Management's Discussion and Analysis of Results of Operations and Financial
Condition
Following shareholder and regulatory approval on March 6, 1996, AGL Resources
Inc. (AGL Resources), a Georgia corporation, became the holding company of
Atlanta Gas Light Company (AGL), a natural gas distribution utility, and its
subsidiaries. Unless noted specifically or otherwise required by the context,
references to AGL Resources include AGL, AGL's wholly owned natural gas
distribution utility subsidiary, Chattanooga Gas Company (Chattanooga), and AGL
Resources' nonregulated subsidiaries: AGL Energy Services, Inc. (AGL Energy
Services); AGL Investments, Inc. (AGL Investments); AGL Resources Service
Company; and The Energy Spring, Inc. AGL Energy Services has one nonregulated
subsidiary, Georgia Gas Company. AGL Investments has six nonregulated
subsidiaries: AGL Propane, Inc., formerly known as Georgia Gas Service Company
(AGL Propane); AGL Consumer Services, Inc.; AGL Gas Marketing, Inc.; AGL Power
Services, Inc.; AGL Energy Wise Services, Inc.; and Trustees Investments, Inc.
Unless specifically noted or otherwise required by the context, references to
AGL or the utility include the operations and activities of AGL and Chattanooga.
Graph reflects consolidated operating revenues, operating expenses and operating
expenses as a percentage of operating revenues for the fiscal years ended
September 30, 1995 through 1997, inclusive. Data presented is as follows:
In millions of dollars 1995(a) 1996 1997
- ----------------------------------------------------
Operating Revenues 1,069 1,229 1,288
Operating Expenses 975 1,065 1,116
% Operating Expenses to
Operating Revenues 91% 87% 87%
- ----------------------------------------------------
(a) Operating expenses include restructuring costs of $70.3 million.
Graph reflects common stock market value, book value and % market to book value
for the fiscal years ended September 30, 1995, through 1997, inclusive. Data
presented is as follows:
In dollars per share 1995 1996 1997
- ----------------------------------------------------
Market value per share $19.31 $19.13 $18.94
Book value per share 10.15 10.56 10.99
% market value to book
value 190% 181% 172%
- ----------------------------------------------------
The following discussion and analysis reflect the results of operations
and financial condition of AGL Resources for the three years ended September 30,
1997, and factors expected to impact its future operations.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides for the use of
cautionary statements accompanying forward-looking statements. Disclosures
provided contain forward-looking statements concerning, among other things,
deregulation and restructuring costs and environmental remediation.
Important factors that could cause actual results to differ materially
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;
uncertainty as to state and federal legislative and regulatory issues; the
effects of competition, particularly in markets where prices and providers
historically have been regulated; and uncertainty with regard to environmental
issues and competitive issues in general.
Results of Operations
Fiscal 1997 Compared with Fiscal 1996
Operating Revenues - Operating revenues increased 4.8% in 1997 compared with
1996 primarily due to (1) increased operating revenues attributable to a
nonregulated retail energy marketing company formed in June 1996, (2) increased
operating revenues from a nonregulated gas supply services company formed in
July 1996, and (3) increased utility base revenues attributable to an increase
of approximately 32,000 in the number of customers served. The increase in
operating revenues was offset partly by (1) decreased volumes of natural gas
sold to utility customers due to weather that was 24.7% warmer in 1997 than in
1996 and (2) a shift by certain interruptible customers from interruptible sales
to transportation service. Operating revenues are less when gas is transported
for a customer than when it is sold to that customer. AGL's transportation rate
generates the same operating income as the applicable sales rate schedule for
interruptible sales of gas; therefore, earnings are not affected.
Cost of Gas - Cost of gas increased 5.7% in 1997 compared with 1996 primarily
due to (1) increased cost of gas attributable to a nonregulated retail energy
marketing company formed in June 1996, (2) increased cost of gas from a
nonregulated gas supply services company formed in July 1996, and (3) an
increase in the cost of the gas supply recovered from customers under the
purchased gas provisions of the utility's rate schedules. The increase in the
cost of gas was offset partly by (1) decreased volumes of natural gas sold to
utility customers due to weather that was 24.7% warmer in 1997 than in 1996 and
(2) a shift by certain interruptible customers from interruptible sales to
transportation service.
The utility's cost of natural gas per therm was 39.4 cents in 1997 and
32.2 cents in 1996. Variations in the cost of purchased gas are passed through
to customers under the purchased gas provisions of the utility's rate schedules.
Over-recoveries or under-recoveries of purchased gas costs are charged or
credited to the cost of gas and are included in current assets or liabilities,
thereby eliminating the effect that recovery of gas costs otherwise would have
on net income.
Operating Margin - Operating margin increased 3.6% in 1997 compared with 1996
primarily due to (1) higher utility base revenues resulting from approximately
32,000 additional customers, (2) an increase in operating margin attributable to
a nonregulated gas supply services company formed in July 1996, and (3) an
increase in operating margin resulting from propane operations acquired during
February and June 1997.
Other Operating Expenses - Operation and maintenance expenses increased 2.3% in
1997 compared with 1996 primarily due to (1) increased uncollectible accounts
expenses, (2) increased expenses attributable to propane operations acquired
during February and June 1997, and (3) increased maintenance of general plant.
Depreciation expense increased 5.2% in 1997 compared with 1996 primarily
due to an increase in depreciable plant in service. The composite
straight-line depreciation rate was approximately 3.2% for depreciable property
other than transportation equipment during 1997 and 1996.
Taxes other than income taxes increased $1 million in 1997 compared
with 1996 primarily due to (1) increased gross receipts taxes and (2) increased
ad valorem taxes.
Graph reflects throughput (utility operations) of therms sold and transported by
class of customer for the year ended September 30, 1997. Data presented is as
follows:
Throughput
(utility Percentage
Customer operations) of Total
- ----------------------------------------------
Industrial 1.3 billion 47%
Commercial .51 billion 18%
Residential .99 billion 35%
- ----------------------------------------------
Graph reflects margin (utility operations) by class of customer for the year
ended September 30, 1997. Data presented is as follows:
Margin
(utility
Customer operations)
- -------------------------------
Industrial 12%
Commercial 23%
Residential 65%
- -------------------------------
Other Income - Other income decreased $2.8 million in 1997 compared with 1996
primarily due to (1) decreased income from a gas marketing joint venture, (2)
decreased recoveries of environmental response costs from insurance carriers and
third parties, and (3) increased carrying costs on portions of recoveries of
environmental response costs from insurance carriers and third parties. The
decrease in other income was offset partly by the recovery from utility
customers of increased carrying costs not included in base rates related to
storage gas inventories.
Interest Expense - Total interest expense increased $3.1 million in 1997
compared with 1996 primarily due to increased amounts of long-term and
short-term debt outstanding during the period.
Dividends on Preferred Stock of Subsidiaries - Dividends on preferred stock of
subsidiaries increased $1.8 million in 1997 compared with 1996 primarily due to
dividend requirements on $75 million in principal amount of Capital Securities
issued in June 1997 by a business trust wholly owned by AGL Resources. (See Note
6 in Notes to Consolidated Financial Statements.)
Income Taxes - Income taxes decreased $0.7 million in 1997 compared with 1996
primarily due to a decrease in the effective tax accrual rate as a result of
payment of tax deductible interest on subordinated debt to fund dividends on
Capital Securities issued in June 1997.
Net Income and Dividends - Net income for 1997 was $76.6 million, compared with
$75.6 million in 1996. Earnings per share of common stock were $1.37 in 1997 and
1996. Dividends per share of common stock were $1.08 in 1997, compared with
$1.06 in 1996. The increase in net income was primarily due to (1) an increase
in operating margin as a result of an increase of approximately 32,000 in the
number of utility customers served and (2) increased operating margins from
nonregulated businesses formed during 1996. The increase in net income was
offset partly by (1) increased operating expenses, (2) increased financing
costs, and (3) decreased other income. Earnings per share of common stock were
unchanged for 1997 compared with 1996 due to an increase in the number of shares
outstanding.
Fiscal 1996 Compared with Fiscal 1995
Operating Revenues - Operating revenues increased 15% in 1996 compared with 1995
primarily due to (1) an increase in the cost of the gas supply recovered from
customers under the purchased gas provisions of the utility's rate schedules,
(2) increased volumes of gas sold to firm service customers as a result of
weather that was 50% colder in 1996 than in 1995, and (3) an increase of
approximately 41,000 in the number of utility customers served.
Cost of Gas - Cost of gas increased 26.4% in 1996 compared with 1995 primarily
due to (1) an increase in the cost of the gas supply recovered from customers
under the purchased gas provisions of the utility's rate schedules and (2)
increased volumes of gas sold to firm service customers as a result of weather
that was 50% colder in 1996 than in 1995.
The utility's cost of natural gas per therm was 32.2 cents in 1996 and
29.7 cents in 1995. Variations in the cost of purchased gas are passed through
to customers under the purchased gas provisions of the utility's rate schedules.
Over-recoveries or under-recoveries of purchased gas costs are charged or
credited to cost of gas and are included in current assets or liabilities,
thereby eliminating the effect that recovery of gas costs otherwise would have
on net income.
Operating Margin - Operating margin increased 1.8% in 1996 compared with 1995
primarily due to (1) recovery of increased expenses related to an Integrated
Resource Plan (IRP), which are recovered through an IRP Cost Recovery Rider
approved by the Georgia Public Service Commission (Georgia Commission), (2) a
revenue increase granted by the Tennessee Regulatory Authority (TRA), effective
November 1, 1995, and (3) an increase of approximately 41,000 in the number of
utility customers served.
Restructuring Costs - In November 1994 AGL Resources announced a corporate
restructuring plan in response to increased competition and changes in the
federal and state regulatory environments in which AGL operates. Restructuring
costs of $61.4 million related to early retirement and severance programs and
$8.9 million related to office closings and costs to exit AGL's appliance
merchandising and real estate investment operations were recorded during 1995.
There were no restructuring costs recorded in 1996.
During the fourth quarter of fiscal 1996, AGL Resources reviewed its
remaining liabilities with respect to its corporate restructuring plan. As a
result, AGL Resources adjusted its restructuring accruals and reduced operating
expenses by $2.7 million, before income taxes. The remaining balance of
restructuring liabilities as of September 30, 1996, was $1 million.
Other Operating Expenses - Operation and maintenance expenses increased 2.2% in
1996 compared with 1995 primarily due to (1) an increase of $3.6 million in
expenses related to IRP and (2) an increase of $1.2 million in franchise
expenses. IRP and franchise expenses are recovered from customers through rate
recovery riders approved by the Georgia Commission. As a result, IRP program
costs and franchise expenses do not affect net income. Operation and maintenance
expenses, excluding IRP and franchise expenses, increased slightly primarily due
to (1) increased uncollectible accounts expenses and (2) expenses associated
with the formation of AGL Resources. The increase in operation and maintenance
expenses, excluding IRP and franchise expenses, was offset partly by decreased
labor-related expenses.
Depreciation expense increased 7.3% in 1996 compared with 1995 primarily
due to increased depreciable plant in service. The composite
straight-line depreciation rate was approximately 3.2% for depreciable property
other than transportation equipment during 1996 and 1995.
Taxes other than income taxes decreased $0.7 million primarily
due to decreased ad valorem taxes.
Other Income - Other income increased $11.6 million in 1996 compared with 1995
primarily due to (1) income in 1996 from a gas marketing joint venture, (2)
income from carrying costs on increased deferred purchased gas undercollections,
and (3) recoveries of environmental response costs from insurance carriers and
third parties.
Interest Expense - Total interest expense increased $1.6 million in 1996
compared with 1995 primarily due to increased amounts of short-term debt
outstanding. The increase was offset partly by decreased amounts of long-term
debt outstanding.
Income Taxes - Income taxes increased $30.8 million in 1996 compared with 1995
primarily due to increased taxable income.
Net Income and Dividends - Net income for 1996 was $75.6 million, compared with
$26.4 million in 1995. Earnings per share of common stock were $1.37 in 1996,
compared with $0.50 in 1995. Dividends per share of common stock were $1.06 in
1996, compared with $1.04 in 1995. The increases in net income and earnings per
share were primarily due to (1) corporate restructuring costs of $43.1 million,
after income taxes, recorded in 1995, (2) increased other income, and (3)
increased operating margin as a result of an increase of approximately 41,000 in
the number of utility customers served. The increases in net income and earnings
per share were offset partly by increased depreciation expense. The increase in
earnings per share also was offset partly by an increase in the number of common
shares outstanding.
Financial Condition
Financing
Preferred Securities - In June 1997 AGL Resources formed AGL Capital Trust, a
Delaware business trust (the Trust), of which AGL Resources owns all of the
common voting securities. The Trust issued and sold to certain initial investors
$75 million principal amount of 8.17% Capital Securities (liquidation amount
$1,000 per Capital Security), the proceeds of which were used to purchase 8.17%
Junior Subordinated Deferrable Interest Debentures, due June 1, 2037, from AGL
Resources. The Capital Securities are subject to mandatory redemption upon
repayment of the Junior Subordinated Debentures on the stated maturity date of
June 1, 2037, upon the earlier occurrence of certain events, or upon the
optional prepayment by AGL Resources on or after June 1, 2007. AGL Resources
has fully and unconditionally guaranteed all of the Trust's obligations with
respect to the Capital Securities. Net proceeds to AGL Resources from the
sale of the Junior Subordinated Debentures of $74.3 million were used to repay
short-term debt, to redeem certain of AGL's outstanding issues of preferred
stock, and for other corporate purposes.
On August 15, 1997, AGL redeemed its 4.5% Cumulative Preferred Stock,
4.72% Cumulative Preferred Stock, 5% Cumulative Preferred Stock, 7.84%
Cumulative Preferred Stock, and 8.32% Cumulative Preferred Stock at the call
price in effect for each issue for an aggregate principal amount of $14.7
million. Those issues of preferred stock have been retired in full.
On December 1, 1997, AGL redeemed its 7.70% depositary preferred shares
at the redemption price of $100 per share. Accordingly, a current liability
associated with that redemption of $44.5 million is recorded in the financial
statements. (See Note 6 in Notes to Consolidated Financial Statements for
additional information regarding preferred stock.)
Common Stock - On June 16, 1995, approximately 3 million shares of common stock
were issued and sold at $16.81 per share, resulting in net proceeds of $48.6
million. Proceeds from that sale of common stock were used to finance capital
expenditures and for other corporate purposes. AGL Resources issued 753,866;
792,919; and 1,107,324 shares of common stock during fiscal 1997, 1996, and
1995, respectively, pursuant to ResourcesDirect, a stock purchase and dividend
reinvestment plan; Retirement Savings Plus Plan; Long-Term Stock Incentive Plan;
Nonqualified Savings Plan; and the Non-Employee Directors Equity Compensation
Plan, which increased common equity by approximately $14 million, $14 million,
and $18 million, respectively.
Long-Term Debt - During fiscal 1997, AGL issued $105.5 million in principal
amount of medium-term notes, Series C, with maturity dates ranging from 20 to 30
years and with interest rates ranging from 6.55% to 7.3%. The notes were issued
under an Indenture dated December 1, 1989, and are unsecured and rank on a
parity with all other unsecured
indebtedness. Net proceeds from the notes were used to fund capital
expenditures, to repay short-term debt, and for other corporate purposes.
Short-Term Debt - Because AGL Resources' primary business is highly seasonal,
short-term debt is used to meet seasonal working capital requirements. In
addition, capital expenditures are funded temporarily with short-term debt.
Lines of credit with various banks provide for direct borrowings and are subject
to annual renewal. The current lines of credit vary from $156.3 million in the
summer months to $305 million for peak winter financing. Short-term debt
decreased $122.5 million from the amount outstanding as of September 30, 1996,
to $29.5 million as of September 30, 1997, primarily as a result of repayment
from the proceeds of the issuance of Capital Securities and long-term debt. (See
Note 8 in Notes to Consolidated Financial Statements for additional information
concerning short-term debt.)
Capital Requirements - Capital expenditures for construction of distribution
facilities, purchase of equipment, and other general improvements were $147.7
million during 1997. Capital requirements are estimated to be approximately $340
million for the three years ending September 30, 2000. Funding for those
expenditures will be provided through a combination of internal sources and the
issuance of short-term and long-term debt and equity securities.
The cost of natural gas stored underground increased $7.8 million to
$151.8 million as of September 30, 1997, primarily due to an increase in the
cost of the gas that was injected into storage.
Ratios and Coverages - On September 30, 1997, AGL Resources' capitalization
ratios consisted of 47.1% long-term debt, 8.5% preferred securities, and 44.4%
common equity. The times interest earned and ratio of earnings to combined fixed
charges and preferred stock dividends decreased in 1997 compared with 1996
primarily due to the issuance of long-term debt and preferred securities in
1997. The times interest earned and ratio of earnings to combined fixed charges
and preferred stock dividends increased in 1996 compared with 1995 primarily due
to increased earnings.
The weighted average cost of long-term debt decreased from 7.6% on
September 30, 1995, to 7.5% on September 30, 1997. The decrease was due to the
redemption of $15 million in principal amount of 8.85% medium-term notes in
January 1995, and lower interest rates for long-term debt issued in 1997. The
weighted average cost of preferred stock was 7.5% on September 30, 1995, and
1996, and 8% on September 30, 1997. The return on average common equity was 4.9%
for 1995, 13.2% for 1996, and 12.7% for 1997. Net income in 1995 included a
charge for restructuring of $43.1 million, after income taxes.
Regulatory Activity
Gas Cost Recovery Filing - Pursuant to legislation enacted by the Georgia
General Assembly, each investor-owned local gas distribution company is required
to file on or before August 1 of each year a proposed gas supply plan for the
subsequent year, as well as a proposed cost recovery factor.
As part of the 1997 Gas Supply Plan, AGL continued limited gas supply
hedging activities. On August 1, 1997, AGL filed its Gas Supply Plan for fiscal
1998, which consists of gas supply, transportation, and storage options designed
to provide reliable service to firm customers at the best cost. On September 12,
1997, the Georgia Commission approved the entire supply portfolio contained in
the Gas Supply Plan for fiscal 1998.
As part of the Gas Supply Plan for fiscal 1998, AGL is authorized to
enter into an expanded program to hedge up to one-half of its estimated monthly
winter wellhead purchases and to establish a price for those purchases at an
amount other than the beginning of the month index price to create an additional
element of diversification and price stability. The financial results of all
hedging activities are passed through to firm service customers under the
purchased gas provisions of AGL's rate schedules. Accordingly, there is no
earnings impact as a result of the hedging program.
Additionally, the approved plan contains a gas supply incentive
mechanism for off-system and capacity release sales that is consistent with the
incentive mechanism in the Natural Gas Competition and Deregulation Act signed
into law on April 14, 1997, whereby AGL and its firm customers share in any
benefits produced from the incremental use of gas supply assets.
Competition - AGL competes to supply natural gas to interruptible customers who
are capable of switching to alternative fuels, including propane, fuel and waste
oils, electricity
and, in some cases, combustible wood by-products. AGL also competes to supply
gas to interruptible customers who might seek to bypass its distribution system.
AGL can price distribution services to interruptible customers four
ways. First, multiple rates are established under the rate schedules of AGL's
tariff approved by the Georgia Commission. If an existing tariff rate does not
produce a price competitive with a customer's relevant competitive alternative,
three alternate pricing mechanisms exist: Negotiated Contracts, Interruptible
Transportation and Sales Maintenance (ITSM) discounts, and Special Contracts.
On February 17, 1995, the Georgia Commission approved a settlement that
permits AGL to negotiate contracts with customers who have the option of
bypassing AGL's facilities (Bypass Customers) to receive natural gas from other
suppliers. The bypass avoidance contracts (Negotiated Contracts) can be
renewable, provided the initial term does not exceed five years, unless a longer
term specifically is authorized by the Georgia Commission. The rate provided by
the Negotiated Contract may be lower than AGL's filed rate, but not less than
AGL's marginal cost of service to the potential Bypass Customer. Service
pursuant to a Negotiated Contract may commence without Georgia Commission
action, after a copy of the contract is filed with the Georgia Commission.
Negotiated Contracts may be rejected by the Georgia Commission within 90 days of
filing; absent such action, however, the Negotiated Contracts remain in effect.
All of the Negotiated Contracts filed to date with the Georgia Commission are in
effect.
The settlement also provides for a bypass loss recovery mechanism to
operate until the earlier of September 30, 1998, or the effective date of new
rates for AGL resulting from a general rate case. Under the recovery mechanism,
AGL is allowed to recover from other customers 75% of the difference between (a)
the nongas cost revenue that was received from the potential Bypass Customer
during the most recent twelve-month period and (b) the nongas cost revenue that
is calculated to be received from the lower Negotiated Contract rate applied to
the same volumetric level. Concerning the remaining 25% of the difference, AGL
is allowed to retain a 44% share of capacity release revenues in excess of $5
million until AGL is made whole for discounts from Negotiated Contracts.
1998 Gas Supply Plan
10 therms = 1 dekatherm Firm Production Supplemental Total
Transportation Wellhead Underground Underground Liquefied Peak-Day
Capacity Gas Supply Storage Storage Natural Gas Supply
Atlanta Gas Light Company (dekatherms) (dekatherms) (dekatherms) (dekatherms) (dekatherms) (dekatherms)
Southern 775,995 414,753 168,500
Transco 137,989 104,416 280,241
Tennessee / East Tennessee 63,860 33,976
Southern / South Georgia 12,115 6,906 708
Total 989,959 520,655 560,051 449,449 665,000 2,106,450
Chattanooga Gas Company
East Tennessee 46,350 23,871
Southern 27,567 14,346
Total 73,917 34,696 38,217 0 90,000 158,812
In addition to Negotiated Contracts, which are designed to serve
existing and potential Bypass Customers, AGL's ITSM Rider continues to permit
discounts for short-term transactions to compete with alternative fuels. Revenue
shortfalls, if any, from interruptible customers, as measured by the test-year
interruptible revenues determined by the Georgia Commission in AGL's 1993 rate
case, will continue to be recovered under the ITSM Rider.
The settlement approved by the Georgia Commission also provides that AGL
may file contracts (Special Contracts) for Georgia Commission approval if the
service cannot be provided through the ITSM Rider, existing rate schedules, or
Negotiated Contract procedures. A Special Contract, for example, could involve
AGL providing a long-term service contract to compete with alternative fuels
where physical bypass is not the relevant competition.
Pursuant to the approved settlement, AGL has filed and is providing
service pursuant to more than 50 Negotiated Contracts. Additionally, the Georgia
Commission has approved Special Contracts between AGL and seven interruptible
customers.
On November 27, 1996, the TRA approved an experimental rule allowing
Chattanooga to negotiate contracts with large commercial and industrial
customers who have long-term competitive options, including bypass. The
experimental
rule provides that before any such customer is allowed a discounted rate, both
the large customer and Chattanooga must petition the TRA for prior approval of
the rates set forth in the contract. On October 7, 1997, the TRA denied the
petitions filed by Chattanooga and four large customers for discounted
rates pursuant to the experimental rule upon a finding that customer bypass was
not imminent.
Regulatory Reform Initiatives - The 1997 session of the Georgia General Assembly
enacted legislation that provides a legal framework for comprehensive
deregulation of many aspects of the natural gas business in Georgia. The Natural
Gas Competition and Deregulation Act was signed into law by Governor Zell Miller
on April 14, 1997.
On November 26, 1997, AGL filed with the Georgia Commission a notice of
its election to be subject to this new law and to establish separate rates for
unbundled services. AGL filed contemporaneously an application with the Georgia
Commission to have its distribution rates, charges, classifications, and
services regulated pursuant to performance-based regulation. The filing requests
an increase in revenues of $18.6 million annually. The requested increase
includes the costs to support changes in AGL's business systems to ensure
reliable service to customers and that the systems are in place to serve new gas
suppliers in the competitive marketplace.
Within seven months from the date of such filing, the Georgia Commission
must issue an order approving the plan as filed or with modification. Retail
marketing companies, including AGL affiliates, may now file with the Georgia
Commission separate certificate of authority applications to sell natural gas to
firm customers connected to AGL's delivery system. It is currently anticipated
that marketers who become certificated by the Georgia Commission may begin
offering natural gas sales services to customers of AGL by November 1998.
The Natural Gas Competition and Deregulation Act provides a transition
period leading to a condition of effective competition in all natural gas
markets. AGL, as an electing distribution company, will unbundle all services to
its natural gas customers, allocate firm delivery capacity to certificated
marketers selling the gas commodity, and create a secondary market for
interruptible transportation capacity. Certificated marketers, including
nonregulated affiliates of AGL, will compete to sell natural gas to all
customers at market-based prices. AGL will continue to provide intrastate
delivery of gas to end users through its existing system, subject to continued
rate regulation by the Georgia Commission. As a result of the Natural Gas
Competition and Deregulation Act, it is expected that the purchased gas
adjustment provisions included in AGL's rate schedules will be discontinued
during fiscal 1999. The November 26, 1997, filing contains a provision to
true-up any over-recovery or under-recovery that may exist at the time such
purchased gas adjustment provisions are discontinued. Accordingly, AGL will no
longer defer any over-recoveries or under-recoveries of gas costs when the
purchased gas adjustment provisions are discontinued. In addition, the Georgia
Commission will continue to regulate safety, access, and quality of service
pursuant to an alternative form of regulation.
The Natural Gas Competition and Deregulation Act provides marketing
standards and rules of business practice to ensure the benefits of a competitive
natural gas market are available to all customers on AGL's system. The act
imposes on marketers an obligation to serve, with a corresponding universal
service fund that provides a funding mechanism for uncollectible accounts and
enables AGL to expand its facilities and serve in the public interest.
Additionally, the Natural Gas Competition and Deregulation Act requires
that the Georgia Commission issue rules and regulations by December 31, 1997,
for certification of marketers and assignment of firm customers to marketers
(for customers who ultimately do not select a marketer after competition is
fully developed). Notices of proposed rulemakings on those two subjects were
issued by the Georgia Commission on September 23, 1997.
AGL supported the regulatory initiatives provided for by the Natural Gas
Competition and Deregulation Act for several reasons. AGL currently makes no
profit on the purchase and sale of gas because actual gas procurement costs are
passed through to customers under the purchased gas provisions of AGL's rate
schedules. Earnings are provided through revenues received for intrastate
transportation of the commodity. Consequently, allowing AGL to cease its sales
service function and the associated sales obligation would not affect AGL's
ability to earn a return on its distribution system investment. Allowing gas to
be sold to all customers by numerous retail marketing companies, including
nonregulated subsidiaries of AGL Resources, would provide new business
opportunities.
On May 21, 1996, the Georgia Commission adopted a Policy Statement
concerning changes in state regulatory guidelines to respond to trends toward
increased competition
in natural gas markets. Consistent with the specific goals expressed in the
Policy Statement, AGL filed on June 10, 1996, the Natural Gas Service Provider
Selection Plan (the Plan), a comprehensive plan for serving interruptible
markets. The Plan proposed further unbundling of services to provide large
customers more service options and the ability to purchase only those services
they required. As a result of various procedural delays, a decision on the
proposed Plan had not been reached by the Georgia Commission prior to AGL's
election to be subject to the Natural Gas Competition and Deregulation Act.
Since implementation of the Plan would be unlikely to occur significantly in
advance of implementation of AGL's election under the Natural Gas Competition
and Deregulation Act, the Plan could not serve as a meaningful opportunity for
AGL, marketers, and end-use customers to gain experience with pooling and
aggregation of loads. Consequently, simultaneous with the filing of the notice
of election under the Natural Gas Competition and Deregulation Act on November
26, 1997, AGL filed with the Georgia Commission a notice of withdrawal of the
Plan.
Chattanooga Rate Filing - On May 1, 1997, Chattanooga filed a rate proceeding
with the TRA seeking an increase in revenues of $4.4 million annually. Revenues
from the rate increase would be used to improve and expand Chattanooga's natural
gas distribution system; to recover increased operation, maintenance, and tax
expenses; and, to provide a reasonable return to investors. Under the TRA's
rules and regulations, the effective date of the requested new rates was
suspended until November 1, 1997. Hearings in the rate proceeding were scheduled
to begin on October 13, 1997. On October 3, 1997, all parties to the proceeding
filed a motion with the TRA requesting that the hearings be continued and that
the suspended effective date for new rates be extended to afford an opportunity
to pursue settlement discussions. On October 7, 1997, the TRA granted the
motion. The TRA has rescheduled the hearings in this case to begin on February
9, 1998. AGL cannot predict the outcome of the proceedings.
Order 636 - During the past decade, the Federal Energy Regulatory Commission
(FERC) has dramatically transformed the natural gas industry through a series of
generic orders promoting competition in the industry. As part of that
transformation, the interstate pipelines that serve AGL have been required to
unbundle their transportation and gas supply services and to provide
transportation service on a nondiscriminatory basis for gas supplied by numerous
gas producers or other third parties. FERC is considering further changes to its
regulatory structure, including, but not limited to, potential revisions to its
policies governing secondary market transactions and revisions to permit
pipelines and their customers to establish individually negotiated terms and
conditions of service that depart from pipeline tariff rules. AGL cannot predict
the likelihood that such initiatives will be adopted or the effect of those
potential changes upon AGL.
Based on filings with FERC by its pipeline suppliers, AGL currently
estimates that its total portion of transition costs from all of its pipeline
suppliers would be approximately $105.8 million. Approximately $92.2 million of
such costs has been incurred by AGL as of September 30, 1997, and is being
recovered from its customers under the purchased gas provisions of AGL's rate
schedules. Transition costs have not affected the total cost of gas to AGL's
customers significantly because (1) AGL purchases its wellhead gas supplies
based on market prices that are below the cost of gas previously embedded in the
bundled pipelines' sales service rates and (2) many elements of transition costs
previously were embedded in the rates for the pipelines' bundled sales service.
(See Note 9 in Notes to Consolidated Financial Statements for further discussion
of recovery of gas costs.)
Weather Normalization - The Georgia Commission and the TRA have authorized
weather normalization adjustment riders (WNARs), which are designed to offset
the impact that unusually cold or warm weather has on customer billings and
operating margin. Fiscal 1997 and 1995 were warmer than normal, and the WNARs
increased net income and net cash flow from operating activities to normal
levels for those periods. Because fiscal 1996 was colder than normal, the WNARs
reduced net income and net cash flow from operating activities to normal levels.
The WNARs increased net income by $16.2 million in 1997, decreased net income by
$4.4 million in 1996, and increased net income by $27.3 million in 1995. As a
result of the Natural Gas Competition and Deregulation Act, it is expected that
the WNAR authorized by the Georgia Commission will be discontinued.
Environmental Matters
AGL has identified nine sites in Georgia where it currently
owns all or part of a manufactured gas plant (MGP) site. In addition, AGL has
identified three other sites in Georgia that AGL does not own, but that may
have been associated with the operation of MGPs by AGL or its predecessors.
Those sites are potentially subject to a variety of regulatory programs.
AGL's response to MGP sites in Georgia is proceeding under two state
regulatory programs: the Georgia Hazardous Waste Management Act (HWMA) and the
Hazardous Site Response Act (HSRA). Some degree of response action, under one
or both of those programs, is likely to be required at most of the Georgia
sites.
AGL also has identified three sites in Florida that may have been
associated with AGL or its predecessors. AGL does not own any of the former MGP
sites in Florida. However, AGL has been contacted by the current owners of two
of those sites. In addition, AGL has received a "Special Notice Letter" from the
U.S. Environmental Protection Agency (EPA) with respect to one of the two sites.
AGL expects that some degree of response action is likely to be required at
those two sites. AGL currently is negotiating with both regulatory authorities
and other potentially responsible parties to determine the extent of its
responsibility for the two sites.
AGL has estimated the investigation and remediation expenses likely to
be associated with the former MGP sites. AGL currently estimates that the future
cost to AGL of investigating and remediating the former MGP sites could be as
low as $37.3 million or as high as $76.5 million. That range does not include
other expenses, such as unasserted property damage claims, for which AGL may be
held liable, but for which neither the existence nor the amount of such
liabilities can be reasonably forecast. Within the stated range of $37.3 million
to $76.5 million, no amount within the range can be reliably identified as a
better estimate than any other estimate. Therefore, a liability at the low end
of that range has been recorded in the financial statements. (See Note 11 in
Notes to Consolidated Financial Statements for additional information concerning
environmental response costs.)
AGL has two means of recovering the expenses associated with the former
MGP sites. First, the Georgia Commission has approved the recovery by AGL of
Environmental Response Costs, as defined, pursuant to an Environmental Response
Cost Recovery Rider (ERCRR). For purposes of the ERCRR, Environmental Response
Costs include investigation, testing, remediation, and litigation costs and
expenses, or other liabilities relating to or arising from MGP sites. A
regulatory asset in the amount of $55 million has been recorded in the financial
statements to reflect the recovery of those costs through the ERCRR.
In connection with the ERCRR, the staff of the Georgia Commission has
undertaken a financial and management process audit related to the MGP sites,
cleanup activities at the sites, and environmental response costs that have been
incurred for purposes of the ERCRR. On October 10, 1996, the Georgia Commission
issued an order to prohibit funds collected through the ERCRR from being used
for payment of any damage award, including punitive damages, as a result of any
litigation associated with the MGP sites in which AGL is involved. On October
22, 1997, the Georgia Commission issued an order rescinding its 1996 order and
has scheduled a hearing for February 16, 1998, to consider three issues relating
to the ERCRR. Specifically, the Georgia Commission is to consider whether the
term "Environmental Response Costs" should include punitive damages, whether
AGL should be required to provide an annual accounting for revenue recovered
from customers through the ERCRR, and whether a schedule should be established
for site remediation.
Second, AGL intends to seek recovery of appropriate costs from its
insurers and other potentially responsible parties. During fiscal 1997 AGL
recovered $5.7 million from its insurance carriers and other potentially
responsible parties. In accordance with provisions of the ERCRR, AGL recognized
other income of $1.4 million and established regulatory liabilities for the
remainder of the recoveries.
On February 10, 1995, a class action lawsuit captioned Trinity Christian
Methodist Episcopal Church, et al. v. Atlanta Gas Light Company, No. 95-RCCV-93,
was filed in the Superior Court of Richmond County, Georgia, seeking to recover
for damage to property owned by persons adjacent to and nearby the former
manufactured gas plant site in Augusta, Georgia. On December 13, 1996, the
parties reached a preliminary settlement, which was approved by the Court on
April 15, 1997. Pursuant to the settlement, there is a claims process before an
umpire to determine either the full fair market value of properties tendered to
AGL or the diminution in fair market value of properties not tendered to AGL.
Settlements have been paid to 188 property owners in the class totaling
approximately $2.9 million, including legal fees and expenses of the plaintiffs.
There are seven settlements yet to be paid. One settlement of approximately
$64,000,
including attorney's fees, is pending reconsideration, and AGL has filed motions
to vacate six settlements totaling approximately $4.3 million. An order was
entered on July 8, 1997, denying the motion to vacate. AGL has filed a notice of
appeal with the Georgia Court of Appeals seeking to reverse the denial of the
motion to vacate.
Accounting Developments
During its July 1997 meeting, the Emerging Issues Task Force 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, Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71),
should be discontinued for that segment. The state of Georgia has enacted
legislation (the Natural Gas Competition and Deregulation Act) that allows for
the deregulation of the merchant function and unbundling of certain ancillary
services of local gas distribution companies. AGL has filed its election to
become an electing distribution company. The rates to transport natural gas
through the intrastate pipe system of the local gas distribution company will be
regulated by the Georgia Commission. Since AGL's regulatory assets and
liabilities associated with its gas distribution activities continue to be
regulated, AGL has determined that the continued application of SFAS 71 related
to those distribution activities remains appropriate. (See Notes 1 and 14 in
Notes to Consolidated Financial Statements for additional information.)
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128), which establishes standards for computing and presenting earnings per
share. AGL Resources will adopt SFAS 128 in the first quarter of fiscal 1998.
Management does not expect that new pronouncement to significantly impact the
presentation of AGL Resources' consolidated financial statements.
In June 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130) and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130
establishes standards for the reporting and displaying of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. AGL Resources will adopt SFAS 130 and SFAS 131 in fiscal 1999.
Management does not expect those new pronouncements to significantly impact the
presentation of AGL Resources' consolidated financial statements.
Impact of Inflation
Inflation impacts the prices AGL Resources must pay for labor and other goods
and services required for operation, maintenance, and capital improvements. The
utility's rate schedules include purchased gas adjustment provisions that permit
the increases in gas costs to be passed on to its customers. Increases in costs
not recovered through the purchased gas adjustment provisions and other similar
rate riders must be recovered through timely filings for rate relief.
Year 2000
AGL Resources uses several application programs written over many years using
two-digit year fields to define the applicable year, rather than four-digit year
fields. Programs that are time-sensitive may recognize a date using "00" as the
year 1900 rather than the year 2000. That misinterpretation of the year could
result in incorrect computations or computer shutdown.
AGL Resources has identified the systems that could be affected by the
year 2000 issue and is developing an implementation plan to resolve the issue.
That plan contemplates, among other things, the replacement or modification of
existing data processing systems as necessary. In addition, management is in the
process of developing cost estimates associated with the implementation of the
plan. Those costs are not expected to significantly impact AGL Resources'
consolidated financial statements.
Management believes that with the appropriate modifications, AGL
Resources will be able to operate its time-sensitive business systems through
the turn of the century.
Statements of Consolidated Income
For the years ended September 30,
In millions, except per share amounts 1997 1996 1995
--------------------------------
Operating Revenues $1,287.6 $1,228.6 $1,068.5
Cost of Gas 766.5 725.5 574.1
--------------------------------
Operating Margin 521.1 503.1 494.4
--------------------------------
Other Operating Expenses
Operation 226.2 221.8 215.5
Restructuring costs 70.3
Maintenance 30.8 29.5 30.4
Depreciation 66.6 63.3 59.0
Taxes other than income taxes 26.0 25.0 25.7
--------------------------------
Total other operating expenses 349.6 339.6 400.9
--------------------------------
Operating Income 171.5 163.5 93.5
--------------------------------
Other Income 10.3 13.1 1.5
--------------------------------
Income Before Interest, Preferred Stock
Dividends, and Income Taxes 181.8 176.6 95.0
--------------------------------
Interest Expense and Preferred
Stock Dividends
Interest on long-term debt 45.1 42.2 42.7
Other interest 7.1 6.9 4.8
Dividends on preferred stock of subsidiaries 6.2 4.4 4.4
--------------------------------
Total interest expense and
preferred stock dividends 58.4 53.5 51.9
--------------------------------
Income Before Income Taxes 123.4 123.1 43.1
--------------------------------
Income Taxes 46.8 47.5 16.7
--------------------------------
Net Income $ 76.6 $ 75.6 $ 26.4
--------------------------------
Earnings Per Share of Common Stock $ 1.37 $ 1.37 $ 0.50
--------------------------------
Weighted Average Number of Common
Shares Outstanding 56.1 55.3 52.4
- ---------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</FN>
Statements of Consolidated Cash Flows
For the years ended September 30,
In millions 1997 1996 1995
------------------------------
Cash Flows from Operating Activities
Net income $ 76.6 $ 75.6 $ 26.4
Adjustments to reconcile net income to
net cash flow from operating activities
Depreciation and amortization 70.3 67.5 62.5
Noncash restructuring costs 52.9
Deferred income taxes 18.5 25.7 (1.2)
Other 0.3 0.4 3.8
------------------------------
165.7 169.2 144.4
Changes in assets and liabilities
Receivables 4.0 (29.6) 14.6
Inventories (10.3) (35.8) 43.3
Deferred purchased gas adjustment (3.8) (11.0) (13.8)
Accounts payable (9.9) 1.4 14.7
Other - net 5.7 (12.3) 2.4
------------------------------
Net cash flow from operating activities 151.4 81.9 205.6
------------------------------
Cash Flows from Financing Activities
Sale of common stock, net of expenses 1.7 1.8 50.4
Short-term borrowings, net (124.0) 101.0 (44.4)
Redemptions and purchase fund
requirements of preferred stock (14.7)
Redemptions of long-term debt (15.0)
Sale of preferred securities, net of expenses 74.3
Sale of long-term debt 105.5
Dividends paid on common stock (50.7) (49.1) (44.3)
------------------------------
Net cash flow (used in) from financing
activities (7.9) 53.7 (53.3)
------------------------------
Cash Flows from Investing Activities
Utility plant expenditures (123.5) (132.0) (120.8)
Nonutility property expenditures (23.3) 0.3 (0.4)
Cash received from joint venture 2.0 3.1
Investment in joint ventures (1.0) (1.0) (32.6)
Other (1.6) (1.0) 1.9
------------------------------
Net cash flow used in investing activities (147.4) (130.6) (151.9)
------------------------------
Net (decrease) increase in cash and
cash equivalents (3.9) 5.0 0.4
Cash and cash equivalents at
beginning of year 8.7 3.7 3.3
------------------------------
Cash and cash equivalents at end of year $ 4.8 $ 8.7 $ 3.7
------------------------------
Cash Paid During the Year for
Interest $ 48.8 $ 49.2 $ 48.4
Income taxes $ 28.2 $ 19.3 $ 28.6
- ------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</FN>
Consolidated Balance Sheets
Assets
For the years ended September 30,
In millions 1997 1996
-----------------------
Current Assets
Cash and cash equivalents $ 4.8 $ 8.7
Receivables
Gas (less allowance for uncollectible accounts
of $2.4 in 1997 and $2.2 in 1996) 56.1 62.4
Merchandise (less allowance for uncollectible
accounts of $.1 in 1997 and $.4 in 1996) 0.4 2.5
Integrated resource plan loans (less allowance
for uncollectible accounts of $.1 in 1997 and 3.2 3.4
$.2 in 1996)
Other 12.2 4.8
Unbilled revenues 22.0 20.5
Inventories
Natural gas stored underground 151.8 144.0
Liquefied natural gas 17.5 16.8
Materials and supplies 8.2 8.1
Other 6.0 3.0
Deferred purchased gas adjustment 8.5 4.7
Other 2.0 10.3
-----------------------
Total current assets 292.7 289.2
-----------------------
Property, Plant, and Equipment
Utility plant 2,069.1 1,969.0
Less accumulated depreciation 648.8 607.8
-----------------------
Utility plant - net 1,420.3 1,361.2
-----------------------
Nonutility property 105.8 80.4
Less accumulated depreciation 29.5 26.3
-----------------------
Nonutility property - net 76.3 54.1
-----------------------
Total property, plant, and equipment - net 1,496.6 1,415.3
-----------------------
Deferred Debits and Other Assets
Unrecovered environmental response costs 55.0 38.0
Investment in joint ventures 32.7 34.0
Unrecovered integrated resource plan costs 2.0 10.0
Unrecovered postretirement benefits costs 10.0 9.7
Unamortized cost to repurchase long-term debt 2.2 3.5
Prepaid pension costs 3.2
Other 30.6 23.4
-----------------------
Total deferred debits and other assets 135.7 118.6
-----------------------
Total Assets $1,925.0 $1,823.1
- -------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</FN>
Liabilities and
Capitalization
For the years ended September 30,
In millions 1997 1996
---------------------
Current Liabilities
Accounts payable - trade $ 65.1 $ 73.7
Short-term debt 29.5 152.0
Customer deposits 29.2 27.8
Interest 29.6 25.7
Other accrued liabilities 26.4 22.3
Redemption requirements on preferred stock 44.5 0.3
Other 19.1 20.5
---------------------
Total current liabilities 243.4 322.3
---------------------
Accumulated Deferred Income Taxes 191.7 167.1
---------------------
Long-Term Liabilities
Accrued environmental response costs 37.3 30.4
Accrued pension costs 4.9
Accrued postretirement benefits costs 34.3 36.2
---------------------
Total long-term liabilities 71.6 71.5
---------------------
Deferred Credits
Unamortized investment tax credit 27.3 28.8
Regulatory tax liability 18.3 19.3
Other 16.3 12.8
---------------------
Total deferred credits 61.9 60.9
---------------------
Commitments and Contingencies (Notes 9 and 11)
Capitalization
Long-term debt 660.0 554.5
Preferred stock
Subsidiary obligated mandatorily redeemable
preferred securities 74.3
Cumulative preferred stock of subsidiary 58.5
Common stockholders' equity (See accompanying
statements of consolidated common stock equity.) 622.1 588.3
---------------------
Total capitalization 1,356.4 1,201.3
---------------------
Total Liabilities and Capitalization $1,925.0 $1,823.1
---------------------
Statements of Consolidated Common Stock Equity
For the years ended September 30,
In millions, except per share amounts 1997 1996 1995
--------------------------------
Common Stock
$5 par value; authorized 100.0 shares;
outstanding, 56.6 in 1997, 55.7 in 1996,
and 54.9 in 1995
Beginning of year $ 278.4 $ 137.3 $ 127.1
Issuance of common stock
Public sale 7.5
Acquisition of nonregulated operation 1.0
Benefit, stock compensation,
dividend reinvestment, and stock
purchase plans 3.7 3.6 2.7
Stock dividend 137.5
--------------------------------
End of year 283.1 278.4 137.3
--------------------------------
Premium on Capital Stock
Beginning of year 170.6 297.7 241.3
Issuance of common stock
Public sale 41.1
Acquisition of nonregulated operation 2.9
Benefit, stock compensation,
dividend reinvestment, and stock
purchase plans 10.1 10.4 15.3
Stock dividend (137.5)
--------------------------------
End of year 183.6 170.6 297.7
--------------------------------
Earnings Reinvested
Beginning of year 139.3 122.3 150.1
Net income 76.6 75.6 26.4
Common stock dividends ($1.08 a share
in 1997, $1.06 a share in 1996, and
$1.04 a share in 1995) (60.5) (58.6) (54.2)
--------------------------------
End of year 155.4 139.3 122.3
--------------------------------
Total common stock equity $ 622.1 $ 588.3 $ 557.3
- -----------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</FN>
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation - AGL Resources Inc. (AGL Resources), a Georgia
corporation, became the holding company for Atlanta Gas Light Company (AGL),
AGL's wholly owned natural gas utility subsidiary, Chattanooga Gas Company
(Chattanooga), and AGL's nonregulated subsidiaries upon receipt of shareholder
and regulatory approval on March 6, 1996. At that time each share of AGL common
stock was converted into one share of AGL Resources common stock, and AGL became
the primary subsidiary of AGL Resources. AGL comprises substantially all of AGL
Resources' assets, revenues, and earnings. The consolidated financial statements
of AGL Resources include the financial statements of AGL, Chattanooga, and the
nonregulated subsidiaries as though AGL Resources had existed in all periods
shown and had owned all of AGL's outstanding common stock prior to March 6,
1996. Intercompany balances and transactions have been eliminated.
Subsidiaries - AGL Resources engages in natural gas distribution through AGL and
AGL's wholly owned subsidiary, Chattanooga. AGL is a public utility that
distributes and transports natural gas in Georgia and Tennessee and is subject
to regulation by the Georgia Public Service Commission (Georgia Commission) and
the Tennessee Regulatory Authority (TRA), with respect to its rates for service,
maintenance of its accounting records, and various other matters. The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles, which give appropriate recognition to the
rate-making and accounting practices and policies of the Georgia Commission and
the TRA.
AGL Resources engages in nonregulated business activities through its
wholly owned subsidiaries, AGL Energy Services, Inc. (AGL Energy Services), a
gas supply services company; AGL Investments, Inc. (AGL Investments), a
subsidiary established to develop and manage certain nonregulated businesses;
The Energy Spring, Inc., a retail energy marketing company; and AGL Resources
Service Company (Service Company). AGL Energy Services has one nonregulated
subsidiary, Georgia Gas Company. AGL Investments has six nonregulated
subsidiaries: AGL Propane, Inc., formerly known as Georgia Gas Service Company;
AGL Consumer Services, Inc.; AGL Gas Marketing, Inc. (AGL Gas Marketing); AGL
Power Services, Inc. (AGL Power Services); AGL Energy Wise Services, Inc. and
Trustees Investments, Inc.
Regulation - The consolidated financial statements reflect regulatory actions by
the Georgia Commission and the TRA that result in the recognition of certain
revenues and expenses in time periods that are different from enterprises that
are not rate regulated. In accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS 71), AGL has recorded regulatory assets and liabilities that represent
regulator-approved deferrals resulting from the rate-making process.
During its July 1997 meeting, the Emerging Issues Task Force 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. The state of Georgia has enacted legislation (the Natural Gas
Competition and Deregulation Act) that allows for the deregulation of the
merchant function and unbundling of certain ancillary services of local gas
distribution companies. The rates to transport natural gas through the
intrastate pipe system of the local gas distribution company will be regulated
by the Georgia Commission. Since AGL's regulatory assets and liabilities
associated with its gas distribution activities continue to be regulated, AGL
has determined that the continued application of SFAS 71 related to these
distribution activities remains appropriate. (See Note 14 for additional
information.) SFAS 71 assets and liabilities recorded on September 30 consist of
the following:
In millions 1997 1996
---------------------
Assets
Unrecovered environmental response costs $ 55.0 $ 38.0
Unrecovered integrated resource plan costs 2.0 10.0
Unrecovered postretirement benefits costs 10.0 9.7
Deferred purchased gas adjustment 8.5 4.7
Unamortized cost to repurchase
long-term debt 2.2 3.5
---------------------
Total $ 77.7 $ 65.9
=====================
Liabilities
Unamortized investment tax credit $ 27.3 $ 28.8
Regulatory tax liability 18.3 19.3
Environmental response cost recoveries
from third parties - customer portion 10.1 7.4
Environmental response cost recoveries
from third parties - deferred
company portion 6.1 4.5
Other 3.7 3.7
---------------------
Total $ 65.5 $ 63.7
=====================
Utility Plant and Depreciation - Utility plant is stated at original cost.
Direct labor and material costs of plant construction and related indirect
construction costs, including administrative, engineering and general overhead,
taxes, and an allowance for funds used during construction (AFUDC), are added to
utility plant. The portion of AFUDC attributable to equity funds is included in
other income, and the portion attributable to borrowed funds is shown as a
reduction in interest charges in the statements of consolidated income. The
AFUDC rate of 9.32% in fiscal 1997, 1996, and 1995, was the cost of capital
approved by the Georgia Commission in a prior rate proceeding.
The original cost of utility property retired or otherwise disposed of,
plus the cost of dismantling, less salvage, is charged to accumulated
depreciation. Maintenance, repairs and minor additions, renewals, and
betterments to property are charged to operations.
The composite straight-line depreciation rate was approximately 3.2%
for depreciable property other than transportation equipment during 1997, 1996,
and 1995. Transportation equipment is depreciated on a straight-line basis over
a period of five to 10 years.
Deferred Purchased Gas Adjustment - The utility's rate schedules include
purchased gas adjustment provisions that permit the recovery of purchased gas
costs. The purchased gas adjustment factor is revised periodically to reflect
changes in the cost of purchased gas without formal rate proceedings. Any
over-recoveries or under-recoveries of gas costs are charged or credited to cost
of gas and are included in current assets or liabilities. As a result of the
Natural Gas Competition and Deregulation Act, it is expected that the purchased
gas adjustment provisions included in AGL's rate schedules will be discontinued
during fiscal 1999. The November 26, 1997, filing contains a provision to
true-up any over-recovery or under-recovery that may exist at the time such
purchased gas adjustment provisions are discontinued. Accordingly, AGL will no
longer defer any over-recoveries or under-recoveries of gas costs when the
purchased gas adjustment provisions are discontinued.
As part of the 1997 Gas Supply Plan, AGL continued limited gas supply
hedging activities. Accounting for hedging activities is provided in accordance
with Statement of Financial Accounting Standards No. 80, "Accounting for Futures
Contracts." The financial results of all hedging activities are passed through
to firm service customers under the purchased gas provisions of AGL's rate
schedules. Accordingly, there is no earnings impact as a result of the hedging
program. Contracts outstanding as of September 30, 1997, and 1996, and during
the years then ended, were not significant.
Operating Revenues - Revenues from AGL Resources' utility business are based on
rates approved by the Georgia Commission and the TRA. Customers' base rates may
not be changed without formal approval of the Georgia Commission or the TRA.
Revenues are recognized on the accrual basis, which includes estimated amounts
for gas delivered but not yet billed.
The Georgia Commission and the TRA have authorized weather normalization
adjustment riders. Such riders are designed to offset the impact that unusually
cold or warm weather has on operating margin.
Certain interruptible customers purchase gas directly from gas
producers and marketers. The Georgia Commission and the TRA have approved
programs whereby transportation charges are billed on those purchases.
Income Taxes - Deferred income taxes result from temporary differences between
book and taxable income and principally relate to depreciation.
Investment tax credits have been deferred and are being amortized by
credits to income in accordance with regulatory treatment over the estimated
lives of the related properties.
Statements of Cash Flows - For purposes of reporting cash flows, AGL Resources
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
Noncash investing and financing transactions include (1) the issuance of
common stock for dividend reinvestments pursuant to ResourcesDirect, a stock
purchase and dividend reinvestment plan; Retirement Savings Plus Plan; Long-Term
Stock Incentive Plan; Nonqualified Savings Plan; and the Non-Employee Directors
Equity Compensation Plan of $12.5 million in 1997, $12.3 million in 1996, and
$16.2 million in 1995 and (2) the issuance of 200,000 shares of common stock in
the amount of $3.9 million related to the acquisition of a propane company in
June 1997.
Use of Estimates - Preparing financial statements in conformity with generally
accepted accounting principles requires
management to make estimates and assumptions. Those estimates and assumptions
affect the reported amounts of assets and liabilities, disclosure on contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Other - Gas inventories are stated at cost on a principally first-in, first-out
method. Materials and supplies inventories are stated at lower of average cost
or market.
Consistent with the rate treatment prescribed by the Georgia Commission
and the TRA, vacation pay and short-term disability benefits for AGL are
expensed when those benefits are paid.
The computation of earnings per share of common stock is based on the
weighted average number of common shares outstanding during each year.
Certain reclassifications have been made in 1996 and 1995 to conform
with the 1997 financial statement presentation.
Recently Issued Accounting Pronouncements - In February 1997 the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS 128), which establishes standards for
computing and presenting earnings per share. AGL Resources will adopt SFAS 128
in the first quarter of fiscal 1998.
In June 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 130 establishes standards for the reporting and displaying of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. AGL Resources will adopt SFAS 130 and
SFAS 131 in fiscal 1999.
Management does not expect those new pronouncements to have a
significant impact on the presentation of AGL Resources' consolidated financial
statements.
Note 2. Income Tax Expense
Deferred tax balances are measured at the tax rates that will apply during the
period the taxes become payable and are adjusted whenever new rates are enacted.
Because of the regulated nature of the utility's business, a regulatory
liability has been recorded in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The regulatory liability is
being amortized over approximately 30 years.
Components of income tax expense shown in the consolidated income
statements are as follows:
In millions 1997 1996 1995
- --------------------------------------------------------
Included in expenses
Current income taxes
Federal $ 24.2 $ 20.3 $ 16.9
State 5.5 3.0 2.6
Deferred income taxes
Federal 16.7 21.6 (1.0)
State 1.8 4.1 (0.2)
Amortization of investment
tax credits (1.4) (1.5) (1.6)
- --------------------------------------------------------
Total $ 46.8 $ 47.5 $ 16.7
========================================================
A reconciliation between the statutory federal income tax rate and the
effective rate is as follows:
In millions 1997
- --------------------------------------------------------
% of
Pretax
Amount Income
- --------------------------------------------------------
Computed tax expense $ 43.2 35.0
State income tax, net of federal
income tax benefit 4.5 3.7
Amortization of investment tax credits (1.4) (1.1)
Other - net 0.5 0.4
- --------------------------------------------------------
Total income tax expense $ 46.8 38.0
========================================================
In millions 1996
- --------------------------------------------------------
% of
Pretax
Amount Income
Computed tax expense $ 43.1 35.0
State income tax, net of federal
income tax benefit 4.3 3.5
Amortization of investment tax credits (1.5) (1.2)
Other - net 1.6 1.3
- --------------------------------------------------------
Total income tax expense $ 47.5 38.6
========================================================
In millions 1995
- --------------------------------------------------------
% of
Pretax
Amount Income
Computed tax expense $ 15.1 35.0
State income tax, net of federal
income tax benefit 1.3 3.0
Amortization of investment tax credits (1.6) (3.7)
Other - net 1.9 4.4
- --------------------------------------------------------
Total income tax expense $ 16.7 38.7
========================================================
Components that give rise to the net deferred income tax liability as of
September 30 are as follows:
In millions 1997 1996
- --------------------------------------------------------------
Deferred tax liabilities
Property - accelerated depreciation and
other property-related items $ 206.8 $ 204.4
Other 18.5 15.2
- --------------------------------------------------------------
Total deferred tax liabilities 225.3 219.6
- --------------------------------------------------------------
Deferred tax assets
Deferred investment tax credits 10.6 11.1
Alternative minimum tax 4.2 11.8
Other 18.8 29.6
- --------------------------------------------------------------
Total deferred tax assets 33.6 52.5
- --------------------------------------------------------------
Net deferred tax liability $ 191.7 $ 167.1
==============================================================
Note 3. Corporate Restructuring
In November 1994 AGL Resources announced a corporate restructuring plan and
began its implementation during fiscal 1995. As a result of the restructuring,
AGL combined offices, established centralized customer service centers, and
reduced the number of employees through voluntary retirement, severance
programs, and attrition. Restructuring costs of $43.1 million, after income
taxes, were recorded during 1995. The principal effect of the restructuring
charges was to increase obligations with respect to pension benefits and
postretirement benefits other than pensions.
During the fourth quarter of fiscal 1996, AGL Resources reviewed its
remaining liabilities with respect to its corporate restructuring plan. As a
result, AGL Resources adjusted its restructuring accruals and reduced operating
expenses by $2.7 million. The remaining balance of restructuring liabilities as
of September 30, 1997, and 1996, was $0.2 million and $1 million, respectively.
Note 4. Employee Benefit Plans and Stock Compensation Plans
Effective July 1, 1996, the Board of Directors authorized the transfer of the
sponsorship of all employee benefit plans from AGL to AGL Resources.
Substantially all employees of AGL Resources and its subsidiaries are eligible
to participate in the benefit plans.
AGL Resources has a noncontributory defined benefit retirement plan. The
plan's assets consist primarily of marketable securities, corporate obligations,
U.S. government obligations, insurance contracts, real estate investments, and
cash equivalents. The plan provides pension benefits that are based on years of
service and the employee's highest 36 consecutive months' compensation out of
the last 60 months worked. AGL Resources' funding policy is to make the annual
contribution required by applicable regulations and recommended by its actuary.
AGL Resources has an excess benefit plan that is unfunded and provides
supplemental benefits to certain officers after retirement. In September 1994
AGL Resources established a voluntary early retirement plan for certain officers
of AGL Resources that is unfunded and provides supplemental pension benefits to
participants who elected early retirement. The annual expense and accumulated
benefits of such plans are not significant.
Net periodic pension costs for the plans include service cost, interest
cost, return on pension assets, and straight-line amortization of unrecognized
initial net assets over approximately 16 years. Net periodic pension costs
include the following components:
In millions 1997 1996 1995
- -------------------------------------------------------------
Service cost $ 4.0 $ 4.0 $ 4.5
Interest cost 16.2 15.8 14.9
Actual return on assets (30.6) (19.3) (17.0)
Net amortization and deferral 16.9 6.3 5.9
- -------------------------------------------------------------
Net periodic pension cost $ 6.5 $ 6.8 $ 8.3
- -------------------------------------------------------------
Actuarial assumptions used include:
Discount rate 7.5% 7.8% 8.3%
Rate of increase in
compensation levels 4.5% 4.5% 5.0%
Expected long-term rate
of return on assets 8.3% 8.3% 8.3%
=============================================================
The following schedule sets forth the plans' funded status as of June
30, 1997, and 1996, and amounts recognized in the consolidated balance sheets as
of September 30, 1997, and 1996:
In millions 1997 1996
- -------------------------------------------------------------
Actuarial present value
of benefit obligations
Vested benefit obligation $ 187.2 $ 180.5
- -------------------------------------------------------------
Accumulated benefit obligation $ 190.5 $ 183.2
- -------------------------------------------------------------
Projected benefit obligation $ (223.8) $ (212.9)
Plan assets at fair value 212.1 181.8
- -------------------------------------------------------------
Plan assets less than projected
benefit obligation (11.7) (31.1)
Unrecognized net loss 15.1 26.8
Remaining unrecognized net
assets at date of initial adoption (3.7) (4.5)
Unrecognized prior service cost 3.5 3.9
- -------------------------------------------------------------
Prepaid (accrued) pension costs $ 3.2 $ (4.9)
=============================================================
AGL Resources' Retirement Savings Plus Plan (RSP Plan), a 401(k) plan,
provides participants a mechanism for making contributions for retirement
savings. Each participant may contribute amounts up to 15% of eligible
compensation. AGL Resources makes a contribution equal to 65% of the
participant's contribution not to exceed 3.9% of the participant's compensation
for the plan year. The contribution was $3.3 million for 1997, $3.2 million for
1996, and $3.3 million for 1995.
AGL Resources' Nonqualified Savings Plan (NSP), an unfunded,
nonqualified plan similar to the RSP Plan, was established on July 1, 1995. The
NSP provides an opportunity for eligible employees to make contributions for
retirement savings. AGL Resources' contributions during 1997 and 1996 to the NSP
were not significant.
In January 1988, in connection with a Leveraged Employee Stock Ownership
Plan (LESOP), AGL Resources purchased 2 million shares of its common stock for
$11.75 per share, with the proceeds of a loan secured by such common stock. AGL
Resources has not guaranteed the repayment of the loan. The loan is repaid from
regular cash dividends on AGL Resources' common stock paid to LESOP and from
contributions to LESOP, as approved by AGL Resources' Board of Directors.
Contributions to LESOP were $0.9 million for 1997, $0.7 million for 1996, and
$0.8 million for 1995. The principal balance of the loan was $0.6 million as of
September 30, 1997, and $2.9 million as of September 30, 1996. The loan is
payable on December 31, 1997.
In addition to providing pension benefits, AGL Resources provides
certain health care and life insurance benefits for retired employees.
Substantially all employees become eligible for those benefits if they reach
retirement age while working for AGL Resources.
In 1993 the Georgia Commission approved a five-year phase-in of
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106), that defers a portion
of SFAS 106 expense for future recovery. A regulatory asset has been recorded
for the deferred portion of SFAS 106 expense. In 1993 the TRA approved the
recovery of SFAS 106 expense that is funded through an external trust.
Net periodic postretirement benefits costs for fiscal 1997, 1996, and
1995 include the following components:
In millions 1997 1996 1995
- ------------------------------------------------------------
Service cost $ 0.8 $ 0.8 $ 0.9
Interest cost 8.0 8.8 7.6
Actual return on assets (1.0) (0.6) (0.3)
Amortization of transition
obligation and other 3.8 4.2 4.2
- ------------------------------------------------------------
Net postretirement
benefits costs $ 11.6 $ 13.2 $ 12.4
============================================================
Approximately $11.3 million, $10.7 million, and $8.7 million of net
periodic postretirement benefits costs for fiscal 1997, 1996, and 1995,
respectively, were recovered from the utility's customers. The remaining $0.3
million, $2.5 million, and $3.7 million for 1997, 1996, and 1995, respectively,
were deferred for future recovery through amortization and recognized as
regulatory assets in the financial statements consistent with regulatory
decisions. AGL Resources has funded, through an external trust, SFAS 106 expense
recovered from its utility customers in excess of the pay-as-you-go amounts.
The following schedule sets forth the plan's funded status as of
September 30, 1997, and 1996:
In millions 1997 1996
- -----------------------------------------------------------------
Retirees $ 82.2 $ 85.8
Fully eligible active plan participants 6.4 6.4
Other active plan participants 14.8 13.3
- -----------------------------------------------------------------
Total accumulated postretirement
benefit obligation 103.4 105.5
Plan assets at fair value 17.9 10.4
- -----------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 85.5 95.1
Unrecognized transition obligation (65.5) (69.5)
Unrecognized gain 14.3 10.6
- -----------------------------------------------------------------
Accrued postretirement benefits costs $ 34.3 $ 36.2
=================================================================
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation for pre-Medicare eligibility is
10.5% in 1997, decreasing 0.5% per year to 6% in the year 2006 and an additional
0.25% to 5.75% in 2007. The rate for post-Medicare eligibility is 9.0% in 1997,
decreasing 0.5% per year to 5.5% in the year 2004 and an additional 0.25% to
5.25% in 2005. Increasing the assumed health care cost trend rate by 1% would
increase the accumulated postretirement benefit obligation as of September 30,
1997, by approximately $5.1 million and the accrued postretirement benefits cost
by approximately $0.4 million for fiscal 1997. The assumed discount rate used in
determining the postretirement benefit obligation was 7.50% in 1997 and 7.75% in
1996.
The AGL Resources Long-Term Stock Incentive Plan (LTSIP) provides that
incentive and nonqualified stock options, restricted stock awards, and stock
appreciation rights may be granted to key employees of AGL Resources and its
subsidiaries. The exercise price of shares underlying each option must be at
least equal to the fair market value of the common stock on the date the option
is granted. Options become fully exercisable six months after the date of grant
and generally expire 10 years after the date of grant. The LTSIP currently
authorizes for issuance up to 3.2 million shares of AGL Resources common stock.
AGL Resources issued stock awards for 31,863; 7,249; and 2,000 shares to
key employees under the LTSIP during the years ended September 30, 1997, 1996,
and 1995, respectively. The 1997 stock awards are subject to certain vesting
restrictions. The weighted-average fair value at date of issuance for shares
awarded during the years ended September 30, 1997, 1996, and 1995, was $20.125,
$19.758, and $15.625 per share, respectively. AGL Resources is recognizing
compensation expense for these stock awards over the related vesting periods.
Option transactions during the three years ended September 30, 1997,
were as follows:
Weighted-Avg.
Shares Exercise Price
- -----------------------------------------------------------------
Outstanding - Sept. 30, 1994 619,338 $ 17.78
Granted 318,028 16.07
Exercised (46,264) 15.94
Forfeited (41,942) 18.91
- -----------------------------------------------------------------
Outstanding - Sept. 30, 1995 849,160 $ 17.18
=================================================================
Exercisable - Sept. 30, 1995 841,870 $ 17.17
=================================================================
Outstanding - Sept. 30, 1995 849,160 $ 17.18
Granted 299,340 19.40
Exercised (109,980) 17.24
Forfeited (27,176) 19.49
- -----------------------------------------------------------------
Outstanding - Sept. 30, 1996 1,011,344 $ 17.77
=================================================================
Exercisable - Sept. 30, 1996 1,006,166 $ 17.76
=================================================================
Outstanding - Sept. 30, 1996 1,011,344 $ 17.77
Granted 510,119 20.17
Exercised (104,520) 16.70
Forfeited (28,169) 19.76
- -----------------------------------------------------------------
Outstanding - Sept. 30, 1997 1,388,774 $ 18.69
=================================================================
Exercisable - Sept. 30, 1997 1,384,125 $ 18.69
=================================================================
Exercise prices for the 1,388,774 options outstanding as of September
30, 1997, ranged from $13.75 to $21.625. The weighted-average remaining
contractual life of those options is 7.6 years.
In 1997 AGL Resources adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), and
determined it would continue to follow the requirements of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," in its
accounting for employee stock options. Because the exercise price of employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. As of September 30, 1997, AGL
Resources adopted the disclosure-only provisions of SFAS 123. Had compensation
expense been reflected for the issuance of options granted in 1997 and 1996
based on the fair value method of SFAS 123, AGL Resources' net income and
earnings per share would have changed to the pro forma amounts indicated as
follows:
For the years ended September 30, 1997 1996
- ---------------------------------------------------------
Net income - as reported (millions) $ 76.6 $ 75.6
Net income - pro forma (millions) $ 75.6 $ 75.2
Earnings per share - as reported $ 1.37 $ 1.37
Earnings per share - pro forma $ 1.35 $ 1.36
- ---------------------------------------------------------
The weighted-average fair value at date of grant for stock options
granted during the years ended September 30, 1997, 1996, and 1995, was $2.93,
$2.34, and $2.03 per option, respectively. The fair value of options was
estimated using the Black-Scholes pricing model with the following
weighted-average assumptions:
For the years ended September 30, 1997 1996 1995
- -------------------------------------------------------------
Expected life (years) 7 7 7
Interest rate 6.3% 5.5% 7.4%
Volatility 17.1% 16.5% 16.4%
Dividend yield 5.3% 5.4% 6.5%
- -------------------------------------------------------------
AGL Resources maintains the AGL Resources Inc. 1996 Non-Employee
Directors Equity Compensation Plan (Directors Plan), in which all nonemployee
directors participate. The Directors Plan provides for an automatic grant to
each nonemployee director on the first day of each annual service term of (1) an
award of common stock equivalent in fair market value on such date to the
$16,000 annual retainer payable to each director and (2) a nonqualified stock
option to purchase the same number of shares of common stock as are awarded on
such date in payment of the retainer. The per share option exercise price is
equal to the fair market value of AGL Resources' common stock on the date of
grant of the option. Nonemployee directors were granted options to purchase an
aggregate of 7,960 shares and 9,306 shares for the years ended September 30,
1997, and 1996, respectively. The Directors Plan currently authorizes for
issuance up to 200,000 shares of common stock for stock awards and option
grants.
Note 5. Common Stock
AGL Resources has a Shareholder Rights Plan designed to protect the interests of
shareholders in the event of an unfavorable attempt to acquire AGL Resources and
to make it more difficult for a person to gain control of AGL Resources in a
manner or on terms not approved by the Board of Directors. The plan provides for
the issuance of one right for each outstanding share of common stock. The
purchase rights issued under the plan are redeemable at any time by AGL
Resources before their expiration on March 6, 2006, unless certain triggering
events have occurred. The purchase rights outstanding under the plan are
exercisable for one one-hundredth of a share of no par Class A Junior
Participating Preferred Stock at a purchase price of $60, with each share having
substantially the rights and preferences of 100 shares of common stock. As of
September 30, 1997, 1 million shares of Class A Junior Participating Preferred
Stock were reserved for issuance under this plan.
On November 3, 1995, the Board of Directors declared a two-for-one stock
split of the common stock effected in the form of a 100% stock dividend to
shareholders of record on November 17, 1995, and payable on December 1, 1995.
AGL Resources recorded a decrease to premium on capital stock and an increase to
common stock of $137.5 million to transfer the amount of the par value of the
stock dividend to common stock. All references to number of shares and to per
share amounts have been restated retroactively to reflect the stock dividend.
On June 16, 1995, approximately 3 million shares of common stock were
issued and sold at $16.81 per share, resulting in net proceeds of $48.6 million.
Proceeds from
that sale of common stock were used to finance capital expenditures and
for other corporate purposes.
AGL Resources also issued 753,866; 792,919; and 1,107,324 shares of its
common stock during the years ended September 30, 1997, 1996, and 1995,
respectively, pursuant to ResourcesDirect, a direct stock purchase and dividend
reinvestment plan; the RSP Plan; LTSIP; NSP; and the Non-Employee Directors
Equity Compensation Plans.
As of September 30, 1997, 7,760,821 shares of common stock were reserved
for issuance pursuant to ResourcesDirect, the RSP Plan, LTSIP, NSP, and the
Non-Employee Directors Equity Compensation Plan.
Note 6. Preferred Stock
In June 1997 AGL Resources formed AGL Capital Trust, a Delaware business trust
(the Trust), of which AGL Resources owns all of the common voting securities.
The Trust issued and sold to certain initial investors $75 million in principal
amount of 8.17% Capital Securities (liquidation amount $1,000 per Capital
Security), the proceeds of which were used to purchase 8.17% Junior Subordinated
Deferrable Interest Debentures, due June 1, 2037, from AGL Resources. The
Capital Securities are subject to mandatory redemption upon repayment of the
Junior Subordinated Debentures on the stated maturity date of June 1, 2037, upon
the earlier occurrence of certain events, or upon the optional prepayment by AGL
Resources on or after June 1, 2007. AGL Resources has fully and unconditionally
guaranteed all of the Trust's obligations with respect to the Capital
Securities. Net proceeds to AGL Resources from the sale of the Junior
Subordinated Debentures of $74.3 million was used to repay short-term debt, to
redeem certain of AGL's outstanding issues of preferred stock, and for other
corporate purposes.
As of September 30, 1997, AGL Resources had 10 million shares of
authorized, but unissued, Class A Junior Participating Preferred Stock, no par
value, and 10 million shares of authorized, but unissued, preferred stock, no
par value. As of September 30, 1997, AGL had 10 million shares of authorized,
but unissued, preferred stock, no par value.
On July 1, 1997, AGL redeemed 60 shares of its 7.84% Cumulative
Preferred Stock at a price of $100 per share pursuant to purchase fund
provisions associated with that issue.
On August 15, 1997, AGL redeemed its 4.5% Cumulative Preferred Stock,
4.72% Cumulative Preferred Stock, 5% Cumulative Preferred Stock, 7.84%
Cumulative Preferred Stock, and 8.32% Cumulative Preferred Stock at the call
price in effect for each issue for a total repurchase of 142,724 shares for
$14.7 million. That preferred stock had a carrying value of $14 million, net of
current maturities, as of September 30, 1996. Those issues of preferred stock
have been retired in full.
In addition to the Capital Securities outstanding, AGL has 445,000
shares of 7.70% Series depositary preferred stock outstanding with a carrying
value of $44.5 million as of September 30, 1997, and 1996. AGL announced the
redemption in full of those shares, effective December 1, 1997, at the
redemption price of $100 per share.
Note 7. Long-Term Debt
Medium-term notes Series A, Series B, and Series C were issued under an
Indenture dated December 1, 1989. The notes are unsecured and rank on a parity
with all other unsecured indebtedness. During 1997 $105.5 million in principal
amount of such notes was issued, with maturity dates ranging from 20 to 30 years
and with interest rates ranging from 6.55% to 7.3%. Net proceeds from the
issuance of medium-term notes were used to fund capital expenditures, to repay
short-term debt, and for other corporate purposes. The annual maturities of
long-term debt for the five years ending September 30, 2002, are $50 million in
2000, $20 million in 2001, and $45 million in 2002.
The outstanding long-term debt, net of current maturities, as of
September 30 is as follows:
In millions 1997 1996
- -----------------------------------------
Medium-term notes
Series A (1) $ 60.0 $ 60.0
Series B (2) 300.0 300.0
Series C (3) 300.0 194.5
- -----------------------------------------
Total $ 660.0 $ 554.5
=========================================
(1) Interest rates from 8.90% to 9.10% with maturity dates from 2000 to 2021
(2) Interest rates from 7.15% to 8.70% with maturity dates from 2000 to 2023.
(3) Interest rates from 5.90% to 7.30% with maturity dates from 2004 to 2027.
Note 8. Short-Term Debt
Lines of credit with various banks provide for direct borrowings and are subject
to annual renewal. The current lines of credit vary throughout the year from
$156.3 million in the summer months to $305 million for peak winter financing.
Certain of the lines are on a commitment-fee basis. As of September 30, 1997,
$152 million was available on lines of credit.
Short-term borrowings consisted of the following:
In millions 1997 1996 1995
- ---------------------------------------------------------------------
Short-term debt outstanding
at end of year $ 29.5 $ 152.0 $ 51.0
Maximum amounts of
short-term debt outstanding
at any month end during
the year 189.0 156.3 155.0
Average amounts of
short-term debt outstanding
during the year (a) 98.0 87.5 51.5
- ---------------------------------------------------------------------
Weighted Average
Interest Rates 1997 1996 1995
- ---------------------------------------------------------------------
Short-term debt outstanding
at end of year 5.9% 5.7% 5.9%
Average amounts of
short-term debt outstanding
during the year (a) 5.7% 5.8% 5.7%
- ---------------------------------------------------------------------
(a) Average amount outstanding during the year calculated based on daily
outstanding balances. Weighted average interest rate during the year calculated
based on interest expense and average amount outstanding during the year.
Note 9. Commitments and Contingencies
In connection with its utility business, AGL Resources has agreements for firm
pipeline and storage capacity that expire at various dates through 2014. The
aggregate amount of required payments under such agreements totals approximately
$1.4 billion, with annual required payments of $221 million in 1998, $218
million in 1999, $216 million in 2000, $196 million in 2001, and $184 million in
2002. Total payments of fixed charges under all agreements were $215 million in
1997, $225 million in 1996, and $230 million in 1995. The purchased gas
adjustment provisions of the utility's rate schedules permit the recovery of gas
costs from customers. As a result of the Natural Gas Competition and
Deregulation Act, those purchase commitments will be assigned to certificated
marketers.
During the past decade the Federal Energy Regulatory Commission (FERC)
has dramatically transformed the natural gas industry through a series of
generic orders promoting competition in the industry. As part of this
transformation, the interstate pipelines that serve AGL have been required to
unbundle their transportation and gas supply services and to provide
transportation service on a nondiscriminatory basis for gas supplied by numerous
gas producers or other third parties. FERC is considering further changes to its
regulatory structure, including, but not limited to, potential revisions to its
policies governing secondary market transactions and revisions to permit
pipelines and their customers to establish individually negotiated terms and
conditions of service that depart from pipeline tariff rules. AGL cannot predict
the likelihood that such initiatives will be adopted or the effect of those
potential changes upon AGL.
Based on filings with FERC by its pipeline suppliers, AGL currently
estimates that its total portion of transition costs from all of its pipeline
suppliers would be approximately $105.8 million. Approximately $92.2 million of
such costs has been incurred by AGL as of September 30, 1997, and is being
recovered from its customers under the purchased gas provisions of AGL's rate
schedules. Transition costs have not affected the total cost of gas to AGL's
customers significantly because (1) AGL purchases its wellhead gas supplies
based on market prices that are below the cost of gas previously embedded in the
bundled pipelines' sales service rates and (2) many elements of transition costs
previously were embedded in the rates for the pipelines' bundled sales service.
In conjunction with the regulatory changes mandated by FERC, AGL has
been required to pay transition costs associated with the unbundling of its
interstate pipeline suppliers, including substantial gas supply realignment
costs billed to AGL by Southern Natural Gas Company (Southern) and Tennessee Gas
Pipeline Company (Tennessee). AGL and other parties have entered into
restructuring settlements with Southern and Tennessee that resolve all
transition cost issues for those pipelines. Pursuant to the Southern settlement,
AGL's share of Southern's transition costs is estimated to be $87.6 million,
$79.4 million of which has been incurred by AGL as of September 30, 1997. The
Southern settlement has been approved by FERC, but is subject to judicial
review;
thus, AGL's ultimate liability for Southern's transition costs is not finally
established. Pursuant to the Tennessee settlement, AGL's share of
Tennessee's transition costs is estimated to be $14.7 million, $9.6 million of
which has been incurred by AGL as of September 30, 1997. The Tennessee
settlement is final, as it has been approved by FERC and is no longer subject to
judicial review.
On September 30, 1997, AGL Resources and its subsidiaries had 3,035
employees. Approximately 724 employees working for AGL and 50 employees working
for Service Company are covered by provisions of collective bargaining
agreements. Those agreements provide for a $500 lump sum payment to each
bargaining unit employee in 1997 and 1998. Based on current pay levels, it is
anticipated that the majority of bargaining unit employees will not receive any
base rate increases until 1999. The collective bargaining agreements expire in
2000 and 2001.
Total rental expense for property and equipment was $6.5 million in
1997, $7 million in 1996, and $6.3 million in 1995. Minimum annual rentals under
noncancelable operating leases are as follows: 1998 - $6.2 million; 1999 - $5.4
million; 2000 - $4.9 million; 2001 - $3.6 million; 2002 - $3.5 million; and
thereafter - $3 million.
AGL Resources and its subsidiaries are involved in litigation arising in
the normal course of business. (See Note 11 regarding Environmental Matters.)
Management believes that the ultimate resolution of such litigation will not
have a material adverse effect on the consolidated financial statements.
Note 10. Customers' and Suppliers' Refunds
Pursuant to orders of FERC, the utility has received refunds from its interstate
natural gas suppliers. Those refunds are a result of FERC orders adjusting the
price of various pipeline services purchased by the utility from its suppliers
in prior periods. The utility passes the refunds on to its customers under
purchased gas provisions of rate schedules approved by the Georgia Commission
and the TRA.
On August 23, 1995, the Georgia Commission approved a $38.5 million plus
interest refund of deferred purchased gas costs. The refund resulted from the
over-recovery of gas costs through the purchased gas provisions of the utility's
rate schedules. The refund was credited to customers' bills in September 1995.
Note 11. Environmental Matters
AGL has identified nine sites in Georgia where it currently owns all or part of
a manufactured gas plant (MGP) site. In addition, AGL has identified three
other sites in Georgia that AGL does not own, but that may have been associated
with the operation of MGPs by AGL or its predecessors.
Those sites are potentially subject to a variety of regulatory programs.
AGL's response to MGP sites in Georgia is proceeding under two state
regulatory programs: the Georgia Hazardous Waste Management Act (HWMA) and the
Hazardous Site Response Act (HSRA). Some degree of response action, under one or
both of those programs, is likely to be required at most of the Georgia sites.
AGL also has identified three sites in Florida that may have been
associated with AGL or its predecessors. AGL does not own any of the former MGP
sites in Florida. However, AGL has been contacted by the current owners of two
of those sites. In addition, AGL has received a "Special Notice Letter" from the
U.S. Environmental Protection Agency (EPA) with respect to one of the two sites.
AGL expects that some degree of response action is likely to be required at
those two sites. AGL currently is negotiating with both regulatory authorities
and other potentially responsible parties to determine the extent of its
responsibility for the two sites.
AGL has estimated the investigation and remediation expenses likely to
be associated with the former MGP sites. AGL currently estimates that the future
cost to AGL of investigating and remediating the former MGP sites could be as
low as $37.3 million or as high as $76.5 million. That range does not include
other expenses, such as unasserted property damage claims, for which AGL may be
held liable, but for which neither the existence nor the amount of such
liabilities can be reasonably forecast. Within the stated range of $37.3 million
to $76.5 million, no amount within the range can be reliably identified as a
better estimate than any other estimate. Therefore, a liability at the low end
of that range has been recorded in the financial statements.
AGL has two means of recovering the expenses associated with the former
MGP sites. First, the Georgia Commission has approved the recovery by AGL of
Environmental Response Costs, as defined, pursuant to an Environmental Response
Cost Recovery Rider (ERCRR). For purposes of the
ERCRR, Environmental Response Costs include investigation, testing, remediation,
and litigation costs and expenses, or other liabilities relating to or arising
from MGP sites. A regulatory asset in the amount of $55 million has been
recorded in the financial statements to reflect the recovery of those costs
through the ERCRR.
In connection with the ERCRR, the staff of the Georgia Commission has
undertaken a financial and management process audit related to the MGP sites,
cleanup activities at the sites, and environmental response costs that have been
incurred for purposes of the ERCRR. On October 10, 1996, the Georgia Commission
issued an order to prohibit funds collected through the ERCRR from being used
for payment of any damage award, including punitive damages, as a result of any
litigation associated with the MGP sites in which AGL is involved. On October
22, 1997, the Georgia Commission issued an order rescinding its 1996 order and
has scheduled a hearing for February 16, 1998, to consider three issues relating
to the ERCRR. Specifically, the Georgia Commission is to consider whether the
term "Environmental Response Costs" should include punitive damages, whether
AGL should be required to provide an annual accounting for revenue recovered
from customers through the ERCRR, and whether a schedule should be established
for site remediation.
Second, AGL intends to seek recovery of appropriate costs from its
insurers and other potentially responsible parties. During fiscal 1997 and
fiscal 1996, AGL recovered $5.7 million and $14.7 million, respectively, from
its insurance carriers and other potentially responsible parties. In accordance
with provisions of the ERCRR, AGL recognized other income of $1.4 million during
fiscal 1997 and $2.9 million during fiscal 1996 and established regulatory
liabilities for the remainder of the recoveries.
On February 10, 1995, a class action lawsuit captioned Trinity Christian
Methodist Episcopal Church, et al. v. Atlanta Gas Light Company, No. 95-RCCV-93,
was filed in the Superior Court of Richmond County, Georgia, seeking to recover
for damage to property owned by persons adjacent to and nearby the former
manufactured gas plant site in Augusta, Georgia. On December 13, 1996 the
parties reached a preliminary settlement, which was approved by the Court on
April 15, 1997. Pursuant to the settlement, there is a claims process before an
umpire to determine either the full fair market value of properties tendered to
AGL or the diminution in fair market value of properties not tendered to AGL.
Settlements have been paid to 188 property owners in the class totaling
approximately $2.9 million, including legal fees and expenses of the plaintiffs.
There are seven settlements yet to be paid. One settlement of approximately
$64,000, including attorney's fees, is pending reconsideration, and AGL has
filed motions to vacate six settlements totaling approximately $4.3 million. An
order was entered on July 8, 1997, denying the motion to vacate. AGL has filed a
notice of appeal with the Georgia Court of Appeals seeking to reverse the denial
of the motion to vacate.
Note 12. Fair Value of Financial Instruments
AGL Resources has estimated the fair value of its financial instruments, the
carrying value of which differed from fair value, using available market
information and appropriate valuation methodologies. Considerable judgment is
required in developing the estimates of fair value presented herein and,
therefore, the values are not necessarily indicative of the amounts that could
be realized in a current market exchange.
The carrying amount and the estimated fair value of such financial
instruments as of September 30, 1997, and 1996, consist of the following:
Carrying Estimated
In millions Amount Fair Value
- ----------------------------------------------------------
1997
Long-term debt, including
current portion $ 660.0 $ 687.0
Capital Securities 74.3 76.3
- ----------------------------------------------------------
1996
Long-term debt, including
current portion $ 554.5 $ 566.6
Redeemable cumulative preferred
stock of AGL, including
current portion 55.8 56.9
- ----------------------------------------------------------
The estimated fair values are determined based on the following:
Long-Term Debt - interest rates that currently are available for issuance of
debt with similar terms and remaining maturities.
Capital Securities - quoted market price and dividend rates for preferred stock
with similar terms.
The fair value estimates presented herein are based on information
available to management as of September 30, 1997, and 1996. Management is not
aware of any subsequent factors that would affect the estimated fair value
amounts significantly.
Note 13. Joint Ventures and Nonregulated Acquisitions
During November 1997 AGL Resources and Southern Natural Gas Company, a
subsidiary of Sonat Inc., (Sonat), entered into a letter of intent to jointly
construct, own, and operate a new liquefied natural gas peaking facility, Etowah
LNG (Etowah) in Polk County, Georgia. Under the letter of intent, which is
subject to regulatory approval and the execution of definitive documents, AGL
Resources and Southern Natural Gas each will own 50% of Etowah, which will be
regulated by FERC.
The proposed plant will connect directly into AGL's and Southern Natural
Gas' pipeline. Etowah will provide natural gas storage and peaking services to
AGL and other southeastern customers. The new facility will cost approximately
$90 million, with 3 billion-cubic-feet of natural gas storage capacity and 450
million-cubic-feet per day of vaporization capacity. Affiliates of AGL Resources
will manage the construction of the facility and operate it. Southern Natural
Gas will provide administrative services.
During December 1996 AGL Resources signed a letter of intent with
Transcontinental Gas Pipe Line Corporation (Transco) to form a joint venture,
which would be known as Cumberland Pipeline Company (Cumberland), to provide
interstate pipeline services to customers in Georgia and Tennessee. The
transaction is subject to various corporate and regulatory approvals. Initially,
the 135-mile Cumberland pipeline will include existing pipeline infrastructure
owned by the two companies, extending from Walton County, Georgia, to Catoosa
County, Georgia. Projected to enter service by November 1, 2000, Cumberland will
be positioned to serve AGL, Chattanooga, and other markets throughout the
eastern Tennessee Valley, northwest Georgia, and northeast Alabama. Affiliates
of Transco and AGL Resources each will own 50% of Cumberland, and an affiliate
of Transco will serve as operator. It currently is anticipated that the project
will be submitted to FERC for approval during fiscal 1998.
AGL Power Services, a wholly owned subsidiary of AGL Investments, holds
a 35% interest in Sonat Power Marketing L.P., which provides power marketing and
all related services in key market areas throughout the United States. During
fiscal 1996 AGL Power Services invested approximately $1 million in exchange for
a 35% ownership interest in the partnership.
During August 1995 AGL signed an agreement with Sonat to form a joint
venture to acquire the business of Sonat Marketing Company, a wholly owned
subsidiary of Sonat. The joint venture, Sonat Marketing Company L.P. (Sonat
Marketing), offers natural gas sales, transportation, risk management, and
storage services to natural gas users and producers in key natural gas producing
and consuming areas of the United States.
AGL invested $32.6 million for a 35% ownership interest in Sonat
Marketing, which was transferred to AGL Gas Marketing, a wholly owned subsidiary
of AGL Investments, during the third quarter of fiscal 1996. AGL Gas Marketing's
35% investment is being accounted for under the equity method. The excess of the
purchase price over the estimated fair value of the net tangible assets of
approximately $23 million has been allocated to intangible assets consisting of
customer lists and goodwill; those assets are being amortized over 10 and 35
years, respectively.
AGL Investments has certain rights through August 2000 to sell its
interest in Sonat Marketing to Sonat at a predetermined fixed price, as defined,
or for fair market value at any time.
During fiscal 1997 and 1996, AGL Resources purchased gas totaling $287.9
million and $247.5 million, respectively, from Sonat Marketing and its
affiliates. As of September 30, 1997, and September 30, 1996, AGL Resources had
outstanding obligations payable to Sonat Marketing of $32.6 million and $18.8
million, respectively.
During fiscal 1997 AGL Investments acquired regional propane operations
located in northern Alabama, northern Georgia, and eastern Tennessee for a total
cost of approximately $17.7 million. Those acquisitions are accounted for
pursuant to the purchase method of accounting.
Note 14. Subsequent Event
On November 26, 1997, AGL filed with the Georgia Commission a notice of its
election to become an electing distribution company pursuant to Georgia's
Natural Gas Competition and Deregulation Act. That election will allow AGL to
unbundle its services and eventually exit from the sale of gas. Unbundling
services involves separating AGL's transportation business from ancillary
services, such as peaking services, meter reading, billing services, collection
services, payment processing services, and billing inquiry services. Rates
requested in connection with that filing will be calculated using a
performance-based measurement.
Note 15. Quarterly Financial Data (Unaudited)
Quarterly financial data for fiscal 1997 and 1996 are summarized as follows:
Operating Operating
In millions Revenues Income
- ------------------------------------------------
Quarter Ended
1997
December 31, 1996 $ 379.6 $ 60.2
March 31, 1997 496.7 89.0
June 30, 1997 216.7 15.1
September 30, 1997 194.6 7.2
- ------------------------------------------------
1996
December 31, 1995 $ 330.7 $ 59.5
March 31, 1996 482.0 79.8
June 30, 1996 241.6 17.4
September 30, 1996 174.3 6.8
- ------------------------------------------------
Net Earnings (Loss)
Income Per Share of
(Loss) Common Stock
In millions except per share data (a) (a)
- ----------------------------------------------------------------
Quarter Ended
1997
December 31, 1996 $ 29.6 $ 0.53
March 31, 1997 49.0 0.88
June 30, 1997 1.4 0.03
September 30, 1997 (3.4) (0.06)
- ----------------------------------------------------------------
1996
December 31, 1995 $ 29.1 $ 0.53
March 31, 1996 45.0 0.81
June 30, 1996 3.6 0.06
September 30, 1996 (b) (2.1) (0.04)
- ----------------------------------------------------------------
(a) The wide variance in quarterly earnings results from the highly seasonal
nature of AGL Resources' primary business.
Earnings per share are calculated based on the weighted average number
of shares outstanding during the quarter. That total differs from the earnings
per share, as shown on the statements of consolidated income, which is based on
the weighted average number of shares outstanding for the entire year.
(b) During the fourth quarter of fiscal 1996, AGL Resources increased net income
and earnings per share by $1.6 million and $.03, respectively, as a result of a
review of remaining liabilities in connection with a corporate restructuring
plan. (See Note 3.)
In addition, net income and earnings per share were increased during the
fourth quarter of fiscal 1996 by $1.6 million and $.03, respectively, in
connection with recoveries from insurers in accordance with provisions of an
environmental response cost recovery rider. (See Note 11.)
Independent Auditors' Report
To the Shareholders and Board of Directors
of AGL Resources Inc.:
We have audited the accompanying consolidated balance sheets of AGL Resources
Inc. and subsidiaries as of September 30, 1997, and 1996, and the related
statements of consolidated income, common stock equity, and cash flows for each
of the three years in the period ended September 30, 1997. These financial
statements are the responsibility of AGL Resources' 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, such consolidated financial statements present fairly,
in all material respects, the financial position of AGL Resources Inc. and
subsidiaries as of September 30, 1997, and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
November 7, 1997
(November 26, 1997 as to Note 14)
Management's Responsibility for Financial Reporting
The consolidated financial statements and related information are the
responsibility of management. The financial statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances. The financial information contained elsewhere in this Annual
Report is consistent with that in the financial statements.
AGL Resources maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded from loss
and that transactions are executed and recorded in accordance with established
procedures. The concept of reasonable assurance is based on the recognition that
the cost of maintaining a system of internal accounting controls should not
exceed related benefits. The system of internal accounting controls is supported
by written policies and guidelines.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors. Their audits were made in accordance with generally
accepted auditing standards, as indicated in the Independent Auditors' Report,
and included a review of the system of internal accounting controls and tests of
transactions to the extent they considered necessary to carry out their
responsibilities.
The Board of Directors pursues its responsibility for reported financial
information through its Audit Committee. The Audit Committee meets periodically
with management and the independent auditors to assure that they are carrying
out their responsibilities and to discuss internal accounting controls, auditing
and financial reporting matters.
David R. Jones J. Michael Riley
President and Vice President and
Chief Executive Officer Chief Financial Officer
Selected Financial Data
For the years ended September 30,
In millions, except per share amounts 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Income Statement Data
Operating revenues $ 1,287.6 $ 1,228.6 $ 1,068.5 $ 1,199.9 $ 1,130.3 $ 994.6
Cost of gas 766.5 725.5 574.1 736.8 701.0 590.5
- ------------------------------------------------------------------------------------------------------------------------------------
Operating margin 521.1 503.1 494.4 463.1 429.3 404.1
- ------------------------------------------------------------------------------------------------------------------------------------
Other operating expenses
Operation 226.2 221.8 215.5 207.0 187.6 170.7
Restructuring costs 70.3
Maintenance 30.8 29.5 30.4 32.8 30.9 29.5
Depreciation 66.6 63.3 59.0 55.4 58.8 54.9
Taxes other than income taxes 26.0 25.0 25.7 26.0 23.9 23.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 349.6 339.6 400.9 321.2 301.2 278.3
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 171.5 163.5 93.5 141.9 128.1 125.8
- ------------------------------------------------------------------------------------------------------------------------------------
Other income 10.3 13.1 1.5 5.2 6.6 2.8
- ------------------------------------------------------------------------------------------------------------------------------------
Income before interest
and income taxes 181.8 176.6 95.0 147.1 134.7 128.6
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense
and preferred stock dividends 58.4 53.5 51.9 52.1 51.0 48.4
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 123.4 123.1 43.1 95.0 83.7 80.2
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes 46.8 47.5 16.7 36.3 30.5 25.8
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 76.6 75.6 26.4 58.7 53.2 54.4
Common dividends paid 60.5 58.6 54.2 52.2 51.1 49.6
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings reinvested $ 16.1 $ 17.0 $ (27.8) $ 6.5 $ 2.1 $ 4.8
====================================================================================================================================
Common Stock Data (1)
Weighted average shares
outstanding 56.1 55.3 52.4 50.2 49.2 48.2
Earnings per share $ 1.37 $ 1.37 $ 0.50 $ 1.17 $ 1.08 $ 1.13
Dividends paid per share $ 1.08 $ 1.06 $ 1.04 $ 1.04 $ 1.04 $ 1.03
Dividend payout ratio 78.8% 77.4% 208.0% 88.9% 96.3% 91.2%
Book value per share (2) $ 10.99 $ 10.56 $ 10.15 $ 10.20 $ 9.90 $ 9.70
Market value per share (2) $ 18.94 $ 19.13 $ 19.31 $ 15.31 $ 18.81 $ 18.81
====================================================================================================================================
Balance Sheet Data (2)
Total assets $ 1,925.0 $ 1,823.1 $ 1,674.6 $ 1,642.9 $ 1,533.0 $ 1,428.6
Long-term liabilities
Take-or-pay charges payable $ 5.0
Accrued environmental
response costs $ 37.3 $ 30.4 $ 28.6 $ 24.3 $ 19.6 $ 25.0
Accrued pension costs $ 4.9 $ 10.3
Accrued postretirement
benefits costs $ 34.3 $ 36.2 $ 30.1 $ 3.6
Deferred credits $ 61.9 $ 60.9 $ 65.6 $ 66.6 $ 42.3 $ 43.8
- ------------------------------------------------------------------------------------------------------------------------------------
Capitalization
Long-term debt
(including current portion) $ 660.0 $ 554.5 $ 554.5 $ 569.5 $ 500.7 $ 476.5
Preferred stock (including current portion)
Preferred stock of
subsidiary 44.5 58.8 58.8 58.8 59.0 14.5
Subsidiary obligated
mandatorily redeemable
preferred securities 74.3
Common equity 622.1 588.3 557.3 518.5 492.0 472.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,400.9 $ 1,201.6 $ 1,170.6 $ 1,146.8 $ 1,051.7 $ 963.1
====================================================================================================================================
Financial Ratios (2)
Capitalization
Long-term debt
(including current portion) 47.1% 46.1% 47.4% 49.6% 47.6% 49.5%
Preferred stock (including current portion)
Preferred stock of subsidiary 3.2 4.9 5.0 5.2 5.6 1.5
Subsidiary obligated
mandatorily redeemable
preferred securities 5.3
Common equity 44.4 49.0 47.6 45.2 46.8 49.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====================================================================================================================================
Return on average common
equity 12.7% 13.2% 4.9% 11.6% 11.0% 11.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Times charges earned before income taxes (3)
Total interest 3.46 3.58 1.99 3.08 2.86 2.66
Total interest and preferred
dividends 3.10 3.28 1.83 2.82 2.63 2.60
Fixed (4) 2.90 3.08 1.75 2.66 2.49 2.54
====================================================================================================================================
<FN>
(1) Adjusted for two-for-one stock split paid in the form of 100% stock dividends on December 1, 1995. (2) Year-end.
(3) Interest charges exclude the debt portion of allowance for funds used during construction. (4) Fixed charges consist of
interest on short- and long-term debt, other interest, preferred dividends, and the estimated interest component of rentals.
</FN>
Gas Sales and Statistics
For the years ended September 30,
In millions 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Sales of gas
Residential $ 728.5 $ 708.8 $ 610.6 $ 700.7 $ 658.2 $ 575.7
Commercial 290.9 288.8 243.2 285.8 268.1 231.5
Industrial 148.0 178.8 169.4 172.1 154.2 140.9
Transportation revenues 28.5 21.5 23.9 22.6 33.8 36.6
Miscellaneous revenues 20.2 19.7 15.9 18.7 16.0 9.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total utility operating
revenues 1,216.1 1,217.6 1,063.0 1,199.9 1,130.3 994.6
- ------------------------------------------------------------------------------------------------------------------------------------
Other operating revenues 71.5 11.0 5.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating revenues $ 1,287.6 $ 1,228.6 $ 1,068.5 $ 1,199.9 $ 1,130.3 $ 994.6
====================================================================================================================================
Utility Throughput
Therms sold (Millions)
Residential 986.1 1,165.4 916.8 1,003.1 1,001.4 915.4
Commercial 455.5 538.2 454.0 478.9 478.5 433.9
Industrial 344.9 449.6 526.0 424.8 388.7 445.0
Therms transported 1,014.5 738.7 722.8 697.4 795.6 901.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total utility throughput 2,801.0 2,891.9 2,619.6 2,604.2 2,664.2 2,696.1
====================================================================================================================================
Average Utility Customers (Thousands)
Residential 1,319.0 1,289.4 1,250.4 1,215.2 1,182.7 1,152.2
Commercial 104.5 102.5 100.0 98.0 95.7 93.7
Industrial 2.7 2.6 2.6 2.5 2.5 2.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,426.2 1,394.5 1,353.0 1,315.7 1,280.9 1,248.4
====================================================================================================================================
Sales, Per Average Residential Customer
Gas sold (Therms) 748 904 733 825 847 794
Revenue (Dollars) 552 550 488 577 557 500
Revenue per therm (Cents) 73.9 60.8 66.6 69.9 65.7 62.9
Degree Days - Atlanta Area
30-year normal 2,991 2,991 2,991 2,991 3,021 3,021
Actual 2,402 3,191 2,121 2,565 2,852 2,552
Percentage of actual to
30-year normal 80.3 106.7 70.9 85.8 94.4 84.5
Gas Account (Millions of Therms)
Natural gas purchased 1,323.4 1,632.9 1,406.9 1,453.6 1,629.9 1,555.4
Natural gas withdrawn
from storage 472.4 596.0 520.7 500.3 276.4 263.3
Natural gas transported 1,014.5 738.7 722.8 697.4 795.6 901.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total send-out 2,810.3 2,967.6 2,650.4 2,651.3 2,701.9 2,720.5
Less
Unaccounted for 1.3 60.4 20.4 37.2 29.0 16.2
Company use 8.0 15.3 10.4 9.9 8.7 8.2
- ------------------------------------------------------------------------------------------------------------------------------------
Sold and transported
to utility customers 2,801.0 2,891.9 2,619.6 2,604.2 2,664.2 2,696.1
====================================================================================================================================
Cost of Gas (Millions of Dollars)
Natural gas purchased $ 532.5 $ 547.1 $ 389.4 $ 550.1 $ 595.7 $ 487.9
Natural gas withdrawn
from storage 175.7 171.6 182.4 186.7 105.3 102.6
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of gas - utility operations 708.2 718.7 571.8 736.8 701.0 590.5
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of gas - other 58.3 6.8 2.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total cost of gas $ 766.5 $ 725.5 $ 574.1 $ 736.8 $ 701.0 $ 590.5
====================================================================================================================================
Utility Plant - End of Year (Millions of Dollars)
Gross plant $ 2,069.1 $ 1,969.0 $ 1,919.9 $ 1,833.2 $ 1,740.6 $ 1,634.8
Net plant $ 1,420.3 $ 1,361.2 $ 1,336.6 $ 1,279.6 $ 1,217.9 $ 1,157.4
Gross plant investment per utility customer
(Thousands of Dollars) $ 1.5 $ 1.4 $ 1.4 $ 1.4 $ 1.4 $ 1.3
Capital Expenditures
(Millions of Dollars) $ 147.7 $ 132.5 $ 121.7 $ 122.5 $ 122.2 $ 132.9
Gas Mains - Miles of 3" Equivalent 30,261 29,045 28,520 27,972 27,390 26,936
Employees - Average 2,986 2,942 3,249 3,764 3,764 3,794
Average Btu Content of Natural Gas 1,024 1,024 1,027 1,032 1,027 1,024
====================================================================================================================================
Officers of AGL Resources Inc. and Subsidiaries
Executive Officers of AGL Resources Inc.
David R. Jones (37) President and Chief Executive Officer
Charles W. Bass (27) Executive Vice President and Chief Operating Officer
Thomas H. Benson (27) Executive Vice President;
President and Chief Operating Officer of Atlanta Gas
Light Company
Robert L. Goocher (25) Executive Vice President;
President and Chief Operating Officer of AGL
Resources Service Company
General Officers of AGL Resources Inc.
Stephen J. Gunther (12) Vice President;
President of AGL Energy Services, Inc.
Clayton H. Preble (27) Vice President;
President of The Energy Spring, Inc.
Richard H. Woodward (27) Vice President;
President of AGL Investments, Inc.
Peter L. Banks (15) Vice President, External Affairs
Mark D. Caudill (5) Vice President, Regulatory Affairs
H. Edwin Overcast (8) Vice President, Strategic Planning and Rates
Melanie M. Platt (2) Vice President and Corporate Secretary
J. Michael Riley (24) Vice President and Chief Financial Officer
James S. Thomas, Jr. (11) Vice President, Legal
Atlanta Gas Light Company
Isaac Blythers (24) Vice President, Metro Region
Jerry B. Brown (22) Vice President, Georgia Region
Michael D. Hutchins (24) Vice President, Operations and Engineering
Charlie J. Lail (33) Senior Vice President, Operations Improvement
Catherine Land-Waters (15) Vice President, Customer Service
Henry P. Linginfelter (16) Vice President, Market Services and Development
AGL Resources Service Company
Verlene P. Cobb (34) Vice President, Corporate Communications
James W. Connally (27) Vice President, Human Resources
Gerald A. Hinesley (18) Vice President and Controller
John H. Mobley, Jr. (2) Vice President, Information Systems
Charles C. Moore, Jr. (29) Vice President and Treasurer
Marvin M. Wyatt, Jr. (27) Vice President, Operations Support
Chattanooga Gas Company
Harrison F. Thompson (27) President
Number in parentheses denotes full years of service as of September 30, 1997.
Board of Directors
Frank Barron, Jr. 1,4
Vice President
Rome Coca-Cola Bottling Company
Rome, Georgia
Director since 1983
W. Waldo Bradley 2,3
Chairman of the Board
Bradley Plywood Corporation
Savannah, Georgia
Director since 1991
Otis A. Brumby, Jr. 2,3
Chairman of the Board and Chief Executive Officer
The Marietta Daily Journal and Neighbor Newspapers, Inc.
Marietta, Georgia
Director since 1990
L.L. Gellerstedt, III 2,4
Chairman and Chief Executive Officer
Beers Construction Company
Atlanta, Georgia
Director since 1996
David R. Jones 1,4
President and Chief Executive Officer
AGL Resources Inc.
Atlanta, Georgia
Director since 1985
Albert G. Norman, Jr. 1,3
Attorney
Long Aldridge & Norman LLP
Atlanta, Georgia
Director since 1976
D. Raymond Riddle 1,2
Retired Chairman and Chief Executive Officer
National Service Industries, Inc.
Atlanta, Georgia
Director since 1978
Dr. Betty L. Siegel 2,4
President
Kennesaw State University
Kennesaw, Georgia
Director since 1986
Ben J. Tarbutton, Jr. 1,3
Vice President
Sandersville Railroad Co.
Sandersville, Georgia
Director since 1983
Charles McKenzie Taylor 3,4
Chairman
Taylor & Mathis, Inc.
Atlanta, Georgia
Director since 1984
Felker W. Ward, Jr. 1,4
Chairman
Pinnacle Investment Advisors, Inc.
Atlanta, Georgia
Director since 1988
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Nominating and Compensation Committee
4 Member of Corporate Responsibility Committee
Stock Listing - AGL Resources Inc.'s common stock is traded on the New York
Stock Exchange (NYSE) under the symbol ATG. It appears in newspaper financial
section stock listings as AGL Res.
Ownership - Approximately 56.6 million outstanding shares of AGL Resources'
common stock are owned by 17,840 shareholders of record in 50 states, the
District of Columbia, and 15 foreign countries.
Market Prices and Dividends - The following table reflects the quarterly high
and low closing sales prices, as reported in the listing of the NYSE composite
transactions for shares of common stock for fiscal 1997 and 1996, and the
quarterly dividends paid per share.
Dividends
Paid
Quarter Ended High Low Per Share
1997
September 30, 1997 $ 20.94 $ 18.88 $ .27
June 30, 1997 20.75 18.75 .27
March 31, 1997 21.50 18.63 .27
December 31, 1996 21.75 19.50 .27
1996
September 30, 1996 $ 20.88 $ 17.38 $ .265
June 30, 1996 19.00 17.13 .265
March 31, 1996 20.25 17.63 .265
December 31, 1995 19.88 18.88 .265
Annual Meeting - The 1998 Annual Meeting of Shareholders will be held February
6, 1998, at AGL Resources' offices, 303 Peachtree Street, N.E., Atlanta,
Georgia. Proxies for the meeting of shareholders are being solicited by the
Board of Directors. A formal notice of the meeting, proxy statement, and proxy
card have been mailed with the 1997 Annual Report.
Shareholder Reports, Form 10-K and Inquiries - Additional copies of this report
and the Form 10-K Annual Report to the Securities and Exchange Commission
(excluding exhibits) can be obtained by writing to or calling the Corporate
Secretary's Office, AGL Resources Inc., Post Office Box 4569, Atlanta, GA
30302-4569, (404) 584-3794.
Shareholder inquiries also may be directed to the Corporate Secretary's office
or to AGL Resources' toll-free shareholder service number: (800) 633-4236.
ResourcesDirect - ResourcesDirect provides potential investors and existing
shareholders with an economical and convenient method for purchasing initial or
additional shares of common stock directly from AGL Resources without paying any
brokerage fees or service charges. Dividends reinvested through the plan are
used to purchase shares of common stock directly from AGL Resources. Call
1-800-866-1543, or visit our web site at www.aglr.com for a plan prospectus and
enrollment application.
Transfer Agent, Registrar and Dividend Disbursing Agent - AGL Resources'
transfer agent is Wachovia Bank of North Carolina, N.A.
Correspondence and requests for transfer should be directed to
Wachovia Shareholder Services
Post Office Box 8217
Boston, MA 02266-8217
(800) 633-4236
Direct deposit of cash dividends and automated stock purchase services are
available from the transfer agent above.
Financial Inquiries - Financial analysts and professional investment managers
are invited to contact
J. Michael Riley
Vice President and Chief Financial Officer
AGL Resources Inc.
Post Office Box 4569
Atlanta, GA 30302-4569
(404) 584-3954
Please visit our web site at http://www.aglr.com for additional financial
information.