UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification Number
1-14174 AGL RESOURCES INC. 58-2210952
(A Georgia Corporation)
817 West Peachtree Street, N.E.
Suite 1000
Atlanta, Georgia 30308
404-584-9470
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 2000.
Common Stock, $5.00 Par Value
Shares Outstanding at March 31, 2000 ...............................54,285,667
AGL RESOURCES INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2000
Table of Contents
Item Page
Number Number
PART I -- FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Condensed Statements of Consolidated Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
3 Quantitative and Qualitative Disclosure About Market Risk 26
PART II -- OTHER INFORMATION
1 Legal Proceedings 27
4 Submission of Matters to a Vote of Security Holders 27
5 Other Information 27
Recent Events 28
6 Exhibits and Reports on Form 8-K 29
SIGNATURE 30
Page 2 of 30 Pages
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED
MARCH 31, 2000 AND 1999
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Six Months
2000 1999 2000 1999
Operating Revenues ............................ $ 160.1 $ 375.1 $ 342.4 $ 699.0
Cost of Sales ................................. 30.7 232.0 85.3 419.0
--------- --------- --------- ---------
Operating Margin ......................... 129.4 143.1 257.1 280.0
Other Operating Expenses ...................... 91.9 90.7 186.1 179.9
--------- --------- --------- ---------
Operating Income ......................... 37.5 52.4 71.0 100.1
Other Income (Loss) ........................... 12.4 (0.2) 19.3 (8.1)
--------- --------- --------- ---------
Income Before Interest and Income Taxes .. 49.9 52.2 90.3 92.0
Interest Expense and Preferred Stock Dividends
Interest expense ......................... 12.4 13.6 24.6 27.8
Dividends on preferred stock of subsidiary 1.6 1.6 3.1 3.1
--------- --------- --------- ---------
Total interest expense and preferred
stock dividends ..................... 14.0 15.2 27.7 30.9
--------- --------- --------- ---------
Income Before Income Taxes ............... 35.9 37.0 62.6 61.1
Income Taxes .................................. 13.2 12.8 22.8 21.0
--------- --------- --------- ---------
Net Income ............................... $ 22.7 $ 24.2 $ 39.8 $ 40.1
========= ========= ========= =========
Earnings per Common Share
Basic .................................... $ 0.41 $ 0.42 $ 0.71 $ 0.70
Diluted .................................. $ 0.41 $ 0.42 $ 0.71 $ 0.70
Weighted Average Number of Common
Shares Outstanding
Basic .................................... 55.5 57.6 56.2 57.5
Diluted .................................. 55.5 57.6 56.2 57.7
Cash Dividends Paid Per Share of
Common Stock ............................. $ 0.27 $ 0.27 $ 0.54 $ 0.54
See notes to condensed consolidated financial statements.
Page 3 of 30 Pages
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(Unaudited)
March 31, September 30,
ASSETS 2000 1999
Current Assets
Cash and cash equivalents ................... $ 6.5 $ 32.9
Receivables (less allowance for uncollectible
accounts of $6.5 at March 31, 2000
and $4.3 at September 30, 1999) ......... 46.0 51.8
Inventories
Natural gas stored underground .......... 17.2 47.3
Liquefied natural gas ................... 1.5 6.7
Other ................................... 10.0 12.9
Other ....................................... 3.1 7.0
---------- ---------
Total current assets .................... 84.3 158.6
---------- ---------
Property, Plant and Equipment
Utility plant ............................... 2,338.4 2,274.3
Less accumulated depreciation ............... 787.5 757.1
---------- ---------
Utility plant - net ..................... 1,550.9 1,517.2
---------- ---------
Non-utility property ........................ 112.2 116.7
Less accumulated depreciation ............... 34.2 35.0
---------- ---------
Non-utility property - net .............. 78.0 81.7
---------- ---------
Total property, plant and equipment - net 1,628.9 1,598.9
---------- ---------
Deferred Debits and Other Assets
Unrecovered environmental response costs .... 148.6 150.2
Investments in joint ventures ............... 51.5 28.2
Other ....................................... 36.2 34.5
---------- ---------
Total deferred debits and other assets .. 236.3 212.9
---------- ---------
Total Assets ...................................... $ 1,949.5 $ 1,970.4
========== =========
See notes to condensed consolidated financial statements.
Page 4 of 30 Pages
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(Unaudited)
March 31, September 30,
LIABILITIES AND CAPITALIZATION 2000 1999
Current Liabilities
Accounts payable - trade .................. $ 27.4 $ 31.3
Short-term debt ........................... 111.0 1.5
Customer deposits ......................... 2.0 7.4
Interest .................................. 21.4 26.0
Taxes ..................................... 15.1 31.2
Gas cost credits .......................... 2.0 37.9
Current portion of long-term debt ......... 20.0 50.0
Other ..................................... 32.3 38.7
---------- ---------
Total current liabilities ............. 231.2 224.0
---------- ---------
Accumulated Deferred Income Taxes ............... 230.4 211.3
---------- ---------
Long-Term Liabilities
Accrued environmental response costs ...... 102.4 102.4
Accrued postretirement benefits costs ..... 32.2 32.4
Deferred credits .......................... 57.3 49.2
Other ..................................... 8.3 5.3
---------- ---------
Total long-term liabilities ........... 200.2 189.3
---------- ---------
Capitalization
Long-term debt ............................ 590.0 610.0
Subsidiary obligated mandatorily redeemable
preferred securities .................. 74.3 74.3
Common stockholders' equity, $5 par value,
shares issued of 57.8 at March 31, 2000
and September 30, 1999 ................ 684.9 675.9
Less shares held in treasury, at cost
3.5 at March 31, 2000 and
0.7 at September 30, 1999 (61.5) (14.4)
---------- ---------
Total capitalization .................. 1,287.7 1,345.8
---------- ---------
Total Liabilities and Capitalization ............ $ 1,949.5 $ 1,970.4
========== =========
See notes to condensed consolidated financial statements.
Page 5 of 30 Pages
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(IN MILLIONS)
(UNAUDITED)
Six Months
2000 1999
Cash Flows from Operating Activities
Net income .................................. $ 39.8 $ 40.1
Adjustments to reconcile net income to net
cash flow from operating activities
Depreciation and amortization ......... 43.1 41.4
Deferred income taxes ................. 19.1 4.3
Other ................................. (2.6) (0.7)
Changes in certain assets and liabilities
Receivables ........................... 5.8 (65.0)
Inventories ........................... 38.2 102.5
Accounts payable ...................... (3.9) (5.1)
Gas cost credits ...................... (35.9) 51.0
Accrued interest ...................... (4.6) (2.8)
Other current liabilities ............. (8.6) 7.4
Other-net ............................. (17.9) (7.3)
--------- ---------
Net cash flow from operating
activities ....................... 72.5 165.8
--------- ---------
Cash Flows from Financing Activities
Net borrowings of debt ...................... 59.5 (75.0)
Sale of common stock, net of expenses ....... -- 6.6
Noncash dividends ........................... (4.6) (4.7)
Sale of treasury shares ..................... 5.5 --
Purchase of treasury shares ................. (52.7) --
Dividends paid on common stock .............. (26.1) (26.0)
--------- ---------
Net cash flow used in financing
activities ....................... (18.4) (99.1)
--------- ---------
Cash Flows from Investing Activities
Utility plant expenditures .................. (74.4) (52.4)
Non-utility property expenditures ........... (5.1) (9.4)
Retirements, net of removal costs and salvage 7.8 (0.6)
Cash provided to joint ventures ............. (9.4) --
Other ....................................... 0.6 1.7
--------- ---------
Net cash used in investing
activities ....................... (80.5) (60.7)
--------- ---------
Net increase (decrease) in cash
and cash equivalents ............. (26.4) 6.0
Cash and cash equivalents at
beginning of period .............. 32.9 0.9
--------- ---------
Cash and cash equivalents at
end of period .................... $ 6.5 $ 6.9
========= =========
Cash Paid During the Period for
Interest .................................... $ 29.2 $ 31.0
Income taxes ................................ $ 16.6 $ 11.8
See notes to condensed consolidated financial statements.
Page 6 of 30 Pages
AGL RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
AGL Resources Inc. is the holding company for Atlanta Gas Light Company ("AGLC")
and its wholly-owned subsidiary, Chattanooga Gas Company ("Chattanooga"), which
are both natural gas local distribution utilities. Additionally, AGL Resources
Inc. owns or has an interest in several non-utility subsidiaries and joint
ventures. AGL Resources Inc. and its subsidiaries are collectively referred to
as "AGL Resources."
In the opinion of management, the unaudited condensed consolidated financial
statements included herein reflect all normal recurring adjustments necessary
for a fair statement of the results of the interim periods reflected. These
interim financial statements and notes are condensed as permitted by the
instructions to Form 10-Q, and should be read in conjunction with the financial
statements and the notes included in the annual report on Form 10-K of AGL
Resources for the fiscal year ended September 30, 1999. Due to the seasonal
nature of a portion of AGL Resources' businesses, the results of operations for
the three-month period are not necessarily indicative of results of operations
for a twelve-month period.
Management makes estimates and assumptions when preparing financial statements
under generally accepted accounting principles. Those estimates and assumptions
affect various matters, including:
- - Reported amounts of assets and liabilities in our Condensed Consolidated
Balance Sheets as of the dates of the financial statements;
- - Disclosure of contingent assets and liabilities as of the dates of the
financial statements; and Reported amounts of revenues and expenses in our
Condensed Statements of
- - Consolidated Income during the reported periods.
Those estimates involve judgments with respect to, among other things, future
economic factors that are difficult to predict and are beyond management's
control. Consequently, actual amounts could differ from our estimates.
Certain amounts in financial statements of prior years have been reclassified to
conform to the presentation of the current year.
2. Overview of the Transition from a Regulated to a Competitive Business
Environment
Pursuant to Georgia's 1997 Natural Gas Competition and Deregulation Act
("Deregulation Act"), AGLC unbundled various components of its services to
end-use customers. Historically, only large, interruptible commercial and
industrial customers had the option of purchasing natural gas from suppliers
other than AGLC and transporting such natural gas through AGLC's distribution
system for delivery. The Deregulation Act enabled AGLC to unbundle its delivery
service and other related services from the sale of natural gas for all
customers, thus allowing firm residential and small commercial customers to
purchase natural gas and other services from suppliers other than AGLC.
Effective October 1, 1999, virtually all of AGLC's 1.4 million customers in
Georgia were purchasing natural gas from marketers who were approved and
certificated ("certificated marketers") by the Georgia Public Service Commission
("GPSC"). As a result of the Deregulation Act, AGLC has become primarily a
provider of delivery service and other related services.
Page 7 of 30 Pages
2. Overview of the Transition from a Regulated to a Competitive Business
Environment (Continued)
As a result of the transition to competition, numerous changes have occurred
with respect to the services being offered by AGLC and with respect to the
manner in which AGLC prices and accounts for those services. Consequently,
AGLC's future revenues and expenses will not follow historical patterns due to
the provision of delivery services to end-use customers which are priced based
upon straight fixed variable ("SFV") rates. The effect of SFV rates is to spread
evenly throughout the year AGLC's recovery of its delivery service costs.
Although, when compared to corresponding quarters of prior years, the effect of
SFV rates is to shift utility delivery service revenues among quarters, AGLC's
annual delivery service revenues should remain relatively consistent on a going
forward basis.
AGLC continues to provide intrastate delivery service through its existing
pipeline system to end-use customers in Georgia, but has exited the natural gas
sales function. AGLC's delivery of natural gas remains subject to the GPSC's
continued regulation of delivery rates, safety, access to AGLC's system, and
quality of service for all aspects of delivery service.
Certificated marketers, including AGL Resources' marketing affiliate, SouthStar
Energy Services LLC ("SouthStar"), compete to sell natural gas to end-use
customers at market-based prices. AGLC allocates delivery capacity to
certificated marketers in proportion to the number and size of residential and
small commercial customers served by each certificated marketer. Delivery
capacity that is not used on any day to serve residential and small commercial
customers is made available to large, interruptible commercial and industrial
customers. Similarly, AGLC has allocated to certificated marketers the majority
of the pipeline storage services that it has under contract, along with a
corresponding amount of inventory.
During the transition to competition, AGLC continued to provide gas sales
service to customers who had not yet switched to a certificated marketer.
Pursuant to a joint stipulation agreement with the GPSC, AGLC implemented a rate
structure for gas sales that ensured AGLC's recovery of its purchased gas costs
incurred from October 6, 1998 through September 30, 1999, without creating any
significant income or loss. The joint stipulation agreement provided for a
true-up for any profit or loss outside of a specified range during fiscal 1999.
During December 1999, as contemplated by the joint stipulation agreement, AGLC
paid $33 million in over-collected purchased gas costs to the GPSC. Since AGLC
paid the $33 million to the GPSC, the GPSC has instituted a mechanism pursuant
to which certificated marketers will be required to provide customers with a
credit on their marketer's bill. To be eligible for the refund credit, the
customer must have been on AGLC's system on May 25, 1999, and still connected as
of April 3, 2000. The average refund per customer is expected to be
approximately $25. (See Gas Cost Credits in the Financial Condition section
contained in Item 2 of Part I under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition.")
Also during the transition to competition, AGLC continued to bill end-use
customers who had not yet switched to certificated marketers for gas sales
service and for certain ancillary services. These ancillary services included
meter reading, billing, bill inquiry, payment processing, and collection
services. Once an end-use customer switched to a certificated marketer for gas
sales service, the Deregulation Act permitted AGLC to bill the marketer only for
the AGLC-provided ancillary services actually used by the marketer. AGLC was
unable, however, to eliminate all of the costs associated with the provision of
ancillary services as quickly as customers switched to certificated marketers
for natural gas sales, thereby creating an imbalance between revenues and
expenses.
Page 8 of 30 Pages
2. Overview of the Transition from a Regulated to a Competitive Business
Environment (Continued)
The Deregulation Act provides marketing standards and rules of business practice
to ensure that the benefits of a competitive natural gas market are available to
all customers on AGLC's system. It imposes on certificated marketers an
obligation to serve end-use customers, and creates a universal service fund. The
universal service fund provides a method to fund the recovery of certificated
marketers' uncollectible accounts and enables AGLC to expand its facilities to
serve the public interest.
3. Earnings Per Common Share; Common Stockholders' Equity; and Share Repurchase
Program
Basic earnings per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per common share reflects the potential
dilution that could occur when common share equivalents are added to common
shares outstanding. AGL Resources' only common share equivalents are stock
options whose exercise prices were less than the average market price of the
common shares for the respective periods. As of March 31, 2000 and 1999,
respectively, options to purchase 3,400,466 and 2,199,643 shares of common stock
were outstanding, and were not included in the computation of diluted earnings
per common share because the exercise prices of those options were greater than
the average market price of the common shares for the respective periods.
On October 5, 1999, the Board of Directors of AGL Resources authorized a plan to
repurchase up to 3.6 million shares (6.3% of total outstanding as of September
30, 1999) of AGL Resources common stock over a period ending no later than
September 30, 2001. Open market purchases of the shares may be made from time to
time, subject to availability, and the repurchased shares will be held in
treasury. Under the share repurchase program, during the three month period
ended March 31, 2000, AGL Resources repurchased 2,813,600 shares of common stock
for a total of $48.2 million. During the six month period ended March 31, 2000,
AGL Resources repurchased 3,072,500 shares of common stock for a total of $52.7
million.
During the three month period and six month period ended March 31, 2000, AGL
Resources issued 149,449 shares and 307,925 shares of common stock,
respectively, under ResourcesDirect, a direct stock purchase and dividend
reinvestment plan; the Retirement Savings Plus Plan; the Long-Term Incentive
Plan; and the Non-Employee Directors Equity Compensation Plan.
4. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. AGL
Resources will adopt SFAS 133 on October 1, 2000. The impact of SFAS 133 on AGL
Resources' consolidated financial statements is under review and is currently
unknown.
5. Environmental Matters
Before natural gas was widely available in the Southeast, AGLC manufactured gas
from coal and other fuels. Those manufacturing operations were known as
"manufactured gas plants," or "MGPs" which AGLC ceased operating in the 1950s.
Because of recent environmental concerns, AGLC is required to investigate
possible environmental contamination at those plants and, if necessary, clean up
any contamination.
Page 9 of 30 Pages
5. Environmental Matters (Continued)
AGLC has been associated with nine MGP sites in Georgia and three in Florida.
Based on investigations to date, AGLC believes that some cleanup is likely at
most of the sites. In Georgia, the state Environmental Protection Division
supervises the investigation and cleanup of MGP sites. In Florida, the U.S.
Environmental Protection Agency has that responsibility.
For each of the MGP sites, AGLC has estimated its share of the likely costs of
investigation and cleanup. AGLC currently estimates that its total future cost
of investigating and cleaning up its MGP sites is between $102.4 million and
$148.2 million. That range does not include other potential expenses, such as
unasserted property damage or personal injury claims or legal expenses for which
AGLC may be held liable but for which neither the existence nor the amount of
such liabilities can be reasonably forecast. Within that range, AGLC cannot
identify any single number as a "better" estimate of its likely future costs
because its actual future investigation and cleanup costs will be affected by a
number of contingencies that cannot be quantified at this time. Consequently, as
of March 31, 2000, AGLC has recorded the lower end of the range, or $102.4
million, as a liability, which remains unchanged from December 31, 1999, and a
corresponding regulatory asset.
On April 24, 2000, AGLC entered into an agreement with ThermoRetec Consulting
Corporation for the management of the environmental investigations and cleanups
associated with the MGP sites. Management does not believe the outsourcing of
the management will have a material effect on the total future cost of
investigating and cleaning up the MGP sites.
6. Segment Information
AGL Resources is organized into two operating segments: Utility and Non-utility.
Management evaluates segment performance based on net income, which includes the
effects of corporate expense allocations. There were no material inter-segment
sales during the three-month or six-month periods ended March 31, 2000 or 1999.
Three Months Ended March 31, 2000 March 31, 1999
------------------------------- -------------------------------
Non- Non-
(Millions of Dollars) Utility utility Total Utility utility Total
Operating Revenues .......... $ 145.8 $ 14.3 $ 160.1 $ 364.7 $ 10.4 $ 375.1
Depreciation and Amortization 18.6 2.9 21.5 16.9 2.8 19.7
Interest Expense ............ 11.0 1.4 12.4 11.5 2.1 13.6
Interest Income ............. 0.1 -- 0.1 0.1 0.1 0.2
Equity in the Net Income
(Loss) of Joint Ventures ... -- 10.4 10.4 -- (0.5) (0.5)
Income Tax Expense (Benefit) 9.3 3.9 13.2 13.1 (0.3) 12.8
Net Income (Loss) ........... 16.3 6.4 22.7 25.0 (0.8) 24.2
Capital Expenditures ........ 40.7 3.5 44.2 26.9 5.5 32.4
Page 10 of 30 Pages
6. Segment Information (Continued)
Six Months Ended March 31, 2000 March 31, 1999
------------------------------- -------------------------------
Non- Non-
(Millions of Dollars) Utility utility Total Utility utility Total
Operating Revenues .......... $ 317.1 $ 25.3 $ 342.4 $ 681.9 $ 17.1 $ 699.0
Depreciation and Amortization 35.9 6.3 42.2 33.7 6.2 39.9
Interest Expense ............ 22.9 1.7 24.6 24.5 3.3 27.8
Interest Income ............. 0.2 0.2 0.4 0.1 0.1 0.2
Equity in the Net Income
(Loss) of Joint Ventures..... -- 15.2 15.2 -- (8.4) (8.4)
Income Tax Expense (Benefit). 19.3 3.5 22.8 25.5 (4.5) 21.0
Net Income (Loss) ........... 33.9 5.9 39.8 47.5 (7.4) 40.1
Capital Expenditures ........ 74.4 5.1 79.5 52.4 9.4 61.8
Balance as of March 31, 2000 September 30, 1999
-------------------------------- --------------------------------
Non- Non-
Millions of Dollars) Utility utility Total Utility utility Total
Identifiable Assets ......... $ 1,791.2 $ 106.8 $ 1,898.0 $ 1,799.7 $ 142.5 $ 1,942.2
Investments in Joint Ventures 0.4 51.1 51.5 0.4 27.8 28.2
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Page 11 of 30 Pages
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 allows public companies to
provide cautionary remarks about forward-looking statements that they make in
documents that are filed with the Securities and Exchange Commission.
Forward-looking statements in our Management's Discussion and Analysis include
statements about the following:
- - Deregulation;
- - Concentration of credit risk;
- - Environmental investigations and cleanups; and
- - Quantitative and qualitative disclosures about market risk.
Important factors that could cause our actual results to differ substantially
from those in the forward-looking statements include, but are not limited to,
the following:
- - Changes in price and demand for natural gas and related products;
- - Impact of changes in state and federal legislation and regulation on both
the gas and electric industries;
- - Effects and uncertainties of deregulation and competition, particularly in
markets where prices and providers historically have been regulated,
unknown risks related to nonregulated businesses, and unknown issues such
as the stability of certificated marketers;
- - Concentration of credit risk in certificated marketers;
- - Industry consolidation;
- - Changes in accounting policies and practices;
- - Interest rate fluctuations, financial market conditions, and economic
conditions, generally; and
- - Uncertainties about environmental issues and the related impact of such
issues.
Nature of Our Business
AGL Resources Inc. is the holding company for:
- - Atlanta Gas Light Company ("AGLC") and its wholly-owned subsidiary,
Chattanooga Gas Company ("Chattanooga"), which are natural gas local
distribution utilities;
- - AGL Energy Services, Inc. ("AGLE"), a gas supply services company; and
- - Several non-utility subsidiaries.
AGL Resources and its subsidiaries are collectively referred to as "AGL
Resources."
Page 12 of 30 Pages
AGLC conducts its primary business, the distribution of natural gas, in Georgia
including Atlanta, Athens, Augusta, Brunswick, Macon, Rome, Savannah, and
Valdosta. Chattanooga distributes natural gas in the Chattanooga and Cleveland
areas of Tennessee. The Georgia Public Service Commission ("GPSC") regulates
AGLC, and the Tennessee Regulatory Authority ("TRA") regulates Chattanooga. AGLE
is a nonregulated company that bought and sold the natural gas that was supplied
to AGLC's customers during the deregulation transition period to full
competition in Georgia. Currently, AGLE buys and sells natural gas for
Chattanooga's customers.
AGLC comprises substantially all of AGL Resources' assets, revenues, and
earnings. The operations and activities of AGLC, AGLE, and Chattanooga,
collectively, are referred to as the "utility." The utility's total other
operating expenses include costs allocated from AGL Resources Inc.
AGL Resources currently owns or has an interest in the following non-utility
businesses:
- - SouthStar Energy Services LLC ("SouthStar"), a joint venture among a
subsidiary of AGL Resources and subsidiaries of Dynegy, Inc. and Piedmont
Natural Gas Company. SouthStar markets natural gas and related services to
residential and small commercial customers in Georgia and to industrial
customers in the Southeast. SouthStar began marketing natural gas to
customers in Georgia during the first quarter of fiscal 1999 under the
trade name "Georgia Natural Gas Services;"
- - AGL Investments, Inc., which currently manages certain non-utility
businesses including:
- AGL Propane, Inc. ("Propane"), which engages in the sale of propane
and related products and services in Georgia, Alabama, Tennessee and
North Carolina; For an update on Propane, see Financial Condition,
Transition to Competition, Non-utility;
- Trustees Investments, Inc., which owns Trustees Gardens, a residential
and retail development located in Savannah, Georgia; and
- Utilipro, Inc. ("Utilipro"), in which AGL Resources has an 85%
ownership interest and which engages in the sale of integrated
customer care solutions and billing services to energy marketers in
the United States and Canada;
- - AGL Peaking Services, Inc., which owns a 50% interest in Etowah LNG Company
LLC ("Etowah"), a joint venture with Southern Natural Gas Company. Etowah
was formed for the purpose of constructing, owning, and operating a
liquefied natural gas peaking facility.
(The remainder of this page was intentionally left blank.)
Page 13 of 30 Pages
Results of Operations
Three-Month Periods Ended March 31, 2000 and 1999
In this section, the results of operations for the three-month periods ended
March 31, 2000 and 1999 are compared.
Operating Margin Analysis
(Dollars in Millions)
Three Months Ended
3/31/2000 3/31/1999 Favorable/(Unfavorable)
Operating Revenues
Utility ... $ 145.8 $ 364.7 $ (218.9) (60.0%)
Non-utility 14.3 10.4 3.9 37.5%
-------- -------- --------
Total ..... $ 160.1 $ 375.1 $ (215.0) (57.3%)
======== ======== ========
Cost of Sales
Utility ... $ 25.0 $ 228.5 $ 203.5 89.1%
Non-utility 5.7 3.5 (2.2) (62.9%)
-------- -------- --------
Total ..... $ 30.7 $ 232.0 $ 201.3 86.8%
======== ======== ========
Operating Margin
Utility ... $ 120.8 $ 136.2 $ (15.4) (11.3%)
Non-utility 8.6 6.9 1.7 24.6%
-------- -------- --------
Total ..... $ 129.4 $ 143.1 $ (13.7) (9.6%)
======== ======== ========
UTILITY. Utility operating revenues decreased $218.9 million and cost of sales
decreased $203.5 million primarily due to the following factors:
- - Pursuant to the Deregulation Act, Georgia customers began to switch from
AGLC to certificated marketers for natural gas purchases beginning November
1, 1998. As of October 1, 1999, except for isolated circumstances, all of
AGLC's approximately 1.4 million Georgia customers had switched to or had
been assigned to certificated marketers. As a result, AGLC sold less gas.
The reduction in gas sold resulted in a net decrease of $213.6 million in
operating revenues and a net decrease of $207.6 million in the cost of gas
sold to end-use customers resulting from the effect of customer migration
to certificated marketers. Historically, AGLC recovered its actual gas
costs, including carrying costs related to storage of gas inventories, from
its customers;
- - Chattanooga's operating revenues increased $4.1 million and cost of sales
increased $4.2 million as a result of weather that was colder than the
prior year; and
- - A decrease of $9.4 million in delivery service revenue due to the loss of
ancillary service revenues and certain transition revenues of which $8.9
million of the decrease was due to customer migration to certificated
marketers. Additionally, AGLC's late payment fee revenue from end-use
customers decreased $4.9 million. This decrease was primarily due to the
fact that AGLC no longer billing end-use customers. The decrease in
delivery service revenue was partially offset by revenue increases of $2.5
million related to customer growth and $1.8 million related to damage
billing.
Page 14 of 30 Pages
The operating margin decreased to $120.8 million for the three months ended
March 31, 2000 from $136.2 million for the same period last year. The decrease
of $15.4 million was the result of the factors noted above. The operating margin
as a percentage of operating revenues increased to 82.9% for the three months
ended March 31, 2000 from 37.3% for the same period last year. This increase was
primarily due to decreased revenues from gas sales and a corresponding decrease
in cost of gas resulting from deregulation.
NON-UTILITY. Non-utility operating revenues increased to $14.3 million for the
three months ended March 31, 2000 from $10.4 million for the same period last
year. The net increase of $3.9 million was primarily due to the following
factors:
- - An increase of $2.7 million in Utilipro's operating revenues. Utilipro
engages in the sale of integrated customer care solutions to energy
marketers. Utilipro's growth in revenue over the previous year was
primarily due to increased demand for its customer care services; and
- - An increase of $1.9 million in Propane's operating revenues. The increase
was due primarily to an increase in the selling price per gallon compared
with the same period in fiscal 1999.
Non-utility cost of sales increased to $5.7 million for the three months ended
March 31, 2000 from $3.5 million for the same period last year. The increase of
$2.2 million was primarily due to an increase in Propane's cost of gas resulting
from an increase in the cost per gallon as compared to the same period last
year.
Non-utility operating margin increased to $8.6 million for the three months
ended March 31, 2000 from $6.9 million for the same period last year. The
increase of $1.7 million was the result of the factors noted above.
Total Other Operating Expenses Analysis
(Dollars in Millions)
Three Months Ended
3/31/2000 3/31/1999 Favorable/(Unfavorable)
Total Other Operating Expenses
Utility ................... $ 85.2 $ 86.8 $ 1.6 1.8%
Non-utility ............... 6.7 3.9 (2.8) (71.8%)
------- ------- ------
Total ..................... $ 91.9 $ 90.7 $ (1.2) (1.3%)
======= ======= ======
Total Other Operating Expenses
Total other operating expenses increased to $91.9 million for the three months
ended March 31, 2000 from $90.7 million for the same period last year, an
increase of 1.3%.
UTILITY. Utility total other operating expenses decreased $1.6 million as
compared with the same period last year. The decrease was primarily due to a
decrease in customer service expense related to billing, bill inquiry, payment
processing and collection services resulting from the migration of customers to
certificated marketers. The decrease was partially offset by an increase in
general and administrative expense and an increase in depreciation expense due
to increased depreciable property.
NON-UTILITY. Non-utility total other operating expenses increased $2.8 million
as compared with the same period last year primarily due to an increase in
Utilipro's operating expenses caused by increased demand for its services. (see
Non-utility section under Operating Margin Analysis.)
Page 15 of 30 Pages
Other Income/(Loss)
Other income totaled $12.4 million for the three months ended March 31, 2000,
compared with other losses of $0.2 million for the same period last year. The
increase in other income of $12.6 million is primarily due to an increase in AGL
Resources' portion of SouthStar's income of $10.4 million from a loss of $1.9
million, an increase of $12.3 million. The improved performance by SouthStar is
primarily due to an increase in customers served and lower marketing expenses,
compared to the same period last year.
Interest Expense
Interest expense decreased to $12.4 million for the three months ended March 31,
2000 from $13.6 million for the same period last year. The decrease of $1.2
million was primarily due to the following:
- - A decrease of $0.9 million resulting from decreased amounts of long-term
debt outstanding during the period; and
- - A decrease of approximately $0.5 million resulting from a reduction of
interest expense related to customer deposits as a result of customer
migration to certificated marketers.
Income Taxes
Income tax expense increased to $13.2 million for the three months ended March
31, 2000 from $12.8 million for the same period last year. The increase in
income taxes of $0.4 million was due primarily to an increase in the effective
tax rate partially offset by a $1.1 million decrease in income before income
taxes compared to the same period last year. The increase in the effective tax
rate resulted from a reduction in certain tax reserves related to the favorable
resolution of certain outstanding tax issues during the same period last year.
The effective tax rate (income tax expense expressed as a percentage of pretax
income) for the three months ended March 31, 2000 was 36.8% as compared to 34.6%
for the same period last year.
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Page 16 of 30 Pages
Six-Month Periods Ended March 31, 2000 and 1999
In this section, the results of operations for the six-month periods ended March
31, 2000 and 1999 are compared.
Operating Margin Analysis
(Dollars in Millions)
Six Months Ended
3/31/2000 3/31/1999 Favorable/(Unfavorable)
Operating Revenues
Utility ............... $ 317.1 $ 681.9 $ (364.8) (53.5%)
Non-utility ........... 25.3 17.1 8.2 48.0%
-------- -------- --------
Total ................. $ 342.4 $ 699.0 $ (356.6) (51.0%)
======== ======== ========
Cost of Sales
Utility ............... $ 76.8 $ 413.4 $ 336.6 81.4%
Non-utility ........... 8.5 5.6 (2.9) (51.8%)
-------- -------- --------
Total ................. $ 85.3 $ 419.0 $ 333.7 79.6%
======== ======== ========
Operating Margin
Utility ............... $ 240.3 $ 268.5 $ (28.2) (10.5%)
Non-utility ........... 16.8 11.5 5.3 46.1%
-------- -------- --------
Total ................. $ 257.1 $ 280.0 $ (22.9) (8.2%)
======== ======== ========
UTILITY. Utility operating revenues decreased $364.8 million and cost of sales
decreased $336.6 million primarily due to the following factors:
- - Pursuant to the Deregulation Act, Georgia customers began to switch from
AGLC to certificated marketers for natural gas purchases beginning November
1, 1998. As of October 1, 1999, except for isolated circumstances, all of
AGLC's approximately 1.4 million Georgia customers had switched to or had
been assigned to certificated marketers. As a result, AGLC sold less gas.
The reduction in gas sold resulted in a net decrease of $350.9 million in
operating revenues and a net decrease of $345.0 million in the cost of gas
sold to end-use customers resulting from the effect of customer migration
to certificated marketers. Historically, AGLC recovered its actual gas
costs, including carrying costs related to storage of gas inventories, from
its customers;
- - Chattanooga's operating revenues increased $8.4 million and cost of sales
increased $8.5 million as a result of weather that was colder than the
prior year; and
- - A decrease of $24.0 million in delivery service revenue due to the loss of
ancillary service revenues and certain transition revenues of which $20.0
million of the decrease was due to customer migration to certificated
marketers. Additionally, AGLC's late payment fee revenue from end-use
customers decreased $9.9 million. This decrease was primarily due to the
fact that AGLC no longer billing end-use customers. The decrease in
delivery service revenue was partially offset by revenue increases of $4.7
million related to customer growth and $2.0 million related to damage
billing.
Page 17 of 30 Pages
The operating margin decreased to $240.3 million for the six months ended March
31, 2000 from $268.5 million for the same period last year. The decrease of
$28.2 million was the result of the factors noted above. The operating margin as
a percentage of operating revenues increased to 75.8% for the six months ended
March 31, 2000 from 39.4% for the same period last year. This increase was
primarily due to decreased revenues from gas sales and a corresponding decrease
in cost of gas resulting from deregulation.
NON-UTILITY. Non-utility operating revenues increased to $25.3 million for the
six months ended March 31, 2000 from $17.1 million for the same period last
year. The net increase of $8.2 million was primarily due to the following
factors:
- - An increase of $6.0 million in Utilipro's operating revenues. Utilipro's
growth in revenue was primarily due to increased demand for its customer
care services; and
- - An increase of $3.2 million in Propane's operating revenues. The increase
was due to an increase in the selling price per gallon compared with the
same period in fiscal 1999.
Non-utility cost of sales increased to $8.5 million for the six months ended
March 31, 2000 from $5.6 million for the same period last year. The increase of
$2.9 million was primarily due to an increase in Propane's cost of gas resulting
from an increase in the cost per gallon as compared to the same period last
year.
Non-utility operating margin increased to $16.8 million for the six months ended
March 31, 2000 from $11.5 million for the same period last year. The increase of
$5.3 million was the result of the factors noted above.
Total Other Operating Expenses Analysis
(Dollars in Millions)
Six Months Ended
3/31/2000 3/31/1999 Favorable/(Unfavorable)
Total Other Operating Expenses
Utility ................... $ 167.0 $ 171.4 $ 4.4 2.6%
Non-utility ............... 19.1 8.5 (10.6) (124.7%)
-------- -------- --------
Total ..................... $ 186.1 $ 179.9 $ (6.2) (3.4%)
======== ======== ========
Total Other Operating Expenses
Total other operating expenses increased to $186.1 million for the six months
ended March 31, 2000 from $179.9 million for the same period last year, an
increase of 3.4%.
UTILITY. Utility total other operating expenses decreased $4.4 million as
compared with the same period last year. The decrease was primarily due to a
decrease in customer service expense related to billing, bill inquiry, payment
processing and collection services and a decrease in bad debt expense resulting
from the migration of customers to certificated marketers. The decreases were
partially offset by increases in general and administrative expense and
depreciation expense.
NON-UTILITY. Non-utility total other operating expenses increased $10.6 million
as compared with the same period last year primarily due to an increase in
Utilipro's operating expenses caused by increased demand for its services. (See
Non-utility section under Operating Margin Analysis.).
Page 18 of 30 Pages
Other Income/(Loss)
Other income totaled $19.3 million for the six months ended March 31, 2000,
compared with other losses of $8.1 million for the same period last year. The
increase in other income of $27.4 million was primarily due to the following
factors:
- - AGL Resources' portion of SouthStar's income increased to $15.2 million
from a loss of $3.3 million, an increase of $18.5 million. The improved
performance by SouthStar was primarily due to an increase in customers
served and lower marketing expenses, compared to the same period last year;
and
- - During the first six months of fiscal 1999, AGL Resources recorded pre-tax
losses related to its interests in Sonat Marketing Company L.P. ("Sonat
Marketing") and Sonat Power Marketing L.P. ("Sonat Power Marketing")
totaling approximately $5.3 million. AGL Resources sold its interests in
Sonat Marketing and Sonat Power Marketing during the fourth quarter of
fiscal 1999.
Interest Expense
Interest expense decreased to $24.6 million for the six months ended March 31,
2000 from $27.8 million for the same period last year. The decrease of $3.2
million was primarily due to the following:
- - A decrease of $1.1 million resulting from decreased amounts of long-term
debt outstanding during the period; and
- - A decrease of approximately $1.0 million resulting from a reduction of
interest expense related to customer deposits as a result of customer
migration to certificated marketers.
Income Taxes
Income tax expense increased to $22.8 million for the six months ended March 31,
2000 from $21.0 million for the same period last year. The increase in income
taxes of $1.8 million was due to an increase in the effective tax rate and a
$1.5 million increase in income before income taxes compared to the same period
last year. The increase in the effective tax rate resulted from a reduction in
certain tax reserves related to the favorable resolution of certain outstanding
tax issues during the same period last year. The effective tax rate (income tax
expense expressed as a percentage of pretax income) for the six months ended
March 31, 2000 was 36.4% as compared to 34.4% for the same period last year.
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Page 19 of 30 Pages
Financial Condition
Seasonality of Business
Historically, the utility business has been seasonal in nature, resulting in a
substantial increase in accounts receivable from customers from September 30 to
March 31 due to higher billings during colder weather. As a result of
deregulation and the implementation of SFV rates, the seasonality of both
expenses and revenues related to AGLC's Georgia operations has been eliminated.
However, the operations of SouthStar, Chattanooga, and Propane are seasonal, and
those entities will likely experience greater profitability in the winter months
than in the summer months. (See Note 2. Overview of the Transition from a
Regulated to a Competitive Business Environment.)
Inventory of natural gas stored underground decreased $30.1 million during the
six months ended March 31, 2000 primarily due to the assignment of most of
AGLC's inventories to certificated marketers as a result of the Deregulation
Act. AGLC will continue to maintain small amounts of inventory of natural gas
stored underground in order to optimize the operation of its gas distribution
system.
AGL Resources historically meets its liquidity requirements through operating
cash flow and the issuance of short-term debt. Short-term lines of credit with
various banks provide for direct borrowings and are subject to annual renewal.
Availability under the current lines of credit ranges up to $180 million.
Short-term debt increased $109.5 million to $111.0 million as of March 31, 2000
from $1.5 million as of September 30, 1999. The increase in short-term debt was
primarily due to the repayment of $50 million of AGLC's long-term debt, which
matured during the six months ended March 31, 2000, and the repurchase of 3.1
million shares of common stock for a total of $52.7 million. Management expects
to obtain other long-term financing in fiscal 2001 to replace the short-term
debt that was used for these purposes.
Operating cash flow decreased to $72.5 million for the six months ended March
31, 2000 as compared to $165.8 million for the same period last year primarily
due to a decrease in gas cost credits. (See Gas Cost Credits section below.)
Management believes available credit will be sufficient to meet working capital
needs both on a short and long-term basis. However, capital needs depend on many
factors and AGL Resources may seek additional financing through debt or equity
offerings in the private or public markets at any time.
Transition to Competition
UTILITY. The regulated rate structure under which AGLC unbundled its gas sales
and delivery service assumed that AGLC's costs associated with providing
customer service decreased each time a customer switched to a certificated
marketer for gas sales service, and such costs would be eliminated at the time
the switch was made. In fact, a significant portion of the costs associated with
customer service activities ("ancillary services"), including billing, bill
inquiry, payment processing and collection services, could not be eliminated for
a period of up to several months, during which AGLC continued to incur these
expenses. The accelerated pace of customer migration to certificated marketers
also required AGLC to incur additional customer service expenses, not originally
provided for in regulated rates, in order to maintain a high level of customer
service during the transition to competition. During the six months ended March
31, 2000, AGLC aggressively pursued the elimination of these expenses by
implementing various cost reduction and operational excellence strategies.
Management believes that those strategies have been effective and that AGLC's
operating expenses are approaching an appropriate level.
Page 20 of 30 Pages
The Deregulation Act authorizes an electing distribution company, like AGLC, to
recover prudently incurred costs that are found by the GPSC to be "stranded" as
a result of the transition to competition, and necessary to provide a reasonable
rate of return. On June 25, 1999, AGLC filed a request with the GPSC for an
accounting order (the "Order"), which would allow AGLC to defer transition costs
which are considered by AGLC to be "stranded." The Order, which was approved on
October 19, 1999, allows AGLC to defer these costs if such costs are incurred
from October 1, 1999 to September 30, 2000, and recovery is necessary in order
for AGLC to earn the 11% return on common stockholders' equity approved by the
GPSC in AGLC's last rate case. In order to be deferred, the cost must also be
one that:
- - AGLC is still incurring but, as a result of deregulation, is no longer
receiving revenue from the rate or rates which were set based on that cost;
- - Is prudently incurred; and
- - Cannot be mitigated.
As of March 31, 2000, AGLC has deferred a net amount of $2.9 million in expenses
related to deregulation and recorded a regulatory asset in that amount.
NON-UTILITY. AGL Resources Inc. has entered into a definitive agreement that
will combine its propane operations, presently operated through Propane, with
the propane operations of Atmos Energy Corporation, Dallas TX; Piedmont Natural
Gas Company, Inc., Charlotte, NC; and TECO Energy, Inc., Tampa FL. The joint
venture, which will be called U.S. Propane, will be among the 10 largest propane
retailers in the nation with approximately 200,000 customers and operations in
Alabama, Georgia, South Carolina, Florida, Kentucky, North Carolina and
Tennessee. The transaction is expected to be completed by June 30, 2000.
Concentration of Credit Risk
AGLC has concentration of credit risk related to the provision of services to
certificated marketers. At September 30, 1998, AGLC billed approximately 1.4
million end-use customers in Georgia for its services. In contrast, at March 31,
2000, AGLC billed 14 certificated and active marketers in Georgia for services,
who, in turn, billed end-use customers.
As of March 31, 2000, 54.6% of AGL Resources' total gas receivables were due
from four of the 14 certificated and active marketers plus one inactive marketer
and 8.2% were due from end-use customers in Georgia who migrated to certificated
marketers late in fiscal 1999 or who were randomly assigned. Beginning October
1, 1999, only gas receivables primarily attributable to Chattanooga will be due
from end-use customers. As a result, in fiscal 2000, a significantly higher
percentage of AGL Resources' total gas receivables will be due from Georgia
certificated marketers than was the case in prior years.
Several factors mitigate the risks to AGL Resources of the increased
concentration of credit that has resulted from deregulation. First, in order to
obtain a certificate from the GPSC, a certificated marketer must demonstrate to
the GPSC, among other things, that it possesses satisfactory financial and
technical capability to render the certificated service. Second, AGLC has
instituted certain practices and imposed certain requirements designed to reduce
credit risk. These include:
- - Pursuant to AGLC's tariff, each certificated marketer is required to
maintain security for its obligations to AGLC in an amount equal to at
least two times the marketer's estimated maximum monthly bill and in the
form of a cash deposit, letter of credit, surety bond or guaranty from a
creditworthy guarantor; and
- - Intrastate delivery service is billed in advance rather than in arrears.
Page 21 of 30 Pages
AGLC also faces potential credit risk in connection with assignments to
certificated marketers of interstate pipeline transportation and storage
capacity. Although AGLC has assigned this capacity to the certificated
marketers, in the event that the certificated marketers fail to pay the
interstate pipelines for the capacity, the interstate pipelines would in all
likelihood seek repayment from AGLC. This risk is mitigated somewhat by the fact
that the interstate pipelines require the certificated marketers to maintain
security for their obligations to the interstates arising out of the assigned
capacity.
On October 26, 1999, Peachtree Natural Gas, LLC ("Peachtree"), one of the five
largest certificated marketers in Georgia based on customer count, filed for
protection under Chapter 11 of the United States Bankruptcy Code. As of the date
of Peachtree's bankruptcy filing, Peachtree owed AGLC approximately $14.3
million for pre-petition delivery service and other services and charges, and
AGLC held $11 million of surety bonds as security for Peachtree's obligations.
The amount owed to AGLC does not include amounts owed by Peachtree to interstate
pipelines for assigned capacity. Based upon proofs of claim filed by interstate
pipelines in Peachtree's bankruptcy proceeding, as of the date of Peachtree's
filing, Peachtree owed interstate pipelines approximately $3.4 million for
assigned capacity. In December 1999, Shell Energy Services Company, L.L.C. began
serving the firm customers formerly served by Peachtree. AGLC has been paid in
full for all post-petition delivery and other services provided by AGLC to
Peachtree.
Capital Expenditures
Capital expenditures for construction of distribution facilities, purchase of
equipment, and other general improvements were $79.5 million for the six-month
period ended March 31, 2000 as compared to $61.8 million for the six-month
period ended March 31, 1999. The increase of $17.7 million is primarily
attributable to the capital expenditures incurred for the accelerated pipeline
replacement plan. (See AGLC Pipeline Safety section under State Regulatory
Activity.) Typically, funding for capital expenditures is provided through a
combination of internal and external sources.
Common Stock
During the six months ended March 31, 2000, AGL Resources repurchased 3,072,500
shares of common stock for a total of $52.7 million pursuant to a previously
announced stock repurchase plan. During that same period, AGL Resources issued
307,925 shares of common stock under ResourcesDirect, a direct stock purchase
and dividend reinvestment plan; the Retirement Savings Plus Plan; the Long-Term
Incentive Plan; and the Non-Employee Directors Equity Compensation Plan.
Ratios
As of March 31, 2000, AGL Resources' capitalization ratios consisted of:
46.6% long-term debt;
5.7% preferred securities; and
47.7% common equity.
Gas Cost Credits
Gas cost credits decreased to $2.0 million as of March 31, 2000 from $37.9
million as of September 30, 1999. The decrease is primarily due to a $33 million
payment to the GPSC during December 1999, and payments totaling approximately
$2.5 million to buyout and terminate remaining long-term gas supply contracts.
In accordance with the January 26, 1999 joint stipulation agreement entered into
with the GPSC, AGLC recognized profits of $1.0 million in fiscal 1999 and
recorded a liability for the remaining over-collection of gas costs in
accordance with SFV rates. (See Note 2. Overview of the Transition from a
Regulated to a Competitive Business Environment.)
Page 22 of 30 Pages
Since AGLC paid the $33 million to the GPSC, the GPSC has instituted a mechanism
pursuant to which certificated marketers will be required to provide customers
with a credit on their marketer's bill. To be eligible for the refund credit,
the customer must have been on AGLC's system on May 25, 1999, and still
connected as of April 3, 2000. The average refund per customer is expected to be
approximately $25.
State Regulatory Activity
In January 2000, the GPSC approved a new tariff to be made available to certain
agricultural processing customers. Approximately 350 commercial poultry growers
and other similarly situated customers switched to other fuels following the
introduction of new rates in 1998. The new tariff is expected to allow many of
these customers to return to natural gas to fuel their operations.
In March 2000, the GPSC approved a plan to refund approximately $34 million to
retail end-use customers of certificated marketers. The refund is a result of a
positive balance in AGLC's purchased gas adjustment ("PGA") which accrued while
AGLC was still a retail provider of natural gas. The refund has no effect on
AGLC's earnings. However, AGLC was allowed to recover approximately $0.8 million
from the PGA balance prior to disbursement of refunds in order to cover bad debt
balances of certain customers who were eligible for refunds.
The GPSC also approved the release of $0.2 million during the quarter ended
March 31, 2000 from the Universal Service Fund ("USF") for system expansion
projects in AGLC's distribution system. The USF was established as a component
of gas deregulation in Georgia in order to, among other things, fund expansion
of AGLC's distribution system in areas where it would otherwise not be
economically feasible to do so. For the six months ended March 31, 2000, USF
contributions totaled $0.3 million for expansion projects.
On February 1, 2000, the TRA approved a special contract for the Company with an
industrial customer in order to avoid bypass of the distribution system in
Tennessee. The special contract allows the Company to recover 90 percent of the
margin lost from this industrial customer through a surcharge to all other
customers.
Regulatory Accounting
AGL Resources has recorded regulatory assets and liabilities in its Condensed
Consolidated Balance Sheets in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("SFAS 71").
In July 1997, the Emerging Issues Task Force ("EITF") concluded that once
legislation is passed to deregulate a segment of a utility and that legislation
includes sufficient detail for the enterprise to determine how the transition
plan will affect that segment, SFAS 71 should be discontinued for that segment
of the utility. The EITF consensus permits assets and liabilities of a
deregulated segment to be retained if they are recoverable through a segment
that remains regulated.
AGLC Pipeline Safety
On January 8, 1998, the GPSC issued procedures and set a schedule for hearings
about alleged pipeline safety violations. On July 21, 1998, the GPSC approved a
settlement between AGLC and the Adversary Staff of the GPSC that details a
10-year replacement program for approximately 2,300 miles of cast iron and bare
steel pipe. Over that 10-year period, AGLC will recover from customers, through
billings to certificated marketers, the costs related to the program net of any
cost savings from the replacement program.
Page 23 of 30 Pages
During the six months ended March 31, 2000, approximately 111 miles of pipe was
replaced pursuant to the program. During that period, AGLC's capital
expenditures and operation and maintenance expenses related to the pipeline
replacement program were approximately $23.3 million and $4.3 million,
respectively. All such amounts will be recovered through a combination of SFV
rates and a regulatory mechanism. On October 1, 1999, AGLC began recovering
costs of the program through the regulatory mechanism. The amount recovered
through March 31, 2000 was approximately $1.0 million.
Environmental
AGLC has been associated with nine MGP sites in Georgia and three in Florida.
Based on investigations to date, AGLC believes that some cleanup is likely at
most of the sites. AGLC currently estimates that its total future cost of
investigating and cleaning up its MGP sites is between $102.4 million and $148.2
million. AGLC has two ways of recovering investigation and cleanup costs. First,
the GPSC has approved an "Environmental Response Cost Recovery Rider." It allows
the recovery of costs of investigation, testing, cleanup, and litigation.
Because of that rider, AGLC has recorded a regulatory asset in the same amount
as the recorded liability for investigation and cleanup. The second way AGLC can
recover costs is by exercising the legal rights AGLC believes it has to recover
a share of its costs from other potentially responsible parties, typically
former owners or operators of the MGP sites. AGLC has been actively pursuing
those recoveries. There were no material recoveries during the quarter ended
March 31, 2000.
Federal Regulatory Activity
FERC Order 636: Transition Costs Settlement Agreements
The Federal Energy Regulatory Commission ("FERC") issued Order No. 637 on
February 9, 2000. The order revises the FERC's rules governing the operations of
the utility's interstate pipeline suppliers. Among other things, the FERC:
- - Permitted holders of firm pipeline capacity to release the capacity to
other shippers at a price greater than the pipeline's maximum rate for the
same capacity on an experimental basis through September 30, 2002;
- - Authorized pipelines to propose different rates for services rendered
during periods of peak usage and to propose rates that would differ based
on the length of the customer's contract; and
- - Declined, for the present time, to permit pipelines and their customers to
establish individually negotiated terms and conditions of service that
depart from generally applicable pipeline tariff rules.
The utility cannot predict how these revisions may potentially affect
operations.
The FERC has required the utility, as well as other interstate pipeline
customers, to pay transition costs associated with the separation of the
suppliers' transportation and gas supply services. Based on its pipeline
suppliers' filings with the FERC, the utility estimates the total portion of its
transition costs from all its pipeline suppliers will be approximately $107.9
million. As of March 31, 2000, approximately $107.4 million of those costs had
been incurred and were being recovered primarily from the utility's customers
under rates charged for the distribution of gas. AGLC's remaining costs will be
recovered from certificated marketers.
Page 24 of 30 Pages
The utility continues to pay transition costs to Southern Natural Gas Company
("Southern") pursuant to a restructuring settlement that resolves all transition
cost issues for Southern. Under the Southern settlement, the utility's share of
Southern's transition costs is approximately $89.7 million, of which the utility
incurred $89.2 million as of March 31, 2000.
On March 10, 2000, Southern filed a settlement to resolve all issues arising out
of its September 1, 1999 general rate case filing. Among other matters, the
settlement provides for the termination of Southern's interstate pipeline
affiliate, South Georgia Natural Gas Company ("South Georgia"), as a separate
entity, with Southern absorbing South Georgia's facilities and operations. The
settlement rates would represent a decrease of approximately $6 million per year
under AGLC's existing contracts for firm interstate pipeline capacity. The FERC
has authorized Southern to implement the settlement rates on an interim basis
effective March 1, 2000, pending action by the FERC on the settlement. In return
for the rate reduction firm contract holders were required to extend their
existing contracts by three years. The utility has filed comments requesting
that the FERC approve the settlement.
AGLC is involved in three Transcontinental Gas Pipe Line Corporation ("Transco")
rate cases, which concern rates in effect since September 1, 1995, as well as
proposed changes to take effect prospectively. These rate proceedings are at
various stages of litigation before the FERC, and none of these proceedings are
final. At the present time, AGLC cannot predict the effect of these proceedings
on its rates or operations.
Environmental Matters
Before natural gas was widely available in the Southeast, AGLC manufactured gas
from coal and other fuels. Those manufacturing operations were known as
"manufactured gas plants", or "MGPs" which AGLC ceased operating in the 1950s.
Because of recent environmental concerns, AGLC is required to investigate
possible environmental contamination at those plants and, if necessary, clean up
any contamination.
AGLC has been associated with nine MGP sites in Georgia and three in Florida.
Based on investigations to date, AGLC believes that some cleanup is likely at
most of the sites. In Georgia, the state Environmental Protection Division
supervises the investigation and cleanup of MGP sites. In Florida, the U.S.
Environmental Protection Agency has that responsibility.
For each of the MGP sites, AGLC has estimated its share of the likely costs of
investigation and cleanup. AGLC currently estimates that its total future cost
of investigating and cleaning up its MGP sites is between $102.4 million and
$148.2 million. That range does not include other potential expenses, such as
unasserted property damage or personal injury claims or legal expenses for which
AGLC may be held liable but for which neither the existence nor the amount of
such liabilities can be reasonably forecast. Within that range, AGLC cannot
identify any single number as a "better" estimate of its likely future costs
because its actual future investigation and cleanup costs will be affected by a
number of contingencies that cannot be quantified at this time. Consequently, as
of March 31, 2000, AGLC has recorded the lower end of the range, or $102.4
million, as a liability, which remains unchanged from September 30, 1999, and a
corresponding regulatory asset. (See Environmental section under State
Regulatory Activity.)
On April 24, 2000, AGLC entered into an agreement with ThermoRetec Consulting
Corporation for the management of the environmental investigations and cleanups
associated with the MGP sites. Management does not believe the outsourcing of
the management will have a material effect on the total future cost of
investigating and cleaning up the MGP sites.
Page 25 of 30 Pages
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
All financial instruments and positions held by AGL Resources described below
are held for purposes other than trading.
Interest Rate Risk
AGL Resources' exposure to market risk related to changes in interest rates
relates primarily to its borrowing activities. A hypothetical 10% increase or
decrease in interest rates related to AGL Resources' variable rate debt ($111.0
million outstanding as of March 31, 2000) would not have a material effect on
results of operations or financial condition over the next 12 months. The fair
value of AGL Resources' long-term debt and capital securities also are affected
by changes in interest rates. A hypothetical 10% increase or decrease in
interest rates would not have a material effect on the estimated fair value of
AGL Resources' long-term debt or capital securities. Additionally, the fair
value of outstanding long-term debt and capital securities has not materially
changed since September 30, 1999. During the six months ended March 31, 2000,
AGL Resources repaid $50.0 million of long-term debt.
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Page 26 of 30 Pages
PART II -- OTHER INFORMATION
"Part II -- Other Information" is intended to supplement information contained
in the Annual Report on Form 10-K for the fiscal year ended September 30, 1999,
and should be read in conjunction therewith.
ITEM 1. LEGAL PROCEEDINGS
With regard to legal proceedings, AGL Resources is a party, as both plaintiff
and defendant, to a number of suits, claims and counterclaims on an ongoing
basis. (See State Regulatory Activity, Federal Regulatory Activity, and
Environmental Matters contained in Item 2 of Part I under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition.") Management believes that the outcome of all litigation in which it
is involved will not have a material adverse effect on the consolidated
financial statements of AGL Resources.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on February 4, 2000 (the "Annual
Meeting"). At the Annual Meeting, the shareholders elected the following four
director nominees, as set forth in AGL Resources' Proxy Statement. The number of
votes "for" each nominee is as follows:
Nominee................................... For Withheld
Otis A. Brumby, Jr ..................... 47,421,325 898,960
Robert S. Jepson, Jr ................... 47,492,535 827,750
Wyck A. Knox, Jr ....................... 47,485,655 834,634
Dennis M. Love ......................... 47,476,513 843,772
Directors whose term of office continued after the Annual Meeting are: Frank
Barron, Jr., Walter M. Higgins, D. Raymond Riddle, Betty L. Siegel, Ben J.
Tarbutton, Jr. and Felker W. Ward, Jr.
ITEM 5. OTHER INFORMATION
Information related to State Regulatory Activity, Federal Regulatory Activity,
and Environmental Matters is contained in Item 2 of Part I under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
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Page 27 of 30 Pages
RECENT EVENTS
On May 8, 2000, AGL Resources entered into a definitive agreement to purchase
Virginia Natural Gas ("VNG"), a wholly owned subsidiary of Dominion Resources,
for $500 million in cash. The purchase price includes $22 million in working
capital. Under the agreement, AGL Resources would acquire all of the outstanding
stock of VNG. At the option of the seller, the parties may elect to treat the
transaction as a sale of assets for tax purposes, commonly referred to as a
Section 338(h)(10) election, in which case the purchase price shall be increased
to $550 million to reflect the increased value of the transaction to AGL
Resources. The transaction is conditioned, among other things, upon approvals of
various regulatory agencies, including the Virginia State Corporation
Commission, and is expected to close by December 31, 2000.
In connection with the acquisition of VNG, AGL Resources intends to register
with the Securities and Exchange Commission as a holding company under the
Public Utility Holding Company Act of 1935.
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Page 28 of 30 Pages
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Eighth Amendment to the AGL Resources Inc. Long-Term Stock
Incentive Plan of 1990.
10.2 First Amendment to the Atlanta Gas Light Company 1996
Non-Employee Directors Equity Compensation Plan.
10.3 Second Amendment to the AGL Resources Inc. 1996 Non-Employee
Directors Equity Compensation Plan.
10.4 Third Amendment to the AGL Resources Inc. 1996 Non-Employee
Directors Equity Compensation Plan.
10.5 First Amendment to the AGL Resources Inc. 1998 Common Stock
Equivalent Plan for Non-Employee Directors.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On February 17, 2000, AGL Resources filed a Current Report on Form 8-K
dated February 16, 2000, in connection with AGL Resources Inc.'s
participation in the U.S. Propane joint venture.
(The remainder of this page was intentionally left blank.)
Page 29 of 30 Pages
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGL Resources Inc.
(Registrant)
Date May 15, 2000 /s/ Donald P. Weinstein
Donald P. Weinstein
Senior Vice President and
Chief Financial Officer
(Principal Accounting and Financial Officer)
Page 30 of 30 Pages