) and Phillips were placed in service
by Sebring in 1966 and 1983, respectively. In March 1994, Dinner Lake Station
was placed on long-term reserve standby.
Tampa Electric owns approximately 4,350 acres of land in Polk County,
Florida. This site accommodates Polk Unit One, a 250-MW coal gasification
generating plant currently being constructed, and can accommodate additional
generating capacity in the future. Polk Unit One is discussed further under
Capital Expenditures on pages 26 and 27.
Tampa Electric owns 178 substations having an aggregate transformer
capacity of 15,777,966 KVA. The transmission system consists of approximately
1,197 pole miles of high voltage transmission lines, and the distribution system
consists of 6,822 pole miles of overhead lines and 2,444 trench miles of
underground lines. As of Dec. 31, 1995, there were 501,909 meters in service.
All of the foregoing property is located within Florida.
All plants and important fixed assets are held in fee except that title to
some of the properties are subject to easements, leases, contracts, covenants
and similar encumbrances and minor defects, of a nature common to properties of
the size and character of those of Tampa Electric.
Tampa Electric has easements for rights-of-way adequate for the maintenance
and operation of its electrical transmission and distribution lines that are not
constructed upon public highways, roads and streets. It has the power of eminent
domain under Florida law for the acquisition of any such rights-of-way for the
operation of transmission and distribution lines. Transmission and distribution
lines located in public ways are maintained under franchises or permits.
Tampa Electric has a long-term lease for the office building in downtown
Tampa, Florida, that serves as headquarters for TECO Energy, Tampa Electric and
certain other TECO Energy subsidiaries.
TECO COAL
TECO Coal's subsidiary, Gatliff, has 65,000 acres of coal reserves and
mining property in Knox and Whitley Counties, Kentucky and Campbell County,
Tennessee. Gatliff owns 9,300 acres in fee and leases 59,700 acres under
long-term leases. These properties contain estimated proven and probable coal
reserves of 45 million tons. This coal, which combines low-sulfur and low-ash
fusion temperature characteristics, is found in both deep and surface mines.
Gatliff owns and operates a rapid-loading rail tipple and a coal preparation
plant near its deep mines.
Clintwood has 5,000 acres of coal reserves held under long-term leases in
Pike County, Kentucky. These properties contain estimated proven and probable
reserves of 6 million tons. Clintwood owns and operates a rail tipple and a coal
preparation plant near the mines.
11
<PAGE> 171
Rich Mountain operates a surface mine for Gatliff in Campbell County,
Tennessee, and does not own any coal reserves.
Pike-Letcher controls 43,000 acres in Pike and Letcher Counties, Kentucky.
These properties contain estimated proven and probable reserves in excess of 112
million tons.
Premier owns and operates a preparation plant and unit-train loadout
facility in Pike County, Kentucky and conducts surface and deep mining
operations of reserves, which are leased from Pike-Letcher. Premier does not own
any coal reserves.
TECO COALBED METHANE
TECO Coalbed Methane's interest in proven gas reserves at Dec. 31, 1995 was
independently estimated to be 184 billion cubic feet for 556 wells. Its
interests in proven and probable recoverable gas reserves are estimated by TECO
Coalbed Methane at 190 billion cubic feet for a total of 754 wells.
TECO Coalbed Methane's share of production for 1995 was 20.3 billion cubic
feet.
TECO TRANSPORT
Electro-Coal's storage and transfer terminal is on a 1,070-acre site
fronting on the Mississippi River approximately 40 miles south of New Orleans.
Electro-Coal owns 342 of these acres in fee, with the remainder held under
long-term leases.
Mid-South owns and operates a fleet of 14 towboats and 535 river barges,
nearly all of which it owns, on the Mississippi and Ohio rivers. Mid-South owns
15 acres of land fronting on the Ohio River at Metropolis, Illinois on which its
operating offices, warehouse and repair facilities are located. Fleeting and
repair services for its barges and those of other barge lines are performed at
this location and on the upper Mississippi River near the mouth of the Kaskaskia
River.
Gulfcoast owns and operates a fleet of 12 ocean-going tug/barge units, with
a combined cargo capacity of over 329,000 tons.
TECO POWER SERVICES
Hardee Power has a 22-year lease for approximately 1,300 acres of land in
Hardee and Polk Counties, Florida on which the Hardee Power Station is located.
In addition, a TECO Power Services' subsidiary has a significant interest
in a project entity, TCAE, which owns 7 acres in Guatemala on which a 78-MW
generating facility is located.
TECO GAS & OIL
At Dec. 31, 1995 aggregate capitalized costs associated with 12 leases
acquired at two federal auctions were not significant. Reserves associated with
the first two successful wells have yet to be evaluated.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1995 to a vote of TECO
Energy's security holders, through the solicitation of proxies or otherwise.
12
<PAGE> 172
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the current executive officers of TECO Energy is as
follows:
<TABLE>
<CAPTION>
CURRENT POSITIONS AND PRINCIPAL
NAME AGE OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Timothy L. Guzzle............. 59 Chairman of the Board and Chief Executive Officer, July
1994 to date; and prior thereto, Chairman of the Board,
President and Chief Executive Officer.
Girard F. Anderson............ 64 President and Chief Operating Officer, July 1994 to
date; and prior thereto, Executive Vice
President-Utility Operations and President and Chief
Operating Officer of Tampa Electric Company.
Keith S. Surgenor............. 48 President and Chief Operating Officer of Tampa Electric
Company, July 1995 to date; Vice President-Human
Resources, and President and Chief Operating Officer of
Tampa Electric Company, July 1994 to July 1995; and
prior thereto, Vice President-Human Resources.
Roger H. Kessel............... 59 Senior Vice President-General Counsel and Secretary,
April 1995 to date; Vice President-General Counsel and
Secretary, 1992 to April 1995; and prior thereto, Vice
President-General Counsel.
Alan D. Oak................... 49 Senior Vice President-Finance and Chief Financial
Officer, April 1995 to date; and prior thereto, Senior
Vice President-Finance, Treasurer and Chief Financial
Officer.
Roger A. Dunn................. 53 Vice President-Human Resources, July 1995 to date; and
prior thereto, Senior Vice President-Human Resources and
Corporate Affairs of LTV Corporation (steel
manufacturer), Cleveland, Ohio.
</TABLE>
- ---------------
There is no family relationship between any of the persons named above. The
term of office of each officer extends to the meeting of the Board of Directors
following the next annual meeting of shareholders, scheduled to be held on April
17, 1996, and until his successor is elected and qualified.
13
<PAGE> 173
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table shows the composite high, low and closing sale prices
for shares of TECO Energy common stock, which is listed on the New York Stock
Exchange, and dividends paid per share, per quarter.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995
High........................................ $22 1/8 $22 3/4 $23 1/2 $25 3/4
Low......................................... $20 $20 1/2 $21 1/4 $23 1/8
Close....................................... $21 $22 $23 1/4 $25 5/8
Dividend.................................... $.2525 $.265 $.265 $.265
1994
High........................................ $22 5/8 $20 7/8 $21 $21
Low......................................... $19 1/8 $18 1/4 $18 1/8 $18 1/2
Close....................................... $19 1/2 $19 1/8 $19 1/4 $20 1/4
Dividend.................................... $.24 $.2525 $.2525 $.2525
</TABLE>
- ---------------
The approximate number of shareholders of record of common stock of TECO Energy
as of Feb. 29, 1996 was 31,251.
TECO Energy's primary source of funds is dividends from its operating
companies. Tampa Electric's Restated Articles of Incorporation and certain of
the supplemental indentures relating to different series of its First Mortgage
Bonds contain restrictions as to the payment of dividends on the common stock of
Tampa Electric and as to the purchase or retirement of capital stock of Tampa
Electric. Substantially all of Tampa Electric's retained earnings were available
for dividends throughout 1995.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues(1)................................. $1,392.3 $1,350.9 $1,283.9 $1,183.2 $1,154.1
======== ======== ======== ======== ========
Income before cumulative effect of change in 186.1
accounting principle(1)................... 153.2(4) 150.3 149.0 145.3
Cumulative effect of change in accounting --
principle(1).............................. -- 11.2 -- --
-------- -------- -------- -------- --------
Net income(1)............................... $ 186.1 $ 153.2(4) $ 161.5 $ 149.0 $ 145.3
======== ======== ======== ======== ========
Earnings per average share outstanding:
Before cumulative effect of change in 1.60
accounting principle(2)................ 1.32(4) 1.30 1.30 1.28
Cumulative effect of change in accounting --
principle(2)........................... -- .10 -- --
-------- -------- -------- -------- --------
Earnings per average common share $ 1.60
outstanding(2)............................ $ 1.32(4) $ 1.40 $ 1.30 $ 1.28
======== ======== ======== ======== ========
Common dividends paid per share(2).......... $ 1.0475 $ .9975 $ .9475 $ .8975 $ .8475
Total assets(1)(3).......................... $3,473.4 $3,312.2 $3,123.3 $3,020.6 $2,833.6
Long-term debt(1)(3)........................ $ 994.9 $1,023.9 $1,038.8 $1,044.9 $ 907.9
</TABLE>
- ---------------
(1) Millions of dollars.
14
<PAGE> 174
(2) Restated to reflect a two-for-one stock split on Aug. 30, 1993.
(3) The total asset and long-term debt balances for 1993 and 1992 have been
restated to reflect current year presentation.
(4) Includes the effect of a corporate restructuring charge which reduced net
income by $15 million and earnings per share by $.13. See Note H on page 50.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EARNINGS SUMMARY
TECO Energy achieved earnings of $1.60 per share in 1995 compared to
reported earnings of $1.32 in 1994. These 1995 results were achieved after the
deferral of $50.8 million of revenues at Tampa Electric under a plan described
in the Utility Regulation section. 1994 earnings were $1.45 before a 13-cent
charge for corporate restructuring.
Earnings growth in 1995 was driven by strong performance at the diversified
companies as well as continued growth in energy sales and reduced operating
expenses at Tampa Electric. Earnings grew in 1994 on the strength of increased
retail energy sales at Tampa Electric and increased third-party business at TECO
Coal.
The restructuring charge reduced 1994 reported earnings per share by 13
cents. The restructuring program included a 10-percent reduction in staffing
levels and other cost reductions, primarily at Tampa Electric. Approximately 70
percent of the charge represented costs associated with retirement benefits.
<TABLE>
<CAPTION>
EARNINGS PER SHARE 1995 CHANGE 1994 CHANGE 1993
------------------------------------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Reported earnings per share......... $ 1.60 21.2 % $ 1.32 -5.7 % $ 1.40
Restructuring charge................ -- -- .13 -- --
------- ------ ------
Earnings per share before
restructuring charge.............. $ 1.60 10.3 % $ 1.45 3.6 % $ 1.40
======= ====== ======
Net income after restructuring
charge (millions)................. $ 186.1 21.5 % $153.2 -5.1 % $161.5
Net income before restructuring
charge (millions)................. $ 186.1 10.4 % $168.6 4.4 % $161.5
Average common shares outstanding
(millions)........................ 116.5 .5 % 115.9 .5 % 115.3
Return on average common equity..... 15.5% 14.8%(1) 15.0%
</TABLE>
- ---------------
(1) Excludes the effect of a corporate restructuring charge
OPERATING RESULTS
TECO ENERGY'S OPERATING RESULTS
The strong performance of the diversified companies, particularly TECO
Transport & Trade, and continued growth at Tampa Electric led to higher
consolidated operating income in 1995. The improved results were achieved even
after the deferral of $50.8 million of revenues at Tampa Electric under a plan
described in the Utility Regulation section. Growth in 1994's consolidated
operating income resulted from Tampa Electric's 5-percent increase in operating
income before the restructuring charge, and from increased third-party business
at TECO Coal.
15
<PAGE> 175
The following table identifies the unconsolidated revenues and operating
income of the significant operating groups.
CONTRIBUTIONS BY OPERATING GROUP (UNCONSOLIDATED)
<TABLE>
<CAPTION>
REVENUES 1995 CHANGE 1994 CHANGE 1993
- ------------------------------------------ -------- ------ -------- ------ --------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Tampa Electric............................ $1,092.3(1) -.2 % $1,094.9 5.1% $1,041.3
Diversified companies..................... $ 505.7 7.4 % $ 470.9 -.7% $ 474.4
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME BEFORE
1994 RESTRUCTURING CHARGE
- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Tampa Electric............................ $ 229.5 1.6 % $ 225.8 5.2% $ 214.6
Diversified companies(2).................. $ 96.6 35.9 % $ 71.1 -6.3% $ 75.9
</TABLE>
- ---------------
(1) 1995 Tampa Electric revenues were net of $50.8 million of revenues deferred
under a plan as described in the Utility Regulation section.
(2) Operating income includes items which are reclassified for consolidated
financial statement purposes. The principal items are the non-conventional
fuels tax credit related to coalbed methane production and interest expense
on the non-recourse debt related to the independent power operations. In the
Consolidated Statements of Income, the tax credit is part of the provision
for income taxes and the interest is part of interest expense.
TAMPA ELECTRIC'S OPERATING RESULTS
Tampa Electric's operating income increased almost 2 percent even after the
deferral of $50.8 million of revenues. Two-percent customer growth and favorable
weather increased retail energy sales 5 percent. In addition, nonfuel operations
and maintenance expenses were 5 percent below last year's levels as Tampa
Electric benefited from the 1994 restructuring efforts.
Tampa Electric's 1994 operating income, before the $21.3-million pretax
restructuring charge, increased 5 percent over 1993. Higher base revenues from
retail customer growth, increased retail energy usage from an improved economy
and a retail price increase effective in January 1994 were partially offset by
higher operating expenses.
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
-------- ------ -------- ------ --------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $1,092.3(1) -.2 % $1,094.9 5.1% $1,041.3
Operating expenses.............................. 862.8 -.7 % 869.1 5.1% 826.7
-------- ------ -----
Operating income before 1994 restructuring
charge........................................ 229.5 1.6 % 225.8 5.2% 214.6
Restructuring charge............................ -- -- 21.3 -- --
-------- ------ -----
Operating income................................ $ 229.5 12.2 % $ 204.5 -4.7% $ 214.6
======== ====== =====
</TABLE>
- ---------------
(1) 1995 Tampa Electric revenues were net of $50.8 million of revenues deferred
under a plan as described in the Utility Regulation section.
TAMPA ELECTRIC'S OPERATING REVENUES
Tampa Electric's 1995 revenues decreased slightly to $1,092.3 million
reflecting the deferral of $50.8 million of revenues. Tampa Electric's revenues
rose in 1994 with retail customer growth of almost 2 percent, increased retail
energy sales of almost 4 percent and a $16-million retail price increase
effective in January 1994.
The economy in Tampa Electric's service area continued to strengthen in
1995. The combined residential and commercial energy sales grew by more than 5
percent in 1995. Sales to the phosphate industry grew by almost 11 percent in
1995 as these companies continued to experience strong prices and demand for
their
16
<PAGE> 176
product. Non-phosphate industrial sales declined in 1995 due to the closure of a
steel-making facility in the service area.
Total retail energy sales are projected to increase almost 2 percent
annually over the next five years based on continued growth in the local
economy. Annual energy sales growth in the residential and commercial sectors is
projected at 2 percent to 3 percent for the next five years. Growth in energy
sales to non-phosphate industrial customers is projected to be less after a
possible decline in 1996.
In 1996 the Tampa Electric service area economy is expected to grow
moderately, but at rates higher than the country as a whole. The local economy
continues to benefit from a good labor market, available land and good access
through airport and port facilities.
Energy sales to the phosphate industry are expected to decline from
increased self-generation and as mining activity slowly moves out of Tampa
Electric's service area. In 1995 sales to the phosphate customer group
represented less than 6 percent of total operating revenues.
Non-fuel revenues from sales to other utilities in 1995 were $34 million,
$33 million in 1994 and $34 million in 1993. Energy sold to other utilities
increased in 1995 due to generating unit availability and lower fuel cost.
In 1994 energy sold to other utilities declined because of lower-priced oil
and gas-fired generation available on other systems. A shift to higher-margin,
longer-term wholesale power sales agreements resulted in only a 3-percent
decline in 1994 non-fuel revenues despite the 10-percent decline in energy sales
to other utilities.
Securing additional longer-term wholesale power sales agreements remains a
priority. In the past three years, Tampa Electric has added nine bulk power
sales contracts of varying size and duration. Competitive pricing of coal-fired
generation has allowed Tampa Electric to market available capacity successfully.
ENERGY SALES:
<TABLE>
<CAPTION>
MEGAWATT-HOUR SALES 1995 CHANGE 1994 CHANGE 1993
------------------------------------ ------- ------ ------- ------ -------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential......................... 6,352 6.8% 5,947 4.2% 5,706
Commercial.......................... 4,710 2.8% 4,583 3.4% 4,432
Industrial.......................... 2,362 3.7% 2,278 1.9% 2,236
Other............................... 1,176 4.6% 1,124 4.7% 1,073
------- ------- -------
Total retail...................... 14,600 4.8% 13,932 3.6% 13,447
Sales for resale.................... 2,706 28.7% 2,102 -9.8% 2,330
------- ------- -------
Total energy sold................. 17,306 7.9% 16,034 1.6% 15,777
======= ======= =======
Retail customers (average).......... 495,198 2.0% 485,698 1.8% 477,010
</TABLE>
TAMPA ELECTRIC'S OPERATING EXPENSES
Effective cost management and improved efficiency continue to be principal
objectives at Tampa Electric. Operating expenses declined in 1995 from the
restructuring actions taken in 1994 and continuing efforts to control costs in
all areas of the company.
17
<PAGE> 177
OPERATING EXPENSES:
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
------ ------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Other operating expenses............... $163.3 -4.8% $171.6 8.8 % $157.7
Maintenance............................ 69.6 -4.5% 72.9 2.1 % 71.4
Depreciation........................... 113.3 -1.6% 115.1 2.9 % 111.9
Taxes, other than income............... 87.9 1.3% 86.8 3.9 % 83.5
------ ------ ------
Operating expenses................... 434.1 -2.8% 446.4 5.2 % 424.5
------ ------ ------
Restructuring charge................... -- -- 21.3 -- --
------ ------ ------
Fuel................................... 384.3 -1.3% 389.3 7.2 % 363.2
Purchased power........................ 44.4 32.9% 33.4 -14.4 % 39.0
------ ------ ------
Total fuel cost................... 428.7 1.4% 422.7 5.1 % 402.2
------ ------ ------
Total operating expenses............... $862.8 -3.1% $890.4 7.7 % $826.7
====== ====== ======
</TABLE>
In 1995 non-fuel operations and maintenance expenses declined almost 5
percent from 1994 levels before the restructuring charge. The $11.6-million
reduction was primarily from lower payroll and employee-related expenses as a
result of 217 fewer positions than in 1994.
In both 1994 and 1995 Tampa Electric achieved savings from work redesign
efforts and equipment redesign and enhancements. In 1995 operating areas of the
company achieved lower costs through technology improvements, the streamlining
of maintenance programs, and the sharing of manpower resources in power
generation facilities.
The savings realized from these efforts will partially offset increased
operations and maintenance expenses expected in 1996 from Polk Unit One. During
the first two years of operations, when domestic coals will be evaluated for use
in the gasifier, Tampa Electric will receive $20 million from the U. S.
Department of Energy for operations, maintenance and fuel expenses.
Total operating expenses in 1994 included the restructuring charge
discussed in the Earnings Summary section, a $4-million annual charge to
establish a transmission and distribution property storm-damage reserve in
accordance with regulatory directives described in the Utility Regulation
section, and the effects of accounting for fuel expense in accordance with
Florida Public Service Commission (FPSC) requirements. Absent these three items,
total operating expense increased only 4 percent over 1993 principally as a
result of higher employee-related expenses, higher accruals for self-insurance
liability reserves and increased expenses for regulatory activity.
Depreciation expense in 1995 decreased as certain shorter-lived assets were
fully amortized. The decrease more than offset the impact of normal additions to
plant and equipment. The company's efforts to reduce capital investment in
recent years have limited additions to all asset classes, particularly
shorter-life asset classes. The increased depreciation expense in 1994 from
normal additions to plant and equipment was minimized by these cost-control
efforts. Depreciation expense is projected to increase in 1996 as a result of
the start of commercial operation of Polk Unit One.
Taxes other than those on income increased each year primarily from higher
gross receipts taxes and franchise fees.
Actual system fuel cost was only 4 percent higher than in 1994 despite an
8-percent increase in generation. The success in controlling fuel cost is a
result of Tampa Electric's use of lower-priced coals and the mix in operating
generating units. Average coal cost, on a cents-per-million BTU basis, declined
3 percent in 1995 after a 2-percent drop in 1994.
Fuel and purchased power cost rose only 1 percent in 1995 despite a
9-percent increase in coal burned to meet increased generation. This cost
increase was partially offset by the normal effects of accounting for deferred
fuel expense consistent with the FPSC-approved fuel adjustment clause. Fuel and
purchased power
18
<PAGE> 178
cost was 5 percent higher in 1994 than in 1993 primarily from the normal effects
of accounting for deferred fuel expense consistent with the fuel adjustment
clause.
In 1995 Tampa Electric purchased more power from both TECO Power Services'
Hardee Power Station and cogenerators than in 1994, primarily to meet
weather-related demand. In 1994 Tampa Electric purchased less energy from other
utilities than in 1993 because of the combination of mild weather and higher
levels of availability of its own generating units. Substantially all fuel and
purchased power expenses were recovered through the fuel adjustment clause.
Nearly all of Tampa Electric's generation in the last three years has been
from coal, and the fuel mix will continue to be substantially coal. Coal prices
are expected to remain relatively unchanged during the next few years compared
to oil or gas prices. The company continues to work to reduce its fuel cost.
COAL CONTRACT BUYOUT:
In December 1994, Tampa Electric bought out a long-term coal supply
contract which would have expired in 2004 for a payment of $25.5 million and
entered into two new contracts with the supplier. The coal supplied under the
new contracts is competitive in price with coals of comparable quality.
As a result of this buyout Tampa Electric customers will benefit from
anticipated savings of more than $40 million, net of the buyout costs, through
the year 2004. The FPSC has authorized the recovery of the buyout costs plus
carrying costs through the fuel adjustment clause during the years 1995 through
2004.
DIVERSIFIED COMPANIES' OPERATING RESULTS
The diversified companies achieved operating income of $96.6 million in
1995 compared with $71.1 million in 1994 before the restructuring charge and
$75.9 million in 1993.
The increase in 1995 was the result of strong performances at all of the
diversified companies, led by TECO Transport & Trade. Increased third-party
sales at TECO Coal and TECO Power Services' Guatemalan power project also
contributed to the improved results.
The decrease in 1994 operating income from the diversified companies
reflected the effects of a difficult year for TECO Transport & Trade in the
ocean shipping business. TECO Coalbed Methane's operating income was lower,
despite a 16-percent increase in production, because of lower gas prices in the
second half of 1994. These results were only partially offset by improvements in
other diversified businesses.
DIVERSIFIED COMPANIES RESULTS (UNCONSOLIDATED)
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
------ ------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues............................... $505.7 7.4 % $470.9 -.7% $474.4
Operating expenses..................... 409.1 2.3 % 399.8 .3% 398.5
====== ----- ====== ----- ======
Operating income before 1994
restructuring charge(1).............. 96.6 35.9 % 71.1 -6.3% 75.9
Restructuring charge................... -- -- 2.5 -- --
====== ====== ----- ======
Operating income(1).................... $ 96.6 40.8 % $ 68.6 -9.6% $ 75.9
====== ====== ======
</TABLE>
- ---------------
(1) Operating income includes items which are reclassified for consolidated
financial statement purposes. The principal items are the non-conventional
fuels tax credit related to coalbed methane production and interest expense
on the non-recourse debt related to independent power operations, both of
which are included in operating income for the diversified companies. In the
Consolidated Statements of Income the tax credit is part of the provision
for income taxes and the interest is part of interest expense.
TECO Transport & Trade achieved significantly higher operating income in
1995 through improved results in all of its businesses. The river business in
particular had an excellent year as a result of higher volumes and prices.
Improved fleet utilization and increased levels of northbound shipments
contributed to
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<PAGE> 179
increased volumes. A strong demand for northbound movements and a record 1994
grain harvest together with a better balance in the supply and demand for barges
caused stronger prices throughout the industry. The transfer facility at the
mouth of the Mississippi River handled more coal tonnage for both Tampa Electric
and third-party export business. The ocean shipping business benefited from
increased shipments of phosphate and higher shipments of coal to Tampa Electric.
Lower operating expenses at all the transportation companies also contributed to
the improved results.
The conditions affecting favorable pricing and strong demand in 1995 are
expected to continue in 1996.
TECO Transport & Trade reported lower operating income in 1994 from reduced
overseas grain business, adverse weather early in the year and lower Tampa
Electric volumes which more than offset improved utilization of the river fleet.
TECO Transport's overseas grain business was adversely impacted by the U. S.
Maritime Administration's suspension which was lifted in April 1994, reduced U.
S. bulk cargo preference program tonnage, lower grain charter prices and a late
start to 1994 movements caused by high grain prices. In addition the loss of an
ocean barge in a winter storm off the coast of Louisiana had an adverse impact
on fleet utilization in 1994.
TECO Coal's operating income grew in 1995 as a result of increased
third-party tonnage and a $5.2-million pretax gain from the sale of land and
mineral rights under a condemnation settlement with the state of Kentucky. The
combination of mild winter weather and excess capacity in domestic steam coal
production resulted in soft demand and prices in 1995.
Total 1995 tonnage increased more than 8 percent to 5.3 million tons, up
from 4.9 million tons in 1994 and 4.6 million tons in 1993. This growth came
from sales to third parties which more than offset reduced tonnage to Tampa
Electric. The company completed a high-speed unit-train loading facility and a
state-of-the-art coal washing and preparation plant in late 1994 at the Premier
Elkhorn mines, which supported increased third-party sales.
TECO Coal expects sales to third parties to increase again in 1996 as
eastern utilities meet increasing demand with existing coal-fired generating
capacity and use low-sulfur coal to comply with the Clean Air Act. In 1996 TECO
Coal expects to sell 85 percent of the production from the Premier mines under
existing multi-year contracts.
The increased third-party sales in 1995 more than offset a decline in the
tonnage sold to Tampa Electric. Sales to Tampa Electric decreased in 1995 and
are expected to decrease again in 1996. Tampa Electric is reducing its purchases
of Gatliff's low-sulfur, low-ash-fusion-temperature coal as a result of its
success in burning more conventional lowercost steam coals. TECO Coal's
objective is to more than offset the effects of this reduction by increasing the
amount of coal sold to third parties, principally from the reserves being
developed by Premier.
TECO Coalbed Methane's operating income increased as production rose to
20.3 billion cubic feet (Bcf) in 1995, up from 19.5 Bcf in 1994 and 16.8 Bcf in
1993. Although gas prices strengthened in the fourth quarter, average gas prices
in 1995 were significantly lower than in 1994. 1995's lower gas prices were more
than offset by a 5-percent increase in production, a 10-percent reduction in
operating costs, and a $4.4-million pretax settlement related to the termination
of a gas sales contract and related agreements. In connection with this
settlement, TECO Coalbed Methane entered into replacement contracts providing
for the sale of all gas produced at spot prices, similar to the original
contract, for the life of the reserves.
In 1994 gas prices declined significantly in the second half of the year,
more than offsetting the impact of 16-percent higher production.
In both 1994 and 1995 TECO Coalbed Methane acquired additional reserves in
Alabama's Black Warrior Basin through the purchase of royalty interests in wells
located on or near TECO Coalbed Methane's existing holdings.
Production from all reserves is eligible for the alternative energy tax
credits under Section 29 of the Internal Revenue Code through the year 2002.
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<PAGE> 180
Assuming normal operating conditions, production is expected to remain
stable in 1996 and then decline gradually in 1997 and beyond.
TECO Power Services' operating income increased in 1995 from the commercial
operation of the Alborada Power Station in Guatemala beginning in September. The
power station consists of two combustion turbines supplying a combined 78
megawatts of power to a local distribution utility under a 15-year power sales
agreement. At Dec. 31, 1995, TECO Power Services, through a wholly owned
subsidiary, owned an 87.5-percent interest in the project, and a Guatemalan
business group owned the remaining interest. In March 1996, the TECO Power
Services' subsidiary acquired an additional interest in the project from the
Guatemalan business group, bringing its total interest to 98.2 percent. TECO
Power Services expects to secure project debt financing from the Overseas
Private Investment Corporation (OPIC), an agency of the U.S.
GOVERNMENT, FOR 60 PERCENT OF THE PROJECT COST BY MID-YEAR 1996.
In 1994 operating income for TECO Power Services remained stable relative
to 1993, the year TECO Power Services made its initial contribution to operating
income from its Hardee Power Station.
DIVERSIFIED COMPANIES' OPERATING REVENUES
Diversified revenues increased significantly in 1995 from better operating
results at all companies. TECO Coal recorded $5.8 million before expenses from
the sale of land and mineral rights under a condemnation settlement with the
state of Kentucky and TECO Coalbed Methane recorded $4.4 million from the
termination of a gas sales contract.
The diversified companies' revenues decreased slightly in 1994 as growth in
coal revenues was more than offset by decreased revenues from the water
transportation business.
DIVERSIFIED COMPANIES' OPERATING EXPENSES
Diversified operating expenses increased 2 percent in 1995. TECO Power
Services incurred higher expenses from increased power generation at the Hardee
plant and the new Guatemalan plant. These increases were partially offset by
lower operating expenses at other diversified companies.
In 1994 diversified companies' operating expenses increased slightly in
line with higher production of coal and natural gas. The diversified companies
recorded a charge of $2.5 million for corporate restructuring in 1994 related to
reductions in staffing levels and other costs.
NEW BUSINESSES
TECO Energy has expanded its natural gas production business through a new
subsidiary, TECO Gas & Oil, Inc., which is participating in joint ventures in
exploration and development of conventional gas and oil in the shallow gulf
waters off Texas and Louisiana. The joint ventures have successfully bid for
several offshore leases at federal auctions and have negotiated drilling rights
on other parcels. The first two exploratory wells were successfully completed in
1995 with production facilities planned to be operational in the first half of
1996. The joint ventures are making extensive use of 3-D seismic data to
increase the probability of successful exploration efforts. The company expects
to invest $25 million to $30 million per year for the next few years for
exploration and production.
In 1995 TECO Energy organized a new subsidiary, TeCom Inc., formerly named
TECO Energy Management Services Corporation, which is pilot testing an advanced
energy management and communications system for residential and commercial use,
and has under development a system for industrial application. Development and
testing will continue in 1996 with pilot testing at other utilities expected.
The 1996 operating expenses and capital investment for these pilot programs are
not expected to be significant.
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<PAGE> 181
NON-OPERATING ITEMS
OTHER INCOME (EXPENSE)
Other income in 1995 consisted mostly of allowance for funds used during
construction (AFUDC) which increased to $13.7 million from $3.5 million in 1994
and $1.6 million in 1993. AFUDC will increase again in 1996 with the additional
investment in the construction of Tampa Electric's Polk Unit One and is expected
to decline to minimal amounts for several years after the completion of this
unit, scheduled for the fourth quarter of 1996. In addition, investment earnings
were lower in 1995 primarily because of lower invested balances.
Other income (expense) in 1993 included a one-time $10-million pretax
charge at Tampa Electric associated with an FPSC-approved settlement agreement
between Tampa Electric and the Office of Public Counsel as described in the
Utility Regulation section. Excluding this $10-million charge, other income was
$2.9 million in 1993.
INTEREST CHARGES
Interest charges were $83.2 million in 1995, up 8 percent from 1994 due to
higher short-term debt balances and rates. In 1995 interest expense included
$1.5 million of interest accrued on Tampa Electric's $50.8 million of deferred
revenues. Savings from long-term debt refinancings accomplished in 1993
substantially offset the impact of rising short-term interest rates in 1994.
INCOME TAXES
1995 income tax expense increased over 1994 levels primarily from higher
pretax income. 1994 income tax expense was below 1993 levels, primarily due to
higher Section 29 tax credits related to coalbed methane gas production and
lower taxable income because of the restructuring charge. In addition, 1993
income tax expense included a charge for restating deferred income tax balances
for the diversified companies to reflect the federal corporate income tax rate
increase to 35 percent.
Primarily due to the tax credits related to the production of coalbed
methane, income tax expense was 24 percent of pretax income in 1995, 23 percent
in 1994 and 26 percent in 1993. Reflecting increased production, these tax
credits totaled $20.6 million in 1995, up from $19.6 million in 1994 and $16.6
million in 1993. The tax credit rate was estimated at $1.03 per thousand cubic
feet in 1995, and was $1.00 in 1994 and 98 cents in 1993. This rate escalates
with inflation, and could be limited by domestic oil prices. In 1995, domestic
oil prices would have had to exceed $46 per barrel for this limitation to have
been effective. The federal tax credit on production of coalbed methane is
available through the year 2002.
ACCOUNTING STANDARDS
STOCK OPTIONS
In 1995, the Financial Accounting Standards Board issued FAS 123,
Accounting for Stock Options, effective for fiscal years beginning after Dec.
15, 1995. FAS 123 encourages, but does not require, companies to recognize
compensation expense based on the fair value of grants of stock, stock options
and other equity instruments to employees. Although expense recognition for
employee stock-based compensation is not mandatory, FAS 123 requires that
companies not adopting must disclose pro forma net income and earnings per
share. TECO Energy will continue to apply the prior accounting rules and make
pro forma disclosures.
CAPITAL EXPENDITURES
TECO Energy's 1995 capital expenditures of $433 million consisted of $335
million for Tampa Electric, which included $19 million of AFUDC, and $98 million
for the diversified companies.
Tampa Electric spent $199 million in 1995 on construction of Polk Unit One,
a 250-megawatt coal-gasification plant. The capital cost of the plant is
estimated at about $450 million, net of the construction funding from the U.S.
Department of Energy under its Clean Coal Technology Program. An estimated $70
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<PAGE> 182
million will be spent in 1996 to complete this project with commercial operation
expected in the fourth quarter of 1996.
Tampa Electric spent an additional $117 million in 1995 for equipment and
facilities to meet the company's growing customer base and for generation
equipment improvements.
At the diversified companies in 1995 TECO Transport & Trade's capital
program of $32 million included purchasing an ocean barge previously leased, a
program of barge enlargement and refurbishment, and normal equipment
replacement. TECO Coalbed Methane's additional investment of $12 million in 1995
included the purchase of the royalty rights to additional reserves in the Black
Warrior Basin and enhancements to existing wells. TECO Coal spent $9 million
primarily on the completion of its new coal washing and preparation plant, and
the development of new mines. TECO Power Services spent $38 million for its
87.5-percent share of the 78-megawatt Alborada Power Station in Guatemala.
TECO Energy estimates total capital expenditures for ongoing operations at
$260 million for 1996 and $779 million for 1997 through 2000, excluding AFUDC.
Tampa Electric expects to spend $178 million in 1996 and $569 million
during the 1997-2000 period, mainly for distribution facilities to meet customer
growth and for Polk Unit One in 1996. At the end of 1995, Tampa Electric had
outstanding commitments of about $72 million for capital programs including the
construction of Polk Unit One.
Tampa Electric's capital expenditure projections include about $30 million
over the 1996 to 2000 period to comply with Phase II of the Clean Air Act
Amendments for nitrogen oxide reductions and emissions monitoring equipment as
described in the Environmental Compliance section.
The diversified companies expect capital expenditures of about $82 million
in 1996 and $210 million for the 1997 through 2000 period for coal mining
equipment, exploration and production of conventional gas and oil, acquisition
of river barges and ocean transportation equipment, and normal asset
replacement. At the end of 1995, $12 million had been committed.
ENVIRONMENTAL COMPLIANCE
Tampa Electric is complying with the Phase I emission limitations imposed
by the Clean Air Act Amendments which became effective Jan. 1, 1995 by using
blends of lower-sulfur coal, controlling stack emissions and emission
allowances.
In 1995 Tampa Electric successfully integrated Big Bend Unit Three into the
existing scrubber on Big Bend Unit Four. This resulted in an additional scrubbed
unit at a fraction of the cost of a new scrubber.
In connection with its Phase I compliance plan, Tampa Electric entered into
two long-term contracts effective in mid-1994 for the purchase of low-sulfur
coal. In December 1995, one of the sellers ceased operations at the mine
supplying this coal. Tampa Electric believes that there will be no negative
impact on its operations because of the availability of alternative sources of
supply and the successful scrubber integration of Big Bend Units Three and Four.
To comply with Phase II emission standards set for 2000 Tampa Electric
would potentially have to scrub additional capacity and is evaluating equipment
and technologies to accomplish compliance in the most cost effective manner.
Absent capital expenditures for additional scrubbing, Tampa Electric expects to
spend $30 million of capital to comply with Phase II of the Clean Air Act
Amendments for nitrogen oxide reductions and emissions monitoring equipment. The
cost of compliance with Phase I and Phase II is expected to have little impact
on Tampa Electric's prices.
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<PAGE> 183
UTILITY REGULATION
PRICE INCREASE
1993 AND 1994
The FPSC granted Tampa Electric a $1.2-million permanent base revenue
increase and a $10.3-million revenue increase primarily associated with recovery
of purchased power capacity payments effective in February 1993. The utility
received an additional base revenue increase of $16 million effective Jan. 1,
1994. The FPSC's decision reflected overall allowed regulatory rates of return
of 8.20 percent in 1993 and 8.34 percent in 1994, which included an allowed
regulatory rate of return on common equity (ROE) of 12 percent, the midpoint of
a range of 11 percent to 13 percent.
RETURN ON EQUITY AGREEMENTS
1994
In March 1994 the FPSC issued an order which changed Tampa Electric's
authorized ROE to an 11.35-percent midpoint with a range of 10.35 percent to
12.35 percent, while leaving in effect the rates it had previously established.
The FPSC also ordered a $4-million annual accrual to establish an unfunded storm
damage reserve for transmission and distribution property.
In July 1994 the FPSC issued an order approving an agreement between its
staff and Tampa Electric to cap the utility's authorized regulatory rate of
return on common equity at 12.45 percent for 1994 only with any earnings above
that amount to be used to increase the storm damage reserve. Tampa Electric did
not exceed the 12.45-percent cap in 1994 and therefore accrued only the $4.0
million to the storm damage reserve.
1995
Tampa Electric's objective is to place Polk Unit One in service without
increasing the total price that its customers pay for electric service. A number
of actions, discussed in the Tampa Electric's Operating Expenses section, have
been taken to reduce costs. A component of the strategy to accomplish this
objective has been the deferral of certain revenues.
In 1995 the FPSC approved a plan submitted by Tampa Electric to defer
certain revenues for 1995. Under this plan Tampa Electric's allowed ROE
increased to an 11.75-percent midpoint with a range of 10.75 percent to 12.75
percent and Tampa Electric deferred revenues under certain financial
circumstances related to these returns. For 1995 a minimum of $15 million of
revenues was deferred as well as 50 percent of actual revenues in excess of an
ROE of 11.75 percent up to a net earned ROE of 12.75 percent and all actual
revenues above an ROE of 12.75 percent. In 1995 Tampa Electric deferred $50.8
million of revenues under this plan. The deferred revenues accrue interest at
the 30-day commercial paper rate specified in the Florida Administrative Code.
Also as part of this plan the FPSC eliminated Tampa Electric's oil backout
tariff effective Jan. 1, 1996, a reduction of about $12 million of annual
revenues.
1996
On Jan. 3, 1996 the FPSC in a proposed agency action approved a plan by
Tampa Electric relating to the deferral in 1996 of revenues under certain
circumstances defined by ROE levels. As a result of protests by the Office of
Public Counsel and the Florida Industrial Power Users Group, this action did not
become effective and there became operative a provision of the order that
required Tampa Electric to hold subject to the FPSC's jurisdiction any revenues
in 1996 contributing to an ROE in excess of 12.75 percent.
On March 25, 1996 Tampa Electric filed with the FPSC an agreement between
Tampa Electric and the two intervenors protesting the January 3 proposed order.
If approved by the FPSC in a proposed agency action proceeding and if no
protests are filed, the agreement would replace the Jan. 3, 1996 order. This
agreement addresses, among other things, Tampa Electric's base rate levels, ROE
levels for 1996 through 1998, and regulatory treatment of all accumulated
deferred revenues through the period ending Dec. 31, 1998. It
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<PAGE> 184
provides for Tampa Electric's existing base rates to be frozen at current levels
through Dec. 31, 1998; a refund to its customers of $25 million ($15 million
from 1996 operations and $10 million from the 1995 deferred revenues) plus
interest over a period of one year commencing on Oct. 1, 1996; and for the
possibility of an additional refund in 1999.
Under the agreement, for the years 1996 through 1998 Tampa Electric will
keep in each year all revenues contributing to an ROE up to 11.75 percent. Any
additional revenues will be allocated according to the following formula. In
1996, 40 percent of any actual revenues that contribute to an ROE in excess of
11.75 percent will be included in 1996 revenues and the remaining 60 percent
will be deferred for use in 1997 and 1998. There will also be available for use
in 1997 and 1998 about $41 million of the revenues deferred from 1995, after
deducting from 1995 deferred revenues the $10-million portion of the $25-million
refund.
In 1997, 40 percent of any revenues that contribute to an ROE in excess of
11.75 percent up to 12.75 percent will be included in Tampa Electric's 1997
revenues. The remaining 60 percent will be deferred for use in 1998. Any
revenues contributing to an ROE exceeding 12.75 percent will be deferred for use
during 1998.
The same 40 percent allocation of revenues will be made in 1998 after
taking into account any accumulated deferred revenues not used in previous
years. The remaining 60 percent, as well as all revenues contributing to an ROE
in excess of 12.75 percent, if any, will be refunded to Tampa Electric's
customers in 1999. No refunds resulting from the 1998 portion of the agreement
will commence until a final, non-appealable order has been issued resolving all
issues with respect to the calculation of earned ROE during the periods covered
by the agreement, including the appropriate regulatory treatment of the Polk
Power Station.
Finally, the agreement calls for an expeditious review of the regulatory
treatment of Tampa Electric's Polk Power Station. Tampa Electric is optimistic
that the FPSC will complete this review in the third quarter of 1996. An
objective of the agreement is to maintain price stability by utilizing the 1995,
1996 and 1997 deferred revenues to offset a portion of the revenue requirements
associated with the Polk Power Station.
COAL SETTLEMENT
In February 1993 the FPSC approved an agreement between Tampa Electric and
the Office of Public Counsel that resolved all issues relating to prices for
coal purchased in the years 1990 through 1992 by Tampa Electric from its
affiliate, Gatliff Coal, a subsidiary of TECO Coal. Tampa Electric agreed to
refund $10 million plus interest to its customers through the fuel adjustment
clause over a 12-month period beginning April 1, 1993. Tampa Electric refunded
$7.6 million to its customers in 1993 and the remainder in 1994.
UTILITY COMPETITION
Tampa Electric's retail business is substantially free from direct
competition with other electric utilities, municipalities and public agencies.
At the present time, the principal form of competition at the retail level
consists of natural gas for residences and businesses and the self-generation
option available to larger users of electric energy. Such users, and possibly
commercial and residential customers as well, may seek to expand their options
through legislative and/or regulatory initiatives that would permit competition
at the retail level. Tampa Electric intends to take all appropriate actions to
retain and expand its retail business, to control costs, and provide high
quality service to retail customers.
There is presently active competition in the wholesale power markets in
Florida, and this is increasing largely as a result of the Energy Policy Act of
1992 and related federal initiatives. This act removed certain regulatory
barriers to independent power producers and required utilities to transmit power
from such producers, utilities and others to wholesale customers under certain
circumstances. Tampa Electric continues its cost reduction efforts to increase
its wholesale business, which is dependent on access to transmission systems
owned by others.
In March 1995 the Federal Energy Regulatory Commission (FERC) issued its
Notice Of Proposed Rulemaking on Open Access Transmission Services (NOPR). The
NOPR would require open access to transmission systems and utilities owning
transmission facilities (including Tampa Electric) to provide services to
wholesale transmission customers comparable to those they provide to themselves
on comparable
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<PAGE> 185
terms and conditions (including price). Among other things the NOPR would
unbundle transmission services from power sales and require owners of
transmission systems to take service under their own transmission tariffs.
FERC TRANSMISSION/INTERCHANGE PROCEEDINGS
Tampa Electric is one of several utilities that intervened in Florida Power
and Light's (FPL) proceeding before the FERC in which FPL has requested to
change substantially the terms for providing interchange power and transmission
services. In addition to challenging the reasonableness and fairness of many
aspects of FPL's filing, Tampa Electric maintains that FPL's transmission
tariffs adversely affect competition in the wholesale market and violate FERC's
comparability standard governing open access to wholesale transmission.
In December 1995 an Administrative Law Judge appointed by the FERC issued
his initial decision which is generally favorable to the positions advocated by
Tampa Electric. Briefs on this decision have been filed by the active
intervenors, FERC staff and FPL and the case is now fully submitted for a
decision by the FERC. Any disposition of transmission issues is expected to
reflect FERC action on the NOPR.
Tampa Electric protested transmission tariff filings by Florida Power
Corporation (FPC), likewise based principally on their adverse competitive
effects on the wholesale power market and failure to comply with the FERC's
comparability standard. FPC has withdrawn these tariffs and substituted tariffs
which conform to the pro forma tariffs in the NOPR. The ultimate terms of these
tariffs will be determined after final action by FERC under the NOPR.
In November 1995 the FERC accepted for filing Tampa Electric's open access
transmission tariffs, which conform to the pro forma tariffs contained in the
NOPR, subject to refund and the outcome of the final rule under the NOPR.
INVESTMENT ACTIVITY
At Dec. 31, 1995 TECO Energy had $42.5 million in cash, cash equivalents
and short-term investments versus $136.4 million at year-end 1994. In the first
quarter of 1995 the company reduced its short-term investments and cash
equivalents by $84 million and used the proceeds primarily to reduce short-term
debt.
Short-term investments at Dec. 31, 1995 included a $32.2-million investment
in a hedged-equity utility portfolio. The company also had $86.3 million in
longer-term passive investments, including a continuing investment in leveraged
leases of $64.6 million. At Dec. 31, 1995 the net leveraged lease investment had
essentially a zero balance and all leases were performing on a current basis.
The company has made no investment in leveraged leases since 1989.
TECO Properties has invested $43 million of equity in seven projects solely
or as a limited partner. In 1995 TECO Properties recorded a $1.2 million gain
from the sale of an apartment complex and established a reserve of $1.6 million
for the expected 1996 sale of another apartment complex. TECO Energy plans to
continue its conservative real estate investment approach.
FINANCING ACTIVITY
TECO Energy's 1995 year-end capital structure, excluding the effect of
unearned compensation related to its ESOP, was 52 percent debt, 46 percent
common equity and 2 percent preferred equity. The company's objective is to
maintain a capital structure over time that will support its current credit
ratings.
CREDIT RATINGS/SENIOR DEBT
<TABLE>
<CAPTION>
DUFF & PHELPS MOODY'S STANDARD & POOR'S
------------- ------- -----------------
<S> <C> <C> <C>
Tampa Electric............................... AA+ Aa2 AA
TECO Finance/TECO Energy..................... AA- A1 AA-
</TABLE>
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<PAGE> 186
The current ratings reflect actions taken by Duff & Phelps in March 1995 to
increase Tampa Electric's senior and subordinate debt ratings one level and by
Moody's Investor Services in April to lower Tampa Electric's senior and
subordinate debt ratings and TECO Energy's debt rating one level.
In July 1993 Tampa Electric entered into a forward refunding arrangement
for $85.95 million of outstanding Pollution Control Revenue Bonds. Under this
arrangement $85.95 million of new tax-exempt bonds due Dec. 1, 2034 were issued
on Dec. 1, 1994, at a 6.25-percent interest rate. The proceeds were used on Feb.
1, 1995 to refund the series having a 9.9-percent interest rate. For accounting
and ratemaking purposes Tampa Electric began recording interest expense using a
blended rate for the original and refunding bonds. This blended rate was used
from July 1993 and will continue to be used through the maturity dates of the
original bonds.
TECO Energy raised $9.4 million of common equity in 1995, $10.6 million in
1994 and $8.3 million in 1993 from the sale of common stock through its Dividend
Reinvestment and Common Stock Purchase Plan (DRP) implemented in 1992. The
company expects to raise a similar amount of equity through this plan in 1996.
As a part of its risk management program TECO Energy has entered into
interest rate exchange agreements to moderate its exposure to interest rate
changes. The benefit of these agreements are at risk only in the event of
nonperformance by the other party to the agreement, which the company does not
anticipate. The company has no other derivative instruments.
LIQUIDITY, CAPITAL RESOURCES
TECO Energy and its operating companies met cash needs during 1995 largely
with internally generated funds with the balance from the sale of certain
short-term investments and from equity raised through the DRP.
At Dec. 31, 1995 TECO Energy had bank credit lines of $370 million, of
which $368 million in credit was available.
TECO Energy anticipates meeting its capital requirements for ongoing
operations in 1996 through 2000 substantially from internally generated funds.
In 1996 TECO Power Services expects to secure non-recourse financing for the
Guatemalan project as discussed on page 24 and Tampa Electric expects to issue
about $100 million of long-term debt primarily to reduce short-term debt and
redeem current maturities.
On March 29, 1996, Tampa Electric issued a notice to call and retire on
April 29, 1996, $35 million aggregate par value Series E and F Preferred Stock
at redemption prices of $102 and $101, respectively, plus accrued dividends.
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<PAGE> 187
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
NO.
-----
<S> <C>
Report of Independent Accountants....................................................
Consolidated Balance Sheets, Dec. 31, 1995 and 1994..................................
Consolidated Statements of Income for the years ended Dec. 31, 1995, 1994 and 1993...
Consolidated Statements of Cash Flows for the years ended Dec. 31, 1995, 1994 and
1993...............................................................................
Consolidated Statements of Common Equity for the year ended Dec. 31, 1995, 1994 and
1993...............................................................................
Notes to Consolidated Financial Statements...........................................
</TABLE>
Financial Statement Schedules have been omitted since they are not
required, are inapplicable or the required information is presented in the
financial statements or notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of TECO Energy, Inc.,
We have audited the consolidated balance sheets of TECO Energy, Inc. and
subsidiaries as of Dec. 31, 1995 and 1994, and the related consolidated
statements of income, common equity and cash flows for each of the three years
in the period ended Dec. 31, 1995. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TECO Energy,
Inc. and subsidiaries as of Dec. 31, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended Dec. 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, effective
Jan. 1, 1993 the company adopted Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes.
COOPERS & LYBRAND L.L.P.
Certified Public Accountants
Tampa, Florida
Jan. 15, 1996
29
<PAGE> 189
CONSOLIDATED BALANCE SHEETS
(MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DEC. 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................... $ 10.3 $ 35.8
Short-term investments.................................................. 32.2 100.6
Receivables, less allowance for uncollectibles.......................... 163.5 144.6
Inventories, at average cost Fuel....................................... 76.7 101.8
Materials and supplies................................................ 49.0 49.7
Prepayments............................................................. 9.6 8.6
-------- --------
341.3 441.1
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
Utility plant in service................................................ 3,174.5 3,060.8
Construction work in progress........................................... 479.6 286.6
Other property.......................................................... 836.4 748.3
-------- --------
4,490.5 4,095.7
Less accumulated depreciation........................................... (1,616.2) (1,475.4)
-------- --------
2,874.3 2,620.3
-------- --------
OTHER ASSETS
Other investments....................................................... 86.3 107.0
Deferred income taxes................................................... 65.9 52.3
Deferred charges and other assets....................................... 105.6 91.5
-------- --------
257.8 250.8
-------- --------
$3,473.4 $3,312.2
======== ========
LIABILITIES AND CAPITAL
CURRENT LIABILITIES
Long-term debt due within one year...................................... $ 31.3 $ 7.8
Notes payable........................................................... 361.4 349.9
Accounts payable........................................................ 146.3 145.3
Customer deposits....................................................... 51.3 49.5
Interest accrued........................................................ 13.3 15.4
Taxes accrued........................................................... 11.7 .2
-------- --------
615.3 568.1
OTHER LIABILITIES
Deferred income taxes................................................... 396.6 390.8
Investment tax credits.................................................. 61.3 66.6
Regulatory liability-tax related........................................ 47.5 57.5
Other deferred credits.................................................. 136.1 66.1
Long-term debt, less amount due within one year......................... 994.9 1,023.9
PREFERRED STOCK OF TAMPA ELECTRIC....................................... 55.0 55.0
CAPITAL
Common equity........................................................... 1,240.9 1,163.3
Unearned compensation related to ESOP................................... (74.2) (79.1)
-------- --------
$3,473.4 $3,312.2
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE> 190
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
-------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES.................................................. $1,392.3 $1,350.9 $1,283.9
-------- -------- --------
EXPENSES
Operation................................................. 684.6 670.8 624.9
Maintenance............................................... 101.3 101.1 98.9
Restructuring charge and other cost reductions............ -- 25.0 --
Depreciation.............................................. 174.7 174.0 165.3
Taxes, other than income.................................. 114.0 110.2 104.3
-------- -------- --------
1,074.6 1,081.1 993.4
-------- -------- --------
INCOME FROM OPERATIONS.................................... 317.7 269.8(1) 290.5
-------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for other funds used during construction........ 13.7 3.5 1.6
Other income (expense), net............................... .6 6.4 (7.1)
Preferred dividend requirements of Tampa Electric......... (3.6) (3.6) (3.6)
-------- -------- --------
10.7 6.3 (9.1)
-------- -------- --------
INCOME BEFORE INTEREST AND INCOME TAXES................... 328.4 276.1 281.4
-------- -------- --------
INTEREST CHARGES
Interest expense.......................................... 88.8 79.3 78.2
Allowance for borrowed funds used during construction..... (5.6) (2.2) (2.1)
-------- -------- --------
83.2 77.1 76.1
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.................. 245.2 199.0 205.3
Provision for income taxes................................ 59.1 45.8 55.0
-------- -------- --------
Income before cumulative effect of change in accounting
principle............................................... 186.1 153.2 150.3
Cumulative effect of change in accounting principle....... -- -- 11.2
-------- -------- --------
Net Income................................................ $ 186.1 $ 153.2(1) $ 161.5
======== ======== ========
Average common shares outstanding during year............. 116.5 115.9 115.3
======== ======== ========
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING:
Before cumulative effect of change in accounting
principle............................................... $ 1.60 $ 1.32 $ 1.30
Cumulative effect of change in accounting principle....... -- -- .10
-------- -------- --------
Earnings per average common share outstanding............. $ 1.60 $ 1.32(1) $ 1.40
======== ======== ========
</TABLE>
- ---------------
(1) Includes the effect of a corporate restructuring charge which reduced
operating income by $25 million, net income by $15 million and earnings per
share by $0.13. See Note H.
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE> 191
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................... $ 186.1 $ 153.2 $ 161.5
Adjustments to reconcile net income to net cash
Depreciation................................................ 174.7 174.0 165.3
Deferred income taxes....................................... (17.3) (12.1) 7.8
Cumulative effect of change in accounting principle......... -- -- (11.2)
Restructuring charge and other cost reductions.............. -- 25.0 --
Investment tax credits, net................................. (5.3) (6.8) (5.6)
Allowance for funds used during construction................ (19.3) (5.7) (3.7)
Amortization of unearned compensation related to ESOP....... 4.9 5.7 4.2
Deferred revenue............................................ 50.8 -- --
Deferred recovery clause.................................... (12.4) 19.9 (10.6)
Fuel cost settlement........................................ -- -- 10.0
Refund to customers......................................... -- (2.4) (7.6)
Coal contract buyout and amortization....................... 2.0 (25.5) --
Receivables, less allowance for uncollectibles.............. (18.9) (10.5) (2.8)
Inventories................................................. 25.8 (23.7) 9.9
Taxes accrued............................................... 11.5 (1.0) (3.9)
Interest accrued............................................ (2.1) .6 (1.5)
Accounts payable............................................ 1.0 30.0 4.2
Other....................................................... 25.7 17.5 1.4
------- ------- -------
407.2 338.2 317.4
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................................... (432.7) (309.1) (270.6)
Allowance for funds used during construction................ 19.3 5.7 3.7
Investment in short-term investments........................ 68.4 12.5 14.2
Other non-current investments............................... 17.5 (6.0) (1.4)
------- ------- -------
(327.5) (296.9) (254.1)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock.................................................. 11.1 11.1 12.1
Proceeds from long-term debt.................................. .6 .7 15.6
Repayment of long-term debt................................... (6.5) (19.0) (73.2)
Net increase in short-term debt............................... 11.5 84.1 68.6
Dividends..................................................... (121.9) (115.6) (109.2)
------- ------- -------
(105.2) (38.7) (86.1)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.......... (25.5) 2.6 (22.8)
Cash and cash equivalents at beginning of year................ 35.8 33.2 56.0
------- ------- -------
Cash and cash equivalents at end of year...................... $ 10.3 $ 35.8 $ 33.2
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amounts capitalized)....................... $ 105.4 $ 85.1 $ 80.0
Income taxes................................................ $ 66.5 $ 69.2 $ 53.3
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE> 192
CONSOLIDATED STATEMENTS OF COMMON EQUITY
(MILLIONS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED UNEARNED COMMON
SHARES(1) STOCK(1) CAPITAL(1) EARNINGS COMPENSATION EQUITY
--------- -------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DEC. 31, 1992.............. 115.0 $115.0 $308.5 $ 621.3 $(89.0) $ 955.8
Net income for 1993............... 161.5 161.5
Common stock issued............... .6 .6 11.5 12.1
Cash dividends declared ($.9475
per share)(1).................. (109.2) (109.2)
Amortization of unearned
compensation related to ESOP... 4.2 4.2
Tax benefits -- ESOP dividends and
stock options.................. 1.0 2.2 3.2
----- ------ ------ ------- ------ --------
BALANCE, DEC. 31, 1993.............. 115.6 115.6 321.0 675.8 (84.8) 1,027.6
Net income for 1994............... 153.2 153.2
Common stock issued............... .6 .6 10.5 11.1
Cash dividends declared ($.9975
per share)..................... (115.6) (115.6)
Amortization of unearned
compensation related to ESOP... 5.7 5.7
Tax benefits -- ESOP dividends.... 2.2 2.2
----- ------ ------ ------- ------ --------
BALANCE, DEC. 31, 1994.............. 116.2 116.2 331.5 715.6 (79.1) 1,084.2
Net income for 1995............... 186.1 186.1
Common stock issued............... .5 .5 10.6 11.1
Cash dividends declared ($1.0475
per share)..................... (121.9) (121.9)
Amortization of unearned
compensation related to ESOP... 4.9 4.9
Tax benefits -- ESOP dividends and
stock options.................. .1 2.2 2.3
----- ------ ------ ------- ------ --------
BALANCE, DEC. 31, 1995.............. 116.7 $116.7 $342.2 $ 782.0 $(74.2) $1,166.7
===== ====== ====== ======= ====== ========
</TABLE>
- ---------------
(1) Restated to reflect a two-for-one stock split on Aug. 30, 1993.
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE> 193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The significant accounting policies for both utility and diversified
operations are as follows:
The consolidated financial statements include the accounts of TECO Energy,
Inc. (TECO Energy) and its wholly owned subsidiaries.
The equity method of accounting is used to account for investments in
partnership arrangements in which TECO Energy or its subsidiary companies do not
have majority ownership or exercise control.
The proportional share of expenses, revenues and assets reflecting TECO
Coalbed Methane's and TECO Gas & Oil's undivided interest in joint venture
property is included in the consolidated financial statements.
All significant intercompany balances and intercompany transactions have
been eliminated in consolidation.
BASIS OF ACCOUNTING
Tampa Electric maintains its accounts in accordance with recognized
policies prescribed or permitted by the Florida Public Service Commission (FPSC)
and the Federal Energy Regulatory Commission (FERC). These policies conform with
generally accepted accounting principles in all material respects.
The impact of Financial Accounting Standard (FAS) No. 71, Accounting for
the Effects of Certain Types of Regulation, has been minimal in Tampa Electric's
experience, but when cost recovery is ordered over a longer period than a fiscal
year, costs are recognized in the period that the regulatory agency recognizes
them in accordance with FAS 71.
Tampa Electric's retail and wholesale businesses are regulated by the FPSC
and the FERC, respectively. Prices allowed by both agencies are generally based
on recovery of prudent costs incurred plus a reasonable return on invested
capital.
The use of estimates is inherent in the preparation of financial statements
in accordance with generally accepted accounting principles.
REVENUES AND FUEL COSTS
Revenues include amounts resulting from cost recovery clauses which provide
for monthly billing charges to reflect increases or decreases in fuel, purchased
capacity, oil backout and conservation costs. These adjustment factors are based
on costs projected by Tampa Electric for a specific recovery period. Any over-
recovery or under-recovery of costs plus an interest factor are refunded or
billed to customers during the subsequent recovery period. Over-recoveries of
costs are recorded as deferred credits and under-recoveries of costs are
recorded as deferred debits.
On May 10, 1995, the FPSC approved the termination of the oil backout
clause effective Jan. 1, 1996. Any oil backout project costs incurred beginning
Jan 1, 1996 will no longer be recovered through the cost recovery clause.
In December 1994, Tampa Electric bought out a long-term coal supply
contract which would have expired in 2004 for a lump sum payment of $25.5
million and entered into two new contracts with the supplier. The coal supplied
under the new contracts is competitive in price with coals of comparable
quality. As a result of this buyout, Tampa Electric customers will benefit from
anticipated net fuel savings of more than $40 million through the year 2004. In
February 1995, the FPSC authorized the recovery of the $25.5 million buy-out
amount plus carrying costs through the Fuel and Purchased Power Cost Recovery
Clause over the next ten years beginning April 1, 1995. In 1995, $2 million of
buy-out costs were amortized to expense.
34
<PAGE> 194
Certain other costs incurred by Tampa Electric are allowed to be recovered
from customers through prices approved in the regulatory process. These costs
are recognized as the associated revenues are billed.
Tampa Electric accrues base revenues for services rendered but unbilled to
provide a closer matching of revenues and expenses.
In February 1993, the FPSC approved an agreement between Tampa Electric and
the Office of Public Counsel which resolved all issues relating to prices for
coal purchased in the years 1990 through 1992 by Tampa Electric from its
affiliate, Gatliff Coal, a subsidiary of TECO Coal. Tampa Electric recognized a
$10-million liability in February 1993 and agreed to return this amount plus
interest during the 12-month period effective April 1, 1993. The $10-million
charge related to this agreement is classified in "Other income (expense)" on
the income statement.
DEPRECIATION
TECO Energy provides for depreciation primarily by the straight-line method
at annual rates that amortize the original cost, less net salvage, of
depreciable property over its estimated service life. The provision for utility
plant in service, expressed as a percentage of the original cost of depreciable
property, was 3.9% for 1995, and 4.2% for 1994 and 1993.
The original cost of utility plant retired or otherwise disposed of and the
cost of removal less salvage are charged to accumulated depreciation.
FOREIGN OPERATIONS
The functional currency of TPS Guatemala One, Inc.'s partnership in
Guatemala is the U.S. dollar. Transactions conducted in Guatemala in the local
currency, the quetzal, are remeasured to the U.S. dollar for financial reporting
purposes with aggregate transaction gains or losses included in net income. The
aggregate loss included in net income during 1995 was not significant.
The partnership is protected from any significant currency gains or losses
by the terms of the power sales agreement where payments are defined in U.S.
dollars.
DEFERRED INCOME TAXES
Effective Jan. 1, 1993, TECO Energy adopted FAS 109, which changed the
requirements for accounting for income taxes. Although FAS 109 retains the
concept of comprehensive interperiod income tax allocation, it adopts the
liability method in the measurement of deferred income taxes rather than the
deferred method. Under the liability method, the temporary differences between
the financial statement and tax bases of assets and liabilities are reported as
deferred taxes measured at current tax rates. The cumulative effect of adopting
FAS 109 increased TECO Energy's earnings by $11.2 million in 1993. Since Tampa
Electric is a regulated enterprise its books and records reflect approved
regulatory treatment, the adoption of FAS 109 resulted in certain adjustments to
accumulated deferred income taxes and the establishment of a corresponding
regulatory tax liability reflecting the amount payable to customers through
future rates and had no effect on earnings.
INVESTMENT TAX CREDITS
Investment tax credits have been recorded as deferred credits and are being
amortized to income tax expense over the service lives of the related property.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
AFUDC is a non-cash credit to income with a corresponding charge to utility
plant which represents the cost of borrowed funds and a reasonable return on
other funds used for construction. The rate used to calculate AFUDC is revised
periodically to reflect significant changes in Tampa Electric's cost of capital.
The rate was
35
<PAGE> 195
7.79% for 1995, 7.28% for 1994, and 7.70% for 1993. The base on which AFUDC is
calculated excludes construction work in progress which has been included in
rate base.
INTEREST CAPITALIZED
Interest costs for the construction of TECO Coal's preparation plant and
loadout facility and TECO Power Services' Alborada Power Station were
capitalized and will be depreciated over the service lives of the related
property. Such interest costs capitalized totaled $.9 million in 1995 for the
Alborada Power Station and $.9 million in 1994 for TECO Coal's preparation
plant.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Included in cash and cash equivalents and short-term investments at Dec.
31, 1994 are $20.8 million and $70.2 million, respectively, of securities
classified as available-for-sale. Securities classified as available-for-sale
are highly liquid, high-quality debt instruments purchased with a maturity of
three months or less. There are no available-for-sale securities at Dec. 31,
1995.
Short-term investments also include $32.2 million and $30.3 million at Dec.
31, 1995 and 1994, respectively of trading securities, which have a cost basis
of $31.4 million and $29.9 million. The estimated fair market values were based
on quoted market prices. Trading securities consist of a hedged equity
investment in a utility portfolio. The utility portfolio is comprised of various
utility equities, hedged by selling short other utility equities. Realized gains
and losses are determined on the specific identification cost basis. In 1994,
TECO Energy adopted FAS 115, Accounting for Certain Investments in Debt and
Equity Securities, which requires fair value accounting for debt and equity
securities. The change in net unrealized gains and losses on trading securities
included in earnings in 1995 and 1994 was not significant.
OTHER INVESTMENTS
Other investments include longer-term passive investments, primarily
leveraged leases.
COALBED SEAM GAS PROPERTIES
TECO Coalbed Methane, a subsidiary of TECO Energy, has entered into
agreements with others to develop jointly the natural gas potential in a portion
of Alabama's Black Warrior Basin.
TECO Coalbed Methane utilizes the successful efforts method to account for
its gas operations. Under this method, expenditures for unsuccessful exploration
activities are expensed currently.
Capitalized costs are amortized on the unit-of-production method using
estimates of proven reserves. Investments in unproven properties and major
development projects are not amortized until proven reserves associated with the
projects can be determined or until impairment occurs.
Aggregate capitalized costs related to wells producing and under
development at Dec. 31, 1995 and 1994 were $203.3 million and $190.9 million,
respectively. Net proven reserves at Dec. 31, 1995 and 1994 were 184.0 billion
cubic feet for 556 wells and 172.7 billion cubic feet for 462 wells,
respectively.
CONVENTIONAL GAS AND OIL PROPERTIES
TECO Gas & Oil, a subsidiary of TECO Energy formed in 1995, has entered
into joint ventures with several partners to explore for conventional gas and
oil in the shallow gulf waters off Texas and Louisiana.
TECO Gas & Oil utilizes the successful efforts method to account for its
gas and oil operations. Under this method, expenditures for unsuccessful
exploration activities are expensed currently.
At Dec. 31, 1995 aggregate capitalized costs were not significant.
RECLASSIFICATION
Certain 1994 and 1993 amounts were reclassified to conform with current
year presentation.
36
<PAGE> 196
B. COMMON EQUITY
STOCK OPTIONS
The 1980 Stock Option and Appreciation Rights Plan was succeeded by the
1990 Equity Incentive Plan. Under the Equity Incentive Plan, the Compensation
Committee of the Board of Directors may grant options to purchase common stock
to officers and key employees of TECO Energy and its subsidiaries. The stock
options are exercisable at a price not less than the fair market value of the
common stock on the date of grant. The plan also provides that the Committee may
issue stock appreciation rights. The exercise price of the stock appreciation
rights may not be less than the fair market value of the common stock on the
date of grant or if issued with a stock option, the exercise price of the
related option. Stock appreciation rights provide for the issuance of common
stock or the payment of cash or a combination of both equal to the difference
between the exercise price of the stock appreciation right and the fair market
value of the common stock on the date of exercise.
In January 1996, The Board of Directors adopted the 1996 Equity Incentive
Plan (the "Plan") as an amendment and restatement of the company's 1990 Equity
Incentive Plan (the "1990 Plan"). This Plan will be submitted to shareholders
for approval at the 1996 Annual Meeting. Upon such approval, the Plan will
supersede the 1990 Plan and no additional grants will be made thereunder. The
rights of the holders of outstanding options under the 1990 Plan will not be
affected. The purpose of the Plan is to attract and retain key employees of the
company, to provide an incentive for them to achieve long-range performance
goals and to enable them to participate in the long-term growth of the company.
The Plan will continue to be administered by the Compensation Committee. The
Plan would amend the 1990 Plan to increase the number of shares of Common Stock
subject to grants by 3,750,000 shares, expand the types of awards available to
be granted and specify a limit on the maximum number of shares with respect to
which stock options and stock appreciation rights may be made to any participant
under the Plan.
37
<PAGE> 197
Transactions during the last three years under the 1990 Equity Incentive
Plan and the 1980 Stock Option and Appreciation Rights Plan are summarized as
follows:
EQUITY INCENTIVE PLAN AND STOCK OPTION AND APPRECIATION RIGHTS PLAN
<TABLE>
<CAPTION>
OPTION
SHARES OPTION
(THOUSANDS) PRICE
----------- -------------------
<S> <C> <C>
1995
Outstanding, beginning of year............................... 1,913 $ 8.6563 - $23.5625
Granted.................................................... 488 $ 20.75 - $ 21.625
Exercised.................................................. 100 $ 8.6563 - $23.5625
Canceled................................................... 38 $18.8438 - $23.5625
-----
Outstanding, end of year..................................... 2,263 $ 11.50 - $23.5625
=====
Exercisable, end of year..................................... 2,263 $ 11.50 - $23.5625
=====
Available for grant.......................................... 1,936
=====
1994
Outstanding, beginning of year............................... 1,567 $ 8.6563 - $23.5625
Granted.................................................... 401 $19.4375 - $ 20.00
Exercised.................................................. 55 $10.0469 - $18.8438
Canceled................................................... --
-----
Outstanding, end of year..................................... 1,913 $ 8.6563 - $23.5625
=====
Exercisable, end of year..................................... 1,505 $ 8.6563 - $19.4375
=====
Available for grant.......................................... 2,386
=====
1993
Outstanding, beginning of year............................... 1,463 $ 8.6563 - $18.8438
Granted.................................................... 416 $23.5625
Exercised.................................................. 305 $ 8.6563 - $23.5625
Canceled................................................... 7 $23.5625
-----
Outstanding, end of year..................................... 1,567 $ 8.6563 - $23.5625
=====
Exercisable, end of year..................................... 1,567 $ 8.6563 - $23.5625
=====
Available for grant.......................................... 2,787
=====
</TABLE>
The 1991 Director Stock Option Plan provides grants of stock options to
non-employee directors on the first trading day following each annual meeting of
shareholders. This 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
thereafter, with
38
<PAGE> 198
an exercise price equal to the fair market value on the date of grant.
Transactions during the last three years under the 1991 Director Stock Option
Plan are summarized as follows:
DIRECTOR STOCK OPTION PLAN
<TABLE>
<CAPTION>
OPTION
SHARES OPTION
(THOUSANDS) PRICE
----------- -------------------
<S> <C> <C>
1995
Outstanding, beginning of year............................... 171 $17.7188 - $23.4063
Granted.................................................... 20 $21.125
Exercised.................................................. 14 $17.7188 - $19.8125
Canceled................................................... 2 $23.4063
---
Outstanding, end of year..................................... 175 $17.7188 - $23.4063
===
Exercisable, end of year..................................... 175 $17.7188 - $23.4063
===
Available for grant.......................................... 286
===
1994
Outstanding, beginning of year............................... 149 $17.7188 - $23.4063
Granted.................................................... 22 $19.8125
Exercised.................................................. --
---
Outstanding, end of year..................................... 171 $17.7188 - $23.4063
===
Exercisable, end of year..................................... 149 $17.7188 - $19.8125
===
Available for grant.......................................... 304
===
1993
Outstanding, beginning of year............................... 139 $17.7188 - $18.5313
Granted.................................................... 22 $23.4063
Exercised.................................................. 12 $17.7188 - $18.5313
---
Outstanding, end of year..................................... 149 $17.7188 - $23.4063
===
Exercisable, end of year..................................... 149 $17.7188 - $23.4063
===
Available for grant.......................................... 326
===
</TABLE>
In 1995, the Financial Accounting Standards Board issued FAS 123,
Accounting for Stock Options, effective for fiscal years beginning after Dec.
15, 1995. FAS 123 encourages, but does not require, companies to recognize
compensation expense based on the fair value of grants of stock, stock options
and other equity investments to employees. Although expense recognition for
employee stock-based compensation is not mandatory, FAS 123 requires that
companies not adopting must disclose pro forma net income and earnings per
share. TECO Energy will continue to apply the prior accounting rules and make
pro forma disclosures.
COMMON STOCK
The company had 400 million shares of $1 par value common stock authorized
in 1995, 1994 and 1993. On July 20, 1993, the Board of Directors declared a
two-for-one stock split of the corporation's outstanding common stock, effective
Aug. 30, 1993, for shareholders of record as of July 30, 1993. All information
related to TECO Energy common stock, including shares outstanding and per share
amounts, has been calculated as if the stock split had been in effect for all
periods presented.
39
<PAGE> 199
DIVIDEND REINVESTMENT PLAN
In 1992, TECO Energy implemented a Dividend Reinvestment and Common Stock
Purchase Plan. TECO Energy raised common equity of $9.4 million, $10.6 million
and $8.3 million from this plan in 1995, 1994 and 1993, respectively.
SHAREHOLDER RIGHTS PLAN
In 1989, TECO Energy declared a distribution of Rights to purchase one
additional share of the company's common stock at a price of $40 per share for
each share outstanding. The Rights expire in May 1999. The Rights will become
exercisable 10 days after a person acquires 20 percent or more of the company's
outstanding common stock or commences a tender offer that would result in such
person owning 30 percent or more of such stock or at the time the Board of
Directors declares a person who acquired 10 percent or more of such stock to be
an "adverse person." If any person acquires 20 percent or more of the
outstanding common stock or the Board declares that a person is an adverse
person, the rights of holders, other than such acquiring person or adverse
person, become rights to buy shares of common stock of the company (or the
acquiring company if the company is involved in a merger or other business
combination and is not the surviving corporation) having a market value of twice
the exercise price of each right.
The company may redeem the Rights at a price of $.005 per Right until 10
days after a person acquires 20 percent or more of the outstanding common stock
but not after the Board has declared a person to be an adverse person.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective Jan. 1, 1990, TECO Energy amended the TECO Energy Group
Retirement Savings Plan, a tax-qualified benefit plan available to substantially
all employees, to include an employee stock ownership plan (ESOP). During 1990,
the ESOP purchased 7 million shares of TECO Energy common stock on the open
market for $100 million. The share purchase was financed through a loan from
TECO Energy to the ESOP. This loan is at a fixed interest rate of 9.3% and will
be repaid from dividends on ESOP shares and from TECO Energy's contributions to
the ESOP.
TECO Energy's contributions to the ESOP were $4.8 million, $7.6 million and
$3.4 million in 1995, 1994 and 1993, respectively. TECO Energy's annual
contribution equals the interest accrued on the loan during the year plus
additional principal payments needed to meet the matching allocation
requirements under the plan, less dividends received on the ESOP shares. The
components of net ESOP expense recognized for the past three years are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(MILLIONS)
<S> <C> <C> <C>
Interest expense............................ $ 8.3 $ 8.8 $ 9.0
Compensation expense........................ 4.9 5.7 4.2
Dividends................................... (7.1) (6.9) (6.6)
---- ---- ----
Net ESOP expense............................ $ 6.1 $ 7.6 $ 6.6
==== ==== ====
</TABLE>
Compensation expense was determined by the shares allocated method.
At Dec. 31, 1995, the ESOP had 1.5 million allocated shares, .1 million
committed-to-be-released shares, and 5.2 million unallocated shares. Shares are
released to provide employees with the company match in accordance with the
terms of the TECO Energy Group Retirement Savings Plan and in lieu of dividends
on allocated ESOP shares. The dividends received by the ESOP are used to pay
debt service.
For financial statement purposes, the unallocated shares of TECO Energy
stock are reflected as a reduction of common equity, classified as unearned
compensation related to ESOP. Dividends on all ESOP shares are recorded as a
reduction of retained earnings, as are dividends on all TECO Energy common
stock. The tax benefit related to the dividends paid to the ESOP for allocated
shares is a reduction of income tax
40
<PAGE> 200
expense and for unallocated shares is an increase in retained earnings. All ESOP
shares are considered outstanding for earnings per share computations.
C. PREFERRED STOCK
PREFERRED STOCK OF TECO ENERGY -- NO PAR
10 million shares authorized, none outstanding.
PREFERRED STOCK OF TAMPA ELECTRIC -- NO PAR
2.5 million shares authorized, none outstanding.
PREFERENCE STOCK OF TAMPA ELECTRIC -- NO PAR
2.5 million shares authorized, none outstanding.
PREFERRED STOCK OF TAMPA ELECTRIC -- $100 PAR VALUE
1.5 million shares authorized
<TABLE>
<CAPTION>
OUTSTANDING
DEC.31, 1995 CASH DIVIDENDS
------------------------------------ PAID IN 1995(1)
CURRENT -------------------
REDEMPTION PER
PRICE SHARES AMOUNT(2) SHARE AMOUNT(2)
---------- ------- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
4.32% Cumulative, Series A..... $ 103.75 49,600 $ 5.0 $4.32 $ .2
4.16% Cumulative, Series B..... $ 102.875 50,000 5.0 $4.16 .2
4.58% Cumulative, Series D..... $ 101.00 100,000 10.0 $4.58 .5
8.00% Cumulative, Series
E(3)......................... $ 102.00 149,960 15.0 $8.00 1.2
7.44% Cumulative, Series
F(3)......................... $ 101.00 200,000 20.0 $7.44 1.5
------- ------- ------
549,560 $55.0 $ 3.6
======= ======= ======
</TABLE>
- ---------------
(1) Quarterly dividends paid on Feb. 15, May 15, Aug. 15 and Nov. 15.
(2) Millions.
(3) On March 29, 1996, Tampa Electric issued a notice to call and retire on
April 29, 1996, the Series E and F Preferred Stock at redemption prices set
forth plus accrued dividends.
At Dec. 31, 1995, preferred stock had a carrying amount of $55.0 million
and an estimated fair market value of $49.1 million. The estimated fair market
value of preferred stock was based on quoted market prices.
D. SHORT-TERM DEBT
Notes payable consisted primarily of commercial paper with weighted average
interest rates of 5.76% and 5.68%, respectively, at Dec. 31, 1995 and Dec. 31,
1994. The carrying amount of notes payable approximated fair market value
because of the short maturity of these instruments. Consolidated unused lines of
credit at Dec. 31, 1995 were $368 million. Certain lines of credit require
commitment fees ranging from .05% to .1875% on the unused balances.
During 1995, TECO Finance entered into an interest rate exchange agreement
to moderate its exposure to interest rate changes. This three-year agreement
effectively converted the interest rate on $100 million of short-term debt from
a floating rate to a fixed rate. TECO Finance will pay a fixed rate of 5.8% and
will receive a floating rate based on a 30-day commercial paper index. There
would not have been a significant loss to terminate this agreement at Dec. 31,
1995. The benefits of this agreement are at risk only in the event of
non-performance by the other party to the agreement, which the company does not
anticipate. The benefits of this agreement reduced interest expense in 1995.
41
<PAGE> 201
E. LONG-TERM DEBT
<TABLE>
<CAPTION>
DEC. 31,
---------------------
(millions) DUE 1995 1994
--------- -------- --------
<S> <C> <C> <C>
TECO ENERGY
Medium-term notes payable: 9.28% for 1995 and 1994(1)...... 1997-2000 $ 100.0 $ 100.0
-------- --------
TAMPA ELECTRIC
First mortgage bonds (issuable in series)
5 1/2%................................................... 1996 25.0 25.0
7 3/43/4%................................................ 2022 75.0 75.0
5 3/43/4%................................................ 2000 80.0 80.0
6 1/81/8%................................................ 2003 75.0 75.0
Installment contracts payable(2)
5 3/43/4%................................................ 2007 24.4 24.7
7 7/87/8% Refunding bonds(3)............................. 2021 25.0 25.0
8% Refunding bonds(3).................................... 2022 100.0 100.0
6.25% Refunding bonds(4)................................. 2034 86.0 86.0
Variable rate: 3.81% for 1995 and 4.10% for 1994(1)...... 2025 51.6 51.6
Variable rate: 3.72% for 1995 and 4.02% for 1994(1)...... 2018 54.2 54.2
Variable rate: 3.90% for 1995 and 4.23% for 1994(1)(5)... 2020 16.9 16.3
-------- --------
613.1 612.8
======== ========
DIVERSIFIED COMPANIES
Dock and wharf bonds, variable rate:
3.74% for 1995 and 3.88% for 1994(1)(2).................. 2007 110.6 110.6
Mortgage notes payable: 7.6%............................... 1996-2003 3.3 4.1
Non-recourse secured facility notes,
Series A: 7.8%........................................... 1996-2012 153.2 157.5
-------- --------
267.1 272.2
======== ========
TECO FINANCE
Medium-term notes payable, various rates:
7.04% for 1995 and 7.09% for 1994(1)..................... 1997-2002 50.0 50.9
-------- --------
Unamortized debt premium (discount), net................... (4.0) (4.2)
-------- --------
1,026.2 1,031.7
Less amount due within one year(6)......................... 31.3 7.8
-------- --------
Total long-term debt....................................... $ 994.9 $1,023.9
======== ========
</TABLE>
Substantially all of the property, plant and equipment of Tampa Electric is
pledged as collateral.
Maturities and annual sinking fund requirements of long-term debt for the
years 1997, 1998, 1999 and 2000 are $76.7 million, $6.9 million, $28.4 million,
and $137.9 million, respectively. Of these amounts $.8 million per year for 1997
through 2000 may be satisfied by the substitution of property in lieu of cash
payments.
- ---------------
(1) Composite year-end interest rate.
(2) Tax-exempt securities.
(3) Proceeds of these bonds were used to refund bonds with interest rates of
11 5/8% - 12 5/8%. For accounting purposes, interest expense has been
recorded using blended rates of 8.28%-8.66% on the original and refunding
bonds, consistent with regulatory treatment.
42
<PAGE> 202
(4) Proceeds of these bonds were used to refund bonds with an interest rate of
9.9% in February 1995. For accounting purposes, interest expense has been
recorded using a blended rate of 6.52% on the original and refunding bonds,
consistent with regulatory treatment.
(5) This amount is recorded net of $3.1 million and $3.7 million at Dec. 31,
1995 and Dec. 31, 1994, respectively, on deposit with trustee.
(6) Of the amount due in 1996, $.8 million may be satisfied by the substitution
of property in lieu of cash payments.
At Dec. 31, 1995, total long-term debt had a carrying amount of $994.9
million and an estimated fair market value of $1,076.5 million. The estimated
fair market value of long-term debt was based on quoted market prices for the
same or similar issues, on the current rates offered for debt of the same
remaining maturities, or for long-term debt issues with variable rates that
approximate market rates, at carrying amounts. The carrying amount of long-term
debt due within one year approximated fair market value because of the short
maturity of these instruments.
Tampa Electric entered into an interest rate exchange agreement, which
expired Jan. 11, 1996, to reduce the cost of $100 million of fixed rate
long-term debt. The agreement reduced interest expense by $2.3 million per year
in 1995, 1994 and 1993.
F. RETIREMENT PLAN
TECO Energy has a non-contributory defined benefit retirement plan which
covers substantially all employees. Benefits are based on employees' years of
service and average final earnings.
The company's policy is to fund the plan within the guidelines set by ERISA
for the minimum annual contribution and the maximum allowable as a tax deduction
by the IRS. About 65 percent of plan assets were invested in common stocks and
35 percent in fixed income investments at Dec. 31, 1995.
COMPONENTS OF NET PENSION EXPENSE
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -----
(MILLIONS)
<S> <C> <C> <C>
Service cost
(benefits earned during the period)............................. $ 7.2 $ 8.8 $ 7.7
------ ------ -----
Interest cost on projected benefit obligations.................... 17.3 15.8 15.0
------ ------ -----
Less: Return on plan assets
Actual.......................................................... 66.4 (3.7) 30.5
Less net amortization of unrecognized transition asset and
deferred return.............................................. 43.3 (25.8) 10.3
------ ------ -----
Net return on assets.............................................. 23.1 22.1 20.2
------ ------ -----
Net pension expense............................................... 1.4 2.5 2.5
Effect of restructuring charge.................................... -- 13.3 --
------ ------ -----
Net pension expense recognized in the Consolidated Statements of
Income.......................................................... $ 1.4 $ 15.8 $ 2.5
====== ====== =====
</TABLE>
43
<PAGE> 203
RECONCILIATION OF THE FUNDED STATUS OF THE
RETIREMENT PLAN AND THE ACCRUED PENSION PREPAYMENT/(LIABILITY)
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
1995 1994
-------- --------
(MILLIONS)
<S> <C> <C>
Fair market value of plan assets.......................................... $286.7 $239.2
Projected benefit obligation.............................................. (260.2) (218.0)
------ ------
Excess of plan assets over projected benefit obligation................... 26.5 21.2
Less unrecognized net gain from past experience different from that
assumed................................................................. 33.4 23.8
Less unrecognized prior service cost...................................... (7.1) (7.7)
Less unrecognized net transition asset (being amortized over 19.5
years).................................................................. 9.5 10.5
------ ------
Accrued pension prepayment/(liability).................................... $ (9.3) $ (5.4)
====== ======
Accumulated benefit obligation (including vested benefits of $193.2 for
1995 and $163.8 for 1994)............................................... $215.2 $183.4
====== ======
</TABLE>
ASSUMPTIONS USED IN DETERMINING ACTUARIAL VALUATIONS
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Discount rate to determine projected benefit obligation.................. 7.3% 8.25%
Rates of increase in compensation levels.................................3.3 - 5.3% 3.3 - 5.3%
Plan asset growth rate through time...................................... 9% 9%
</TABLE>
G. POSTRETIREMENT BENEFIT PLAN
TECO Energy and its subsidiaries currently provide certain postretirement
health care benefits for substantially all employees retiring after age 55
meeting certain service requirements. The company contribution toward health
care coverage for most employees retiring after Jan. 1, 1990 is limited to a
defined dollar benefit based on years of service. Postretirement benefit levels
are substantially unrelated to salary. The company reserves the right to
terminate or modify the plans in whole or in part at any time.
In 1993, the company adopted FAS 106 which requires postretirement benefits
be recognized as earned by employees rather than recognized as paid.
COMPONENTS OF POSTRETIREMENT BENEFIT COST
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost (benefits earned during the period)................... $ 1.9 $ 2.2 $1.8
Interest cost on projected benefit obligations..................... 6.3 5.3 4.9
Amortization of transition obligation (straight line over 20
years)........................................................... 2.7 2.8 2.8
Amortization of actuarial (gain)/loss.............................. .2 .2 --
------- ------- ----
Net periodic postretirement benefit expense...................... 11.1 10.5 9.5
Effect of restructuring charge..................................... -- 2.7 --
------- ------- ----
Net periodic postretirement benefit expense recognized in the
Consolidated Statements of Income................................ $ 11.1 $ 13.2 $9.5
======= ======= =====
</TABLE>
44
<PAGE> 204
RECONCILIATION OF THE FUNDED STATUS OF THE
POSTRETIREMENT BENEFIT PLAN AND THE ACCRUED LIABILITY
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
1995 1994
-------- --------
(MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Active employees eligible to retire..................................... $ (4.8) $(11.8)
Active employees not eligible to retire................................. (30.9) (25.9)
Retirees and surviving spouses.......................................... (51.9) (41.3)
------- -------
(87.6) (79.0)
Less unrecognized net gain/(loss) from past experience.................... (19.2) (13.8)
Less unrecognized transition obligation................................... (46.2) (48.9)
------- -------
Liability for accrued postretirement benefit............................ $(22.2) $(16.3)
======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSUMPTIONS USED IN DETERMINING ACTUARIAL VALUATIONS
Discount rate to determine projected benefit obligation................... 7.3% 8.25%
</TABLE>
The assumed health care cost trend rate for medical costs prior to age 65,
and for certain retirees after age 65, was 11% in 1995 and decreases to 5.75% in
2002 and thereafter. The assumed health care cost trend rate for medical costs
after age 65 was 7.5% in 1995 and decreases to 5.75% in 2002 and thereafter.
A 1 percent increase in the medical trend rates would produce an 8 percent
($.6 million) increase in the aggregate service and interest cost for 1995 and a
7 percent ($6.4 million) increase in the accumulated postretirement benefit
obligation as of Dec. 31, 1995.
H. RESTRUCTURING CHARGE
In 1994, TECO Energy implemented a corporate restructuring program which
resulted in a $25 million charge ($15 million after tax) and reduced earnings
per share by $.13. The cost of this restructuring program reflects charges for
241 early retirements, the elimination of other positions and other cost control
initiatives. Approximately $1.7 million of this charge was paid in 1994 and $6.3
million in 1995. The impact on pension cost resulting from the restructuring as
determined under the provisions of FAS 88, Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, was
approximately $13.3 million. The impact on postretirement benefits as determined
under FAS 106, Accounting for Postretirement Benefits Other Than Pensions, was
approximately $2.7 million. These amounts are included as part of the total 1994
charge of $25 million. See Note F and Note G.
45
<PAGE> 205
I. INCOME TAX EXPENSE
Income tax expense consists of the following components:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
(MILLIONS)
<S> <C> <C> <C>
1995
Currently payable................................. $68.4 $13.3 $81.7
Deferred.......................................... (16.6) (.7) (17.3)
Amortization of investment tax credits............ (5.3) -- (5.3)
----- ----- -----
Total income tax expense....................... $46.5 $12.6 $59.1
===== ===== =====
1994
Currently payable................................. $54.7 $10.0 $64.7
Deferred.......................................... (8.3) (3.8) (12.1)
Investment tax credits............................ (1.3) -- (1.3)
Amortization of investment tax credits............ (5.5) -- (5.5)
----- ----- -----
Total income tax expense....................... $39.6 $ 6.2 $45.8
===== ===== =====
1993
Currently payable................................. $44.6 $ 8.2 $52.8
Deferred.......................................... 6.5 1.3 7.8
Amortization of investment tax credits............ (5.6) -- (5.6)
----- ----- -----
Total income tax expense....................... $45.5 $ 9.5 $55.0
===== ===== =====
</TABLE>
TECO Energy adopted FAS 109 as of Jan. 1, 1993 and elected not to restate
prior years' financial statements. Deferred taxes result from temporary
differences in the recognition of certain liabilities or assets for tax and
financial reporting purposes. The principal components of the company's deferred
tax assets and liabilities recognized in the balance sheet are as follows:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
1995 1994
-------- --------
(MILLIONS)
<S> <C> <C>
Deferred income tax assets(1)
Property related....................................... 43.7
Other.................................................. 22.2 18.8
------- -------
Total deferred income tax assets............... 65.9 52.3
------- -------
Deferred income tax liabilities(1)
Property related....................................... (395.7) 370.2)
Intangible drilling costs.............................. (26.9) (25.7)
Revenue deferral plan.................................. 19.6 --
Other.................................................. 6.4 5.1
------- -------
Total deferred income tax liabilities.......... (396.6) (390.8)
------- -------
Accumulated deferred income taxes.............. (330.7) (338.5)
======= =======
</TABLE>
- ---------------
(1) Certain property related assets and liabilities have been netted.
46
<PAGE> 206
The total income tax provisions differ from amounts computed by applying
the federal statutory tax rate to income before income taxes for the following
reasons:
<TABLE>
<CAPTION>
1994 1995 1993
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net income............................................... $186.1 $153.2 $150.3
Total income tax provision............................... 59.1 45.8 55.0
Preferred dividend requirements.......................... 3.6 3.6 3.6
------ ------ ------
Income before income taxes and preferred dividend
requirements........................................... $248.8 $202.6 $208.9
====== ====== ======
Income taxes on above at federal statutory rate of 35%... $ 87.1 $ 70.9 $ 73.1
Increase (Decrease) due to:
State income tax, net of federal income tax............ 8.2 4.0 6.7
Amortization of investment tax credits................. (5.3) (5.5) (5.6)
Non-conventional fuels tax credit...................... (20.6) (19.6) (16.6)
Equity portion of AFUDC................................ (4.9) (1.4) (.8)
Other.................................................. (5.4) (2.6) (1.8)
------ ------ ------
Total income tax provision..................... $ 59.1 $ 45.8 $ 55.0
====== ====== ======
Provision for income taxes as a percent of income before
income taxes........................................... 23.8% 22.6% 26.3%
====== ====== ======
</TABLE>
J. SEGMENT INFORMATION
TECO Energy's principal business segment is Energy Services. This segment
has been separated into two components: Regulated Electric Utility Services and
Other Energy Services which includes the transportation, coal mining, coalbed
methane gas and conventional gas and oil production, and independent power
generation subsidiaries. All other activities of TECO Energy have been included
in Other.
Identifiable assets are those assets used directly in a segment's
operations and are presented net of depreciation.
47
<PAGE> 207
<TABLE>
<CAPTION>
IDENTIFIABLE
INCOME ASSETS CAPITAL
FROM AT EXPENDITURES
REVENUES OPERATIONS DEPRECIATION DEC. 31. FOR THE YEAR
-------- ---------- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
1995
Regulated electric utility
services...................... $1,092.3 $ 229.5 $ 113.3 $ 2,566.7 $ 334.5
Other energy services............ 500.4 93.5(1) 61.1 838.3 95.8
Eliminations..................... (205.3) (8.2)(1) -- (86.1) --
-------- ------ ------ -------- ------
Energy services segment.......... 1,387.4 314.8 174.4 3,318.9 430.3
Other and eliminations........... 4.9 2.9 .3 154.5 2.4
-------- ------ ------ -------- ------
TECO Energy consolidated......... $1,392.3 $ 317.7 $ 174.7 $ 3,473.4 $ 432.7
======== ====== ====== ======== ======
1994
Regulated electric utility
services...................... $1,094.9 $ 204.5 $ 115.1 $ 2,348.7 $ 230.8
Other energy services............ 465.7 67.3(1) 58.6 803.2 78.0
Eliminations..................... (214.5) (6.9)(1) -- (19.8) --
-------- ------ ------ -------- ------
Energy services segment.......... 1,346.1 264.9 173.7 3,132.1 308.8
Other and eliminations........... 4.8 4.9 .3 180.1 .3
-------- ------ ------ -------- ------
TECO Energy consolidated......... $1,350.9 $ 269.8(2) $ 174.0 $ 3,312.2 $ 309.1
======== ====== ====== ======== ======
1993
Regulated electric utility
services...................... $1,041.3 $ 214.6 $ 111.9 $ 2,199.6 $ 205.6
Other energy services............ 470.5 75.2(1) 53.2 789.0 66.2
Eliminations..................... (231.4) (3.9)(1) -- (19.0) --
-------- ------ ------ -------- ------
Energy services segment.......... 1,280.4 285.9 165.1 2,969.6 271.8
Other and eliminations........... 3.5 4.6 .2 158.2 (1.2)
-------- ------ ------ -------- ------
TECO Energy consolidated......... $1,283.9 $ 290.5 $ 165.3 $ 3,127.8 $ 270.6
======== ====== ====== ======== ======
</TABLE>
- ---------------
(1) Income from operations includes non-conventional fuels tax credit of $20.6
million, $19.6 million and $16.6 million in 1995, 1994 and 1993,
respectively, and interest cost on the non-recourse debt related to
independent power operations of $12.4 million in 1995 and $12.7 million in
1994 and 1993. In the Consolidated Statements of Income, the tax credit is
part of the provision for income taxes and the interest is part of interest
expense.
(2) Income from operations includes the effect of a corporate restructuring
charge of $25 million. See Note H.
K. COMMITMENTS AND CONTINGENCIES
TECO Energy has made certain commitments in connection with its continuing
capital improvements program. TECO Energy estimates that capital expenditures
for ongoing businesses during 1996 will be about $260 million and approximately
$779 million for the years 1997 through 2000, excluding AFUDC.
Tampa Electric's capital expenditures are estimated to be $178 million for
1996 and $569 million for 1997 through 2000 for equipment and facilities to meet
customer growth and for construction of additional generating capacity to be
placed in service in 1996. Tampa Electric is building a 250-megawatt coal-
gasification plant (Polk Unit One) with a capital cost of about $450 million,
net of construction funding from the Department of Energy under its Clean Coal
Technology Program. Tampa Electric expects to spend $70 million to complete this
project in 1996. At the end of 1995, Tampa Electric had outstanding commitments
of approximately $72 million primarily for the construction of Polk Unit One. At
the diversified companies, future capital expenditures are estimated at $82
million for 1996 and $210 million for the years 1997 through
48
<PAGE> 208
2000, primarily for asset replacement and refurbishment at TECO Transport &
Trade and TECO Coal, and development of TECO Gas & Oil. This includes
commitments of about $12 million at the end of 1995.
L. QUARTERLY DATA (UNAUDITED)
Financial data by quarter is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1995
Revenues(1).............................. $319.1 $349.7 $389.1 $334.4
Income from operations(1).............. $ 66.0 $ 80.7 $107.1 $ 63.9
Net income(1).......................... $ 36.5 $ 46.4 $ 63.2 $ 40.0
Earnings per average common share...... $ .31 $ .40 $ .55 $ .34
Dividends paid per common share........ $.2525 $ .265 $ .265 $ .265
Stock price per common share(3)
High................................ $22 1/8 $22 3/4 $23 1/2 $25 3/4
Low................................. $20 $20 1/2 $21 1/4 $23 1/8
Close............................... $21 $22 $23 1/2 $25 5/8
1994
Revenues(1)............................ $306.7 $353.3 $366.6 $324.3
Income from operations(1).............. $ 59.9 $ 75.8 $ 94.7 $ 39.4 (2)
Net income(1).......................... $ 33.6 $ 41.9 $ 54.6 $ 23.1 (2)
Earnings per average common share...... $ .29 $ .36 $ .47 $ .20 (2)
Dividends paid per common share........ $ .24 $.2525 $.2525 $.2525
Stock price per common share(3)
High................................ $22 5/8 $20 7/8 $21 $21
Low................................. $19 1/8 $18 1/4 $18 1/8 $18 1/2
Close............................... $19 1/2 $19 1/8 $19 1/4 $20 1/4
</TABLE>
- ---------------
(1) Millions.
(2) Includes the effect of a corporate restructuring charge which reduced
operating income by $25 million, net income by $15 million and earnings per
share by $0.13. See Note H.
(3) Trading prices for common shares of TECO Energy, Inc.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the period Jan. 1, 1994 to the date of this report, TECO Energy has
not had and has not filed with the Commission a report as to any changes in or
disagreements with accountants on accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) The information required by Item 10 with respect to the directors of
the registrant is included under the caption "Election of Directors" on pages 1
through 4 of TECO Energy's definitive proxy statement, dated March 7, 1996,
(Proxy Statement) for its Annual Meeting of Shareholders to be held on April 17,
1996, and is incorporated herein by reference.
(b) The information required by Item 10 concerning executive officers of
the registrant is included under the caption "Executive Officers of the
Registrant" on page 15 of this report.
49
<PAGE> 209
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is included in the Proxy Statement
beginning with the "Summary Compensation Table" on page 9 and ending just before
the caption "Approval of the 1996 Equity Incentive Plan" on page 12 and under
the caption "Election of Directors -- Compensation of Directors" on page 4, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is included under the caption "Share
Ownership" on pages 4 through 5 of the Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is included under the caption "Election
of Directors" on page 4 of the Proxy Statement and is incorporated herein by
reference.
50
<PAGE> 210
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements -- See index on page 33.
2. Financial Statement Schedules -- See index on page 33.
3. Exhibits
<TABLE>
<C> <S>
*3.1 Articles of Incorporation, as amended on April 20, 1993 (Exhibit 3, Form 10-Q for
the quarter ended March 31, 1993 of TECO Energy, Inc.).
*3.2 Bylaws of the Company, as amended effective July 18, 1995 (Exhibit 3, Form 10-Q for
the quarter ended June 30, 1995 of TECO Energy, Inc.).
*4.1 Indenture of Mortgage among Tampa Electric Company, State Street Trust Company and
First Savings & Trust Company of Tampa, dated as of Aug. 1, 1946 (Exhibit 7-A to
Registration Statement No. 2-6693).
*4.2 Ninth Supplemental Indenture, dated as of April 1, 1966, to Exhibit 4.1 (Exhibit
4-k, Registration Statement No. 2-28417).
*4.3 Thirteenth Supplemental Indenture dated as of Jan. 1, 1974, to Exhibit 4.1 (Exhibit
2-g-1, Registration Statement No. 2-51204).
*4.4 Sixteenth Supplemental Indenture, dated as of Oct. 30, 1992, to Exhibit 4.1 (Exhibit
4.1, Form 10-Q for the quarter ended Sept. 30, 1992 of TECO Energy, Inc.).
*4.5 Eighteenth Supplemental Indenture, dated as of May 1, 1993, to Exhibit 4.1 (Exhibit
4.1, Form 10-Q for the quarter ended June 30, 1993 of TECO Energy, Inc.).
*4.6 Installment Purchase and Security Contract between the Hillsborough County
Industrial Development Authority and Tampa Electric Company, dated as of March 1,
1972 (Exhibit 4.9, Form 10-K for 1986 of TECO Energy, Inc.).
*4.7 First Supplemental Installment Purchase and Security Contract, dated as of Dec. 1,
1974 (Exhibit 4.10, Form 10-K for 1986 of TECO Energy, Inc.).
*4.8 Third Supplemental Installment Purchase Contract, dated as of May 1, 1976 (Exhibit
4.12, Form 10-K for 1986 of TECO Energy, Inc.).
*4.9 Installment Purchase Contract between the Hillsborough County Industrial Development
Authority and Tampa Electric Company, dated as of Aug. 1, 1981 (Exhibit 4.13, Form
10-K for 1986 of TECO Energy, Inc.).
*4.10 Amendment to Exhibit A of Installment Purchase Contract, dated April 7, 1983
(Exhibit 4.14, Form 10-K for 1989 of TECO Energy, Inc.).
*4.11 Second Supplemental Installment Purchase Contract, dated as of June 1, 1983 (Exhibit
4.11, Form 10-K for 1994 of TECO Energy, Inc.).
*4.12 Third Supplemental Installment Purchase Contract, dated as of Aug. 1, 1989 (Exhibit
4.16, Form 10-K for 1989 of TECO Energy, Inc.).
*4.13 Installment Purchase Contract between the Hillsborough County Industrial Development
Authority and Tampa Electric Company, dated as of Jan. 31, 1984 (Exhibit 4.13, Form
10-K for 1993 of TECO Energy, Inc.).
*4.14 First Supplemental Installment Purchase Contract, dated as of Aug. 2, 1984 (Exhibit
4.14, Form 10-K for 1994 of TECO Energy, Inc.).
*4.15 Second Supplemental Installment Purchase Contract, dated as of July 1, 1993 (Exhibit
4.3, Form 10-Q for the quarter ended June 30, 1993 of TECO Energy, Inc.).
*4.16 Loan and Trust Agreement among the Hillsborough County Industrial Development
Authority, Tampa Electric Company and NCNB National Bank of Florida, as trustee,
dated as of Sept. 24, 1990 (Exhibit 4.1, Form 10-Q for the quarter ended Sept. 30,
1990 for TECO Energy, Inc.).
</TABLE>
51
<PAGE> 211
<TABLE>
<C> <S>
*4.17 Loan and Trust Agreement, dated as of Oct. 26, 1992 among the Hillsborough County
Industrial Development Authority, Tampa Electric Company and NationsBank of Florida,
N.A., as trustee (Exhibit 4.2, Form 10-Q for the quarter ended Sept. 30, 1992 of
TECO Energy, Inc.).
*4.18 Loan and Trust Agreement, dated as of June 23, 1993, among the Hillsborough County
Industrial Development Authority, Tampa Electric Company and NationsBank of Florida,
N.A., as trustee (Exhibit 4.2, Form 10-Q for the quarter ended June 30, 1993 of TECO
Energy, Inc.).
*4.19 Installment Sales Agreement between the Plaquemines Port, Harbor and Terminal
District (Louisiana) and Electro-Coal Transfer Corporation, dated as of Sept. 1,
1985 (Exhibit 4.19, Form 10-K for 1986 of TECO Energy, Inc.).
*4.20 Reimbursement Agreement between TECO Energy, Inc. and Electro-Coal Transfer
Corporation, dated as of March 22, 1989 (Exhibit 4.19, Form 10-K for 1988 of TECO
Energy, Inc.).
*4.21 Rights Agreement between TECO Energy, Inc. and The First National Bank of Boston, as
Rights Agent, dated as of April 27, 1989 (Exhibit 4, Form 8-K, dated as of May 2,
1989 of TECO Energy, Inc.).
*4.22 Amendment No. 1 to Rights Agreement dated as of July 20, 1993 between TECO Energy,
Inc. and The First National Bank of Boston, as Rights Agent (Exhibit 1.2, Form
8-A/A, dated as of July 27, 1993 of TECO Energy, Inc.).
*10.1 1980 Stock Option and Appreciation Rights Plan, as amended on July 18, 1989 (Exhibit
28.1, Form 10-Q for quarter ended June 30, 1989 of TECO Energy, Inc.).
*10.2 Directors' Retirement Plan, as amended effective July 1, 1995 (Exhibit 10.1, Form
10-Q for quarter ended June 30, 1995 of TECO Energy, Inc.).
*10.3 Supplemental Executive Retirement Plan for H. L. Culbreath, as amended on April 27,
1989 (Exhibit 10.14, Form 10-K for 1989 of TECO Energy, Inc.).
*10.4 Supplemental Executive Retirement Plan for T. L. Guzzle, as amended on July 20, 1993
(Exhibit 10.1, Form 10-Q for the quarter ended Sept. 30, 1993 of TECO Energy, Inc.),
as further amended by the First Amendment to TECO Energy Group Supplemental
Executive Retirement Plan for T.L. Guzzle, effective as of Oct. 1, 1994 (Exhibit
10.4, Form 10-K for 1994 of TECO Energy, Inc.).
*10.5 Supplemental Executive Retirement Plan for R. H. Kessel, dated as of Dec. 4, 1989
(Exhibit 10.16, Form 10-K for 1989 of TECO Energy, Inc.), as amended by the First
Amendment to TECO Energy Group Supplemental Executive Retirement Plan for R.H.
Kessel, effective as of Oct. 1, 1994 (Exhibit 10.5, Form 10-K for 1994 of TECO
Energy, Inc.).
*10.6 TECO Energy Group Supplemental Executive Retirement Plan, as amended on July 18,
1989 (Exhibit 10.17, Form 10-K for 1989 of TECO Energy, Inc.), as further amended by
the First Amendment to TECO Energy Group Supplemental Executive Retirement Plan,
effective as of Oct. 1, 1994 (Exhibit 10.6, Form 10-K for 1994 of TECO Energy,
Inc.).
*10.7 TECO Energy, Inc. Group Supplemental Retirement Benefits Trust Agreement Amendment
and Restatement, effective July 17, 1995, (Exhibit 10.2, Form 10-Q for the quarter
ended June 30, 1995 of TECO Energy, Inc.).
*10.8 Terms of R. H. Kessel's Employment, dated as of Dec. 1, 1989 (Exhibit 10.20, Form
10-K for 1989 of TECO Energy, Inc.).
*10.9 Annual Incentive Compensation Plan for TECO Energy and subsidiaries, as revised
January 1993 (Exhibit 10.2, Form 10-Q for quarter ended March 31, 1994 of TECO
Energy, Inc.).
*10.10 TECO Energy, Inc. Group Supplemental Disability Income Plan, dated as of March 20,
1989 (Exhibit 10.22, Form 10-K for 1988 of TECO Energy, Inc.).
10.11 Forms of Severance Agreement between TECO Energy, Inc. and certain senior
executives, as amended and restated as of March 20, 1996.
</TABLE>
52
<PAGE> 212
<TABLE>
<C> <S>
*10.12 Severance Agreement between TECO Energy, Inc. and H.L. Culbreath, dated as of April
28, 1989 (Exhibit 10.24, Form 10-K for 1989 of TECO Energy, Inc.).
*10.13 Loan and Stock Purchase Agreement between TECO Energy, Inc. and Barnett Banks Trust
Company, N.A., as trustee of the TECO Energy Group Savings Plan Trust Agreement
(Exhibit 10.3, Form 10-Q for the quarter ended March 31, 1990 for TECO Energy,
Inc.).
*10.14 TECO Energy, Inc. 1990 Equity Incentive Plan (Exhibit 10.1, Form 10-Q for the
quarter ended March 31, 1990 of TECO Energy, Inc.)
*10.15 TECO Energy, Inc. 1991 Director Stock Option Plan as amended on Jan. 21, 1992
(Exhibit 10.26, Form 10-K for 1991 of TECO Energy, Inc.).
*10.16 Supplemental Executive Retirement Plan for A.D. Oak, as amended on July 20, 1993
(Exhibit 10.2, Form 10-Q for the quarter ended Sept. 30, 1993 of TECO Energy, Inc.),
as further amended by the First Amendment to TECO Energy Group Supplemental
Executive Retirement Plan for A. D. Oak, effective as of Oct. 1, 1994 (Exhibit
10.16, Form 10-K for 1994 of TECO Energy, Inc.).
*10.17 Supplemental Executive Retirement Plan for K.S. Surgenor, as amended on July 20,
1993 (Exhibit 10.3, Form 10-Q for the quarter ended Sept. 30, 1993 of TECO Energy,
Inc.), as further amended by the First Amendment to TECO Energy Group Supplemental
Executive Retirement Plan for K.S. Surgenor, effective as of Oct. 1, 1994 (Exhibit
10.17, Form 10-K for 1994 of TECO Energy, Inc.).
*10.18 Terms of T.L. Guzzle's employment, dated as of July 20, 1993 (Exhibit 10, Form 10-Q
for the quarter ended June 30, 1993 of TECO Energy, Inc.).
*10.19 Supplemental Executive Retirement Plan for G.F. Anderson (Exhibit 10.4, Form 10-Q
for the quarter ended Sept. 30, 1993 of TECO Energy, Inc.), as amended by the First
Amendment to TECO Energy Group Supplemental Executive Retirement Plan for G.F.
Anderson, effective as of Oct. 1, 1994 (Exhibit 10.19, Form 10-K for 1994 of TECO
Energy, Inc.).
*10.20 TECO Energy Directors' Deferred Compensation Plan, as amended and restated effective
April 1, 1994 (Exhibit 10.1, Form 10-Q for the quarter ended March 31, 1994 for TECO
Energy, Inc.).
*10.21 TECO Energy Group Retirement Savings Excess Benefit Plan, as amended and restated
effective Aug. 1, 1994 (Exhibit 10.21, Form 10-K for 1994 of TECO Energy, Inc.).
*10.22 Supplemental Executive Retirement Plan for R. A. Dunn, dated as of July 17, 1995
(Exhibit 10.3, Form 10-Q for the quarter ended June 30, 1995 of TECO Energy, Inc.).
11. Computation of earnings per common share.
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
24.1 Power of Attorney.
24.2 Certified copy of resolution authorizing Power of Attorney.
27. Financial Data Schedule (EDGAR filing only).
</TABLE>
- ---------------
* Indicates exhibit previously filed with the Securities and Exchange Commission
and incorporated herein by reference. Exhibits filed with periodic reports of
TECO Energy, Inc. were filed under Commission File No. 1-8180.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibits 10.1 through 10.12 and 10.14 through 10.22 above are management
contracts or compensatory plans or arrangements in which executive officers or
directors of TECO Energy, Inc. participate.
Certain instruments defining the rights of holders of long-term debt of
TECO Energy, Inc. and its consolidated subsidiaries authorizing in each case a
total amount of securities not exceeding 10 percent of total assets on a
consolidated basis are not filed herewith. TECO Energy, Inc. will furnish copies
of such instruments to the Securities and Exchange Commission upon request.
53
<PAGE> 213
(b) TECO Energy, Inc. filed no reports on Form 8-K during the last quarter
of 1995.
The registrant filed a Current Report on Form 8-K dated Jan. 4, 1996
reporting under "Item 5. Other Events" on a proposed agency action by the FPSC
relating to the deferral in 1996 of revenues at Tampa Electric under certain
circumstances.
The registrant filed a Current Report on Form 8-K dated Feb. 13, 1996
reporting under "Item 5. Other Events" on the filings with the FPSC by the
Office of Public Counsel and the Florida Industrial Power Users Group, which
protest the FPSC's order of proposed agency action on the deferral in 1996 of
Tampa Electric revenues under certain circumstances.
The registrant filed a Current Report on Form 8-K dated March 25, 1996
reporting under "Item 5. Other Events" the agreement among Tampa Electric, the
Office of Public Counsel and the Florida Industrial Power Users Group on a
multi-year base rate freeze, revenue deferral and refund plan for Tampa
Electric.
54
<PAGE> 214
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
March, 1996.
TECO ENERGY, INC.
By T. L. GUZZLE*
------------------------------------
T. L. GUZZLE, Chairman of the Board,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on March 28, 1996:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ -----------------
<S> <C> <C> <C>
T. L. GUZZLE* Chairman of the Board, Director and Chief Executive Officer
- ------------------------------ (Principal Executive Officer)
T. L. GUZZLE
/s/ A. D. OAK Senior Vice President -- Finance and Chief Financial Officer
- ------------------------------ (Principal Financial and Accounting Officer)
A. D. OAK
G. F. ANDERSON* President, Director and Chief Operating Officer
- ------------------------------
G. F. ANDERSON
C. D. AUSLEY* Director W. P. SOVEY* Director
- ------------------------------ ------------------------------
C. D. AUSLEY W. P. SOVEY
S. L. BALDWIN* Director J. T. TOUCHTON* Director
- ------------------------------ ------------------------------
S. L. BALDWIN J. T. TOUCHTON
H. L. CULBREATH* Director J. A. URQUHART* Director
- ------------------------------ ------------------------------
H. L. CULBREATH J. A. URQUHART
J. L. FERMAN, JR.* Director J. O. WELCH, JR.* Director
- ------------------------------ ------------------------------
J. L. FERMAN, JR. J. O. WELCH, JR.
E. L. FLOM* Director
- ------------------------------
E. L. FLOM
H. R. GUILD, JR.* Director
- ------------------------------
H. R. GUILD, JR.
</TABLE>
55
<PAGE> 215
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ -----------------
<S> <C>
D. R. HENDRIX* Director
- ------------------------------
D. R. HENDRIX
R. L. RYAN* Director
- ------------------------------
R. L. RYAN
*By: /s/ A. D. OAK
-------------------------
A. D. OAK,
Attorney-in-fact
</TABLE>
56
<PAGE> 216
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
------------ TO
------------
COMMISSION FILE NUMBER 1-8180
TECO ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
FLORIDA 59-2052286
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
702 NORTH FRANKLIN STREET, TAMPA, FLORIDA 33602
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (813) 228-4111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
Number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date (April 30, 1996):
Common Stock, $1 Par Value 117,101,052
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 217
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial
statements include all adjustments (none of which were other than normal and
recurring) necessary to present fairly the results for the three-month periods
ended March 31, 1996 and 1995. Reference should be made to the explanatory notes
affecting the income and balance sheet accounts contained in TECO Energy, Inc.'s
Annual Report on Form 10-K for the year ended Dec. 31, 1995 and to the notes on
page 6 of this report.
2
<PAGE> 218
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $ 13,748 $ 10,259
Short-term investments............................................ 32,761 32,176
Receivables, less allowance for uncollectibles.................... 161,081 163,536
Inventories, at average cost
Fuel........................................................... 60,274 76,737
Materials and supplies......................................... 51,718 48,984
Prepayments....................................................... 7,982 9,574
---------- ----------
327,564 341,266
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
Utility plant in service.......................................... 3,207,348 3,174,526
Construction work in progress..................................... 498,870 479,586
Other property.................................................... 839,594 836,411
---------- ----------
4,545,812 4,490,523
Accumulated depreciation.......................................... (1,651,916) (1,616,231)
---------- ----------
2,893,896 2,874,292
---------- ----------
OTHER ASSETS
Other investments................................................. 84,823 86,277
Deferred income taxes............................................. 70,422 65,906
Deferred charges and other assets................................. 105,745 105,626
---------- ----------
260,990 257,809
---------- ----------
$3,482,450 $3,473,367
========== ==========
LIABILITIES AND CAPITAL
CURRENT LIABILITIES
Long-term debt due within one year................................ $ 31,618 $ 31,327
Notes payable..................................................... 337,680 361,340
Accounts payable.................................................. 98,803 146,313
Customer deposits................................................. 52,147 51,273
Interest accrued.................................................. 23,994 13,297
Taxes accrued..................................................... 40,218 11,731
---------- ----------
584,460 615,281
DEFERRED INCOME TAXES............................................... 394,673 396,624
INVESTMENT TAX CREDITS.............................................. 60,056 61,347
REGULATORY LIABILITY-TAX RELATED.................................... 43,984 47,558
OTHER DEFERRED CREDITS.............................................. 164,655 136,092
LONG-TERM DEBT, LESS AMOUNT DUE WITHIN ONE YEAR..................... 995,802 994,856
PREFERRED STOCK OF TAMPA ELECTRIC................................... 54,956 54,956
COMMON EQUITY
Common equity -- 400 million shares authorized, $1 par
value -- issued and outstanding 116,975,525 in 1996 and
116,731,681 in 1995............................................ 1,257,026 1,240,887
Unearned compensation related to ESOP............................. (73,162) (74,234)
---------- ----------
$3,482,450 $3,473,367
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 219
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
REVENUES............................................................. $341,141 $319,134
-------- --------
EXPENSES
Operation.......................................................... 177,070 155,421
Maintenance........................................................ 20,903 23,934
Depreciation....................................................... 44,963 44,597
Taxes, other than income........................................... 30,056 29,135
-------- --------
272,992 253,087
-------- --------
INCOME FROM OPERATIONS............................................... 68,149 66,047
-------- --------
OTHER INCOME
Allowance for other funds used during construction................. 5,019 1,799
Other income, net.................................................. 1,410 192
Preferred dividend requirements of Tampa Electric.................. (892) (892)
-------- --------
5,537 1,099
-------- --------
INCOME BEFORE INTEREST AND INCOME TAXES.............................. 73,686 67,146
-------- --------
INTEREST CHARGES
Interest expense................................................... 22,670 21,685
Allowance for borrowed funds used during construction.............. (2,051) (1,084)
-------- --------
20,619 20,601
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES............................. 53,067 46,545
PROVISION FOR INCOME TAXES........................................... 11,558 10,041
-------- --------
NET INCOME........................................................... $ 41,509 $ 36,504
======== ========
AVERAGE SHARES OUTSTANDING........................................... 116,889 116,266
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING........................ $ 0.36 $ 0.31
======== ========
DIVIDENDS PER COMMON SHARE OUTSTANDING............................... $ 0.265 $ 0.2525
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 220
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME........................................................... $ 41,509 $ 36,504
Adjustments to reconcile net income to net cash:
Depreciation.................................................... 44,963 44,597
Deferred income taxes........................................... (10,883) (3,229)
Investment tax credits, net..................................... (1,309) (1,334)
Allowance for funds used during construction.................... (7,070) (2,883)
Amortization of unearned compensation related to ESOP........... 1,072 1,232
Revenue reduction............................................... 20,869 7,421
Deferred recovery clause........................................ 1,365 (5,857)
Amortization of coal contract buyout............................ 676 --
Receivables, less allowance for uncollectibles.................. 2,455 15,493
Inventories..................................................... 13,729 (7,169)
Taxes accrued................................................... 28,487 16,328
Interest accrued................................................ 10,697 5,730
Accounts payable................................................ (47,510) (34,619)
Other........................................................... 8,582 2,607
--------- ---------
107,632 74,821
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................... (64,938) (102,113)
Allowance for funds used during construction....................... 7,070 2,883
Investment in short-term investments............................... (585) 69,658
Other non-current investments...................................... 2,879 308
--------- ---------
(55,574) (29,264)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock....................................................... 4,888 2,725
Proceeds from long-term debt....................................... 3,058 620
Repayment of long-term debt........................................ (1,880) (2,486)
Net decrease in short-term debt.................................... (23,660) (40,985)
Dividends.......................................................... (30,975) (29,346)
--------- ---------
(48,569) (69,472)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 3,489 (23,915)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................... 10,259 35,797
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 13,748 $ 11,882
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 221
NOTES TO FINANCIAL STATEMENTS
A. TECO Energy, Inc. and its subsidiaries have made certain commitments in
connection with their continuing capital improvement program and estimate that
capital expenditures, excluding allowance for funds used during construction
(AFUDC), during 1996 will be as follows:
<TABLE>
<CAPTION>
MILLIONS
--------
<S> <C>
Tampa Electric Company...................................... $178
TECO Coalbed Methane, Inc. ................................. 3
TECO Coal Corporation....................................... 5
TECO Gas & Oil, Inc......................................... 28
TECO Properties Corporation................................. 1
TECO Transport & Trade Corporation.......................... 37
----
$252
====
</TABLE>
B. During the first quarter of 1996, Tampa Electric recognized a $21
million revenue reduction pursuant to a multi-year base rate freeze, revenue
deferral and refund plan which the Florida Public Service Commission (FPSC)
voted to approve in April 1996. Tampa Electric deferred $7 million during the
first quarter of last year in accordance with a plan approved by the FPSC for
1995. The revenue reductions totaling $70 million recorded under the plans in
1995 and 1996 are included in other deferred credits on the balance sheet. See
additional discussion on page 10.
C. On April 29, 1996, Tampa Electric retired $35 million aggregate par
value of 8.00% Series E and 7.44% Series F preferred stock at redemption prices
of $102.00 and $101.00 per share, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
THREE MONTHS ENDED MARCH 31, 1996:
Net income of $41.5 million in the first quarter of 1996 was $5.0 million
or 14 percent higher than 1995's first quarter due primarily to favorable gas
prices at TECO Coalbed Methane and the onset of operations at TECO Power
Services' independent power project in Guatemala. In addition, Tampa Electric's
capitalized financing costs (AFUDC), primarily associated with the investment in
the Polk Power Station currently under construction, increased to $7.1 million
from $2.9 million for the same period last year.
Consolidated operating income was up 3 percent from 1995's first quarter
due to strong performances by TECO Coalbed Methane and TECO Power Services which
more than offset the decline in Tampa Electric's operating income.
6
<PAGE> 222
The following table identifies the unconsolidated revenues and operating
income of TECO Energy's significant operating groups.
CONTRIBUTIONS BY OPERATING GROUP (UNCONSOLIDATED)
<TABLE>
<CAPTION>
REVENUES
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric......................................... $254,746 $253,796
Diversified companies.................................. $132,533 $114,603
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric......................................... $ 43,468 $ 45,880
Diversified companies*................................. $ 27,011 $ 21,599
</TABLE>
- ---------------
* Operating income includes items which are reclassified for consolidated
financial statement purposes. The principal items are the non-conventional
fuels tax credit related to coalbed methane production and interest expense of
the non-recourse debt related to independent power operations, both of which
are included in operating income for the diversified companies. In the
Consolidated Statements of Income, the tax credit is part of the provision for
income taxes and the interest is part of interest expense.
Tampa Electric's first-quarter operating income of $43.5 million was 6
percent lower than in 1995. The 1996 results were net of a $21-million revenue
reduction which included $15-million of a $25-million refund and a $6-million
revenue deferral. This reduction was in accordance with a FPSC-approved plan
described on page 10. Operating income last year was net of a $7-million revenue
deferral in accordance with 1995's FPSC-approved regulatory plan.
Tampa Electric's revenues for the quarter increased slightly due to higher
energy sales. Retail energy sales increased 10 percent reflecting cooler than
normal temperatures, customer growth of more than 2 percent and a strong local
economy. Energy sales to other utilities were 13 percent higher than in 1995,
driven by lower coal prices at Gannon Station and weather.
Tampa Electric's total operating expenses for the first quarter were 2
percent higher than in 1995. The increase was primarily due to higher fuel
expense resulting from higher energy sales, partially offset by lower
operation-other and maintenance expenses reflecting aggressive cost management
efforts.
Unconsolidated operating income from TECO Energy's diversified companies
increased 25 percent to $27.0 million on revenues of $132.5 million.
Favorable gas prices improved TECO Coalbed Methane's operating income,
which increased over 1995 even though last year's results included a
$4.2-million gain from a gas contract termination settlement.
The Alborada Power Station in Guatemala, which began commercial operation
in the third quarter of 1995, accounted for improved results at TECO Power
Services.
TECO Transport & Trade and TECO Coal continued to increase third-party
volumes even though operations were adversely affected by winter weather.
Consolidated interest expense before the allowance for borrowed funds used
during construction was up 5 percent due to higher levels of short-term debt,
partially offset by lower short-term rates.
Liquidity, Capital Resources and Changes in Financial Condition
Tampa Electric recognized a $21-million revenue reduction during the first
quarter of 1996 pursuant to a multi-year base rate freeze, revenue deferral and
refund plan. The plan is an agreement between Tampa Electric, the Office of
Public Counsel and the Florida Industrial Power Users Group which covers the
years
7
<PAGE> 223
1996 through 1998. A more complete description of the plan, which the FPSC voted
to approve on April 30, 1996, is contained in TECO Energy's Annual Report on
Form 10-K for the year ended Dec. 31, 1995.
TECO Gas & Oil's joint venture, which held 13 lease blocks in the shallow
gulf waters off Texas and Louisiana in 1995, has successfully bid for nine
additional blocks at the April 1996 federal auction.
Fuel inventory declined because of increased energy sales and as a result
of winter weather conditions which affected the transportation of coal to Tampa
Electric's facilities.
The increase in other deferred credits reflected the refund accrual and
revenue deferral at Tampa Electric related to the FPSC-approved regulatory plan.
Taxes accrued increased primarily because of the timing of federal income
tax and property tax payments at Tampa Electric.
8
<PAGE> 224
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on April 17, 1996, the
shareholders of TECO Energy, Inc. elected six directors and voted to approve the
1996 Equity Incentive Plan. The votes were as follows:
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Election of Directors
DuBose Ausley.................................... 99,621,255 2,687,141
James L. Ferman, Jr. ............................ 100,359,010 1,949,386
Dennis R. Hendrix................................ 100,529,197 1,779,199
Robert L. Ryan................................... 100,539,317 1,769,079
William P. Sovey................................. 100,456,573 1,851,823
James O. Welch, Jr. ............................. 100,456,636 1,851,760
1996 Equity Incentive Plan....................... 85,140,964 14,998,382 2,169,049 8,690,954
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 TECO Energy, Inc. 1996 Equity Incentive Plan.
11. Computation of earnings per common share.
27. Financial data schedule. (EDGAR filing only)
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K dated January 4, 1996
reporting under "Item 5. Other Events" on a proposed agency action by the
Florida Public Service Commission.
The registrant filed a Current Report on Form 8-K dated February 13, 1996
reporting under "Item 5. Other Events" on the protest of Florida Public Service
Commission's proposed agency action by the Office of Public Counsel and the
Florida Industrial Power Users Group.
The registrant filed a Current Report on Form 8-K dated March 25, 1996
reporting under "Item 5. Other Events" on the agreement between Tampa Electric,
the Office of Public Counsel and the Florida Industrial Power Users Group on a
multi-year base rate freeze, revenue deferral and refund plan for Tampa
Electric.
9
<PAGE> 225
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECO ENERGY, INC.
--------------------------------------
(Registrant)
Date: May 14, 1996 By: /s/ A. D. OAK
------------------------------------
A. D. Oak
Senior Vice
President -- Finance,
and Chief Financial Officer
(Principal Accounting Officer)
10
<PAGE> 226
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS PAGE NO.
- ----------- ----------------------------------------------------------------------- --------
<C> <S> <C>
10.1 TECO Energy, Inc. 1996 Equity Incentive Plan........................... 14
11. Computation of earnings per common share............................... 20
27. Financial data schedule (EDGAR filing only)............................ --
</TABLE>
11
<PAGE> 227
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
------------ TO
------------
COMMISSION FILE NUMBER 1-8180
TECO ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
FLORIDA 59-2052286
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
702 NORTH FRANKLIN STREET, TAMPA, FLORIDA 33602
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (813) 228-4111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
Number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date (July 31, 1996):
Common Stock, $1 Par Value 117,244,327
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 228
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial
statements include all adjustments (none of which were other than normal and
recurring) necessary to present fairly the results for the three-month and
six-month periods ended June 30, 1996 and 1995. Reference should be made to the
explanatory notes affecting the income and balance sheet accounts contained in
TECO Energy, Inc.'s Annual Report on Form 10-K for the year ended Dec. 31, 1995
and to the notes on page 7 of this report.
2
<PAGE> 229
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................... $ 9,751 $ 10,259
Short-term investments.......................................... 33,244 32,176
Receivables, less allowance for uncollectibles.................. 173,278 163,536
Inventories, at average cost
Fuel......................................................... 65,117 76,737
Materials and supplies....................................... 53,545 48,984
Prepayments..................................................... 11,128 9,574
---------- ----------
346,063 341,266
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
Utility plant in service........................................ 3,233,395 3,174,526
Construction work in progress................................... 529,843 479,586
Other property.................................................. 848,249 836,411
---------- ----------
4,611,487 4,490,523
Accumulated depreciation........................................ (1,685,702) (1,616,231)
---------- ----------
2,925,785 2,874,292
---------- ----------
OTHER ASSETS
Other investments............................................... 85,131 86,277
Deferred income taxes........................................... 73,276 65,906
Deferred charges and other assets............................... 103,965 105,626
---------- ----------
262,372 257,809
---------- ----------
$ 3,534,220 $ 3,473,367
========== ==========
LIABILITIES AND CAPITAL
CURRENT LIABILITIES
Long-term debt due within one year.............................. $ 48,721 $ 31,327
Notes payable................................................... 421,730 361,340
Accounts payable................................................ 146,709 146,313
Customer deposits............................................... 52,713 51,273
Interest accrued................................................ 15,327 13,297
Taxes accrued................................................... 15,208 11,731
---------- ----------
700,408 615,281
DEFERRED INCOME TAXES............................................. 407,394 396,624
INVESTMENT TAX CREDITS............................................ 58,804 61,347
REGULATORY LIABILITY-TAX RELATED.................................. 40,175 47,558
OTHER DEFERRED CREDITS............................................ 150,359 136,092
LONG-TERM DEBT, LESS AMOUNT DUE WITHIN ONE YEAR................... 952,148 994,856
PREFERRED STOCK OF TAMPA ELECTRIC................................. 19,960 54,956
COMMON EQUITY
Common equity -- 400 million shares authorized, $1 par
value -- issued and outstanding 117,223,044 in 1996 and
116,731,681 in 1995.......................................... 1,278,607 1,240,887
Unearned compensation........................................... (73,635) (74,234)
---------- ----------
$ 3,534,220 $ 3,473,367
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 230
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
REVENUES............................................................... $361,475 $349,699
-------- --------
EXPENSES
Operation............................................................ 182,445 169,618
Maintenance.......................................................... 23,944 25,859
Depreciation......................................................... 45,435 44,611
Taxes, other than income............................................. 29,009 28,876
-------- --------
280,833 268,964
-------- --------
INCOME FROM OPERATIONS................................................. 80,642 80,735
-------- --------
OTHER INCOME
Allowance for other funds used during construction................... 5,425 2,521
Other income, net.................................................... 81 266
Preferred dividend requirements of Tampa Electric.................... (435) (892)
-------- --------
5,071 1,895
-------- --------
INCOME BEFORE INTEREST AND INCOME TAXES................................ 85,713 82,630
-------- --------
INTEREST CHARGES
Interest expense..................................................... 23,459 22,732
Allowance for borrowed funds used during construction................ (2,217) (1,519)
-------- --------
21,242 21,213
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES............................... 64,471 61,417
PROVISION FOR INCOME TAXES............................................. 16,168 15,037
-------- --------
NET INCOME............................................................. $ 48,303 $ 46,380
======== ========
AVERAGE SHARES OUTSTANDING............................................. 117,126 116,395
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING.......................... $ 0.41 $ 0.40
======== ========
DIVIDENDS PER COMMON SHARE OUTSTANDING................................. $ 0.28 $ 0.265
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 231
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
REVENUES............................................................. $702,616 $668,833
-------- --------
EXPENSES
Operation.......................................................... 359,515 325,039
Maintenance........................................................ 44,847 49,793
Depreciation....................................................... 90,398 89,208
Taxes, other than income........................................... 59,065 58,011
-------- --------
553,825 522,051
-------- --------
INCOME FROM OPERATIONS............................................... 148,791 146,782
-------- --------
OTHER INCOME
Allowance for other funds used during construction................. 10,444 4,320
Other income, net.................................................. 1,491 458
Preferred dividend requirements of Tampa Electric.................. (1,327) (1,784)
-------- --------
10,608 2,994
-------- --------
INCOME BEFORE INTEREST AND INCOME TAXES.............................. 159,399 149,776
-------- --------
INTEREST CHARGES
Interest expense................................................... 46,129 44,417
Allowance for borrowed funds used during construction.............. (4,268) (2,603)
-------- --------
41,861 41,814
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES............................. 117,538 107,962
PROVISION FOR INCOME TAXES........................................... 27,726 25,078
-------- --------
NET INCOME........................................................... $ 89,812 $ 82,884
======== ========
AVERAGE SHARES OUTSTANDING........................................... 117,012 116,331
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING........................ $ 0.77 $ 0.71
======== ========
DIVIDENDS PER COMMON SHARE OUTSTANDING............................... $ 0.545 $ 0.5175
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 232
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME........................................................... $ 89,812 $ 82,884
Adjustments to reconcile net income to net cash:
Depreciation.................................................... 90,398 89,208
Deferred income taxes........................................... (3,982) (14,215)
Investment tax credits, net..................................... (2,543) (2,649)
Allowance for funds used during construction.................... (14,712) (6,923)
Amortization of unearned compensation........................... 2,485 2,609
Revenue reduction............................................... 29,928 16,822
Deferred recovery clause........................................ 1,296 (13,205)
Amortization of coal contract buyout............................ 1,352 676
Receivables, less allowance for uncollectibles.................. (9,742) (8,363)
Inventories..................................................... 7,059 13,609
Taxes accrued................................................... 3,477 34,012
Interest accrued................................................ 2,030 (2,681)
Accounts payable................................................ (24,604) (32,324)
Other........................................................... 8,236 6,471
---------- ----------
180,490 165,931
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................... (142,293) (242,066)
Allowance for funds used during construction....................... 14,712 6,923
Investment in short-term investments............................... (1,068) 69,359
Other non-current investments...................................... 2,937 15,286
---------- ----------
(125,712) (150,498)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock....................................................... 9,016 5,443
Proceeds from long-term debt....................................... 3,058 620
Repayment of long-term debt........................................ (28,492) (3,765)
Net increase in short-term debt.................................... 60,390 32,455
Redemption of preferred stock, including premium................... (35,496) --
Dividends.......................................................... (63,762) (60,178)
---------- ----------
(55,286) (25,425)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................ (508) (9,992)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................... 10,259 35,797
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 9,751 $ 25,805
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 233
NOTES TO FINANCIAL STATEMENTS
A. TECO Energy, Inc. and its subsidiaries have made certain commitments in
connection with their continuing capital improvement program and estimate that
capital expenditures, excluding allowance for funds used during construction
(AFUDC), during 1996 will be as follows:
<TABLE>
<CAPTION>
MILLIONS
--------
<S> <C>
Tampa Electric Company $179
TECO Gas & Oil, Inc. 27
TECO Transport & Trade Corporation 30
Other diversified businesses 9
----
$245
====
</TABLE>
B. During the first half of 1996, Tampa Electric recognized $30-million of
revenue deferrals and refunds pursuant to a multi-year base rate freeze, revenue
deferral and refund plan (the 1996 Plan) which the Florida Public Service
Commission (FPSC) approved in a final order on May 20, 1996. Tampa Electric
deferred $17 million during the first six months last year in accordance with
another plan (the 1995 Plan) approved by the FPSC for 1995. A total of $81
million of revenues has been recorded on the balance sheet under the plans in
1995 and 1996, of which $56 million is included in other deferred credits. The
remaining $25 million is classified in accounts payable to reflect the refund to
customers beginning Oct. 1, 1996.
C. On April 29, 1996, Tampa Electric retired $35 million aggregate par
value of 8.00% Series E and 7.44% Series F preferred stock at redemption prices
of $102.00 and $101.00 per share, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
THREE MONTHS ENDED JUNE 30, 1996:
Net income of $48.3 million in the second quarter of 1996 was $1.9 million
or 4 percent higher than in 1995's second quarter due to higher capitalized
financing costs (AFUDC) at Tampa Electric, the operation of TECO Power Services'
Alborada Power Station in Guatemala, higher volumes at TECO Transport & Trade
and strong gas prices at TECO Coalbed Methane.
Consolidated operating income was unchanged from 1995's second quarter as
improved results at TECO Transport & Trade, TECO Coalbed Methane and TECO Power
Services were offset by lower operating income at TECO Coal and expenses related
to the development of TECO Gas & Oil and TeCom. Second quarter results in 1995
included a $1.3 million gain on the sale of an apartment complex by TECO
Properties.
7
<PAGE> 234
The following table identifies the unconsolidated revenues and operating
income of TECO Energy's significant operating groups.
CONTRIBUTIONS BY OPERATING GROUP (UNCONSOLIDATED)
<TABLE>
<CAPTION>
REVENUES
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric................................. $272,418 $279,094
Diversified companies.......................... $140,787 $122,193
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric................................. $ 59,771 $ 60,439
Diversified companies*......................... $ 22,389 $ 22,322
</TABLE>
- ---------------
* Operating income includes items that are reclassified for consolidated
financial statement purposes. The principal items are the non-conventional
fuels tax credit related to coalbed methane production and interest expense of
the non-recourse debt related to independent power operations, both of which
are included in operating income for the diversified companies. In the
Consolidated Statements of Income, the tax credit is part of the provision for
income taxes and the interest is part of interest expense.
Tampa Electric's second-quarter operating income of $59.8 million was 1
percent lower than in 1995 due to lower revenues. Both the 1996 and 1995 results
were net of $9-million of revenue deferrals in accordance with FPSC-approved
plans.
Tampa Electric's revenues for the quarter decreased 2 percent due to lower
fuel charges to the customer and the elimination of the oil backout recovery
clause as part of the 1995 Plan. In the absence of this elimination, the oil
backout recovery clause would have contributed $3 million in revenues for the
quarter.
Retail energy sales were essentially unchanged. Energy sales in 1996 were
favorably impacted by customer growth of 2 percent while warmer weather
favorably affected energy sales in 1995.
Tampa Electric's total operating expenses for the second quarter were 3
percent lower than in 1995. The decrease was primarily due to lower fuel expense
from effective coal contract administration and lower maintenance expense from
continued cost control efforts throughout the company.
Unconsolidated operating income for TECO Energy's diversified companies was
slightly higher at $22.4 million on revenues of $140.8 million.
TECO Transport & Trade increased operating income with higher volumes which
more than offset higher fuel costs.
TECO Coal's operating income decreased due to higher deep mine production
costs and lower volumes to Tampa Electric. These results were partially offset
by increased third-party sales at the company's newer mines.
Favorable gas prices continued to contribute to increased operating income
at TECO Coalbed Methane.
The Alborada Power Station in Guatemala, which began commercial operation
in the third quarter of 1995, provided improved results at TECO Power Services.
Diversified results in 1996 also included expenses related to the continued
development of TECO Gas & Oil and TeCom. TECO Gas & Oil participates through
joint ventures in the exploration and production of conventional gas and oil in
the shallow waters of the Gulf of Mexico. TeCom is marketing an advanced energy
management and communications system for residential and commercial
applications.
Consolidated interest expense before the allowance for borrowed funds used
during construction was up 3 percent due to higher levels of short-term debt at
Tampa Electric, interest accrued on the revenue deferrals and the effect of the
expiration of an interest rate swap agreement.
8
<PAGE> 235
Total AFUDC increased in 1996 to $8 million from $4 million in 1995 with
additional investment in Tampa Electric's Polk Power Station which is scheduled
for commercial operation in the fourth quarter of 1996.
The effective income tax rate for the second quarter was slightly higher,
24.9 percent compared to 24.1 percent for the same period last year primarily
due to lower section 29 tax credits at TECO Coalbed Methane.
SIX MONTHS ENDED JUNE 30, 1995:
Net income of $89.8 million in the first half of 1996 was $6.9 million or 8
percent higher than in 1995's first half. Tampa Electric contributed to net
income with higher AFUDC, increased energy sales and lower operating expenses.
TECO Power Services, TECO Transport & Trade and TECO Coalbed Methane also had
improved operating results.
Consolidated operating income was up from 1995's first half due to strong
performances by TECO Transport & Trade, TECO Coalbed Methane and TECO Power
Services, partially offset by lower operating income at Tampa Electric and TECO
Coal. The first half of 1996 also included expenses related to the development
of TECO Gas & Oil and TeCom, and 1995's first half results included a $1.3
million gain on the sale of an apartment complex by TECO Properties.
The following table identifies the unconsolidated revenues and operating
income of TECO Energy's significant operating groups.
CONTRIBUTIONS BY OPERATING GROUP (UNCONSOLIDATED)
<TABLE>
<CAPTION>
REVENUES
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric................................. $527,165 $532,890
Diversified companies.......................... $273,320 $236,796
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric................................. $103,239 $106,319
Diversified companies*......................... $ 49,400 $ 43,921
</TABLE>
- ---------------
* Operating income includes items that are reclassified for consolidated
financial statement purposes. The principal items are the non-conventional
fuels tax credit related to coalbed methane production and interest expense of
the non-recourse debt related to independent power operations, both of which
are included in operating income for the diversified companies. In the
Consolidated Statements of Income, the tax credit is part of the provision for
income taxes and the interest is part of interest expense.
Tampa Electric's first-half operating income of $103.2 million was 3
percent lower than in 1995. The 1996 results were net of $30-million of revenue
deferrals and refunds in accordance with the 1996 Plan. Operating income last
year was net of a $17-million revenue deferral in accordance with the 1995 Plan.
Tampa Electric's revenues in the first half decreased from 1995 because the
1996 revenue deferrals and refunds were higher than the 1995 revenue deferrals.
Increased base revenues from 4 percent higher retail energy sales reflecting
favorable weather, customer growth of more than 2 percent and a strong local
economy were offset by lower fuel charges to the customer and the elimination of
the oil backout recovery clause. In the absence of this elimination, the oil
backout clause would have contributed $6 million in revenues for the first half
of 1996.
Tampa Electric's total operating expenses for the first half of 1996 were
essentially unchanged from 1995. Non-fuel operations and maintenance expenses,
down 3 percent as a result of continued cost control efforts throughout the
company, were offset by higher combined fuel and purchased power expenses from
increased energy sales.
9
<PAGE> 236
Unconsolidated operating income for TECO Energy's diversified companies
increased 12 percent to $49.4 million on revenues of $273.3 million.
At TECO Transport & Trade, operating income increased due to higher
volumes, more than offsetting higher fuel prices and the effects of adverse
winter weather.
TECO Coal's continued growth in third-party revenues from newer mines was
more than offset by lower volumes to Tampa Electric and higher deep-mine
production costs.
Favorable gas prices increased TECO Coalbed Methane's operating income over
1995, despite a $4.4-million pretax gain from a gas contract termination
settlement included in last year's results.
TECO Properties' results declined primarily because 1995's first half
operating income included a $1.3 million gain on the sale of an apartment
complex.
The Alborada Power Station in Guatemala, which began commercial operation
in the third quarter of 1995, provided improved results at TECO Power Services.
Diversified results in 1996 also included expenses related to the continued
development of TECO Gas & Oil and TeCom.
Consolidated interest expense before the allowance for borrowed funds used
during construction was up 4 percent due to higher levels of short-term debt at
Tampa Electric, interest accrued on the revenue deferrals and refunds and the
effect of the expiration of an interest rate swap agreement.
Total AFUDC increased in 1996 to $15 million from $7 million in 1995 with
additional investment in Tampa Electric's Polk Power Station which is scheduled
for commercial operation in the fourth quarter of 1996.
Liquidity, Capital Resources and Changes in Financial Condition
The FPSC issued a final order approving a multi-year base rate freeze,
revenue deferral and refund plan on May 20, 1996. The plan is set forth in an
agreement among Tampa Electric, the Office of Public Counsel and the Florida
Industrial Power Users Group covering the years 1996 through 1998. A more
complete description of the plan is contained in TECO Energy's Annual Report on
Form 10-K for the year ended Dec. 31, 1995.
As contemplated by the 1996 Plan, the FPSC hearings concerning the
regulatory treatment of the investment and expenses associated with Tampa
Electric's Polk Power Station were held on July 17 and 18. The FPSC staff
recommendation on the issues is due September 19 and a FPSC decision is expected
October 1.
Fuel inventory declined from Dec. 31, 1995 due to increased energy sales at
Tampa Electric and effective management of coal contracts and inventory levels.
The increase in other deferred credits primarily reflected the revenue
deferrals at Tampa Electric related to the 1996 Plan and 1995 Plan.
Accounts payable as of June 30, 1996 includes a $25-million refund to Tampa
Electric customers to be made over the 12-month period beginning Oct. 1, 1996
under the 1996 Plan and consists of $15 million from 1996's revenues and $10
million of revenues deferred in 1995.
The increase in notes payable was related to the Polk Unit One construction
program as well as funding of the retirement of $25 million of long-term debt
that matured at Tampa Electric.
The decrease in preferred stock reflected Tampa Electric's redemption of
$35 million aggregate par value of preferred stock in 1996. (See Note C on page
7)
10
<PAGE> 237
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
10.1 Form of Nonstatutory Stock Option under the TECO Energy, Inc. 1996 Equity
Incentive Plan.
10.2 Form of Restricted Stock Agreement between TECO Energy, Inc. and certain senior
executives under the TECO Energy, Inc. 1996 Equity Incentive Plan.
10.3 Form of Restricted Stock Agreement between TECO Energy, Inc. and G.F. Anderson
under the TECO Energy, Inc. 1996 Equity Incentive Plan.
11. Computation of earnings per common share.
27. Financial data schedule. (EDGAR filing only)
</TABLE>
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K dated May 20, 1996
reporting under "Item 5. Other Events" on the FPSC order approving the agreement
among Tampa Electric, the Office of Public Counsel and the Florida Industrial
Power Users Group providing for a multi-year base rate freeze, revenue deferral
and refund plan for Tampa Electric.
11
<PAGE> 238
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECO ENERGY, INC.
--------------------------------------
(Registrant)
Date: August 13, 1996 By: /s/ A. D. OAK
------------------------------------
A. D. Oak
Senior Vice
President -- Finance,
and Chief Financial Officer
(Principal Accounting Officer)
12
<PAGE> 239
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS PAGE NO.
- ----------- ----------------------------------------------------------------------- --------
<C> <S> <C>
10.1 Form of Nonstatutory Stock Option under the TECO Energy, Inc. 1996
Equity Incentive Plan.................................................. 19
10.2 Form of Restricted Stock Agreement between TECO Energy, Inc. and
certain senior executives under the TECO Energy, Inc. 1996 Equity
Incentive Plan......................................................... 24
10.3 Form of Restricted Stock Agreement between TECO Energy, Inc. and G.F.
Anderson under the TECO Energy, Inc. 1996 Equity Incentive Plan........ 28
11. Computation of earnings per common share............................... 32
27. Financial data schedule (EDGAR filing only)............................ --
</TABLE>
13
<PAGE> 240
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
------------ TO
------------
COMMISSION FILE NUMBER 1-8180
TECO ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
FLORIDA 59-2052286
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
702 NORTH FRANKLIN STREET, TAMPA, FLORIDA 33602
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (813) 228-4111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
Number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date (October 31, 1996):
Common Stock, $1 Par Value 117,357,580
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 241
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial
statements include all adjustments (none of which were other than normal or
recurring) necessary to present fairly the results for the three-month and
nine-month periods ended Sept. 30, 1996 and 1995. Reference should be made to
the explanatory notes affecting the income and balance sheet accounts contained
in TECO Energy, Inc.'s Annual Report on Form 10-K for the year ended Dec. 31,
1995 and to the notes on pages 7 and 8 of this report.
2
<PAGE> 242
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $ 17,557 $ 10,259
Short-term investments............................................ 33,728 32,176
Receivables, less allowance for uncollectibles.................... 181,591 163,536
Inventories, at average cost
Fuel........................................................... 52,441 76,737
Materials and supplies......................................... 54,124 48,984
Prepayments....................................................... 9,248 9,574
---------- ----------
348,689 341,266
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
Utility plant in service.......................................... 3,743,012 3,174,526
Construction work in progress..................................... 73,804 479,586
Other property.................................................... 876,909 836,411
---------- ----------
4,693,725 4,490,523
Accumulated depreciation.......................................... (1,727,200) (1,616,231)
---------- ----------
2,966,525 2,874,292
---------- ----------
OTHER ASSETS
Other investments................................................. 85,575 86,277
Deferred income taxes............................................. 76,321 65,906
Deferred charges and other assets................................. 107,182 105,626
---------- ----------
269,078 257,809
---------- ----------
$3,584,292 $3,473,367
========== ==========
LIABILITIES AND CAPITAL
CURRENT LIABILITIES
Long-term debt due within one year................................ $ 48,499 $ 31,327
Notes payable..................................................... 387,425 361,340
Accounts payable.................................................. 149,878 146,313
Customer deposits................................................. 52,572 51,273
Interest accrued.................................................. 26,549 13,297
Taxes accrued..................................................... 41,357 11,731
---------- ----------
706,280 615,281
DEFERRED INCOME TAXES............................................... 410,045 396,624
INVESTMENT TAX CREDITS.............................................. 57,531 61,347
REGULATORY LIABILITY-TAX RELATED.................................... 36,132 47,558
OTHER DEFERRED CREDITS.............................................. 161,477 136,092
LONG-TERM DEBT, LESS AMOUNT DUE WITHIN ONE YEAR..................... 950,835 994,856
PREFERRED STOCK OF TAMPA ELECTRIC................................... 19,960 54,956
COMMON EQUITY
Common equity -- 400 million shares authorized, $1 par
value -- issued and outstanding 117,326,188 in 1996 and
116,731,681 in 1995............................................ 1,314,195 1,240,887
Unearned compensation............................................. (72,163) (74,234)
---------- ----------
$3,584,292 $3,473,367
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 243
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
SEPT. 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
REVENUES............................................................ $ 400,842 $ 389,097
---------- ----------
EXPENSES
Operation......................................................... 195,058 187,786
Maintenance....................................................... 24,829 24,563
Depreciation...................................................... 45,645 41,235
Taxes, other than income.......................................... 28,945 28,445
---------- ----------
294,477 282,029
---------- ----------
INCOME FROM OPERATIONS.............................................. 106,365 107,068
---------- ----------
OTHER INCOME (EXPENSE)
Allowance for other funds used during construction................ 5,774 3,234
Other income (expense), net....................................... (150) (87)
Preferred dividend requirements of Tampa Electric................. (220) (892)
---------- ----------
5,404 2,255
---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES............................. 111,769 109,323
---------- ----------
INTEREST CHARGES
Interest expense.................................................. 23,510 22,318
Allowance for borrowed funds used during construction............. (2,359) (1,949)
---------- ----------
21,151 20,369
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES............................ 90,618 88,954
PROVISION FOR INCOME TAXES.......................................... 25,273 25,707
---------- ----------
NET INCOME.......................................................... $ 65,345 $ 63,247
========== ==========
AVERAGE SHARES OUTSTANDING.......................................... 117,278 116,517
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING....................... $ 0.56 $ 0.55
========== ==========
DIVIDENDS PER COMMON SHARE OUTSTANDING.............................. $ 0.28 $ 0.265
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 244
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPT. 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
REVENUES............................................................ $1,103,458 $1,057,930
---------- ----------
EXPENSES
Operation......................................................... 554,573 512,825
Maintenance....................................................... 69,676 74,356
Depreciation...................................................... 136,043 130,443
Taxes, other than income.......................................... 88,010 86,456
---------- ----------
848,302 804,080
---------- ----------
INCOME FROM OPERATIONS.............................................. 255,156 253,850
---------- ----------
OTHER INCOME (EXPENSE)
Allowance for other funds used during construction................ 16,218 7,554
Other income, net................................................. 1,341 371
Preferred dividend requirements of Tampa Electric................. (1,547) (2,676)
---------- ----------
16,012 5,249
---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES............................. 271,168 259,099
---------- ----------
INTEREST CHARGES
Interest expense.................................................. 69,639 66,735
Allowance for borrowed funds used during construction............. (6,627) (4,552)
---------- ----------
63,012 62,183
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES............................ 208,156 196,916
PROVISION FOR INCOME TAXES.......................................... 52,999 50,785
---------- ----------
NET INCOME.......................................................... $ 155,157 $ 146,131
========== ==========
AVERAGE SHARES OUTSTANDING.......................................... 117,097 116,392
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING....................... $ 1.33 $ 1.26
========== ==========
DIVIDENDS PER COMMON SHARE OUTSTANDING.............................. $ 0.825 $ 0.7825
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 245
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPT. 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME........................................................ $ 155,157 $ 146,131
Adjustments to reconcile net income to net cash:
Depreciation................................................... 136,043 130,443
Deferred income taxes.......................................... (13,004) (19,991)
Investment tax credits, net.................................... (3,816) (3,964)
Allowance for funds used during construction................... (22,845) (12,106)
Amortization of unearned compensation.......................... 3,957 3,863
Revenue deferral and refund.................................... 38,100 30,962
Deferred recovery clause....................................... (426) (13,976)
Amortization of coal contract buyout........................... 2,028 1,352
Receivables, less allowance for uncollectibles................. (18,055) (25,960)
Inventories.................................................... 19,156 30,850
Taxes accrued.................................................. 29,626 57,837
Interest accrued............................................... 13,252 7,452
Accounts payable............................................... (21,435) (21,901)
Other.......................................................... 15,536 18,883
---------- ----------
333,274 329,875
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.............................................. (228,722) (326,950)
Allowance for funds used during construction...................... 22,845 12,106
Investment in short-term investments.............................. (1,552) 68,854
Other non-current investments..................................... 3,086 18,763
---------- ----------
(204,343) (227,227)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock...................................................... 11,400 7,758
Proceeds from long-term debt...................................... 3,058 620
Repayment of long-term debt....................................... (30,089) (5,052)
Net increase (decrease) in short-term debt........................ 26,085 (37,290)
Redemption of preferred stock, including premium.................. (35,496) --
Dividends......................................................... (96,591) (91,046)
(121,633) (125,010)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ 7,298 (22,362)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 10,259 35,797
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 17,557 $ 13,435
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 246
NOTES TO FINANCIAL STATEMENTS
A. TECO Energy, Inc. and its subsidiaries have made certain commitments in
connection with their continuing capital expenditure program and estimate that
capital expenditures, excluding allowance for funds used during construction
(AFUDC), during 1996 will be as follows:
<TABLE>
<CAPTION>
MILLIONS
<S> <C>
Tampa Electric Company...................................................... $182
TECO Transport & Trade Corporation.......................................... 31
TECO Gas & Oil, Inc......................................................... 20
TECO Coal Corporation....................................................... 14
Other diversified businesses................................................ 5
----
$252
====
</TABLE>
In September 1996, TECO Coal purchased the assets of Kyber Coal Company for
$8 million. The assets include a lease on approximately 20 million tons of
metallurgical quality coal along with one active contract deep mine.
B. During the first nine months of 1996, Tampa Electric recognized
$38-million of revenue deferrals and refunds pursuant to a multi-year base rate
freeze, revenue deferral and refund plan (the 1996 Plan) which the Florida
Public Service Commission (FPSC) approved in a final order on May 20, 1996.
Tampa Electric deferred $31 million during the first nine months last year in
accordance with another plan (the 1995 Plan) approved by the FPSC for 1995. A
more complete description of the 1995 Plan and 1996 Plan is contained in TECO
Energy's Annual Report on Form 10-K for the year ended Dec. 31, 1995.
A total of $89 million of revenue has been recorded on the balance sheet
under the 1995 and 1996 Plans, of which $64 million is included in other
deferred credits. The remaining $25 million is classified in accounts payable to
reflect the refund to customers which began Oct. 1, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
THREE MONTHS ENDED SEPT. 30, 1996:
Net income of $65.3 million in the third quarter of 1996 was $2.1 million
or 3 percent higher than in 1995's third quarter due to strong gas prices at
TECO Coalbed Methane, higher capitalized financing costs (AFUDC) at Tampa
Electric and the operation of TECO Power Services' Alborada Power Station in
Guatemala.
Consolidated operating income was slightly lower than in 1995's third
quarter, which included a $2.6-million pretax gain on a condemnation sale of
land and mineral rights at TECO Coal. Improved results at TECO Coalbed Methane
and TECO Power Services were more than offset by lower operating income at TECO
Coal and TECO Transport & Trade.
7
<PAGE> 247
The following table identifies the unconsolidated revenues and operating
income of TECO Energy's significant operating groups.
CONTRIBUTIONS BY OPERATING GROUP (UNCONSOLIDATED)
<TABLE>
<CAPTION>
REVENUES
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric................................. $311,113 $308,067
Diversified companies.......................... $144,633 $135,454
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric................................. $ 82,471 $ 81,921
Diversified companies*......................... $ 25,458 $ 26,765
</TABLE>
- ---------------
* Operating income includes items that are reclassified for consolidated
financial statement purposes. The principal items are the non-conventional
fuels tax credit related to coalbed methane production and interest expense of
the non-recourse debt related to independent power operations, both of which
are included in operating income for the diversified companies. In the
Consolidated Statements of Income, the tax credit is part of the provision for
income taxes and the interest is part of interest expense. Certain 1995
amounts have been restated to conform with the current year presentation.
Tampa Electric's third quarter operating income of $82.5 million was
slightly higher than in 1995 because of higher revenues. The 1996 and 1995
results were net of $8 million and $14 million of revenue deferrals,
respectively, in accordance with FPSC-approved plans.
Tampa Electric's revenues for the quarter increased 1 percent due to higher
energy sales and the difference in the level of revenue deferrals.
Retail energy sales increased 3 percent from 1995 because of 2 percent
customer growth and warmer weather.
Tampa Electric's total operating expenses for the third quarter were
unchanged from 1995. Lower fuel expenses from effective coal contract
administration were offset by higher purchased power expenses from increased
energy sales and higher depreciation.
Unconsolidated operating income for TECO Energy's diversified companies
decreased 5 percent to $25.5 million on revenues of $144.6 million.
Compared to an exceptionally strong quarter in 1995, TECO Transport &
Trade's operating results were down because of lower demand in the river
business and higher expenses in the ocean shipping business. The transfer
terminal had improved results due to higher prices for handling export coal.
At TECO Coal, lower volume to Tampa Electric and higher production costs at
the Gatliff mines more than offset increased sales to outside customers from the
Premier operations. TECO Coal recorded a $1.1-million pretax charge in the
quarter related to the closing of some underground mines at Gatliff.
Favorable gas prices continued to contribute to increased operating income
at TECO Coalbed Methane.
The Alborada Power Station in Guatemala, which began commercial operation
in the third quarter of 1995, provided improved results at TECO Power Services.
Diversified results in 1996 also included expenses related to the continued
development of TECO Gas & Oil and TeCom.
Consolidated interest expense before the allowance for borrowed funds used
during construction was up 5 percent due to higher levels of short-term debt,
interest accrued on the revenue deferrals and the effect of the expiration of an
interest rate swap agreement.
8
<PAGE> 248
Total AFUDC increased in 1996 to $8 million from $5 million in 1995 from
the additional investment in Tampa Electric's Polk Power Station which was
declared in service Sept. 30, 1996.
NINE MONTHS ENDED SEPT. 30, 1996:
Net income of $155.2 million in the first nine months of 1996 was $9.0
million or 6 percent higher than in 1995's nine-month period. Tampa Electric
contributed to net income with higher AFUDC and increased energy sales. TECO
Power Services, TECO Coalbed Methane and TECO Transport & Trade also had
improved results.
Consolidated operating income was up slightly from 1995's first nine months
due to strong performances by TECO Power Services, TECO Coalbed Methane and TECO
Transport & Trade, partially offset by lower operating income at Tampa Electric
and TECO Coal. The first nine months of 1996 also included expenses related to
the continued development of TECO Gas & Oil and TeCom, and 1995's results
included a $1.2-million gain on the sale of an apartment complex by TECO
Properties.
The following table identifies the unconsolidated revenues and operating
income of TECO Energy's significant operating groups.
CONTRIBUTIONS BY OPERATING GROUP (UNCONSOLIDATED)
<TABLE>
<CAPTION>
REVENUES
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric................................. $838,278 $840,957
Diversified companies.......................... $417,953 $372,250
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Tampa Electric................................. $185,711 $188,240
Diversified companies*......................... $ 74,858 $ 69,961
</TABLE>
- ---------------
* Operating income includes items that are reclassified for consolidated
financial statement purposes. The principal items are the non-conventional
fuels tax credit related to coalbed methane production and interest expense of
the non-recourse debt related to independent power operations, both of which
are included in operating income for the diversified companies. In the
Consolidated Statements of Income, the tax credit is part of the provision for
income taxes and the interest is part of interest expense. Certain 1995
amounts have been restated to conform with the current year presentation.
Tampa Electric's operating income of $185.7 million for the nine months was
1 percent lower than in 1995. The 1996 results were net of $38 million of
revenue deferrals and refunds in accordance with the 1996 Plan. Operating income
last year was net of a $31-million revenue deferral in accordance with the 1995
Plan.
Tampa Electric's revenues in the first nine months decreased, despite
higher retail energy sales, because of the elimination of the oil backout
recovery clause pursuant to the 1995 Plan, higher revenue deferrals and lower
fuel charges to customers. Retail energy sales increased 4 percent reflecting
favorable weather, customer growth of more than 2 percent and a strong local
economy.
Tampa Electric's total operating expenses for the first nine months of 1996
were unchanged from 1995. Lower fuel expenses from effective coal contract
administration were offset by higher purchased power and depreciation expense.
Unconsolidated operating income for TECO Energy's diversified companies
increased 7 percent to $74.9 million on revenues of $418.0 million.
At TECO Transport & Trade, increased movements of coal and phosphate by its
ocean fleet, and strong demand and pricing in the river business contributed to
improved operating results.
9
<PAGE> 249
Despite TECO Coal's increased coal sales to outside customers, operating
results were down because sales to Tampa Electric were lower, production costs
were higher and 1995's results included a $2.6-million gain from the sale of
land and mineral rights under a condemnation settlement.
At TECO Coalbed Methane, higher natural gas prices caused operating income
to increase over 1995's results, which included a $4.4-million pretax gain from
a gas contract termination settlement.
TECO Power Services' results improved from the new Alborada Power Station
in Guatemala, which began commercial operation in the third quarter of 1995.
Diversified results also included expenses related to the continued
development of TECO Gas & Oil and TeCom.
Consolidated interest expense before the allowance for borrowed funds used
during construction was up 4 percent due to higher levels of short-term debt,
interest accrued on the revenue deferrals and refunds and the effect of the
expiration of an interest rate swap agreement.
Total AFUDC increased in 1996 to $23 million from $12 million in 1995 from
the additional investment in Tampa Electric's Polk Power Station which was
declared in service Sept. 30, 1996.
Liquidity, Capital Resources and Changes in Financial Condition
The FPSC issued a final order in May 1996 approving a multi-year base rate
freeze, revenue deferral and refund plan. The plan was set forth in an agreement
among Tampa Electric, the Office of Public Counsel (OPC) and the Florida
Industrial Power Users Group (FIPUG) covering the years 1996 through 1998. A
more complete description of the 1996 Plan is contained in TECO Energy's Annual
Report on Form 10-K for the year ended Dec. 31, 1995.
In October 1996, the FPSC issued a final order approving an agreement among
Tampa Electric, OPC and FIPUG which resolved all of the pending regulatory
issues related to a prudence review of Tampa Electric's new Polk Power Station.
This agreement provides for full recovery of the capital costs not to exceed one
percent above $506 million, and all operation and maintenance expenses
associated with the Polk Power Station. The agreement extends through 1999 the
base rate freeze approved in the 1996 Plan. Customers will also benefit from a
$25 million temporary base rate reduction to be reflected as a credit on
customer bills over a 15-month period beginning Oct. 1, 1997. This temporary
rate reduction will offset refunds which might otherwise have been made in 1999
under the 1996 Plan. In addition, customers will be refunded 60 percent of the
revenues generated in 1999 which contribute to a return on equity between 12.00
percent and 12.75 percent, and all 1999 revenues which contribute to a return on
equity above 12.75 percent.
Fuel inventory declined from Dec. 31, 1995 due to increased energy sales at
Tampa Electric and effective management of inventory levels.
The increase in other deferred credits primarily reflected the revenue
deferrals at Tampa Electric related to the 1996 Plan and 1995 Plan.
Accounts payable as of Sept. 30, 1996 included a $25-million refund to
Tampa Electric customers to be made over the 12-month period beginning Oct. 1,
1996 under the 1996 Plan. This refund consists of $15 million from 1996's
revenues and $10 million of revenues deferred from 1995.
The decrease in preferred stock reflected Tampa Electric's redemption of
$35 million aggregate par value of preferred stock in April 1996.
10
<PAGE> 250
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of earnings per common share.
27. Financial data schedule. (EDGAR filing only)
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K dated Sept. 25, 1996
reporting under "Item 5. Other Events" on the agreement among Tampa Electric
Company, the Office of Public Counsel and the Florida Industrial Power Users
Group to resolve all regulatory issues related to a prudence review of Tampa
Electric Company's Polk Power Station, extend the current base rate freeze
through 1999 and provide for a temporary reduction in base rates.
The registrant filed a Current Report on Form 8-K dated Oct. 9, 1996
reporting under "Item 5. Other Events" on the Florida Public Service
Commission's vote to approve the agreement among Tampa Electric Company, the
Office of Public Counsel and the Florida Industrial Power Users Group which
resolves all regulatory issues related to a prudence review of Tampa Electric
Company's Polk Power Station, extends the current base rate freeze through 1999
and provides for a temporary reduction in base rates.
11
<PAGE> 251
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECO ENERGY, INC.
--------------------------------------
(Registrant)
Date: November 13, 1996 By: /s/ A. D. OAK
------------------------------------
A. D. Oak
Senior Vice
President -- Finance,
and Chief Financial Officer
(Principal Accounting Officer)
12
<PAGE> 252
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS PAGE NO.
- ----------- ----------------------------------------------------------------------- --------
<C> <S> <C>
11. Computation of earnings per common share............................... 20
27. Financial data schedule (EDGAR filing only)............................ --
</TABLE>
13
<PAGE> 1
EXHIBIT 5
PALMER & DODGE LLP
ONE BEACON STREET
BOSTON MASSACHUSETTS 02108
TELEPHONE: (617) 573-0100 FACSIMILE: (617) 227-4420
November 22, 1996
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
We are rendering this opinion in connection with the Registration Statement
on Form S-4 (the "Registration Statement") filed by TECO Energy, Inc. (the
"Company") with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, on or about the date hereof. The Registration Statement
relates to shares of the Company's Common Stock, $1.00 par value (the "Shares"),
to be issued in connection with the merger of Lykes Energy, Inc. ("Lykes") with
and into the Company, or, subject to certain conditions, with a wholly-owned
subsidiary of the Company, pursuant to an Agreement and Plan of Merger dated as
of November 21, 1996 between the Company and Lykes (the "Agreement").
We have acted as your counsel in connection with the preparation of the
Registration Statement and are familiar with the proceedings taken by the
Company in connection with the authorization and issuance of the Shares. We have
examined such documents as we consider necessary to render this opinion.
Based upon the foregoing, we are of the opinion that the Shares to be
issued in the merger have been duly authorized, and upon issuance in accordance
with the Agreement, will be validly issued, fully paid and nonassessable.
We hereby consent to the use of our name under the caption "Legal Opinions"
in the Registration Statement and to the filing of this opinion as an exhibit to
the Registration Statement.
Very truly yours,
/s/ Palmer & Dodge LLP
<PAGE> 1
EXHIBIT 8.1
[MACFARLANE FERGUSON & MCMULLEN LETTERHEAD]
November 22, 1996
P.O. Box 1531
Tampa, Florida 33601
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
We have acted as counsel to Lykes Energy, Inc. (the "Company") in
connection with the merger described in the Registration Statement on Form S-4
(the "Registration Statement") of which this exhibit is part. As counsel to the
Company, we prepared the description of the federal income tax consequences of
the merger set forth in the Registration Statement under the heading "Certain
Federal Income Tax Consequences". That description fairly and accurately
represents our opinion as to the federal income tax matters discussed therein,
assuming that the merger is carried out in the manner described in the
Registration Statement.
We hereby consent to the use of our name under the caption "Certain Federal
Income Tax Consequences" in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ MACFARLANE, FERGUSON & MCMULLEN
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Macfarlane, Ferguson & McMullen
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EXHIBIT 8.2
[PALMER & DODGE LLP LETTERHEAD]
November 22, 1996
TECO Energy, Inc.
702 North Franklin Street
Tampa, FL 33602
We have acted as counsel to TECO Energy, Inc. (the "Company") in connection
with the merger described in the Registration Statement on Form S-4 (the
"Registration Statement") of which this exhibit is a part. As counsel to the
Company, we prepared the description of the federal income tax consequences of
the merger set forth in the Registration Statement under the heading "Certain
Federal Income Tax Consequences." That description fairly and accurately
represents our opinion as to the federal income tax matters discussed therein,
assuming that the merger is carried out in the manner described in the
Registration Statement.
We hereby consent to the use of our name under the caption "Certain Federal
Income Tax Consequences" in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Palmer & Dodge LLP
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of TECO Energy, Inc. on Form S-4 of our report dated January 15, 1996, on our
audits of the consolidated financial statements as of December 31, 1995 and
1994, and for the years ended December 31, 1995, 1994 and 1993 included in the
1995 Annual Report on Form 10-K. We also consent to the reference to our firm
under the captions, "Selected Financial Data" and "Experts."
COOPERS & LYBRAND L.L.P
Tampa, Florida
November 22, 1996
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EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of TECO Energy, Inc. of our report dated
October 31, 1996, relating to the financial statements of Lykes Energy, Inc.,
which appears in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data."
PRICE WATERHOUSE LLP
Tampa, Florida
November 22, 1996
