-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DVTMTQ6b8mRnDmvOv+bvpdYrAzyj7EFKHIspAI+pgk8fJAEXKblaclqpVTQsg/BC +t4yAHEe/j+kf06FE7Cc0A== 0001004155-98-000013.txt : 19980518 0001004155-98-000013.hdr.sgml : 19980518 ACCESSION NUMBER: 0001004155-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGL RESOURCES INC CENTRAL INDEX KEY: 0001004155 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 582210952 STATE OF INCORPORATION: GA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14174 FILM NUMBER: 98624754 BUSINESS ADDRESS: STREET 1: 303 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045844000 MAIL ADDRESS: STREET 1: 303 PEACHTREE ST STREET 2: STE 400 CITY: ATLANTA STATE: GA ZIP: 30308 10-Q 1 AGL RESOURCES INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1998 Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification Number 1-14174 AGL RESOURCES INC. 58-2210952 (A Georgia Corporation) 303 PEACHTREE STREET, NE ATLANTA, GEORGIA 30308 404-584-9470 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 1998. Common Stock, $5.00 Par Value Shares Outstanding at March 31, 1998 ...........................56,988,417 AGL RESOURCES INC. Quarterly Report on Form 10-Q For the Quarter Ended March 31, 1998 Table of Contents Item Page Number Number PART I -- FINANCIAL INFORMATION 1 Financial Statements Condensed Consolidated Income Statements 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 7 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 14 PART II -- OTHER INFORMATION 1 Legal Proceedings 23 4 Submission of Matters to a Vote of Security Holders 23 5 Other Information 23 6 Exhibits and Reports on Form 8-K 28 SIGNATURES 29 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS FOR THE THREE MONTHS, SIX MONTHS, AND TWELVE MONTHS ENDED MARCH 31, 1998 AND 1997 (MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Six Months Twelve Months -------------------------------------------------------------------------- 1998 1997 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Operating Revenues $ 483.9 $ 496.7 $ 886.2 $ 876.3 $1,297.5 $1,292.2 Cost of Gas 309.8 315.7 566.9 546.8 786.6 772.9 - --------------------------------------------------------------------------------------------------------------------------------- Operating Margin 174.1 181.0 319.3 329.5 510.9 519.3 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Other Operating Expenses 90.8 92.0 183.6 180.3 352.8 344.7 - --------------------------------------------------------------------------------------------------------------------------------- Operating Income 83.3 89.0 135.7 149.2 158.1 174.6 - --------------------------------------------------------------------------------------------------------------------------------- Other Income 2.9 3.7 8.1 6.1 12.3 10.9 - --------------------------------------------------------------------------------------------------------------------------------- Income Before Interest and Income Taxes 86.2 92.7 143.8 155.3 170.4 185.5 - --------------------------------------------------------------------------------------------------------------------------------- Interest Expense and Preferred Stock Dividends Interest expense 14.1 13.7 28.2 27.3 53.1 51.2 Dividends on preferred stock of subsidiaries 1.2 1.1 3.6 2.2 7.6 4.4 - --------------------------------------------------------------------------------------------------------------------------------- Total interest expense and preferred stock dividends 15.3 14.8 31.8 29.5 60.7 55.6 - --------------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 70.9 77.9 112.0 125.8 109.7 129.9 - --------------------------------------------------------------------------------------------------------------------------------- Income Taxes 25.8 28.9 41.2 47.2 40.8 49.8 - --------------------------------------------------------------------------------------------------------------------------------- Net Income $ 45.1 $ 49.0 $ 70.8 $ 78.6 $ 68.9 $ 80.1 ================================================================================================================================= Basic Earnings Per Share of Common Stock $ 0.79 $ 0.88 $ 1.25 $ 1.41 $ 1.22 $ 1.44 Diluted Earnings Per Share of Common Stock $ 0.79 $ 0.87 $ 1.24 $ 1.40 $ 1.22 $ 1.44 Cash Dividends Paid Per Share of Common Stock $ 0.27 $ 0.27 $ 0.54 $ 0.54 $ 1.08 $ 1.07
See notes to condensed consolidated financial statements. AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (MILLIONS)
(Unaudited) March 31, September 30, ---------------------- ------------ ASSETS 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents $ - $ 8.7 $ 4.8 Receivables (less allowance for uncollectible accounts of $7.5 at March 31, 1998, $7.3 at March 31, 1997, and $2.6 at September 30, 1997) 204.5 219.4 93.9 Inventories Natural gas stored underground 29.2 35.5 151.8 Liquefied natural gas 14.7 12.3 17.5 Materials and supplies 6.8 7.6 8.2 Other 5.0 1.7 6.0 Deferred purchased gas adjustment 17.9 19.3 8.5 Other 1.2 9.2 2.0 ------------------------------------------------------------------------------------------------------------------------ Total current assets 279.3 313.7 292.7 - ------------------------------------------------------------------------------------------------------------------------ Property, Plant and Equipment Utility plant 2,109.9 2,011.5 2,069.1 Less: accumulated depreciation 673.5 627.2 648.8 - ------------------------------------------------------------------------------------------------------------------------ Utility plant - net 1,436.4 1,384.3 1,420.3 - ------------------------------------------------------------------------------------------------------------------------ Nonutility property 113.3 97.7 105.8 - ------------------------------------------------------------------------------------------------------------------------ Less: accumulated depreciation 32.1 27.9 29.5 - ------------------------------------------------------------------------------------------------------------------------ Nonutility property - net 81.2 69.8 76.3 - ----------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment - net 1,517.6 1,454.1 1,496.6 - ------------------------------------------------------------------------------------------------------------------------ Deferred Debits and Other Assets - ------------------------------------------------------------------------------------------------------------------------ Unrecovered environmental response costs 69.7 40.9 55.0 Investment in joint ventures 38.0 32.5 32.7 Unrecovered Integrated Resource Plan costs 1.0 7.7 2.0 Other 38.9 43.0 46.0 - ------------------------------------------------------------------------------------------------------------------------ Total deferred debits and other assets 147.6 124.1 135.7 - ------------------------------------------------------------------------------------------------------------------------ Total Assets $ 1,944.5 $ 1,891.9 $ 1,925.0 ======================================================================================================================== See notes to condensed consolidated financial statements.
AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (MILLIONS)
(Unaudited) March 31, September 30, ---------------------------- ------------- LIABILITIES AND CAPITALIZATION 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------------ Current Liabilities Accounts payable-trade $ 69.5 $ 58.6 $ 65.1 Short-term debt 4.4 113.0 29.5 Redemption requirements on preferred stock 0.3 44.5 Customer deposits 31.9 29.9 29.2 Interest 28.7 27.1 29.6 Taxes 39.7 38.9 19.1 Other 35.6 40.1 26.4 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 209.8 307.9 243.4 - ------------------------------------------------------------------------------------------------------------------------ Accumulated Deferred Income Taxes 191.7 169.6 191.7 - ------------------------------------------------------------------------------------------------------------------------ Long-Term Liabilities Accrued environmental response costs 47.0 31.3 37.3 Accrued postretirement benefits costs 34.5 35.7 34.3 Deferred credits 58.4 60.3 61.9 - ------------------------------------------------------------------------------------------------------------------------ Total long-term liabilities 139.9 127.3 133.5 - ------------------------------------------------------------------------------------------------------------------------ Capitalization Long-term debt 660.0 584.5 660.0 Subsidiary obligated mandatorily redeemable preferred securities 74.3 74.3 Preferred stock of subsidiary, cumulative $100 par or stated value, shares issued and outstanding of 0.6 at March 31, 1997 58.5 Common stock, $5 par value, shares issued and outstanding of 57.0 at March 31, 1998, 56.1 at 668.8 644.1 622.1 March 31, 1997, and 56.6 at September 30, 1997 - ------------------------------------------------------------------------------------------------------------------------ Total capitalization 1,403.1 1,287.1 1,356.4 - ------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Capitalization $ 1,944.5 $ 1,891.9 $ 1,925.0 ======================================================================================================================== See notes to condensed consolidated financial statements.
AGL RESOURCES INC. AND SUBISIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS AND TWELVE MONTHS ENDED MARCH 31, 1998 AND 1997 (MILLIONS) (UNAUDITED)
Six Months Twelve Months ------------------------------ -------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 70.8 $ 78.6 $ 68.9 $ 80.1 Adjustments to reconcile net income to net cash flow from operating activities Depreciation and amortization 36.9 34.9 72.0 69.1 Deferred income taxes (2.1) 2.1 14.3 24.4 Other 0.1 0.6 (0.3) (0.2) Changes in certain assets and liabilities 46.2 (7.7) 37.6 (48.2) - -------------------------------------------------------------------------------------------------------------------------------- Net cash flow from operating activities 151.9 108.5 192.5 125.2 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Sale of common stock, net of expenses 0.3 0.6 1.4 1.4 Sale of preferred securities, net of expenses 74.3 Sale of long-term debt 30.0 75.5 30.0 Short-term borrowings, net (25.1) (39.0) (108.6) 46.5 Redemptions and purchase fund requirements of preferred securities (44.5) (59.2) Dividends paid on common stock (27.2) (25.1) (51.0) (49.8) - -------------------------------------------------------------------------------------------------------------------------------- Net cash flow from financing activities (96.5) (33.5) (67.6) 28.1 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Utility plant expenditures (48.1) (61.9) (109.7) (136.1) Non-utility capital expenditures (7.9) (14.8) (16.7) (15.6) Cost of removal, net of salvage (0.9) 0.4 (2.9) (0.4) Cash received from joint ventures 0.3 1.3 0.3 4.1 Investment in joint ventures (3.6) (4.6) (1.1) - -------------------------------------------------------------------------------------------------------------------------------- Net cash flow from investing activities (60.2) (75.0) (133.6) (149.1) - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (4.8) - (8.7) 4.2 Cash and cash equivalents at beginning of period 4.8 8.7 8.7 4.5 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ - $ 8.7 $ - $ 8.7 ================================================================================================================================ Cash Paid During the Year for Interest $ 29.1 $ 26.1 $ 51.8 $ 49.8 Income taxes $ 18.6 $ 18.4 $ 28.5 $ 25.0 See notes to condensed consolidated financial statements.
AGL RESOURCES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Principles of Consolidation AGL Resources Inc. (AGL Resources), a Georgia corporation, is the holding company for Atlanta Gas Light Company (AGL), AGL's wholly owned natural gas utility subsidiary, Chattanooga Gas Company (Chattanooga), and several nonutility subsidiaries. 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 nonutility subsidiaries as though AGL Resources had existed in all periods shown. Intercompany balances and transactions have been eliminated. 2. Subsidiaries Unless noted specifically or otherwise required by the context, references to AGL Resources include AGL, AGL Interstate Pipeline Company (AGL Interstate Pipeline), AGL Peaking Services, Inc. (AGL Peaking Services), and AGL Resources' nonutility 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 nonutility 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 nonutility businesses; Atlanta Gas Light Services (formerly The Energy Spring, Inc.), a retail energy marketing company; and AGL Resources Service Company. AGL Energy Services has one nonutility subsidiary, Georgia Gas Company. AGL Investments has six wholly owned nonutility 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. 3. Interim Financial Statements In the opinion of management, the unaudited condensed consolidated financial statements included herein reflect all normal recurring accruals necessary for a fair statement of the results of the interim periods reflected. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted from these condensed consolidated financial statements pursuant to applicable rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the annual reports on Form 10-K of AGL Resources for the fiscal years ended September 30, 1997, and September 30, 1996. Certain 1997 amounts have been reclassified for comparability with 1998 amounts. 4. Earnings AGL Resources' principal business is the distribution of natural gas to customers in central, northwest, northeast and southeast Georgia and the Chattanooga, Tennessee area through its natural gas distribution subsidiary, AGL. Since consumption of natural gas is dependent to a large extent on weather, the majority of AGL Resources' income is realized during the winter months. Earnings for three-month and six-month periods are not indicative of the earnings for a twelve-month period. 5. Environmental Matters - AGL 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 which 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). AGL is planning to undertake some degree of response action, under one or both of those programs, at most of the Georgia sites. AGL also has identified three sites in Florida which may have been associated with AGL or its predecessors. AGL does not own any of the former MGP sites in Florida. At one site, AGL has entered into an Administrative Order of Consent along with four other potentially responsible parties to further investigate this site. At another site, AGL has received a "Special Notice Letter" from the U. S. Environmental Protection Agency (EPA), and is negotiating the scope of a response with both EPA and the current owner. AGL has estimated the investigation and remediation expenses likely to be associated with the former MGP sites. First, AGL has identified several sites where it has concluded that no significant response actions are reasonably likely in the foreseeable future and therefore has not made any cost projections for these sites. Second, since response cost liabilities are often spread among potentially responsible parties, AGL's ultimate liability will, in some cases, be limited to AGL's equitable share of such expenses under the circumstances. Therefore, where reasonably possible, AGL has attempted to estimate the range of AGL's equitable share, given current cost sharing arrangements, combined with AGL's current knowledge of relevant facts, including the current methods of equitable apportionment and the solvency of potential contributors. Where such an estimation was not reasonably possible, AGL has estimated a range of expenses without adjustment for AGL's equitable share. Finally, AGL has, with the assistance of outside consultants, prepared estimates of the range of future investigation and remediation costs for those sites where further action appears likely. Applying these concepts to those sites where some future action presently appears reasonably possible, AGL currently estimates that the future cost to AGL of investigating and remediating the former MGP sites could be as low as $47 million or as high as $81.3 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 $47 million to $81.3 million, no amount within the range can be identified reliably 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 $69.7 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. The Georgia Commission conducted hearings on April 16 and 17, 1998 to consider three issues relating to the ERCRR. Specifically, the Georgia Commission considered 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. Additional hearings relating to these issues are expected to be scheduled in the near future. Second, AGL intends to seek recovery of appropriate costs from its insurers and other potentially responsible parties. During the twelve month period ended March 31, 1998, AGL recovered $4.5 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 near the former MGP 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 were paid to 188 property owners in the class totaling approximately $2.9 million, including legal fees and expenses of the plaintiffs. One settlement of approximately $64,000, including attorney's fees, is pending reconsideration. AGL filed motions to vacate six settlements totaling approximately $4.3 million. Orders were entered denying the motions to vacate. AGL filed notices of appeal with the Georgia Court of Appeals seeking to reverse the denial of the motions to vacate. On March 25, 1998, the Georgia Court of Appeals affirmed the ruling of the lower court. Pursuant to the Court of Appeals decision, six settlements totaling $4.9 million, including attorney's fees and post judgement interest, have been paid; and are recoverable pursuant to the terms of the ERCRR. 6. Competition - AGL Alternative Fuels and Competitive Pricing. 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. 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 44% of firm customers' share of capacity release revenues in excess of $5 million until AGL is made whole for discounts from Negotiated Contracts. 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 56 Negotiated Contracts. Additionally, AGL is providing service pursuant to seven Special Contracts. On February 17, 1998, the Georgia Commission nullified two negotiated contracts and one special contract based on its interpretation of a provision of the Natural Gas Competition and Deregulation Act (Georgia Gas Act) that would preclude the Georgia Commission from approving any such contracts on or after the date AGL filed its notice of election to be subject to the act. (See Atlanta Gas Light Company-Unbundling and Rate Filing.) In an administrative session on May 5, 1998, however, the Georgia Commission reversed its earlier decision to nullify those contracts. Further, the Georgia Commission authorized AGL to enter into future special and negotiated contracts provided the initial term of any such contract does not exceed three years. All such future contracts, however, must include market out provisions. A written order reflecting the Georgia Commission's decision in the above is pending. 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 approval of the rates set forth in the contract. On October 7, 1997, the TRA denied 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. On January 14, 1998, however, the FERC issued an order authorizing the bypass of Chattanooga by Southern Natural Gas Company (Southern) to serve an interruptible customer. AGL is continuing to negotiate with the customer to determine whether a compromise can be reached to retain the customer, and Southern has not yet constructed the facilities necessary to complete the bypass. Management does not expect the order issued by the FERC to have a material adverse effect on the consolidated financial statements of AGL Resources. Atlanta Gas Light Company - Unbundling and Rate Filing. The Georgia Gas Act was signed into law on April 14, 1997. The act provides a legal framework for comprehensive deregulation of many aspects of the natural gas business in Georgia. On November 26, 1997, AGL filed with the Georgia Commission 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 then 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 Georgia Gas 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 nonutility 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 election to be subject to the Georgia Gas 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 Georgia Gas 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 the public interest. Hearings in this proceeding began on March 9, 1998, and are scheduled to continue for the weeks of April 28, 1998 and May 18, 1998. A decision by the Georgia Commission is expected in June 1998. Pursuant to the Georgia Gas Act, the Georgia Commission issued rules and regulations on December 30, 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. Additionally, the Georgia Commission issued a Notice of Inquiry to address certain aspects of random assignment of customers and marketer certification not fully resolved in the rulemakings. 7. Earnings Per Share In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128), which establishes standards for computing and presenting earnings per share. AGL Resources adopted SFAS 128 in October 1997. Earnings per share are based on the weighted average number of common and common stock equivalent shares outstanding. The average number of common shares used in the calculation of basic earnings per share and the weighted average number of shares and common stock equivalent shares used in the calculation of diluted earnings per share for the three-month, six-month and twelve-month periods ended March 31, 1998 and 1997, were as follows (in millions): Basic Diluted Three-months ended March 31, 1998 56.9 57.0 March 31, 1997 56.0 56.0 Six-months ended March 31, 1998 56.8 56.9 March 31, 1997 55.9 56.0 Twelve-months ended March 31, 1998 56.6 56.7 March 31, 1997 55.7 55.8 The only common stock equivalent shares are those related to stock options outstanding during the respective years whose exercise price was less than the average market price of the common shares for the respective periods. Additional options to purchase common stock were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of those options was greater than the average market price of the common shares for the respective periods. 8. Accounting Developments During its July 1997 meeting, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) concluded that once legislation is passed to deregulate a segment of a utility and that legislation includes sufficient detail for the enterprise to determine how the transition plan will affect that segment, 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 Georgia Gas 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 Part II, Item 5 - "Other Information, State Regulatory Matters" in this Form 10-Q. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS 130) and Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). AGL Resources will adopt SFAS 130 and SFAS 131 in fiscal year 1999. 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. Management does not expect these new pronouncements to have a significant impact on the presentation of AGL Resources' consolidated financial statements. During November 1997, the EITF published Issue No. 97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation." Issue No. 97-13 addresses costs which have been incurred by organizations related to advances in computer technologies. Some of the costs which have been incurred include consulting fees paid for business process reengineering and information technology transformation. The EITF concluded that these costs should be expensed as incurred rather than capitalized. The EITF requires items previously capitalized to be written off during the quarter which includes November 20, 1997. The impacts of applying the effects of this consensus were not significant to the financial results for the six-month period ended March 31, 1998. 9. Year 2000 AGL Resources uses several computer 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 computation or computer shutdown. With the assistance of an independent consultant, AGL Resources has identified the systems that could be affected by the year 2000 issue and has developed a plan to resolve the issue. The plan provides for, among other things, the replacement or modification of existing data processing systems as necessary. Implementation of the plan has begun, and the cost estimates associated with the implementation are not expected to significantly impact AGL Resources' consolidated financial statements. Management believes that with the appropriate modification, AGL Resources will be able to operate its time-sensitive business systems through the turn of the century. (The remainder of this page was intentionally left blank.) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides for the use of cautionary statements accompanying forward-looking statements. Disclosures provided contain forward-looking statements concerning, among other things, deregulation, restructuring 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; changes in accounting policies and practices; uncertainty with regard to environmental issues, and competitive issues in general. Results of Operations Three-Month Periods Ended March 31, 1998 and 1997 Explained below are the major factors that had a significant effect on results of operations for the three-month period ended March 31, 1998, compared with the same period in 1997. Operating revenues decreased 2.6% for the three-month period ended March 31, 1998, compared with the same period in 1997 primarily due to (1) a decrease in the cost of gas supply recovered from customers under the purchased gas provisions of AGL's rate schedules, as explained in the following paragraph, (2) decreased consumption patterns attributable to AGL's firm-service customers that are not related to weather conditions (3) decreased expenses pursuant to an Integrated Resource Plan (IRP) which are recovered through an IRP Cost Recovery Rider approved by the Georgia Commission and (4) 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. The utility's transportation rate generates the same operating margin as the applicable sales rate schedule for interruptible sales of gas; therefore, earnings are not affected. AGL balances the cost of gas with revenues collected from customers under the purchased gas provisions of its rate schedules. Under-recoveries or over-recoveries of AGL's gas costs are deferred and recorded as current assets or liabilities, thereby eliminating the effect that recovery of gas costs would otherwise have on net income. Cost of gas decreased 1.9% for the three-month period ended March 31, 1998, compared with the same period in 1997 primarily due to (1) a decrease in the cost of gas purchased for utility system supply and (2) decreased volumes of gas sold as a result of a shift by certain interruptible customers from interruptible sales to transportation service. Operating margin decreased 3.8% for the three-month period ended March 31, 1998, compared with the same period in 1997 primarily due to (1) decreased consumption patterns attributable to AGL's firm-service customers that are not related to weather conditions and (2) decreased expenses pursuant to an IRP which are recovered through an IRP Cost Recovery Rider. That decrease in operating margin was offset partly by margins resulting from propane operations acquired in February and June, 1997. Weather normalization adjustment riders (WNARs), approved by the Georgia Commission and the TRA, stabilized operating margin at the level which would occur with normal weather for the three-month periods ended March 31, 1998 and 1997. As a result of the WNARs, weather conditions experienced do not have a significant impact on the comparability of operating margin. Operating expenses decreased 1.3% for the three-month period ended March 31, 1998, compared with the same period in 1997 primarily due to decreased expenses pursuant to an IRP Cost Recovery Rider. AGL balances IRP expenses which are included in operating expenses with revenues collected under the rider, thereby eliminating the effect that recovery of IRP expenses would otherwise have on net income. That decrease in operating expenses was offset partly by (1) increased distribution maintenance expenses and (2) increased depreciation expense recorded as a result of increased depreciable property. Other income decreased $0.8 million for the three-month period ended March 31, 1998, compared with the same period in 1997 primarily due a decrease in certain carrying costs recovered from utility customers. Those decreased carrying costs are attributable to a decrease in underrecovered deferred purchased gas costs and decreased expenses pursuant to an IRP. Interest expense increased $0.4 million for the three-month period ended March 31, 1998, compared with the same period in 1997 primarily due to increased amounts of long-term debt outstanding during the period. The increase in interest expense was offset partly by decreased amounts of short-term debt outstanding. Income taxes decreased $3.1 million for the three-month period ended March 31, 1998, compared with the same period in 1997 primarily due to decreased taxable income. Net income for the three-month period ended March 31, 1998, was $45.1 million, compared with net income of $49.0 million for the same period in 1997. Basic and diluted earnings per share of common stock were $0.79 for the three-month period ended March 31, 1998, compared with basic earnings per share of $0.88 and diluted earnings per share of $0.87 for the same period in 1997. The decreases in net income and earnings per share were primarily due to (1) decreased operating margin and (2) decreased other income. Six-Month Periods Ended March 31, 1998 and 1997 Explained below are the major factors that had a significant effect on results of operations for the six-month period ended March 31, 1998, compared with the same period in 1997. Operating revenues increased 1.1% for the six-month period ended March 31, 1998, compared with the same period in 1997 primarily due to (1) increased operating revenues attributable to a nonutility retail marketing company formed in June 1996 and propane operations acquired in February and June, 1997, (2) an increase in the cost of gas supply recovered from customers under the purchased gas provisions of AGL's rate schedules, as explained in the following paragraph, as a result of increased volumes of gas sold due to weather that was 37.9% colder than during the same period in 1997, and (3) growth in the number of customers served. The increase in operating revenues was offset substantially by 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. The utility's transportation rate generates the same operating margin as the applicable sales rate schedule for interruptible sales of gas; therefore, earnings are not affected. Also offsetting significantly the increase in operating revenues were (1) decreased consumption patterns attributable to AGL's firm service customers that are not related to weather conditions and (2) decreased expenses pursuant to an IRP which are recovered through an IRP Cost Recovery Rider. AGL balances the cost of gas with revenues collected from customers under the purchased gas provisions of its rate schedules. Under-recoveries or over-recoveries of AGL's gas costs are deferred and recorded as current assets or liabilities, thereby eliminating the effect that recovery of gas costs would otherwise have on net income. Cost of gas increased 3.7% for the six-month period ended March 31, 1998, compared with the same period in 1997 primarily due to (1) increased volumes of gas sold as a result of weather that was 37.9% colder than during the same period in 1997 and (2) increased cost of gas attributable to a nonutility retail marketing company formed in June 1996 and propane operations acquired in February and June, 1997. The increase in cost of gas was offset substantially by decreased volumes of gas sold as a result of a shift by certain interruptible customers from interruptible sales to transportation service. Operating margin decreased 3.1% for the six-month period ended March 31, 1998, compared with the same period in 1997 primarily due to (1) decreased consumption patterns attributable to AGL's firm-service customers that are not related to weather conditions and (2) decreased expenses pursuant to an IRP which are recovered through an IRP Cost Recovery Rider. The decrease in operating margin was offset partly by margins resulting from propane operations acquired in February and June, 1997. WNARs, approved by the Georgia Commission and the TRA, stabilized operating margin at the level which would occur with normal weather for the six-month periods ended March 31, 1998 and 1997. As a result of the WNARs, weather conditions experienced do not have a significant impact on the comparability of operating margin. Operating expenses increased 1.8% for the six-month period ended March 31, 1998, compared with the same period in 1997 primarily due to (1) increased distribution maintenance expenses and (2) operating expenses of propane operations acquired during February and June, 1997. The increase in operating expenses was offset partly by decreased expenses pursuant to an IRP Cost Recovery Rider. AGL balances IRP expenses which are included in operating expenses with revenues collected under the rider, thereby eliminating the effect that recovery of IRP expenses would otherwise have on net income. Other income increased $2.0 million for the six-month period ended March 31, 1998, compared with the same period in 1997 primarily due to increased income from a gas marketing joint venture. Interest expense increased 3.3% for the six-month period ended March 31, 1998, compared with the same period in 1997 primarily due to increased amounts of long-term debt outstanding during the period. The increase in interest expense was offset partly by decreased amounts of short-term debt outstanding. Dividends on preferred stock of subsidiaries increased $1.4 million for the six-month period ended March 31, 1998, compared with the same period in 1997 primarily due to dividend requirements related to the issuance of $75 million principal amount of Capital Securities in June 1997 as more fully described below within the caption "Financial Condition." Income taxes decreased $6.0 million for the six-month period ended March 31, 1998, compared with the same period in 1997 primarily due to decreased taxable income. Net income for the six-month period ended March 31, 1998, was $70.8 million, compared with net income of $78.6 million for the same period in 1997. Basic earnings per share was $1.25 for the six-month period ended March 31, 1998, compared with $1.41 for the same period in 1997. Diluted earnings per share was $1.24 for the six-month period ended March 31, 1998, compared with $1.40 for the same period in 1997. The decreases in net income and earnings per share were primarily due to (1) decreased operating margin, (2) increased operating expenses and (3) increased preferred dividend requirements. The decreases in net income and earnings per share were offset partly by increased other income. Twelve-Month Periods Ended March 31, 1998 and 1997 Explained below are the major factors that had a significant effect on results of operations for the twelve-month period ended March 31, 1998, compared with the same period in 1997. Operating revenues increased 0.4% for the twelve-month period ended March 31, 1998, compared with the same period in 1997 primarily due to increased operating revenues attributable to (1) a nonutility retail marketing company formed in June 1996 and (2) propane operations acquired in February and June, 1997. The increase in operating revenues was offset substantially by (1) decreased expenses pursuant to an IRP which are recovered through an IRP Cost Recovery Rider 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. The utility's transportation rate generates the same operating margin as the applicable sales rate schedule for interruptible sales of gas; therefore, earnings are not affected. Cost of gas increased 1.8% for the twelve-month period ended March 31, 1998, compared with the same period in 1997 primarily due to increased cost of gas attributable to a nonutility retail marketing company formed in June 1996 and propane operations acquired in February and June, 1997. The increase in cost of gas was offset substantially by decreased volumes of gas sold as a result of a shift by certain interruptible customers from interruptible sales to transportation service. Operating margin decreased 1.6% for the twelve-month period ended March 31, 1998, compared with the same period in 1997 primarily due to (1) decreased consumption patterns attributable to AGL's firm-service customers that are not related to weather conditions and (2) decreased expenses pursuant to an IRP which are recovered through an IRP Cost Recovery Rider. The decrease in operating margin was offset partly by an increase in operating margin attributable to (1) a nonutility gas supply services company formed in July 1996 and (2) propane operations acquired in February and June, 1997. WNARs, approved by the Georgia Commission and the TRA, stabilized operating margin at the level which would occur with normal weather for the twelve-month periods ended March 31, 1998 and 1997. As a result of the WNARs, weather conditions experienced do not have a significant impact on the comparability of operating margin. Operating expenses increased 2.3% for the twelve-month period ended March 31, 1998, compared with the same period in 1997 primarily due to increased (1) distribution maintenance expense, (2) maintenance of general plant and (3) depreciation expense recorded as a result of increased depreciable property. The increase in operating expenses was offset partly by decreased expenses pursuant to an IRP Cost Recovery Rider. AGL balances IRP expenses which are included in operating expenses with revenues collected under the rider, thereby eliminating the effect that recovery of IRP expenses would otherwise have on net income. Other income increased $1.4 million for the twelve-month period ended March 31, 1998, compared with the same period in 1997 primarily due to increased income from a gas marketing joint venture. Interest expense increased 3.7% for the twelve-month period ended March 31, 1998, compared with the same period in 1997 primarily due to increased amounts of long-term debt outstanding during the period. The increase in interest expense was offset partly by decreased amounts of short-term debt outstanding. Dividends on preferred stock of subsidiaries increased $3.2 million for the twelve-month period ended March 31, 1998, compared with the same period in 1997 primarily due to dividend requirements related to the issuance of $75 million principal amount of Capital Securities in June 1997 as more fully described below within the caption "Financial Condition." Income taxes decreased $9.0 million for the twelve-month period ended March 31, 1998, compared with the same period in 1997 primarily due to decreased taxable income. Net income for the twelve-month period ended March 31, 1998, was $68.9 million, compared with net income of $80.1 million for the same period in 1997. Basic and diluted earnings per share of common stock was $1.22 for the twelve-month period ended March 31, 1998, compared with basic and diluted earnings per share of $1.44 for the same period in 1997. The decreases in net income and earnings per share were primarily due to (1) decreased operating margin, (2) increased operating expenses and (3) increased interest expense and preferred dividend requirements. The decreases in net income and earnings per share were offset partly by increased other income. Financial Condition AGL Resources' primary gas utility business is highly seasonal in nature and typically shows a substantial increase in accounts receivable from customers from September 30 to March 31 as a result of colder weather. The utility also uses gas stored underground and liquefied natural gas to serve its customers during periods of colder weather. As a result, accounts receivable increased $110.6 million and inventory of gas stored underground and liquefied natural gas decreased $125.4 million during the six-month period ended March 31, 1998. Accounts receivable decreased $14.9 million from March 31,1997 to March 31, 1998, primarily due to decreased operating revenues. Inventory of gas stored underground decreased $ 6.3 million from March 31, 1997 to March 31, 1998 primarily due to increased volumes of gas withdrawn from storage as a result of weather that was 41.1% colder during the twelve-month period ended March 31, 1998, compared with the same period in 1997. The gas purchasing practices of AGL are subject to review by the Georgia Commission under legislation enacted by the Georgia General Assembly (Gas Supply Plan Legislation). The Gas Supply Plan Legislation establishes procedures for review and approval, in advance, of gas supply plans for gas utilities and gas cost adjustment factors applicable to firm service customers of gas utilities. Pursuant to AGL's approved Gas Supply Plan for fiscal year 1998, gas supply purchases are being recovered under the purchased gas provisions of AGL's rate schedules. The plan also allows recovery from the customers of AGL of Federal Energy Regulatory Commission's (FERC) Order No. 636 transition costs that are currently being charged by AGL's pipeline suppliers. Based on filings with the FERC by its pipeline suppliers, AGL currently estimates that its total portion of transition costs associated with the FERC's Order No. 636 from all of its pipeline suppliers will be approximately $104.8 million. Approximately $95.6 million of such costs has been incurred by AGL as of March 31, 1998, and is being recovered from its customers under the purchased gas provisions of AGL's rate schedules. AGL's Gas Supply Plan for fiscal year 1998 includes limited gas supply hedging activities. AGL is authorized to enter into an expanded program to hedge up to one half of its estimated monthly winter wellhead purchases and 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. As noted above, AGL recovers the cost of gas under the purchased gas provisions of its rate schedules. AGL was in an under-recovery position of $8.5 million as of September 30, 1997, an under-recovery position of $19.3 million as of March 31, 1997, and an under-recovery position of $17.9 million as of March 31, 1998. Under the provisions of the utility's rate schedules, any under-recoveries or over-recoveries of purchased gas costs are included in current assets or liabilities and have no effect on net income. See Note 6 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q. The expenditures for plant and other property totaled $56 million for the six-month and $126.4 million for the twelve-month periods ended March 31, 1998, respectively. AGL has accrued liabilities of $47 million as of March 31, 1998, $31.3 million as of March 31, 1997, and $37.3 million as of September 30, 1997, for estimated future expenditures covering investigation and remediation of MGP sites which are expected to be made over a period of several years. The Georgia Commission has approved the recovery by AGL of Environmental Response Costs pursuant to 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. The Georgia Commission conducted hearings on April 16 and 17, 1998 to consider three issues relating to the ERCRR. Specifically, the Georgia Commission considered 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. Additional hearings relating to this issue are expected to be scheduled in the near future. See Note 5 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q. In June 1997, AGL Capital Trust, a Delaware business trust (the Trust), of which AGL Resources owns all of the common voting securities, 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 from AGL Resources 8.17% Junior Subordinated Deferrable Interest Debentures due June 1, 2037. 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. 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 for an aggregate principal amount of $44.5 million. Long-term debt outstanding increased $75.5 million during the twelve-month period ended March 31, 1998, as a result of the issuance in July 1997 by AGL of the remaining $75.5 million of $300 million aggregate principal amount of Medium-Term Notes Series C. 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. Short-term debt decreased $25.1 million for the six-month period ended March 31, 1998 primarily due to net cash flow from operating activities. Short-term debt decreased $108.6 million for the twelve-month period ended March 31, 1998 primarily due to the issuance of Capital Securities and long-term debt. 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. 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. 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. 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. Pursuant to the approved settlement, AGL has filed and is providing service pursuant to 56 Negotiated Contracts. Additionally, AGL is providing service pursuant to seven Special Contracts. See Note 6 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q. On November 27, 1996, the TRA approved an experimental rule allowing Chattanooga to negotiate contracts with large commercial or 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 approval of the rates set forth in the contract. On October 7, 1997, the TRA denied 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. On January 14, 1998, however, the FERC issued an order authorizing the bypass of Chattanooga by Southern to serve an interruptible customer. AGL is continuing to negotiate with the customer to determine whether a compromise can be reached to retain the customer, and Southern has not yet constructed the facilities necessary to complete the bypass. Management does not expect the order issued by the FERC to have a material adverse effect on the consolidated financial statements of AGL Resources. The Georgia Gas Act was signed into law on April 14, 1997. The act provides a legal framework for comprehensive deregulation of many aspects of the natural gas business in Georgia. On November 26, 1997, AGL filed with the Georgia Commission 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. The Georgia Gas Act provides a transition period leading to a condition of effective competition in all natural gas markets. See Note 6 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q. 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 will 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 hearings in this proceeding were convened February 9-13, 1998. On March 13, 1998, Chattanooga filed a post-hearing brief reasserting the basis of requested new rates. A decision in this rate case by the TRA currently is pending. AGL cannot predict the outcome of those state regulatory proceedings nor determine the ultimate effect, if any, such proceedings may have on AGL. Year 2000 AGL Resources uses several computer 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 computation or computer shutdown. With the assistance of an independent consultant, AGL Resources has identified the systems that could be affected by the year 2000 issue and has developed a plan to resolve the issue. The plan provides for, among other things, the replacement or modification of existing data processing systems as necessary. Implementation of the plan has begun and the cost estimates associated with the implementation of the plan are not expected to significantly impact AGL Resources' consolidated financial statements. Management believes that with the appropriate modification, AGL Resources will be able to operate its time-sensitive business systems through the turn of the century. Accounting Developments In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share," (SFAS 128), which establishes standards for computing and presenting earnings per share. AGL Resources adopted SFAS 128 in October 1997. See Note 7 in Notes to Condensed Consolidated Financial Statements in this Form 10-Q. During its July 1997 meeting, the Financial Accounting Standard Board's Emerging Issues Task Force (EITF) concluded that once legislation is passed to deregulate a segment of a utility and that legislation includes sufficient detail for the enterprise to determine how the transition plan will affect that segment, 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 Georgia Gas 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. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS 130) and Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). AGL Resources will adopt SFAS 130 and SFAS 131 in fiscal year 1999. 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. Management does not expect these new pronouncements to have a significant impact on the presentation of AGL Resources' consolidated financial statements. During November 1997, the EITF published Issue No. 97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation." Issue No. 97-13 addresses costs which have been incurred by organizations related to advances in computer technologies. Some of the costs which have been incurred include consulting fees paid for business process reengineering and information technology transformation. The EITF concluded that these costs should be expensed as incurred rather than capitalized. The EITF requires items previously capitalized to be written off during the quarter which includes November 20, 1997. The impacts of applying the effects of this consensus were not significant to the financial results for the six-month period ended March 31, 1998. (The remainder of this page was intentionally left blank.) PART II -- OTHER INFORMATION "Part II -- Other Information" is intended to supplement information contained in the Annual Report on Form 10-K for the fiscal year ended September 30, 1997, and should be read in conjunction therewith. ITEM 1. LEGAL PROCEEDINGS See Item 5. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held on February 6, 1998 (the "Annual Meeting"). "Broker non-votes" were not considered in determining whether a quorum existed for purposes of the Annual Meeting. At the Annual Meeting the shareholders elected the following four nominees for director to hold office until the Annual Meeting of Shareholders in the year 2001, as set forth in AGL Resources' Proxy Statement. The number of votes "for" each nominee and the number of votes "withheld" with respect to each nominee is as follows: For Withheld ---------------- -------------- 1. D. Raymond Riddle 49,044,962 831,183 2. Dr. Betty L. Siegel 48,779,344 1,096,801 3. Ben J. Tarbutton, Jr. 49,065,586 810,559 4. Felker W. Ward, Jr. 48,847,341 1,028,804 Directors whose term of office continued after the Annual Meeting are: Frank Barron, Jr., W. Waldo Bradley, Otis A. Brumby, Jr., L.L. Gellerstedt, III, David R. Jones, Albert G. Norman, Jr. and Charles McKenzie Taylor. In addition, Walter M. Higgins was elected as a director by the Board of Directors on February 6, 1998, and L.L. Gellerstedt, III tendered his resignation as a director effective May 1, 1998. ITEM 5. OTHER INFORMATION Federal Regulatory Matters FERC Order 636 Transition Costs Settlement Agreements. Based on filings with the FERC by its pipeline suppliers, AGL currently estimates that its total portion of transition costs associated with the FERC's Order No. 636 from all of its pipeline suppliers will be approximately $104.8 million. Approximately $95.6 million of such costs has been incurred by AGL as of March 31, 1998, and is being recovered from its customers under the purchased gas provisions of AGL's rate schedules. FERC Rate Proceedings. AGL participates in various rate proceedings before the FERC involving applications for rate changes filed by its pipeline suppliers. These proceedings typically involve numerous issues concerning the pipeline's cost of service, allocation of costs to different services, and rate design. A variety of cost allocation and rate design proposals typically are advanced by the pipeline's customers, making it impossible to forecast the precise effect of any given rate change filing on AGL's operations. AGL is authorized to recover the costs paid to its pipeline suppliers from its customers through the purchased gas provisions of its rate schedules. To the extent that these cases have not been settled, as described below, the rates filed in these proceedings have been accepted, and made effective subject to refund and the outcome of the FERC proceedings. Transco. On March 24, 1998, a FERC administrative law judge issued an initial decision which, among other things, rejected the proposal by Transco and other parties to roll into Transco's system rates the costs of certain expansion facilities. AGL opposed Transco's proposed roll-in methodology, which would have increased substantially the rates AGL pays for a bundled storage and transportation service provided by Transco. The initial decision is subject to the filing of exceptions by Transco and other parties, and therefore is not yet final. ANR Pipeline. On February 13, 1998, the FERC issued an order approving ANR's proposed settlement of its current rate case, which will provide AGL with reductions of approximately $3 million in rates, prospectively, as well as rate refunds. The FERC's order approving the settlement is final. AGL cannot predict the outcome of those federal proceedings nor determine the ultimate effect, if any, such proceedings may have on AGL. State Regulatory Matters Atlanta Gas Light Company - Unbundling and Rate Filing. The Georgia Gas Act was signed into law on April 14, 1997. The act provides a legal framework for comprehensive deregulation of many aspects of the natural gas business in Georgia. On November 26, 1997, AGL filed with the Georgia Commission 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 then 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 Georgia Gas 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 nonutility 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 election to be subject to the Georgia Gas 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 Georgia Gas Act provides marketing standards and rules of business practice designed 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 the public interest. Hearings in this proceeding began on March 9, 1998, and are scheduled to continue the weeks of April 28, 1998 and May 18, 1998. A decision by the Georgia Commission is expected in June 1998. Pursuant to the Georgia Gas Act, the Georgia Commission issued rules and regulations on December 30, 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. Additionally, the Georgia Commission issued a Notice of Inquiry to address certain aspects of random assignment of customers and marketer certification not fully resolved in the rulemakings. AGL supported the regulatory initiatives provided for by the Georgia Gas 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 nonutility subsidiaries of AGL Resources, would provide new business opportunities. Atlanta Gas Light Company - Other. On January 8, 1998, the Georgia Commission issued a Procedural and Scheduling Order to establish a schedule for certain hearings and pre-hearings in connection with alleged pipeline safety violations. Hearings in this proceeding had been scheduled for March 31 and April 1, 1998. The Georgia Commission now has granted a stay of the Procedural Schedule to allow the Georgia Commission and AGL to engage in discussions to determine whether the issues presented in the proceeding can be resolved between the parties by compromise and settlement. The stay will continue for the duration of the settlement discussions between the parties. Chattanooga Gas Company - 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 hearings in this proceeding were convened February 9-13, 1998. On March 13, 1998, Chattanooga filed a post-hearing brief reasserting the basis of requested new rates. A decision in this rate case by the TRA currently is pending. AGL cannot predict the outcome of those state regulatory proceedings nor determine the ultimate effect, if any, such proceeding may have on AGL. Environmental Matters AGL has identified nine sites in Georgia where it currently owns all or part of an MGP site. In addition, AGL has identified three other sites in Georgia which 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, HWMA and HSRA, as previously defined in Note 5 to Notes to Condensed Consolidated Financial Statements in this Form 10-Q. AGL is planning to undertake some degree of response action, under one or both of those programs, at most of the Georgia sites. AGL also has identified three sites in Florida which may have been associated with AGL or its predecessors. AGL does not own any of the former MGP sites in Florida. At one site, AGL has entered into an Administrative Order of Consent along with four other potentially responsible parties to further investigate this site. At another site, AGL has received a "Special Notice Letter" from the EPA, and is negotiating the scope of a response with both EPA and the current owner. AGL has estimated the investigation and remediation expenses likely to be associated with the former MGP sites. First, AGL has identified several sites where it has concluded that no significant response actions are reasonably likely in the foreseeable future and therefore has not made any cost projections for these sites. Second, since response cost liabilities are often spread among potentially responsible parties, AGL's ultimate liability will, in some cases, be limited to AGL's equitable share of such expenses under the circumstances. Therefore, where reasonably possible, AGL has attempted to estimate the range of AGL's equitable share, given current cost sharing arrangements, combined with AGL's current knowledge of relevant facts, including the current methods of equitable apportionment and the solvency of potential contributors. Where such an estimation was not reasonably possible, AGL has estimated a range of expenses without adjustment for AGL's equitable share. Finally, AGL has, with the assistance of outside consultants, prepared estimates of the range of future investigation and remediation costs for those sites where further action appears likely. Applying these concepts to those sites where some future action presently appears reasonably possible, AGL currently estimates that the future cost to AGL of investigating and remediating the former MGP sites could be as low as $47 million or as high as $81.3 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 $47 million to $81.3 million, no amount within the range can be identified reliably 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 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 $69.7 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. The Georgia Commission conducted hearings on April 16 and 17, 1998 to consider three issues relating to the ERCRR. Specifically, the Georgia Commission considered 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. Additional hearings relating to these issues are expected to be scheduled in the near future. Second, AGL intends to seek recovery of appropriate costs from its insurers and other potentially responsible parties. During the twelve month period ended March 31, 1998, AGL recovered $4.5 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 near the former MGP 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 were paid to 188 property owners in the class totaling approximately $2.9 million, including legal fees and expenses of the plaintiffs. One settlement of approximately $64,000, including attorney's fees, is pending reconsideration. AGL filed motions to vacate six settlements totaling approximately $4.3 million. Orders were entered denying the motions to vacate. AGL filed notices of appeal with the Georgia Court of Appeals seeking to reverse the denial of the motions to vacate. On March 25, 1998, the Georgia Court of Appeals affirmed the ruling of the lower court. Pursuant to the Court of Appeals decision, six settlements totaling $4.9 million, including attorney's fees and post judgement interest, have been paid; and are recoverable pursuant to the terms of the ERCRR. Other Legal Proceedings With regard to other legal proceedings, AGL Resources is a party, as both plaintiff and defendant, to a number of other suits, claims and counterclaims on an ongoing basis. Management believes that the outcome of all litigation in which it is involved will not have a material adverse effect on the consolidated financial statements of AGL Resources. Joint Ventures On December 1, 1997, AGL Resources, through its subsidiary AGL Interstate Pipeline, entered into a joint venture with a subsidiary of Transcontinental Gas Pipe Line Corporation (Transco) Transcumberland Pipeline Company, known as Cumberland Pipeline Company (Cumberland), to provide interstate pipeline services to customers in Georgia and Tennessee. The transaction is subject to various 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. The companies announced an open season from March 30, 1998 to May 29, 1998 for subscriptions for capacity on Cumberland, and the project will be submitted to the FERC for approval during fiscal year 1998. On December 15, 1997, AGL Resources, through its subsidiary AGL Peaking Services, and Southern, a subsidiary of Sonat Inc., entered into an agreement to jointly construct, own and operate a new liquefied natural gas peaking facility, Etowah LNG (Etowah), in Polk County, Georgia. The transaction is subject to regulatory approvals. AGL Peaking Service and Southern each will own 50 percent of Etowah, the operations of which will be subject to jurisdiction of the FERC. The proposed plant will connect directly into AGL's and Southern's pipelines. Etowah will provide natural gas storage and peaking services to AGL and other southeastern customers. The new facility will cost approximately $90 million, with 2.5 billion-cubic-feet of natural gas storage capacity and 300 million-cubic-feet per day of vaporization capacity. Affiliates of AGL Resources will manage the construction of the facility and operate it. Southern will provide administrative services. The companies held an open season from December 1, 1997 to January 30, 1998 for Etowah subscriptions for peaking services, and subscriptions for 71% of the total firm peak service capacity were received. A certificate application was filed by the companies with the FERC on April 20, 1998. Subject to receiving timely FERC approval, construction will begin in early 1999 in order to provide peaking services during the 2001-2002 winter heating season. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Executive Compensation Plans and Arrangements. 10.1.a Sixth Amendment to the AGL Resources Inc. Long-Term Stock Incentive Plan of 1990 (Exhibit 10.1.b, AGL Resources Form 10-K for the fiscal year ended September 30, 1997). 10.2 Amendment to Service Agreement between Transcontinental Gas Pipe Line Corporation and Atlanta Gas Light Company dated December 15, 1997 (Exhibit 10.3, AGL Resources Form 10-K for the fiscal year ended September 30, 1997). 10.3 Service Agreement between Transcontinental Gas Pipe Line Corporation and Atlanta Gas Light Company dated January 14, 1998. 27.1 Financial Data Schedule. 27.2 Finacial Data Schedules (Restated) (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AGL Resources Inc. (Registrant) Date 5/15/98 /s/ J. Michael Riley J. Michael Riley Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) EX-10 2 EXHIBIT 10.1A SIXTH AMENDMENT TO THE AGL RESOURCES INC. LONG-TERM STOCK INCENTIVE PLAN OF 1990 This Sixth Amendment to the AGL Resources Inc. Long-Term Stock Incentive Plan of 1990 (the "Plan") is made and entered into as of this 6th day of February 1998, by AGL Resources Inc. (the "Company"). W I T N E S S E T H: WHEREAS, the Company sponsors the Plan to provide incentive and to encourage proprietary interest in the Company by its key employees, officers and inside directors; and WHEREAS, the Company has determined that it would be in the best interest of the Company, its employees and the employees of its subsidiaries to amend the Plan to provide for the extension of certain exercise periods for options and to change the definition of fair market value; and WHEREAS, Section 10 of the Plan provides that the Company may amend the Plan at any time; and WHEREAS, at its meeting on February 6, 1998, the Board of Directors of the Company adopted a resolution authorizing the amendment of the Plan; NOW, THEREFORE, BE IT RESOLVED, that the Plan hereby is amended as follows: 1. Subsection 5(c)(ii) of the Plan shall be amended, effective as of March 1, 1998, by deleting that subsection in its entirety and substituting in lieu thereof the following subsection: "(ii) The fair market value of the Common Stock on any particular date shall be the closing sale price per share of the Common Stock on the New York Stock Exchange (or other established exchange on which the Common Stock is listed) on the trading day preceding that particular date. If, for any reason, the fair market value per share of Common Stock cannot be ascertained or is unavailable for a particular date, the fair market value of the Common Stock shall be determined as of the nearest preceding date on which such fair market value can be ascertained pursuant to the terms hereof." 2. Subsection 5(j)(ii) of the Plan shall be amended, effective as of January 1, 1998, by deleting that subsection in its entirety and substituting in lieu thereof the following subsection: "(ii) Upon an Optionee's retirement with the Company's consent or upon the termination of an Optionee's employment due to disability, such disability as affirmed by the Committee in its sole discretion, any Option or unexercised portion thereof granted to him which is otherwise exercisable shall terminate on and shall not be exercisable after 12 months from the date of the Optionee's retirement with the consent of the Company or after 3 months from the date of the Optionee's termination due to disability. Effective as of January 1, 1998, upon an Optionee's retirement with the Company's consent, the Committee, in its sole discretion, may extend the exercise period for an Option or unexercised portion thereof granted to the Optionee which is otherwise exercisable through the end of the term of that Option. Further, upon an Optionee's retirement with the Company's consent, any ISO or unexercised portion thereof which remains unexercised on the date three months after the date on which such Optionee ceases to be an employee of the Company and any Subsidiary shall convert to a Non-ISO through the end of the term of that Option. Notwithstanding the above, the Committee may provide in the Option Agreement that such Option or any unexercised portion thereof shall terminate sooner. An Option shall be exercisable in accordance with its terms and only for the number of shares exercisable on the date such Optionee's employment ceases." 3. Section 7 of the Plan shall be amended, effective as of March 1, 1998, by adding the following subsection (h) to the end thereof: "(h) Fair Market Value. For purposes of this Section 7, the fair market value on any particular date of the Common Stock underlying an award shall be determined pursuant to the terms of Section 5(c) of the Plan." 4. Except as specifically set forth herein, the terms of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Sixth Amendment to the Plan to be executed by its duly authorized officer as of the date first above written. AGL RESOURCES INC. By: /s/ Robert L. Goocher Robert L. Goocher Executive Vice President S2.508341 EX-10 3 EXHIBIT 10.2 AMENDMENT OF SERVICE AGREEMENT THIS AMENDMENT ("Amendment") is entered into this 15th day of December 1997, by and between TRANSCONTINENTAL GAS PIPE LINE CORPORATION, a Delaware corporation, hereinafter to as `Seller", first part, and ATLANTA GAS LIGHT COMPANY, hereinafter referred to as "Buyer", second party. WITNESSETH: WHEREAS, Seller and Buyer entered into that certain Service Agreement, dated August 16, 1974, under Seller's Rate Schedule LG-A ("Service Agreement") pursuant to which Seller provides liquefied natural gas storage service for Buyer up to a total volume of 207,610 Mcf of natural gas which is Buyer's Liquefaction Capacity Volume; and WHEREAS, Seller and Buyer now desire to renew and extend the primary term of the Service Agreement. NOW THEREFORE, Seller and Buyer hereby agree to renew and amend the Service Agreement as follows: 1. Article IV of the Service Agreement is hereby deleted in its entirety and replaced by the following: "ARTICLE IV TERM OF AGREEMENT This agreement shall be effective as of November 1, 1974, and shall remain in force and effect until 8:00 a.m. Eastern Standard Time October 31, 2002 1, and thereafter until terminated by Seller or Buyer upon at least one hundred eighty (180) days prior written notice and subject to the receipt of necessary authorizations; provided, however, this agreement shall terminate immediately and, subject to the receipt of necessary authorizations, Seller may discontinue service hereunder if (a) Buyer, in Seller's reasonable judgement fails to demonstrate creditworthiness, and (b) Buyer fails to provide adequate security in accordance with Section 32 of the General Terms and Conditions of Seller's Volume No. 1 Tariff." 2. As herein amended, the Service Agreement is hereby renewed in full force and effect pursuant to the terms thereof. 3. This Amendment shall be effective as of the date first above written. ____________________________ 1 The parties hereto mutually acknowledge that the term of this agreement is the result of a negotiated compromise between Buyer and Seller and shall not be relied upon by either party as precedent for any future contract term negotiation for this or any other service provided by Seller. Further, the term of this agreement shall not be raised by either party in any proceeding before the FERC as having established any precedent whatsoever to the length of contra terms. LG-A Amendment Page 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be signed by their respective officers or representatives thereunto duly authorized. TRANSCONTINENTAL GAS PIPE LINE ATLANTA GAS LIGHT COMPANY CORPORATION ("Seller") ("Buyer") By: /s/ Frank J. Ferazzi By: /s/ Thomas H. Benson -------------------------- ------------------------------ Frank J. Ferazzi Vice President Title ___________________________ Customer Service EX-10 4 EXHIBIT 10.3 Contract # ___________ SERVICE AGREEMENT between TRANSCONTINENTAL GAS PIPE LINE CORPORATION and ATLANTA GAS LIGHT COMPANY Dated January 14, 1998 SERVICE AGREEMENT THIS AGREEMENT entered into this 14th day of January, 1998, by and between TRANSCONTINENTAL GAS PIPE LINE CORPORATION, a Delaware corporation, hereinafter referred to as "Seller," first party, and ATLANTA GAS LIGHT COMPANY, hereinafter referred to as "Buyer," second party, WITNESSETH WHEREAS, Seller has filed an application with the Federal Energy Regulatory Commission in Docket No. CP97-331 for a certificate of public convenience and necessity authorizing Seller's 1998 Cherokee Expansion Project (referred to as the "Cherokee Expansion"); and WHEREAS, the Cherokee Expansion will add 87,070 Dt per day (at 1035 Btu per standard cubic foot) of incremental firm transportation capacity on Seller's mainline system by a proposed in-service date of November 1, 1998: and WHEREAS, Buyer has requested firm transportation service under the Cherokee Expansion and has executed with Seller a Precedent Agreement, dated February 28, 1997, for such service; and WHEREAS, Seller is willing to provide the requested firm transportation for Buyer under the Cherokee Expansion pursuant to the terms of this Service Agreement and the Precedent Agreement. NOW, THEREFORE, Seller and Buyer agree as follows: ARTICLE I GAS TRANSPORTATION SERVICE 1. Subject to the terms and provisions of this agreement and of Seller's Rate Schedule FT, Buyer agrees to deliver or cause to be delivered to Seller gas for transportation and Seller agrees to receive, transport and redeliver natural gas to Buyer or for the account of Buyer, on a firm basis, a Transportation Contract Quantity ("TCQ") of 85,000 Dt per day at 1035 Btu per standard cubic foot (but in no event to exceed 82,125.6 Mcf per day, irrespective of the actual heat content of the gas). 2. Transportation service rendered hereunder shall not be subject to curtailment or interruption except as provided in Section 11 of the General Terms and Conditions of Seller's FERC Gas Tariff. 2 ARTICLE II POINT(S) OF RECEIPT Buyer shall deliver or cause to be delivered gas at the point(s) of receipt hereunder at a pressure sufficient to allow the gas to enter Seller's pipeline system at the varying pressures that may exist in such system from time to time; provided, however, the pressure of the gas delivered or caused to be delivered by Buyer shall not exceed the maximum operating pressure(s) of Seller's pipeline system at such point(s) of receipt. In the event the maximum operating pressure(s) of Seller's pipeline system, at the point(s) of receipt hereunder, is from time to time increased or decreased, then the maximum allowable pressure(s) of the gas delivered or caused to be delivered by Buyer to Seller at the point(s) of receipt shall be correspondingly increased or decreased upon written notification of Seller to Buyer. The point(s) of receipt for natural gas received for transportation pursuant to this agreement shall be: See Exhibit A, attached hereto, for points of receipt. ARTICLE III POINT(S) OF DELIVERY Seller shall redeliver to Buyer or for the account of Buyer the gas transported hereunder at the following point(s) of delivery and at a pressure(s)of: See Exhibit B, attached hereto, for points of delivery and pressures. ARTICLE IV TERM OF AGREEMENT This agreement shall be effective as of the later of November 1, 1998 or the date Seller's facilities necessary to provide service to Buyer under the Cherokee Expansion have been constructed and are ready for service, and shall remain in force and effect until 10:00 a.m. Eastern Standard Time November 1, 2013 and year to year thereafter until terminated by Seller or Buyer upon at least one (1) year written notice; provided, however, this agreement shall terminate immediately and, subject to the receipt of necessary authorizations, if any, Seller may discontinue service hereunder if (a) Buyer, in Seller's reasonable judgement fails to demonstrate credit worthiness, and (b) Buyer fails to provide adequate security in accordance with Section 32 of the General Terms and Conditions of Seller's Volume No. 1 Tariff. As set forth in Section 8 of Article II of Seller's August 7, 1989 revised Stipulation and Agreement in Docket Nos. RP88-68 et. al., (a) pregranted abandonment under Section 284.221(d) of the Commission's Regulations shall not apply to any long term conversions from firm sales service to transportation service under Seller's Rate Schedule FT and (b) Seller shall not exercise its right to terminate this service agreement as it applies to transportation service resulting from conversions from firm sales service so long as Buyer is willing to pay rates no less favorable than Seller is otherwise able to collect from third parties for such service. 3 SERVICE AGREEMENT (CONTINUED) ARTICLE V RATE SCHEDULE AND PRICE 1. Buyer shall pay Seller for natural gas delivered to Buyer hereunder in accordance with Seller's Rate Schedule FT and the applicable provisions of the General Terms and Conditions of Seller's FERC Gas Tariff as filed with the Federal Energy Regulatory Commission, and as the same may be legally amended or superseded from time to time. Such Rate Schedule and General Terms and Conditions are by this reference made a part hereof. In the event Buyer and Seller mutually agree to a negotiated rate and specified term for service hereunder, provisions governing such negotiated rate (including surcharges) and term shall be set forth on Exhibit C to this service agreement. 2. Seller and Buyer agree that the quantity of gas that Buyer delivers or causes to be delivered to Seller shall include the quantity of gas retained by Seller for applicable compressor fuel, line loss make-up (and injection fuel under Seller's Rate Schedule GSS, if applicable) in providing the transportation service hereunder, which quantity may be changed from time to time and which will be specified in the currently effective Sheet No. 44 of Volume No. 1 of this Tariff which relates to service under this agreement and which is incorporated herein. 3. In addition to the applicable charges for firm transportation service pursuant to Section 3 of Seller's Rate Schedule FT, Buyer shall reimburse Seller for any and all filing fees incurred as a result of Buyer's request for service under Seller's Rate Schedule FT, to the extent such fees are imposed upon Seller by the Federal Energy Regulatory Commission or any successor governmental authority having jurisdiction. ARTICLE VI MISCELLANEOUS 1. This Agreement supersedes and cancels as of the effective date hereof the following contract(s) between the parties hereto: None 2. No waiver by either party of any one or more defaults by the other in the performance of any provisions of this agreement shall operate or be construed as a waiver of any future default or defaults, whether of a like or different character. 3. The interpretation and performance of this agreement shall be in accordance with the laws of the State of Texas, without recourse to the law governing conflict of laws, and to all present and future valid laws with respect to the subject matter, including present and future orders, rules and regulations of duly constituted authorities. 4. This agreement shall be binding upon, and inure to the benefit of the parties hereto and their respective successors and assigns. 4 SERVICE AGREEMENT (CONTINUED) 5. Notices to either party shall be in writing and shall be considered as duly delivered when mailed to the other party at the following address: (a) If to Seller: Transcontinental Gas Pipe Line Corporation P.O. Box 1396 Houston, Texas, 77251-1396 Attention: Director - Customer Services (b) If to Buyer: Atlanta Gas Light Company P.O.Box 4569 Atlanta, Georgia 30302-4569 Attention: Eileen Stanek Such addresses may be changed from time to time by mailing appropriate notice thereof to the other party by certified or registered mail. IN WITHNESS WHEREOF, the parties hereto have caused this agreement to be signed by their respective officers or representatives thereunto duly authorized. TRANSCONTINENTAL GAS PIPE LINE CORPORATION (Seller) By: /s/ Frank J. Ferazzi Frank J. Ferazzi Vice President - Customer Services ATLANTA GAS LIGHT COMPANY (Buyer) By: /s/ Thomas H. Benson 5 EXHIBIT A Maximum Daily Quantity Point(s) of Receipt at each Receipt Pt. (Dt/d) 1 Point of interconnection between Transco's mainline 85,000 and Mobile Bay Lateral at milepost 784.66 in Choctaw County, Alabama __________________________ 1 These quantities do not include the additional quantities of gas to be retained by Seller for compressor fuel and line loss make-up. Therefore, Buyer shall also deliver or cause to be delivered at the receipt points such additional quantities of gas in kind to be retained by Seller for compressor fuel and line loss make-up. EXHIBIT B Maximum Daily Quantity Point(s) of Delivery and Pressure 2 at each Delivery Pt. (Dt/d) 3 Suwanee Delivery Point in Gwinnett County, Georgia 85,000 ___________________________ 2 Pressure(s) shall not be less than fifty (50) pounds per square inch gauge or at such other pressures as may be agreed upon in the day-to-day operations of Buyer and Seller. 3 Deliveries to or for the account of Shipper at the delivery point(s) shall be subject to the limits of the Delivery Point Entitlements ("DPE's") of the entities receiving the gas at the delivery points, as such DPE's are set forth in Transco's FERC Gas Tariff, as amended from time to time. EXHIBIT C Specification of Negotiated Rate and Term Not Applicable EX-27 5 EXHIBIT 27 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT 0001004155 AGL RESOURCES INC. 1,000,000 6-MOS SEP-30-1998 OCT-01-1997 MAR-31-1997 PER-BOOK 1,436 81 279 137 11 1,944 285 188 196 669 74 0 660 4 0 0 0 0 0 0 537 1,944 886 41 184 751 135 8 103 28 75 4 71 31 25 152 1.25 1.24
EX-27 6 EXHIBIT 27 RESTATED
UT 0001004155 AGL RESOURCES INC. 1,000,000 12-MOS 6-MOS 12-MOS 9-MOS SEP-30-1997 SEP-30-1997 SEP-30-1996 SEP-30-1996 OCT-01-1996 OCT-01-1996 OCT-01-1995 OCT-01-1995 SEP-30-1997 MAR-31-1997 SEP-30-1996 JUN-30-1996 PER-BOOK PER-BOOK PER-BOOK PER-BOOK 1,420 1,384 1,361 1,380 76 70 54 47 293 314 289 248 123 109 104 67 13 16 16 2 1,925 1,893 1,825 1,743 283 280 278 278 184 176 171 168 155 188 139 156 622 644 588 602 75 56 56 56 0 3 3 3 660 585 555 555 30 113 152 72 0 0 0 0 0 0 0 0 0 0 0 0 45 0 0 0 0 0 0 0 0 0 0 0 493 492 471 455 1,925 1,893 1,825 1,743 1,288 876 1,220 1,049 47 47 48 44 350 180 720 256 1,116 727 1,058 938 172 149 162 111 10 6 14 7 135 108 129 118 52 27 49 37 83 81 76 78 6 2 4 3 77 79 76 78 61 30 59 44 45 22 42 32 151 109 82 106 1.37 1.41 1.37 1.41 1.36 1.40 1.36 1.40
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