1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) AUGUST 10, 2000 HERITAGE PROPANE PARTNERS, L.P. (Exact name of registrant as specified in its charter) DELAWARE 1-11727 73-1493906 (State or other jurisdiction of (Commission file number) (I.R.S. Employer incorporation or organization) Identification No.) 8801 SOUTH YALE AVENUE, SUITE 310, TULSA, OKLAHOMA 74137 (Address of principal executive offices and zip code) (918) 492-7272 (Registrant's telephone number, including area code) This Form 8-K/A amends the Form 8-K of Heritage Propane Partners, L.P. dated August 23, 2000 and filed with the Securities and Exchange Commission on August 23, 2000. That Form 8-K reported under Item 2 the acquisition of assets from U.S. Propane, L.P. This report provides the financial statements and the pro forma financial information as required under Item 7. This Form 8-K/A also amends the Date of Report (Date of earliest event reported) to be August 10, 2000.
2 ITEM 7. Financial Statements and Exhibits. (a) Financial Statements of businesses acquired: The audited balance sheets of Peoples Gas Company as of as of December 31, 1999 and 1998 and the related statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of operations and retained earnings and cash flows for the six months ended June 30, 2000 and 1999. The audited balance sheets of United Cities Propane Gas, Inc. as of September 30, 1999 and 1998, and the related statements of operations and retained earnings and cash flows for each of the three years in the period ended September 30, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of operations and retained earnings and cash flows for the nine months ended June 30, 2000 and 1999. The audited balance sheets of AGL Propane, Inc. as of September 30, 1999 and 1998, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended September 30, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of income and cash flows for the nine months ended June 30, 2000 and 1999. The audited balance sheets of Piedmont Propane Company as of October 31, 1999 and 1998, and the related statements of income and retained earnings and cash flows for each of the three years in the period ended October 31, 1999 and the unaudited interim balance sheet as of July 31, 2000 and the related statements of income and retained earnings and cash flows for the nine months ended July 31, 2000 and 1999. The above financial statements together with the report of their respective auditors are filed as Exhibit 99.2 to this Current Report. (b) Pro forma financial information: The unaudited pro forma condensed combined financial statements of Heritage Propane Partners, L.P. and U.S. Propane as of June 30, 2000, for the six months ended June 30, 2000 and for the year ended December 31, 1999, are filed as Exhibit 99.3 to this Current Report. (c) Exhibits: The following Exhibits are filed herewith: Exhibit Number Description 99.2 The audited balance sheets of Peoples Gas Company as of December 31, 1999 and 1998 and the related statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of operations and retained earnings and cash flows for the six months ended June 30, 2000 and 1999. The audited balance sheets of United Cities Propane Gas, Inc. as of September 30, 1999 and 1998, and the related statements of operations and retained earnings and cash flows for each of the three years in the period ended September 30, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of operations and retained earnings and cash flows for the nine months ended June 30, 2000 and 1999. The audited balance sheets of AGL Propane, Inc. as of September 30, 1999 and 1998, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended September 30, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of income and cash flows for the nine months ended June 30, 2000 and 1999. The audited balance sheets of Piedmont Propane Company as of October 31, 1999 and 1998, and the related statements of income and retained earnings and cash flows for each of the three years in the period ended October 31, 1999 and the unaudited interim balance sheet as of July 31, 2000 and the related statements of income and retained earnings and cash flows for the nine months ended July 31, 2000 and 1999. 99.3 The unaudited pro forma condensed combined financial statements of Heritage Propane Partners, L.P. and U.S. Propane as of June 30, 2000, for the six months ended June 30, 2000 and the year ended December 31, 1999. 2
3 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. DATED: October 24, 2000 HERITAGE PROPANE PARTNERS, L.P. By: Heritage Holdings, Inc. (General Partner) By: /s/ H. Michael Krimbill --------------------------------- H. Michael Krimbill President and Chief Executive Officer 3
4 INDEX TO EXHIBITS The exhibits listed on the following Exhibit Index are filed as part of this Report. Exhibits required by Item 601 of Regulation S-K, but which are not listed below, are not applicable. Exhibit Number Description ------ ----------- 99.2 The audited balance sheets of Peoples Gas Company as of December 31, 1999 and 1998 and the related statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of operations and retained earnings and cash flows for the six months ended June 30, 2000 and 1999. The audited balance sheets of United Cities Propane Gas, Inc. as of September 30, 1999 and 1998, and the related statements of operations and retained earnings and cash flows for each of the three years in the period ended September 30, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of operations and retained earnings and cash flows for the nine months ended June 30, 2000 and 1999. The audited balance sheets of AGL Propane, Inc. as of September 30, 1999 and 1998, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended September 30, 1999 and the unaudited interim balance sheet as of June 30, 2000 and the related statements of income and cash flows for the nine months ended June 30, 2000 and 1999. The audited balance sheets of Piedmont Propane Company as of October 31, 1999 and 1998, and the related statements of income and retained earnings and cash flows for each of the three years in the period ended October 31, 1999 and the unaudited interim balance sheet as of July 31, 2000 and the related statements of income and retained earnings and cash flows for the nine months ended July 31, 2000 and 1999. 99.3 The unaudited pro forma condensed combined financial statements of Heritage Propane Partners, L.P. and U.S. Propane as of June 30, 2000, for the six months ended June 30, 2000 and the year ended December 31, 1999.
1 EXHIBIT 99.2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholder of Peoples Gas Company: We have audited the accompanying balance sheets of Peoples Gas Company (a Florida corporation and wholly-owned subsidiary of TECO Energy, Inc.) as of December 31, 1999 and 1998, and the related statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Peoples Gas Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP - ----------------------- Tampa, Florida, October 18, 2000 1
2 PEOPLES GAS COMPANY BALANCE SHEETS -- DECEMBER 31, 1999 AND 1998 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998 ASSETS ------- ------- CURRENT ASSETS: Cash and cash equivalents $ 21 $ 116 Accounts receivable, net of allowance of $75 and $50 at December 31, 1999 and 1998, respectively 5,224 3,173 Inventories 1,384 956 Prepaid expenses 14 65 Total current assets 6,643 4,310 ------- ------- PROPERTY, PLANT AND EQUIPMENT, net 36,063 32,095 INTANGIBLES AND OTHER ASSETS, net 1,018 801 ------- ------- Total assets $43,724 $37,206 ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable to related companies $16,315 $10,251 Accounts payable 2,072 1,561 Accrued and other current liabilities 1,774 1,859 ------- ------- Total current liabilities 20,161 13,671 ------- ------- DEFERRED TAX LIABILITIES 8,456 7,939 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 5) SHAREHOLDER'S EQUITY: Common stock, no par value; 60 shares issued and outstanding at December 31, 1999 and 1998 -- -- Paid-in capital 5,054 5,054 Retained earnings 10,053 10,542 ------- ------- Total shareholder's equity 15,107 15,596 ------- ------- Total liabilities and shareholder's equity $43,724 $37,206 ======= ======= The accompanying notes are an integral part of these balance sheets. 2
3 PEOPLES GAS COMPANY STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (AMOUNTS IN THOUSANDS) 1999 1998 1997 -------- -------- -------- REVENUES $ 34,045 $ 30,187 $ 32,874 -------- -------- -------- COSTS AND EXPENSES: Cost of products sold 14,849 12,283 17,063 Operating expenses 13,223 11,088 11,927 Depreciation and amortization 3,088 2,855 2,514 -------- -------- -------- Total costs and expenses 31,160 26,226 31,504 -------- -------- -------- Operating income 2,885 3,961 1,370 OTHER INCOME (EXPENSE) 10 (478) (390) -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 2,895 3,483 980 PROVISION FOR INCOME TAXES 1,127 1,412 378 -------- -------- -------- NET INCOME $ 1,768 $ 2,071 $ 602 ======== ======== ======== RETAINED EARNINGS, beginning of year $ 10,542 $ 10,442 $ 9,840 Net income 1,768 2,071 602 Dividends paid to parent (2,257) (1,971) -- -------- -------- -------- RETAINED EARNINGS, end of year $ 10,053 $ 10,542 $ 10,442 ======== ======== ======== The accompanying notes are an integral part of these statements. 3
4 PEOPLES GAS COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (AMOUNTS IN THOUSANDS) 1999 1998 1997 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,768 $ 2,071 $ 602 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 3,088 2,855 2,514 Deferred income taxes 517 444 326 Changes in assets and liabilities, net of effect of acquisitions- Accounts receivable (2,051) 698 869 Inventories (413) 255 443 Prepaid expenses 51 22 (87) Intangibles and other assets (97) -- (95) Accounts payable to related companies 6,064 4,226 4,546 Accounts payable 511 (300) (194) Accrued and other current liabilities (85) (1,052) (1,242) ------- ------- ------- Net cash provided by operating activities 9,353 9,219 7,682 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquisitions, net of cash acquired (1,015) (1,719) -- Capital expenditures (6,176) (5,328) (4,497) ------- ------- ------- Net cash used in investing activities (7,191) (7,047) (4,497) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt -- (346) (7,811) Capital contributions -- -- 4,250 Dividends paid (2,257) (1,971) -- ------- ------- ------- Net cash used in financing activities (2,257) (2,317) (3,561) ------- ------- ------- DECREASE IN CASH (95) (145) (376) CASH, beginning of year 116 261 637 ------- ------- ------- CASH, end of year $ 21 $ 116 $ 261 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid to parent for income taxes under tax sharing agreement, net $ 851 $ 582 $ 403 ======= ======= ======= The accompanying notes are an integral part of these statements. 4
5 PEOPLES GAS COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 1. OPERATIONS AND ORGANIZATION Peoples Gas Company (the Company) is a wholly-owned subsidiary of TECO Energy, Inc. (the Parent Company) and is engaged in the purchase, distribution and marketing of liquefied petroleum gas (propane). The Company has a diversified customer base, which consists primarily of residential, commercial and industrial customers located in Florida. In June 1997, TECO Energy, Inc. acquired Lykes Energy, Inc. and issued approximately 12.1 million shares of its stock for total consideration of approximately $300 million. Prior to the merger, the Company was a wholly-owned subsidiary of Lykes Energy, Inc. The merger was accounted for as a pooling of interests. The accompanying financial statements have been presented on a carve-out basis and reflect the historical results of operations, financial position and cash flows of the Company. As discussed further in Note 6, certain expenses in the financial statements include allocations from the Parent Company and other wholly-owned subsidiaries of the Parent Company (individually, a Related Company and collectively, the Related Companies). Management believes that the allocations were made on a reasonable basis; however, the allocations of costs and expenses do not necessarily indicate the costs that would have been incurred by the Company on a stand-alone basis. Also, the financial statements may not necessarily reflect what the financial position, results of operations and cash flows of the Company would have been if the Company had been a separate, stand-alone company during the periods presented. In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural Gas Co., Inc., and AGL Resources, Inc. contributed each companies' propane operations, Peoples Gas Company, United Cities Propane Gas, Inc., Piedmont Propane Company and AGL Propane, Inc., respectively, to U.S. Propane L.P., (U.S. Propane) in exchange for equity interests in U.S. Propane. The merger was accounted for as an acquisition using the purchase method of accounting with Peoples Gas Company being the acquirer. Accordingly, Peoples Gas Company's assets and liabilities were recorded at historical cost and the assets and liabilities of United Cities Propane Gas, Inc., Piedmont Propane Company and AGL Propane, Inc. were recorded at fair market value, as determined based on a valuation and appraisal. In August 2000, U.S. Propane obtained control of Heritage Propane Partners, L.P. (Heritage Propane) by acquiring Heritage Holdings, Inc., Heritage Propane's general partner. Simultaneously, U.S. Propane transferred its propane operations to Heritage Propane in exchange for cash, common units in Heritage Propane and a limited partner interest in Heritage Operating, L.P. Upon closing the transaction, which occurred in August 2000, U.S. Propane owns all of the general partnership interest and approximately 34 percent of the limited partnership interest in Heritage Propane. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Sales of propane, propane appliances, parts and fittings are recognized at the later of the time of delivery of the product to the customer or the time of sale or installation. Revenue from service labor is recognized upon completion of the service, and tank rent is recognized ratably over the period it is earned. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 5
6 INVENTORIES Inventories are valued at the lower of cost or market. The cost of fuel inventories is determined using weighted-average cost, while the cost of appliances, parts and fittings is determined by the first-in, first-out method. Inventories consisted of the following at December 31, 1999 and 1998 (amounts in thousands): 1999 1998 ------ ------ Fuel $1,315 $ 684 Appliances, parts and fittings 69 272 ------ ------ $1,384 $ 956 ====== ====== PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are expensed as incurred. Additionally, the Company capitalizes certain costs directly related to the installation of company-owned tanks, including internal labor costs. Components and useful lives of property, plant and equipment were as follows at December 31, 1999 and 1998 (amounts in thousands): Useful Life (in years) 1999 1998 ---------- -------- --------- Land and improvements $ 719 $ 719 Buildings and improvements 20 1,673 1,651 Bulk storage, equipment and facilities 20 2,393 2,393 Tanks and other equipment 5-20 42,206 37,524 Vehicles 10 6,248 5,891 Furniture and fixtures 7-20 1,391 1,233 Other 20 522 517 -------- -------- 55,152 49,928 Less-Accumulated depreciation (20,657) (18,622) -------- -------- 34,495 31,306 Plus-Construction work-in-process 1,568 789 -------- -------- $ 36,063 $ 32,095 ======== ======== Included within tanks and other equipment is approximately $34,627,000 and $30,762,000 of propane equipment (principally tanks and appliances) leased to third parties as of December 31, 1999 and 1998, respectively. 6
7 INTANGIBLES AND OTHER ASSETS Intangibles and other assets are stated at cost net of amortization computed on the straight-line method. Components and useful lives of intangibles and other assets were as follows as of December 31, 1999 and 1998 (amounts in thousands): Useful Life (in years) 1999 1998 ----------- ------ ------- Noncompete agreements 5 $1,295 $ 1,095 Customer lists 5 200 - Other 81 64 ------ ------- 1,576 1,159 Less-Accumulated amortization (558) (358) ------ ------- $1,018 $ 801 ====== ======= The Company entered into noncompete agreements for five years with certain previous owners of acquired companies and certain other outside parties. The costs associated with these agreements are being amortized over the terms of the agreements. Amounts payable under the noncompete obligations total $525,000 at December 31, 1999, and are included in accrued and other current liabilities on the accompanying balance sheet. These payments are payable in the succeeding years and thereafter as follows (amounts in thousands): Year Ending December 31, Amount ------------ ------ 2000 $ 300 2001 100 2002 100 2003 25 ----- $ 525 ===== LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of long-lived assets is not recoverable, the Company reduces the carrying amount of such assets to fair value. Based on the most recent review, the Company believes no impairment exists at December 31, 1999 and 1998. ACCRUED AND OTHER CURRENT LIABILITIES Accrued and other current liabilities consisted of the following as of December 31, 1999 and 1998 (amounts in thousands): 1999 1998 ------ ------ Wages and payroll taxes $ 90 $ 52 Deferred tank rent 278 265 Customer deposits 800 742 Noncompete payable 525 425 Other 81 375 ------ ------ $1,774 $1,859 ====== ====== 7
8 INCOME TAXES The Company has followed the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred income taxes are recorded based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are received and liabilities are settled. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE The carrying amount of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of December 31, 1999 and 1998, because of the relatively short maturity of these instruments. RECENTLY ISSUED ACCOUNTING STANDARD NOT YET ADOPTED The Company has not yet adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 will be effective for the Company's fiscal year ended December 31, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 does not allow retroactive application to financial statements of prior periods. The Company's management has evaluated the impact of adopting SFAS 133 and does not expect it to have a significant impact on its reported financial condition, results of operations and cash flows. 3. ACQUISITIONS Effective January 1998, the Company purchased substantially all of the fixed assets of Ankney Gas, Inc. for approximately $412,000 in cash. Additionally, the Company obtained a five-year noncompete agreement with the prior owner amounting to $203,000, to be amortized over a five-year period. Effective July 1998, the Company purchased substantially all of the fixed assets of Florida Gas Service Corporation for approximately $1,307,000 in cash. Additionally, the Company obtained a five-year noncompete agreement with the prior owners amounting to $50,000, to be amortized over a five-year period. Effective July 1999, the Company purchased substantially all of the inventory and fixed assets of Commercial Propane, Inc. for approximately $1,015,000 in cash. Additionally, the Company obtained a five-year noncompete agreement with the prior owners amounting to $200,000, to be paid in 2000 and amortized over a five-year period. The results of operations of the acquired entities have been included in the Company's financial statements from the date of acquisition. Effective January 1998, the Parent Company completed its merger with Griffis, Inc. and U.S. Propane, Inc. and issued approximately 600,000 shares of its common stock for total consideration of approximately $15,000,000. Concurrent with the merger, Griffis, Inc. and U.S. Propane, Inc. were merged into Peoples Gas Company. This merger was accounted for as a pooling of interests and, accordingly, the Company's balance sheet as of December 31, 1998, and its statements of operations and related earnings and cash flows for the period ended December 31, 1998, include the results of Griffis, Inc. and U.S. Propane, Inc. The statements of operations and retained earnings 8
9 and cash flows for the year ended December 31, 1997, include the results of Griffis, Inc. and U.S. Propane, Inc. Additionally, the Company obtained a five-year noncompete agreement with the prior owner amounting to $500,000 to be paid and amortized over a five-year period. 4. INCOME TAXES The Company files a consolidated federal income tax return with the Parent Company and, based on a tax sharing agreement, includes, in its statements of operations, a provision for income taxes calculated on a separate return basis. The provision for income taxes for the years ended December 31, 1999, 1998, and 1997, was comprised of the following (amounts in thousands): 1999 1998 1997 ------ ------ ------ Federal income taxes: Current $ 524 $ 830 $ 45 Deferred 443 381 280 State income taxes: Current 86 138 7 Deferred 74 63 46 ------ ------ ------ Total provision for income taxes $1,127 $1,412 $ 378 ====== ====== ====== The income tax effect of temporary differences comprising the deferred tax liability on the accompanying balance sheet is a result of the following at December 31, 1999 and 1998 (amounts in thousands): 1999 1998 ------- ------- Depreciation and amortization $ 8,717 $ 8,093 Deferred revenue (104) (102) Other (157) (52) ------- ------- $ 8,456 $ 7,939 ======= ======= Income taxes differ from amounts computed by applying the statutory rates to pre-tax income as follows (amounts in thousands): 1999 1998 1997 ------ ------ ------ Federal income taxes at statutory rate of 35% $ 1,013 $ 1,219 $ 343 State income tax, net 104 130 35 Other, net 10 63 -- ------- ------- ------- Provision for income taxes $ 1,127 $ 1,412 $ 378 ======= ======= ======= 5. COMMITMENTS AND CONTINGENCIES LEASES The Company leases propane equipment (principally tanks and appliances) to third parties. All existing leases are cancelable operating leases. The net book value of total leased property amounted to $23,618,000 and $20,885,000 at December 31, 1999 and 1998, respectively. 9
10 The Company leases certain operational facilities from third parties under non-cancelable operating leases expiring in various years through 2003. Future minimum lease payments under these leases are as follows at December 31, 1999 (amounts in thousands): Year Ending December 31, Amount - ------------ ------ 2000 $ 108 2001 72 2002 48 2003 18 ----- $ 246 Rental expense under the terms of the non-cancelable operating leases for the years ended December 31, 1999, 1998 and 1997, totaled approximately $184,000, $119,000 and $181,000, respectively, and has been included in operating expenses in the accompanying statements of operations. LITIGATION The Company is involved in litigation arising in the normal course of business. The Company participates in umbrella insurance coverage through a policy held by the Parent Company. The Company pays an annual premium to the Parent Company for the Company's portion of the policy, as allocated by the Parent Company. In addition, the Company is allocated a portion of a self-insurance reserve maintained by a Related Company to cover losses up to the deductible of the insurance coverage. Amounts paid for premiums and the self-insurance reserve were approximately $170,000, $260,000 and $290,000 in 1999, 1998 and 1997, respectively. Under the agreement with the Related Company, the Company has no additional liability for actual claims or losses. PURCHASE COMMITMENTS The Company has several non-cancelable purchase agreements with its vendors for the purchase of propane gas inventory, which expire during fiscal 2001. The agreements provide that the Company purchase, principally at market rates, approximately 34,000,000 gallons during fiscal 2000 and 2001. The Company purchases substantially all of its volumes sold through these agreements. During 1999, the Company entered into a contract with one of its vendors to hedge the price of propane gas purchases up to a cap of $0.45 per gallon for 1,000,000 gallons. The agreement provides for specific monthly volumes and expired in February 2000. The Company paid approximately $18,000 for this contract, which is included in other assets. The Company is amortizing this amount over the actual volumes purchased under the contract, or the life of the contract, whichever comes first. 6. RELATED-PARTY TRANSACTIONS The Parent Company and Related Companies perform certain services for the Company, which are billed at actual cost. In addition, common general and administrative salary and other operating costs and expenses are allocated to the Company based upon methods considered reasonable by management. Such charges for employee services amounted to $2,906,000, $2,160,000 and $2,406,000 for the years ended 1999, 1998 and 1997, respectively. Accounts payable to related companies is non-interest bearing. Employees of the Company participate in the non-contributory defined benefit retirement plan and postretirement benefit plan of the Parent Company, which cover substantially all full-time employees. The Company's share of the Parent Company's annual pension, postretirement benefit, and medical and dental expenses amounted to $1,067,000, $821,000 and $820,000 in 1999, 1998 and 1997, respectively. During the year ended December 31, 1997, the Parent Company contributed $4,250,000 to the Company. 10
11 The Company leases certain office space from an employee of the Company. Future minimum lease payments under this lease are $18,444 and $1,537 for the years ending December 31, 2000 and 2001, respectively. 7. SUBSEQUENT EVENT Effective January 2000, the Company purchased substantially all of the fixed assets of Horizon Gas, Inc., Horizon Gas of Dover, Inc., Horizon Gas of St. Petersburg, Inc. and Horizon Gas of Tampa, Inc. for approximately $3,300,000 in cash. Additionally, the Company obtained a five-year noncompete agreement with the prior owners amounting to $500,000, to be amortized over a five-year period. The transaction is being accounted for using the purchase method. 11
12 PEOPLES GAS COMPANY BALANCE SHEET -- JUNE 30, 2000 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) June 30, ASSETS 2000 ---------- (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 11 Accounts receivable, net of allowance of $75 4,206 Inventories 1,541 Prepaid expenses 14 ------- Total current assets 5,772 PROPERTY, PLANT AND EQUIPMENT, net 40,887 INTANGIBLES AND OTHER ASSETS, net 1,284 ------- Total assets $47,943 ======= LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable to related companies $21,359 Accounts payable 1,823 Accrued and other current liabilities 1,205 ------- Total current liabilities 24,387 ------- DEFERRED TAX LIABILITIES 8,711 ------- COMMITMENTS AND CONTINGENCIES SHAREHOLDER'S EQUITY: Common stock, no par value, 60 shares issued and outstanding at June 30, 2000 -- Paid-in capital 5,054 Retained earnings 9,791 ------- Total shareholder's equity 14,845 ------- Total liabilities and shareholder's equity $47,943 ======= The accompanying notes are an integral part of this balance sheet. 12
13 PEOPLES GAS COMPANY STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 (AMOUNTS IN THOUSANDS) Six-month Period Ended June 30, ------------------------ 2000 1999 -------- ------- (unaudited) REVENUES $ 23,747 $ 17,181 -------- -------- COSTS AND EXPENSES: Cost of products sold 13,153 6,954 Operating expenses 6,650 6,020 Depreciation and amortization 1,665 1,525 -------- -------- Total costs and expenses 21,468 14,499 -------- -------- Operating income 2,279 2,682 -------- -------- OTHER (EXPENSE) INCOME (228) 11 -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 2,051 2,693 PROVISION FOR INCOME TAXES 800 1,039 -------- -------- NET INCOME $ 1,251 $ 1,654 ======== ======== RETAINED EARNINGS, beginning of period $ 10,053 $ 10,542 Net income 1,251 1,654 Dividends paid to parent (1,513) (1,755) -------- -------- RETAINED EARNINGS, end of period $ 9,791 $ 10,441 ======== ======== The accompanying notes are an integral part of these statements. 13
14 PEOPLES GAS COMPANY STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 (AMOUNTS IN THOUSANDS) Six-month Period Ended June 30, ----------------------- 2000 1999 ------- ------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,251 $ 1,654 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 1,665 1,525 Deferred income taxes 255 51 Changes in assets and liabilities, net of effect of acquisitions- Accounts receivable 1,018 88 Inventories (157) 54 Prepaid expenses -- 43 Accounts payable (249) (943) Accounts payable to related companies 5,044 1,878 Accrued and other current liabilities (569) (361) ------- ------- Net cash provided by operating activities 8,258 3,989 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquisition and non-compete agreement, net of cash acquired (3,785) -- Capital expenditures (2,970) (2,343) ------- ------- Net cash used in investing activities (6,755) (2,343) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to parent (1,513) (1,755) ------- ------- Net cash used in financing activities (1,513) (1,755) ------- ------- DECREASE IN CASH (10) (109) CASH, beginning of period 21 116 ------- ------- CASH, end of period $ 11 $ 7 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid to parent for income taxes under tax sharing agreement $ 1,028 $ 1,432 ======= ======= The accompanying notes are an integral part of these statements. 14
15 PEOPLES GAS COMPANY NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000 1. OPERATIONS AND ORGANIZATION Peoples Gas Company (the Company) is a wholly-owned subsidiary of TECO Energy, Inc. (the Parent Company) and is engaged in the purchase, distribution and marketing of liquefied petroleum gas (propane). The Company has a diversified customer base, which consists primarily of residential, commercial and industrial customers located in Florida. In June 1997, TECO Energy, Inc. acquired Lykes Energy, Inc. and issued approximately 12.1 million shares of its stock for total consideration of approximately $300 million. Prior to the merger, the Company was a wholly-owned subsidiary of Lykes Energy, Inc. The merger was accounted for as a pooling of interests. The accompanying financial statements have been presented on a carve-out basis and reflect the historical results of operations, financial position and cash flows of the Company. Certain expenses in the financial statements include allocations from the Parent Company and other wholly-owned subsidiaries of the Parent Company (collectively, the Related Companies). Management believes that the allocations were made on a reasonable basis; however, the allocations of costs and expenses do not necessarily indicate the costs that would have been incurred by the Company on a stand-alone basis. Also, the financial statements may not necessarily reflect what the financial position, results of operations and cash flows of the Company would have been if the Company had been a separate, stand-alone company during the periods presented. In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural Gas Co., Inc., and AGL Resources, Inc. contributed each companies' propane operations, Peoples Gas Company, United Cities Propane Gas, Inc., Piedmont Propane Company and AGL Propane, Inc., respectively, to U.S. Propane L.P., (U.S. Propane) in exchange for equity interests in U.S. Propane. The merger was accounted for as an acquisition using the purchase method of accounting with Peoples Gas Company being the acquirer. Accordingly, Peoples Gas Company's assets and liabilities were recorded at historical cost and the assets and liabilities of United Cities Propane Gas, Inc., Piedmont Propane Company and AGL Propane, Inc. were recorded at fair market value, as determined based on a valuation and appraisal. In August 2000, U.S. Propane obtained control of Heritage Propane Partners, L.P. (Heritage Propane) by acquiring Heritage Holdings, Inc., Heritage Propane's general partner. Simultaneously, U.S. Propane transferred its propane operations to Heritage Propane in exchange for cash, common units in Heritage Propane and a limited partner interest in Heritage Operating, L.P. Upon closing of the transaction, which occurred in August 2000, U.S. Propane owns all of the general partnership interest and approximately 34 percent of the limited partnership interest in Heritage Propane. 2. INTERIM FINANCIAL INFORMATION The interim financial statements as of June 30, 2000, and for the six-month periods ended June 30, 2000 and 1999, are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company's management, the unaudited interim financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. 3. ACQUISITION Effective January 2000, the Company purchased substantially all of the fixed assets of Horizon Gas, Inc., Horizon Gas of Dover, Inc., Horizon Gas of St. Petersburg, Inc. and Horizon Gas of Tampa, Inc. for 15
16 approximately $3.3 million in cash. Additionally, the Company obtained a five-year noncompete agreement with the prior owners amounting to $500,000, to be amortized over a five-year period. The transaction is being accounted for using the purchase method. 16
17 Report of Independent Auditors Board of Directors Atmos Energy Corporation We have audited the accompanying balance sheets of United Cities Propane Gas, Inc. (a Tennessee corporation and wholly owned subsidiary of Atmos Energy Corporation) as of September 30, 1999 and 1998, and the related statements of operations and retained earnings, and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Cities Propane Gas, Inc. as of September 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP August 21, 2000 17
18 United Cities Propane Gas, Inc. Balance Sheets SEPTEMBER 30 1999 1998 ------------ ------------ ASSETS Current assets: Cash $ 3,285,000 $ 2,437,000 Receivables: Principally trade, less allowance for uncollectible accounts of $435,000 in 1999 and $440,000 in 1998 956,000 834,000 Accrued income taxes - receivable from Parent Company 1,448,000 1,346,000 Accrued income taxes receivable 891,000 219,000 Inventories 1,465,000 2,167,000 Other current assets 60,000 388,000 ------------ ------------ 8,105,000 7,391,000 Property and equipment: Land 1,767,000 1,867,000 Buildings and improvements 3,461,000 3,503,000 Furniture and fixtures 1,278,000 983,000 Propane equipment 27,317,000 27,129,000 Lease equipment 5,687,000 6,392,000 ------------ ------------ 39,510,000 39,874,000 Less accumulated depreciation (15,753,000) (14,086,000) ------------ ------------ 23,757,000 25,788,000 Deferred charges and noncurrent assets: Noncompetition agreements, less accumulated amortization of $1,449,000 in 1999 and $1,188,000 in 1998 1,604,000 1,865,000 Goodwill, less accumulated amortization of $455,000 in 1999 and $176,000 in 1998 2,721,000 2,999,000 Other assets -- 8,000 ------------ ------------ Total assets $ 36,187,000 $ 38,051,000 ============ ============ 18
19 United Cities Propane Gas, Inc. Balance Sheets SEPTEMBER 30 1999 1998 ----------- ----------- LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable: Principally trade $ 725,000 $ 860,000 Parent Company 4,429,000 3,965,000 Current portion of long-term debt 1,465,000 2,387,000 Short-term notes - due to Parent Company 13,960,000 9,700,000 Other current liabilities 900,000 970,000 ----------- ----------- 21,479,000 17,882,000 Long-term debt, net of current portion 4,160,000 8,879,000 Deferred credits and other liabilities: Obligations payable under noncompetition agreements, net of current portion 1,254,000 1,462,000 Deferred income taxes 1,326,000 1,322,000 Other liabilities 804,000 538,000 ----------- ----------- 3,384,000 3,322,000 Commitments and contingencies Shareholder's equity: Common stock, par value $10 per share: 1,000 1,000 Authorized, issued, and outstanding shares - 100 Paid-in capital 3,708,000 3,708,000 Retained earnings 3,455,000 4,259,000 ----------- ----------- Shareholder's equity 7,164,000 7,968,000 ----------- ----------- Total liabilities and shareholder's equity $36,187,000 $38,051,000 =========== =========== See accompanying notes. 19
20 United Cities Propane Gas, Inc. Statements of Operations and Retained Earnings YEAR ENDED SEPTEMBER 30 1999 1998 1997 ------------ ------------ ------------ Operating revenues: Propane gas $ 19,647,000 $ 20,590,000 $ 29,550,000 Merchandise 1,178,000 1,027,000 1,560,000 Rental 1,430,000 1,199,000 1,551,000 Transport services 689,000 864,000 533,000 ------------ ------------ ------------ Total operating revenues 22,944,000 23,680,000 33,194,000 Operating expenses: Cost of propane gas sold 9,627,000 11,687,000 20,244,000 Cost of merchandise sold 1,268,000 721,000 949,000 General, administrative, and selling 9,499,000 8,321,000 9,478,000 Depreciation 2,413,000 2,099,000 1,944,000 Amortization 547,000 237,000 175,000 ------------ ------------ ------------ Total operating expenses 23,354,000 23,065,000 32,790,000 ------------ ------------ ------------ Operating (loss) income (410,000) 615,000 404,000 Other income, net 206,000 47,000 15,000 Interest income (expense): Interest income 260,000 143,000 144,000 Interest expense (1,338,000) (850,000) (742,000) ------------ ------------ ------------ (1,078,000) (707,000) (598,000) ------------ ------------ ------------ Loss before taxes (1,282,000) (45,000) (179,000) Federal and state income tax benefit 478,000 13,000 90,000 ------------ ------------ ------------ Net loss $ (804,000) $ (32,000) $ (89,000) ============ ============ ============ Retained earnings, beginning of year $ 4,259,000 $ 4,291,000 $ 4,780,000 Less: Net loss (804,000) (32,000) (89,000) Dividends paid -- -- (400,000) ------------ ------------ ------------ Retained earnings, end of year $ 3,455,000 $ 4,259,000 $ 4,291,000 ============ ============ ============ See accompanying notes. 20
21 United Cities Propane Gas, Inc. Statements of Cash Flows YEAR ENDED SEPTEMBER 30 1999 1998 1997 ------------ ------------ ------------ OPERATING ACTIVITIES Net loss $ (804,000) $ (32,000) $ (89,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 2,413,000 2,099,000 1,944,000 Amortization 547,000 237,000 175,000 Deferred income taxes 713,000 227,000 (123,000) Gain on sale of property and equipment (214,000) (7,000) (1,000) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net (122,000) (293,000) 881,000 Inventories 702,000 (68,000) 18,000 Accounts payable 329,000 (1,130,000) 674,000 Noncompetition obligations (233,000) (100,000) (129,000) Accrued taxes (774,000) (1,304,000) (534,000) Other, net (160,000) 619,000 (151,000) ------------ ------------ ------------ Net cash provided by operating activities 2,397,000 248,000 2,665,000 INVESTING ACTIVITIES Property and equipment additions (1,035,000) (582,000) (1,985,000) Proceeds from retirements and other property sales 867,000 59,000 68,000 Acquisition of Harlan LP Gas, Inc. -- -- (809,000) Acquisition of Propane Sales and Service, Inc. -- -- (231,000) Acquisition of Ingas, Inc. -- (1,179,000) -- Acquisition of Harris Propane Gas Co., Inc. -- (177,000) -- Acquisition of E-Con Gas, Inc. -- (470,000) -- Acquisition of Massey Propane -- (393,000) -- Acquisition of Shaw L.P. Gas, Inc. -- (3,861,000) -- ------------ ------------ ------------ Net cash used in investing activities (168,000) (6,603,000) (2,957,000) FINANCING ACTIVITIES Short-term borrowings, net 4,260,000 10,203,000 2,521,000 Payments on long-term debt (5,641,000) (1,769,000) (1,674,000) Cash dividends paid -- -- (400,000) ------------ ------------ ------------ Net cash provided (used) by financing activities (1,381,000) 8,434,000 447,000 ------------ ------------ ------------ Net increase in cash 848,000 2,079,000 155,000 Cash at beginning of year 2,437,000 358,000 203,000 ------------ ------------ ------------ Cash at end of year $ 3,285,000 $ 2,437,000 $ 358,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for income taxes $ -- $ -- $ 577,000 ============ ============ ============ Cash paid for interest $ 1,357,000 $ 882,000 $ 756,000 ============ ============ ============ See accompanying notes. 21
22 United Cities Propane Gas, Inc. Notes to Financial Statements September 30, 1999 1. ACCOUNTING POLICIES DESCRIPTION OF BUSINESS United Cities Propane Gas, Inc. (the Company) is a wholly owned subsidiary of Atmos Energy Corporation (the Parent Company). The Company is engaged in the retail distribution of propane gas and merchandise, the transportation of propane gas and other companies' products as well as the leasing of appliances and propane equipment. The Company has diversified customer classes which consist primarily of residential, commercial, industrial, and transport customers. The financial statements give subsequent effect to business combinations accounted for as purchases (see Note 4). Effective February 15, 2000, the Parent Company entered into an agreement to form a joint venture which combines 100% of the Company's operations with the propane operations of three other unrelated utility companies. Subsequently, the joint venture partners agreed to sell their operations to a publicly traded limited partnership for approximately $181,000,000 in cash and limited partnership units. Upon closing of this transaction, which occurred in August 2000, the joint venture referred to above owns all of the general partnership interest and approximately 34% of the limited partnership interest in the partnership. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INTANGIBLE ASSETS The excess of cost over the fair value of the net intangible assets and identifiable intangible assets acquired has been reflected as goodwill in the Company's balance sheet. Amortization of goodwill is computed by the straight-line method over 10 to 20 years. The Company entered into noncompetition agreements for ten years with certain previous owners of acquired properties and certain other outside parties. The costs associated with these agreements are being amortized over the terms of the agreements. Amounts payable under the noncompetition obligations for each of the five succeeding years and thereafter are as follows: 2000 $ 202,000 2001 202,000 2002 194,000 2003 194,000 2004 162,000 Thereafter 502,000 ---------- $1,456,000 ========== The Company assesses the recoverability of intangible assets by determining whether the amortization of the balances over their remaining lives can be recovered through undiscounted future operating cash flows of the acquired operations. Recoverability is reviewed when events or changes in circumstances indicate that the carrying amount may exceed such cash flows. 22
23 PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided generally on a straight-line basis over the estimated service lives of the respective classes of property. The service lives used are: buildings, 20 years; furniture and fixtures, 5 to 10 years; propane equipment on customers' premises, 5 to 20 years; storage tanks, 10 to 25 years; transportation equipment, 3 to 10 years; rental equipment and other, 8 to 10 years. Amortization of leasehold improvements is based upon the terms of the respective leases. Maintenance, repairs and renewals, including replacements of minor items of physical properties, are charged against income; major additions to physical properties are capitalized. INVENTORIES Inventories are principally priced at average cost and are stated at lower of cost or market. The components of inventories are as follows: SEPTEMBER 30 1999 1998 ---------- ---------- Propane gas $ 841,000 $ 771,000 Appliances 63,000 584,000 Appliance parts 561,000 812,000 ---------- ---------- Total inventories $1,465,000 $2,167,000 ========== ========== FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt, approximated fair value as of September 30, 1999 and 1998, because of the relatively short maturity of these instruments. The carrying value of long-term debt, including the current portion, approximated fair value as of September 30, 1999 and 1998, based upon quoted market prices for the same or similar debt issues. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, the Company considers all liquid debt instruments purchased with remaining maturities of three months or less to be cash equivalents. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with current year presentation. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED The Company has not yet adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement will be effective for the Company's fiscal year 2001. It establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. This Statement does not allow retroactive application to financial statements of prior periods. The Company's management has evaluated the impact of adopting the Statement and does not expect it to have a significant impact on its reported financial condition, results of operations, and cash flows. 2. LONG-TERM DEBT INTERIM FINANCING The Company has a revolving line of credit with First American (Revolver) which provides a total line of credit of $4,000,000 maturing on June 30, 2000, at which time all outstanding principal and interest are due. The Revolver bears interest at the bank's prime interest rate plus 1.75% and requires monthly 23
24 payments of interest only and an annual commitment fee of 3.75% to be paid on the committed, unused portion. The Company had no balance outstanding for this line of credit at September 30, 1999 or 1998. The Company did not renew its credit agreement with First American that expired June 30, 2000. LONG-TERM DEBT Long-term debt consists of the following: SEPTEMBER 30 1999 1998 ------------ ----------- Bank of America credit facility, dated December 15, 1995, totaling $5,000,000, maturing on December 15, 2002, at which time all principal and interest are due. The note bears interest at 6.99% per annum, payable monthly. $ -- $ 3,750,000 Notes due to third parties as the result of acquisitions. The notes have maturities ranging from January 2000 to June 2008 with annual, semiannual, and quarterly payments of principal and interest, ranging from 6.00% to 8.5%. The weighted average interest rate on the long-term debt at September 30, 1999 was 7.31%. 5,625,000 7,516,000 ----------- ----------- $ 5,625,000 $11,266,000 =========== =========== Future maturities of the Company's long-term debt at September 30, 1999, are as follows: 2000 $1,465,000 2001 1,035,000 2002 975,000 2003 942,000 2004 409,000 Thereafter 799,000 ---------- $5,625,000 ========== The Company repaid its Bank of America credit facility during the year, incurring a prepayment penalty of $63,000, which is included in General, administrative, and selling expense on the statement of operations and retained earnings. 3. INCOME TAXES The Company files a consolidated federal income tax return with the Parent Company and, based on an informal tax sharing agreement, includes in its statements of operations a provision or benefit for income tax expense calculated on a separate return basis. 24
25 The Company's net deferred tax liability consists of the following: SEPTEMBER 30 1999 1998 ------------ ------------ Accelerated tax depreciation and amortization $ 1,758,000 $ 1,724,000 Accrual for legal liability (124,000) (89,000) Accrual for uncollectible accounts (165,000) (167,000) Other, net (143,000) (146,000) ------------ ------------ $ 1,326,000 $ 1,322,000 ============ ============ A detail of the federal and state income tax provision (benefit) is set forth below: SEPTEMBER 30 1999 1998 1997 ------------ ------------ ------------ Federal income taxes: Current $ (1,139,000) $ (211,000) $ 25,000 Deferred, net 661,000 199,000 (108,000) State income taxes: Current (52,000) (29,000) 8,000 Deferred, net 52,000 28,000 (15,000) ------------ ------------ ------------ Total federal and state income tax benefit $ (478,000) $ (13,000) $ (90,000) ============ ============ ============ Income taxes differ from amounts computed by applying the statutory rates to pretax income as follows: SEPTEMBER 30 1999 1998 1997 ---------- ---------- ---------- Federal income tax at statutory rate of 35% $ (448,000) $ (16,000) $ (63,000) State income tax, net -- (1,000) (5,000) Other, net (30,000) 4,000 (22,000) ---------- ---------- ---------- Income tax benefit $ (478,000) $ (13,000) $ (90,000) ========== ========== ========== 4. ACQUISITIONS AND OTHER RELATED MATTERS Effective May 31, 1998, the Company purchased substantially all of the assets of Ingas, Inc. of Pulaski, Tennessee, for approximately $1,179,000 in cash for the accounts receivable, inventory, and partial payment of the fixed assets, and $1,000,000 in two notes payable for the balance of fixed assets. Additionally, the Company obtained a ten year noncompetition agreement with the prior owners amounting to $600,000, to be paid and amortized over a ten year period. Effective July 17, 1998, the Company purchased substantially all of the assets of Harris Propane Gas Co., Inc. of Clarksville, Tennessee, for approximately $177,000 in cash for the accounts receivable, inventory, and partial payment of the fixed assets, and $1,600,000 in two notes payable for the balance of fixed assets. Additionally, the Company obtained a ten year noncompetition agreement with the prior owners amounting to $200,000, to be paid over a ten year period. 25
26 Effective August 3, 1998, the Company purchased substantially all of the assets of E-Con Gas, Inc. of Evensville, Tennessee, for approximately $470,000 in cash for the accounts receivable, inventory, and partial payment of the fixed assets, and $1,345,000 in a note payable for the balance of the fixed assets. Additionally, the Company obtained a ten year noncompetition agreement with the prior owner amounting to $250,000, to be paid and amortized over a ten year period. Effective August 17, 1998, the Company purchased substantially all of the assets of Massey Propane of Petersburg, Tennessee, for approximately $393,000 in cash for the accounts receivable, inventory, and partial payment of the fixed assets, and $500,000 in a note payable for the balance of the fixed assets. Additionally, the Company obtained ten year noncompetition agreements with the prior owners amounting to $100,000, to be paid and amortized over a ten year period. Effective September 4, 1998, the Company purchased all of the assets of Shaw L.P. Gas, Inc. of Greenville, Tennessee, for approximately $3,861,000 in cash for the accounts receivable, inventory, and fixed assets. Additionally, the Company obtained ten year noncompetition agreements with the prior owners amounting to $50,000, to be paid and amortized over a ten year period. Effective February 28, 1997, the Company purchased substantially all of the assets of Harlan LP Gas, Inc. and Propane Sales and Service, Inc. for $1,040,000 in cash for the accounts receivable, inventory, and partial payment of the fixed assets and $1,000,000 in notes payable for the balance of the fixed assets. Additionally, the Company obtained ten year noncompetition agreements with the prior owners amounting to $150,000, to be paid and amortized over a ten year period. This acquisition added approximately 3,100 customers in the Harlan, Kentucky, and Tazewell, Tennessee, areas. The acquisitions of Ingas, Inc., Harris Propane Gas Co., Inc., E-Con Gas, Inc., Massey Propane, Shaw L.P. Gas, Inc., Harlan LP Gas, Inc., and Propane Sales and Service, Inc. have been accounted for as purchases, and the results of operations of these companies have been included in the financial statements subsequent to the dates indicated above. The Company recorded no excess of cost over the fair value of assets acquired from Harris Propane Gas Co., Inc., but recorded an excess of cost over fair value of assets acquired from Ingas, Inc., E-Con Gas, Inc., Massey Propane, and Shaw L.P. Gas, Inc. of $300,000, $518,000, $341,000, and $1,100,000, respectively. The excess of cost over fair value of assets acquired is being amortized on a straight-line basis over 20 years. 5. COMMITMENTS AND CONTINGENCIES LEASES The Company leases propane equipment (principally tanks and appliances) to nonaffiliated third parties. All existing leases are cancelable operating leases. At September 30, 1999, the net book value of total leased property amounted to $14,433,000. The Company leases certain operational facilities from nonaffiliated third parties under noncancelable operating leases expiring in various years through 2005. Future minimum lease payments under these leases at September 30, 1999, for each of the five succeeding years and thereafter are as follows: 2000 $169,000 2001 93,000 2002 69,000 2003 29,000 2004 26,000 Thereafter 3,000 -------- Total future minimum lease payments $389,000 ======== 26
27 Rental expense under the operating leases amounted to $192,000, $235,000, and $239,000 in 1999, 1998, and 1997, respectively. Certain operating leases provide for renewal and/or negotiable purchase options. Renewal options are for one and two successive five-year terms at their fair rental value at the time of renewal. PURCHASE COMMITMENTS The Company has several noncancelable purchase agreements with its vendors for the purchase of propane gas inventory, which expire during fiscal 2000. The agreements provide that the Company purchase, primarily at market rates, approximately 15,341,000 gallons during fiscal 2000. The Company purchases all of its volumes sold through these agreements. Additionally, the Company entered into two contracts with one of its vendors to fix the price of its propane gas purchases at $.41 per gallon over 90,000 gallons, and $.51 per gallon over 2,101,000 gallons. The agreements provide for specific monthly volumes and expire during fiscal 2000. The Company paid approximately $50,000 for the contracts, which is included in other current assets. The Company is amortizing the amounts over the actual volumes purchased under the contracts, or the life of the contract, whichever comes first. LITIGATION The Company is a party to an action pending in the Circuit Court of Sevier County, Tennessee. The Plaintiffs' claims arise out of injuries alleged to have been caused by a low-level propane explosion. The Plaintiffs seek to recover damages of $13.0 million. The Company denies any wrongdoing and intends to vigorously defend against the Plaintiffs' claims. The Company does not expect the final outcome of this case to have a material adverse effect on the financial condition, the results of operations, or the net cash flows of the Company because the Company believes that it has adequate insurance coverage for any damages that may be ultimately awarded. The Company is a party to other litigation matters and claims that arise out of the ordinary business of the Company. While the results of these litigation matters and claims cannot be predicted with certainty, the Company does not believe the final outcome of such litigation and claims will have a material adverse effect on the financial condition, the results of operations, or the cash flows of the Company because the Company believes that it has adequate insurance and reserves to cover any damages that may ultimately be awarded. 6. RELATED PARTY DATA The Parent Company's employees perform certain services for which the Company is billed at actual cost. In addition, common general and administrative labor and other operating costs and expenses are allocated to the Company based upon methods considered reasonable by management. Such charges for employee services amounted to $468,000, $389,000, and $426,000 in 1999, 1998, and 1997, respectively. Interest was charged by affiliated companies to the Company on short-term notes payable at an average rate of 5.89%, 6.69%, and 5.70% in 1999, 1998, and 1997, respectively. Total interest expense related to these notes amounted to $673,000, $279,000, and $26,000 in 1999, 1998, and 1997, respectively. Employees of the Company participate in the trusteed noncontributory defined benefit pension plan, the postretirement benefits plan, and the medical and dental insurance plans of the Parent Company, which cover substantially all full-time employees. The Company's share of the Parent Company's annual pension, postretirement benefit, and medical and dental insurance expenses amounted to $1,254,000, $634,000, and $639,000 in 1999, 1998, and 1997, respectively. 27
28 7. IMPACT OF YEAR 2000 - UNAUDITED The Company believes that the Parent Company, as operator of the Company, took the appropriate measures to ensure that the computer systems used in the operations of the Company were made year 2000 compliant prior to the millennium date change. As a result of those measures, the Company experienced no significant disruptions in mission-critical information technology and non-information technology systems and believes those systems successfully responded to the year 2000 date change. The Company is not aware of any material problems resulting from year 2000 issues, either with its products, its internal systems, or the products and services of third parties. 28
29 United Cities Propane Gas, Inc. Balance Sheet (Unaudited) JUNE 30 2000 (UNAUDITED) ------------ ASSETS Current assets: Cash $ 649,000 Receivables: Principally trade, less allowance for uncollectible accounts of $397,000 576,000 Accrued income taxes - receivable from Parent Company 1,358,000 Accrued income taxes receivable 1,110,000 Inventories 1,753,000 Other current assets 39,000 ------------ 5,485,000 Property and equipment: Land 1,776,000 Buildings and improvements 3,471,000 Furniture and fixtures 997,000 Propane equipment 27,825,000 Lease equipment 5,585,000 ------------ 39,654,000 Less accumulated depreciation (17,118,000) ------------ 22,536,000 Deferred charges and noncurrent assets: Noncompetition agreements, less accumulated amortization of $1,556,000 1,497,000 Goodwill, less accumulated amortization of $717,000 2,459,000 Other assets -- ------------ Total assets $ 31,977,000 ============ 29
30 United Cities Propane Gas, Inc. Balance Sheet (Unaudited) JUNE 30 2000 (UNAUDITED) ------------ LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable: Principally trade $ 97,000 Parent Company 3,676,000 Current portion of long-term debt 975,000 Short-term notes - due to Parent Company 13,162,000 Other current liabilities 1,144,000 ------------ 19,054,000 Long-term debt, net of current portion 3,694,000 Deferred credits and other liabilities: Obligations payable under noncompetition agreements, net of current portion 1,113,000 Deferred income taxes 1,330,000 Other liabilities 53,000 ------------ 2,496,000 Commitments and contingencies Shareholder's equity: Common stock, par value $10 per share: 1,000 Authorized, issued, and outstanding shares - 100 Paid-in capital 3,708,000 Retained earnings 3,024,000 ------------ Shareholder's equity 6,733,000 ------------ Total liabilities and shareholder's equity $ 31,977,000 ============ See accompanying notes. 30
31 United Cities Propane Gas, Inc. Statements of Operations and Retained Earnings NINE MONTHS ENDED JUNE 30 2000 1999 (UNAUDITED) (UNAUDITED) ------------ ------------ Operating revenues: Propane gas $ 18,852,000 $ 16,237,000 Merchandise 516,000 1,012,000 Rental 1,475,000 1,298,000 Transport services 552,000 550,000 ------------ ------------ Total operating revenues 21,395,000 19,097,000 Operating expenses: Cost of propane gas sold 11,501,000 7,898,000 Cost of merchandise sold 564,000 1,199,000 General, administrative, and selling 6,965,000 7,304,000 Depreciation 1,722,000 1,813,000 Amortization 369,000 323,000 ------------ ------------ Total operating expenses 21,121,000 18,537,000 ------------ ------------ Operating income 274,000 560,000 Other income (expense), net (8,000) 178,000 Interest income (expense): Interest income 190,000 216,000 Interest expense (1,112,000) (996,000) ------------ ------------ (922,000) (780,000) ------------ ------------ Loss before taxes (656,000) (42,000) Federal and state income tax benefit 225,000 12,000 ------------ ------------ Net loss $ (431,000) $ (30,000) ============ ============ Retained earnings, beginning of year $ 3,455,000 $ 4,259,000 Less: Net loss (431,000) (30,000) ------------ ------------ Retained earnings, end of year $ 3,024,000 $ 4,229,000 ============ ============ See accompanying notes. 31
32 United Cities Propane Gas, Inc. Statements of Cash Flows NINE MONTHS ENDED JUNE 30 2000 1999 (UNAUDITED) (UNAUDITED) ------------ ------------ OPERATING ACTIVITIES Net loss $ (431,000) $ (30,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 1,722,000 1,813,000 Amortization 369,000 323,000 Deferred income taxes 4,000 (1,211,000) (Gain) loss on sale of property and equipment 23,000 (168,000) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net 380,000 886,000 Inventories (288,000) 1,072,000 Accounts payable (1,381,000) (818,000) Noncompetition obligations (141,000) (87,000) Accrued taxes (129,000) 1,025,000 Other, net (486,000) (253,000) ------------ ------------ Net cash provided (used) by operating activities (358,000) 2,552,000 INVESTING ACTIVITIES Property and equipment additions (575,000) (631,000) Proceeds from retirements and other property sales 51,000 623,000 ------------ ------------ Net cash used in investing activities (524,000) (8,000) FINANCING ACTIVITIES Short-term borrowings, net (798,000) 3,462,000 Payments on long-term debt (956,000) (4,582,000) ------------ ------------ Net cash provided (used) by financing activities (1,754,000) (1,120,000) ------------ ------------ Net increase (decrease) in cash (2,636,000) 1,424,000 Cash at beginning of year 3,285,000 2,437,000 ------------ ------------ Cash at end of year $ 649,000 $ 3,861,000 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for income taxes $ -- $ -- ============ ============ Cash paid for interest $ 989,000 $ 978,000 ============ ============ See accompanying notes. 32
33 UNITED CITIES PROPANE GAS, INC. NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 2000 1. ACCOUNTING POLICIES DESCRIPTION OF BUSINESS United Cities Propane Gas, Inc. (the Company) is a wholly owned subsidiary of Atmos Energy Corporation (the Parent Company). The company is engaged in the retail distribution of propane (LP) gas and merchandise, the transportation of propane (LP) gas and other companies' products as well as the leasing of appliances and propane equipment. The Company has diversified customer classes, which consist primarily of residential, commercial, industrial and transport customers. Effective February 15, 2000, the Parent Company entered into an agreement to form a joint venture that combines 100% of the Company's operations with the propane operations of three other unrelated utility companies. Subsequently, the joint venture partners agreed to sell their operations to a publicly traded limited partnership for approximately $181,000,000 in cash and limited partnership units. Upon closing of this transaction, which occurred in August 2000, the joint venture referred to above owns all of the general partnership interest and approximately 34% of the limited partnership interest in the partnership. In the opinion of management, the unaudited financial statements included herein reflect all normal recurring adjustments necessary for a fair statement of the results of the interim period reflected. These interim financial statements and notes are condensed and should be read in conjunction with the financial statements and the notes included in the financial statements for the fiscal year ended September 30, 1999. Due to the seasonal nature of the Company's business, the results of operations for the nine-month period are not necessarily indicative of results of operations for a twelve-month period. INVENTORY Inventories are principally priced at average cost and are stated at lower of cost of market. The components of inventories are as follows: Propane Gas $1,118 Appliances 44 Appliance parts and fittings 591 ------ $1,753 ====== RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED The Company has not yet adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement will be effective for the Company's fiscal year 2001. It establishes accounting and reporting Standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. This Statement does not allow retroactive application to financial statements of prior periods. The Company's management has evaluated the impact of adopting the Statement and does not expect it to have a significant impact on its reported financial condition, results of operations, and cash flows. 33
34 UNITED CITIES PROPANE GAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. COMMITMENTS AND CONTINGENCIES LITIGATION The Company is a party to an action pending in the Circuit Court of Sevier County, Tennessee. The Plaintiffs' claims arise out of injuries alleged to have been caused by a low-level propane explosion. The Plaintiffs seek to recover damages of $13.0 million. The Company denies any wrongdoing and intends to vigorously defend against the Plaintiffs' claims. The Company does not expect the final outcome of this case to have a material adverse effect on the financial condition, the results of operations, or the net cash flows of the Company because the Company believes that it has adequate insurance coverage for any damages that may be ultimately awarded. The Company is party to other litigation matters and claims that arise out of the ordinary business of the Company. While the results of these litigation matters and claims cannot be predicted with certainty, the Company does not believe the final outcome of such litigation and claims will have a material adverse effect on the financial condition, the results of operations, or the cash flows of the Company because the Company believes that it has adequate insurance and reserves to cover any damages that may ultimately be awarded. 34
35 Report of Independent Auditors Board of Directors of AGL Propane, Inc.: We have audited the accompanying balance sheets of AGL Propane, Inc. (the "Company") as of September 30, 1999 and 1998, and the related statements of income, stockholder's equity, and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of AGL Propane, Inc. as of September 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche, LLP - -------------------------- October 2, 2000 35
36 AGL PROPANE, INC. BALANCE SHEETS SEPTEMBER 30, 1999 AND 1998 IN THOUSANDS 1999 1998 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,871 $ 5,001 Receivables (less allowance for uncollectible accounts of $499 in 1999 and $505 in 1998) 2,209 2,040 Receivable due from related parties 1,650 Inventory 2,670 2,815 Other current assets 257 310 -------- -------- Total current assets 8,657 10,166 -------- -------- PROPERTY, PLANT AND EQUIPMENT 27,888 25,847 Less accumulated depreciation 5,623 3,874 -------- -------- Property, plant, and equipment - net 22,265 21,973 -------- -------- GOODWILL 6,051 7,170 -------- -------- $ 36,973 $ 39,309 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 1,557 $ 888 Short-term debt 572 1,485 Payable due to related parties 3,473 Other accrued liabilities 2,160 2,134 -------- -------- Total current liabilities 4,289 7,980 -------- -------- LONG-TERM LIABILITIES: Deferred income taxes 5,075 4,954 Long-term debt 35 70 -------- -------- Total long-term liabilities 5,110 5,024 -------- -------- STOCKHOLDER'S EQUITY (see accompanying statements of stockholder's equity) 27,574 26,305 -------- -------- $ 36,973 $ 39,309 ======== ======== See notes to financial statements 36
37 AGL PROPANE, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997 IN THOUSANDS 1999 1998 1997 ------- ------- ------- OPERATING REVENUES $20,010 $23,380 $14,426 COST OF SALES 8,311 11,265 5,973 ------- ------- ------- OPERATING MARGIN 11,699 12,115 8,453 ------- ------- ------- OTHER OPERATING EXPENSES: Operation 6,693 7,461 5,051 Maintenance 428 224 648 Depreciation and amortization 2,080 1,806 1,203 Taxes other than income taxes 544 680 137 ------- ------- ------- Total other operating expenses 9,745 10,171 7,039 ------- ------- ------- OPERATING INCOME 1,954 1,944 1,414 ------- ------- ------- Other income 341 753 192 Interest expense 65 51 30 ------- ------- ------- INCOME BEFORE INCOME TAXES 2,230 2,646 1,576 Income taxes 961 1,125 679 ------- ------- ------- Net income $ 1,269 $ 1,521 $ 897 ======= ======= ======= See notes to financial statements. 37
38 AGL PROPANE, INC. STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997 IN THOUSANDS 1999 1998 1997 ------- ------- ------- EQUITY INVESTMENT OF PARENT Beginning of year $23,566 $23,566 $ 5,905 Acquisition of propane companies 17,661 ------- ------- ------- End of year 23,566 23,566 23,566 ------- ------- ------- RETAINED EARNINGS Beginning of year 2,739 1,218 321 Net income 1,269 1,521 897 ------- ------- ------- End of year 4,008 2,739 1,218 ------- ------- ------- Total stockholder's equity $27,574 $26,305 $24,784 ======= ======= ======= See notes to financial statements. 38
39 AGL PROPANE, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997 IN THOUSANDS 1999 1998 1997 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,269 $ 1,521 $ 897 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 2,080 1,806 1,203 Deferred income taxes 121 219 146 Changes in assets and liabilities: Inventory 145 1,098 442 Payables due to related parties (3,908) 600 1,350 Other -- net 419 104 899 ------- ------- ------- Net cash flow from operating activities 126 5,348 4,937 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,041) (3,307) (2,728) Loan to related party (1,215) ------- ------- ------- Net cash used in investing activities (3,256) (3,307) (2,728) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,130) 2,041 2,209 CASH AND CASH EQUIVALENTS AT Beginning of period 5,001 2,960 751 ------- ------- ------- End of period $ 1,871 $ 5,001 $ 2,960 ======= ======= ======= CASH PAID DURING PERIOD FOR: Income taxes $ 870 $ 1,038 $ 547 ======= ======= ======= See notes to financial statements. 39
40 AGL PROPANE, INC. NOTES TO FINANCIAL STATEMENTS AS OF THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998, AND FOR THE THREE YEARS ENDED SEPTEMBER 30, 1999 1. ORGANIZATION AGL Propane, Inc. ("AGL Propane" or the "Company") engages in the sale of propane and related products and services in Georgia, Alabama, North Carolina, and Tennessee. AGL Propane was originally incorporated on October 6, 1964 under the name Georgia Gas Service Company. Currently, AGL Propane is a wholly owned subsidiary of AGL Investments, Inc. ("AGLI"), which in turn is a wholly owned subsidiary of AGL Resources Inc. ("AGL Resources"). On August 9, 2000, assets and liabilities of AGL Propane were contributed to AGL Propane Services, Inc. ("AGL Propane Services"), another wholly owned subsidiary of AGLI. Subsequently, AGL Propane Services contributed certain assets and liabilities to U.S. Propane, L.P. ("US Propane") in exchange for a 22.36% interest in US Propane. US Propane is a joint venture between Piedmont Natural Gas Company, Inc.; TECO Energy, Inc.; Atmos Energy Corporation; and AGL Resources. 2. SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition - Sales of propane, propane appliances, parts and fittings are recognized at the time of delivery of the product to the customer or at the time of sale or installation. Revenue from service labor is recognized upon completion of the service, and tank rental revenue is recognized ratably over the period it is earned. Income Taxes - The reporting of AGL Propane's assets and liabilities for financial accounting purposes differs from the reporting for income tax purposes. The tax effects of the differences in those items are reported as deferred income tax assets or liabilities in AGL Propane's Balance Sheet. The operating results of AGL Propane are included in the consolidated federal income tax return of AGL Resources. The resulting income taxes are allocated to AGL Propane as if it were a separate taxpayer. Evaluation of Assets for Impairment - Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"), requires AGL Propane to review long-lived assets and certain intangibles for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is measured by comparing the undiscounted cash flows generated from a long-lived asset to its carrying value. Any impairment losses are reported in the period in which the recognition criteria are first applied based on the fair value of the asset. In accordance with SFAS 121, AGL Propane has evaluated its long-lived assets for financial impairment and believes that no asset impairments exist. Property, Plant, and Equipment - Property, plant, and equipment are recorded at original cost. Gains or losses from retired or otherwise-disposed-of property, plant, and equipment are recognized for the 40
41 difference between cost and accumulated depreciation. Depreciation is computed on a straight-line basis over the lives of various classes of property. Property, plant, and equipment consisted of the following at September 30, 1999 and 1998 (in thousands): USEFUL LIVES 1999 1998 ------------ ------------ ------------ Land and improvements 30 $ 1,268 $ 1,393 Buildings and improvements 30 2,432 2,096 Bulk storage, equipment, and facilities 30 2,984 3,239 Tanks and other equipment 20 14,225 13,036 Vehicles 7 5,631 4,898 Furniture and fixtures 7 731 603 Machinery and equipment 7 617 582 ------------ ------------ Property, plant, and equipment 27,888 25,847 Less accumulated depreciation (5,623) (3,874) ------------ ------------ Property, plant, and equipment - net $ 22,265 $ 21,973 ============ ============ Statement of Cash Flows - For the reporting of cash flows, cash equivalents are defined as highly liquid investments that mature in three months or less. Noncash investing and financing transactions include the following: o Purchase of GBJ Investment Co., Inc.; Jordan Gas Company, Inc.; Good Neighbor Gas Company, Inc.; Southern Butane Co., Inc.; Waters L.P. Gas, Inc.; J&H Propane, Inc.; and Jordan Gas Service, Inc. (collectively referred to as "Jordan Propane"). All the individual Jordan Propane companies were Alabama corporations, except for Good Neighbor Gas Company, Inc., which was a Georgia corporation. (See Note 3, Acquisitions) o Merger with Capitol Fuels, Inc. ("Capitol Fuels"), a Georgia corporation. (See Note 3, Acquisitions) o Purchase of Ocoee Gas Company, LLC ("Ocoee Gas"), a Tennessee limited liability company. (See Note 3, Acquisitions) Inventory - Inventory is valued at the lower of cost or market. The cost of inventory is determined by the first-in, first-out method. Inventory consists of the following at September 30, 1999 and 1998 (in thousands): 1999 1998 ---------- ---------- Fuel $ 1,317 1,600 Appliance, parts, and fittings 1,353 1,215 ---------- ---------- Inventory $ 2,670 $ 2,815 ========== ========== 41
42 Recently Issued Accounting Pronouncements - The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"), as amended by Statement of Financial Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133 ("SFAS 137"); and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities ("SFAS No. 138"). SFAS 133 and SFAS 138 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The impact of SFAS 133 and SFAS 138 on AGL Propane's financial statements is under review and is currently unknown. SFAS 133 is effective for AGL Propane on October 1, 2000. 3. ACQUISITIONS In February 1997, AGLI purchased Jordan Propane's issued and outstanding shares of capital stock for $14,492,000, of which $13,042,000 was paid in cash. The remaining purchase price of $1,450,000 was paid by the deliverance of a non-negotiable promissory note. (See Note 6, Short-Term Debt) In September 1997, AGLI purchased certain assets and liabilities of Ocoee Gas for $274,000 in cash, plus a $175,000 noncompete agreement and a $25,000 consulting agreement. AGLI principally financed these two acquisitions and subsequently dividended them to AGL Propane as an equity investment by AGLI. In June 1997, AGL Propane merged with Capitol Fuels. The merger was financed through AGL Resources' issuance of 200,000 shares of common stock in the amount of $3,875,000 and was dividended to AGL Propane as an equity investment by AGLI. AGL Resources and AGLI incurred costs of $470,000 related to these acquisitions which were accounted for as an additional equity investment by AGLI. The acquisitions have been accounted for using the purchase method and, accordingly, the purchase prices have been allocated to assets acquired and liabilities assumed based on the fair market values at the date of the acquisitions. The excess of the total purchase prices over the total fair market values of the net assets of $7,320,000, the majority of which relates to the Jordan Propane acquisition, has been recorded as goodwill, which is being amortized over 40 years. Amortization expense of $215,000, $214,000, and $136,000 was recognized in the years ended September 30, 1999, 1998, and 1997, respectively. 4. INCOME TAX EXPENSE The components of income tax expense for the years ended September 30, 1999, 1998 and 1997 are as follows (in thousands): 1999 1998 1997 ---------- ---------- ---------- Current: Federal $ 761 $ 820 $ 482 State 79 86 51 Deferred: Federal 110 198 132 State 11 21 14 ---------- ---------- ---------- Income tax expense $ 961 $ 1,125 $ 679 ========== ========== ========== For the three years in the period ended September 30, 1999, the provision for income taxes differs from the amount of income taxes determined by applying the applicable U.S. statutory federal income tax rate to income before taxes as a result of the following differences (in thousands): 42
43 1999 1998 1997 ---------- ---------- ---------- Statutory U.S. tax rates $ 795 $ 941 $ 562 Nondeductible goodwill 82 82 56 State income taxes 84 99 59 Other 3 2 ---------- ---------- ---------- Total $ 961 $ 1,125 $ 679 ========== ========== ========== The tax effect of temporary differences that give rise to the deferred income tax assets and liabilities at September 30, 1999 and 1998 is as follows (in thousands): 1999 1998 ---------- ---------- Current deferred tax asset: Allowance for doubtful accounts $ 164 $ 166 Other 25 44 Long-term deferred tax liability: Property, plant, and equipment (5,264) (5,164) ---------- ---------- Net long-term deferred tax liability $ (5,075) $ (4,954) ========== ========== 5. EMPLOYEE BENEFIT PLANS Substantially all of AGL Propane's employees are eligible to participate in its employee benefit plans. Employee Savings Plan Benefits - AGL Propane participates in a defined contribution plan, the Retirement Savings Plus Plan, which is sponsored by AGL Resources. AGL Propane made matching contributions to participant accounts in the following amounts: o $75,000 for fiscal 1999; o $143,000 for fiscal 1998; and o $60,000 for fiscal 1997 6. SHORT-TERM DEBT In conjunction with the acquisition of Jordan Propane in February 1997, AGL Propane issued to Jordan's shareholders a non-negotiable promissory note for $1,450,000 with an interest rate of 9.25%, which was guaranteed by AGL Propane's parent, AGLI. (See Note 3, Acquisitions) The promissory note's maturity date was the eighteen-month anniversary of the closing date or August 1998. Therefore, as of September 30, 1998, the promissory note was classified as short-term debt. In 1999, AGL Propane fully settled the debt with a payment to the Jordan family in the amount of $538,000. The reduction in the promissory note was due to the resolution of certain contingencies and was accounted for as a reduction in goodwill. 43
44 7. COMMITMENTS AND CONTINGENCIES Total rental expense for property and equipment was as follows: o $15,000 for fiscal 1999; o $45,000 for fiscal 1998; and o No rental expense for fiscal 1997 Minimum annual rentals under noncancelable operating leases are as follows: o Fiscal 2000 - $22,000; o Fiscal 2001 - $18,000; o Fiscal 2002 - $17,000; and o Fiscal 2003 - $4,000 8. RELATED PARTIES Payables Due to Related Parties - consists primarily of amounts due to AGL Resources for current income taxes. Receivables Due from Related Parties - consists of $1,215,000 payable from Utilipro, Inc., a wholly owned subsidiary of AGL Resources Inc., in accordance with a Note Agreement dated April 16, 1999. Interest accrues at a rate of 8.075% annually with a maturity date of June 1, 2000. Interest income recognized during 1999 was $33,000. All interest was accrued and unreceived as of September 30, 1999. The remaining receivable due from related parties is associated with excess cash advanced to AGL Resources. 9. LONG-TERM DEBT In conjunction with the acquisition of Capitol Fuels in June 1997, AGL Propane entered into a non-compete agreement for $175,000, payable over a five-year period. Amounts payable related to this agreement at September 30, 1999 are as follows: o Fiscal 2000 - $35,000 o Fiscal 2001 - $35,000 44
45 AGL PROPANE, INC. BALANCE SHEETS (UNAUDITED) JUNE 30, 2000 IN THOUSANDS 2000 ------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,480 Receivables (less allowance for uncollectible accounts of $723) 1,398 Inventory 1,594 Other current assets 264 ------- Total current assets 4,736 ------- PROPERTY, PLANT AND EQUIPMENT 28,858 Less accumulated depreciation 6,922 ------- Property, plant, and equipment -- net 21,936 ------- GOODWILL 5,866 ------- $32,538 ======= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable -- trade $ 182 Short-term debt 35 Payable due to related parties 133 Other accrued liabilities 1,526 ------- Total current liabilities 1,876 ------- LONG-TERM LIABILITIES: Deferred income taxes 4,980 ------- Total long-term liabilities 4,980 ------- STOCKHOLDER'S EQUITY 25,682 ------- $32,538 ======= See notes to financial statements 45
46 AGL PROPANE, INC. STATEMENTS OF INCOME (UNAUDITED) FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999 IN THOUSANDS 2000 1999 -------- -------- OPERATING REVENUES $ 19,183 $ 16,142 COST OF SALES 9,948 6,456 -------- -------- OPERATING MARGIN 9,235 9,686 -------- -------- OTHER OPERATING EXPENSES: Operation 5,139 5,480 Maintenance 398 214 Depreciation and amortization 1,611 1,566 Taxes other than income taxes 487 438 -------- -------- Total other operating expenses 7,635 7,698 -------- -------- OPERATING INCOME 1,600 1,988 -------- -------- Other income 253 236 Interest expense (5) (46) -------- -------- INCOME BEFORE INCOME TAXES 1,848 2,178 Income taxes 739 871 -------- -------- Net income $ 1,109 $ 1,307 ======== ======== See notes to financial statements. 46
47 AGL PROPANE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999 IN THOUSANDS 2000 1999 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,109 $ 1,307 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 1,611 1,566 Deferred income taxes (95) 248 Changes in assets and liabilities: Inventory 1,076 312 Payables due to related parties 567 (2,645) Other -- net (1,331) (436) ------- ------- Net cash flow from operating activities 2,937 352 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of short-term debt (572) ------- ------- Net cash used in financing activities (572) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (971) (1,960) Repayment of loan to related party 1,215 (1,215) Dividend paid to parent (3,000) ------- ------- Net cash used in investing activities (2,756) (3,175) ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (391) (2,823) CASH AND CASH EQUIVALENTS AT Beginning of period 1,871 5,001 ------- ------- End of period $ 1,480 $ 2,178 ======= ======= CASH PAID DURING PERIOD FOR: Income taxes $ 450 $ 839 ======= ======= See notes to financial statements. 47
48 AGL PROPANE, INC. NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999 1. ORGANIZATION AGL Propane, Inc. ("AGL Propane") engages in the sale of propane and related products and services in Georgia, Alabama, North Carolina and Tennessee. AGL Propane was originally incorporated on October 6, 1964 under the name Georgia Gas Service Company. Currently, AGL Propane is a wholly owned subsidiary of AGL Investments, Inc, ("AGLI"), which in turn is a wholly owned subsidiary of AGL Resources, Inc. ("AGL Resources"). On August 9, 2000, assets and liabilities of AGL Propane were contributed to AGL Propane Services, Inc. ("AGL Propane Services"), another wholly-owned subsidiary of AGLI. Subsequently, AGL Propane Services contributed certain assets and liabilities to U.S. Propane, L. P. ("US Propane") in exchange for a 22.36% interest in US Propane. US Propane is a joint venture between Piedmont Natural Gas Company, Inc., TECO Energy, Inc., Atmos Energy Corporation and AGL Resources. 2. SIGNIFICANT ACCOUNTING POLICIES In the opinion of management, the unaudited financial statements included herein reflect all normal recurring adjustments necessary for a fair statement of the results of the interim period reflected. These interim financial statements and notes are condensed and should be read in conjunction with the financial statements and the notes included in the financial statements for the fiscal year ended September 30, 1999. Due to the seasonal nature of AGL Propane's business, the results of operations for the nine-month period are not necessarily indicative of results of operations for a twelve-month period. Recently Issued Accounting Pronouncements - The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"), as amended by Statement of Financial Standards No. 137 ("SFAS 137") and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities ("SFAS No. 138"). SFAS 133 and SFAS 138 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The impact of SFAS 133 and SFAS 138 on AGL Propane's financial statements is currently unknown. 48
49 Property, Plant and Equipment - Property, plant and equipment is recorded at original cost. Gains or losses from retired or otherwise-disposed-of property, plant and equipment are recognized for the difference between cost and accumulated depreciation. Depreciation is computed on a straight-line basis over the lives of various classes of property. Property, plant and equipment consisted of the following at June 30, 2000: Land and improvements $ 1,471 Buildings and improvements 2,442 Bulk storage, equipment, and facilities 3,078 Tanks and other equipment 14,788 Vehicles 5,657 Furniture and fixtures 787 Machinery and equipment 635 -------- Property, plant, and equipment 28,858 Less accumulated depreciation (6,922) -------- Property, plant, and equipment - net $ 21,936 ======== Inventory - Inventories are valued at the lower of cost or market. The cost of fuel inventories and appliances is determined by the first-in, first-out method. Inventories consist of the following at June 30, 2000: Fuel $ 439 Appliance, parts, and fittings 1,155 -------- Inventory $ 1,594 ======== 49
50 Report of Independent Auditors We have audited the accompanying balance sheets of Piedmont Propane Company (the Company) as of October 31, 1999 and 1998, and the related statements of income and retained earnings and of cash flows for each of the three years in the period ended October 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte and Touche - ----------------------- October 6, 2000 50
51 PIEDMONT PROPANE COMPANY BALANCE SHEETS OCTOBER 31, 1998 AND 1999 AND JULY 31, 2000 (UNAUDITED) JULY 31, 2000 (UNAUDITED) 1999 1998 ----------- ----------- ----------- Current Assets: Cash and cash equivalents $ 1,508,082 $ 1,907,650 $ 837,684 Accounts receivable, less allowance for doubtful accounts of $416,479 in 2000, $248,952 in 1999 and $280,902 in 1998 1,538,180 2,134,740 1,378,517 Inventories: Liquid propane 2,619,306 2,640,267 1,790,868 Materials, supplies and other 756,155 1,055,915 997,929 Prepaid Expenses: Liquid propane inventory 2,789,265 2,704,340 2,719,250 Insurance 24,235 34,802 -- Other 1,087 10,423 3,918 ----------- ----------- ----------- Total current assets 9,236,310 10,488,137 7,728,166 ----------- ----------- ----------- Property, Plant and Equipment, less accumulated depreciation of $19,424,668 in 2000, $17,911,237 in 1999 and $16,459,609 in 1998 23,910,058 24,862,765 25,352,929 Due From Parent 21,881,801 16,571,896 15,924,688 Deferred Charges and Other Assets: Organization costs -- 8,164 8,164 Goodwill, less accumulated amortization of $776,366 in 2000, $712,968 in 1999 and $628,438 in 1998 2,799,350 2,862,748 2,947,279 Covenants not to compete, less accumulated amortization of $497,839 in 2000, $443,521 in 1999 and $391,215 in 1998 78,161 75,337 42,503 Deferred expenses -- -- 9,524 ----------- ----------- ----------- Total deferred charges and other assets 2,877,511 2,946,249 3,007,470 ----------- ----------- ----------- Total Assets $57,905,680 $54,869,047 $52,013,253 =========== =========== =========== See notes to financial statements. 51
52 PIEDMONT PROPANE COMPANY BALANCE SHEETS OCTOBER 31, 1998 AND 1999 AND JULY 31, 2000 (UNAUDITED) JULY 31, 2000 1999 1998 ----------- ----------- ----------- (UNAUDITED) Current Liabilities: Accounts payable - trade $ 2,607,552 $ 2,279,643 $ 1,516,972 Accounts payable - parent 3,819,984 1,106,495 795,837 Accrued liquid propane inventory 701,205 1,270,324 292,629 Unearned finance charges 20,859 22,456 22,149 Accrued insurance 214,509 411,863 512,559 General taxes payable 207,954 142,745 155,585 Income taxes payable 338,979 526,914 583,629 Other 71,925 149,151 115,186 ----------- ----------- ----------- Total current liabilities 7,982,967 5,909,591 3,994,546 ----------- ----------- ----------- Deferred Credits and Other Liabilities: Deferred income taxes 8,295,687 8,027,515 7,759,343 Customer deposits 161,606 166,284 166,328 Escheats payable 74,389 74,389 85,534 Other -- 1,995 -- ----------- ----------- ----------- Total deferred credits and other liabilities 8,531,682 8,270,183 8,011,205 ----------- ----------- ----------- Shareholder's Equity: Common stock, par value $10 per share, 10,000 shares authorized, 101 shares outstanding 1,010 1,010 1,010 Additional paid-in capital 16,270,647 16,270,647 16,270,647 Retained earnings 25,119,374 24,417,616 23,735,845 ----------- ----------- ----------- Total shareholder's equity 41,391,031 40,689,273 40,007,502 ----------- ----------- ----------- Total Liabilities and Shareholder's Equity $57,905,680 $54,869,047 $52,013,253 =========== =========== =========== See notes to financial statements. 52
53 PIEDMONT PROPANE COMPANY STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 AND THE NINE MONTHS ENDED JULY 31, 2000 AND 1999 (UNAUDITED) NINE MONTHS ENDED JULY 31 YEARS ENDED OCTOBER 31, 2000 1999 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Propane $28,488,591 $19,838,621 $26,265,628 $29,072,079 $34,897,661 Appliance sales 607,248 538,013 826,917 693,850 758,287 Service work 548,249 489,639 730,599 636,458 704,901 Tank rentals 288,399 266,667 419,237 371,530 392,252 Miscellaneous 34,949 3,500 7,002 14,672 62,593 ----------- ----------- ----------- ----------- ----------- Total revenues 29,967,436 21,136,440 28,249,383 30,788,589 36,815,694 ----------- ----------- ----------- ----------- ----------- Costs and expenses: Cost of goods sold 18,434,261 10,305,176 14,383,088 16,436,965 21,675,118 General, administrative and selling 7,853,551 7,925,999 9,772,634 9,211,441 9,736,978 Depreciation and amortization 1,743,186 1,801,305 2,132,841 2,183,570 2,216,015 General taxes 583,449 629,386 657,324 619,346 687,722 ----------- ----------- ----------- ----------- ----------- Total costs and expenses 28,614,447 20,661,866 26,945,887 28,451,322 34,315,833 ----------- ----------- ----------- ----------- ----------- Operating income 1,352,989 474,574 1,303,496 2,337,267 2,499,861 ----------- ----------- ----------- ----------- ----------- Other income (expense): Interest income 217,262 114,417 144,724 174,039 281,807 Interest expense (339,561) (298,995) (406,865) (614,627) (618,735) Other, net (51,935) 72,323 109,364 54,050 62,017 ----------- ----------- ----------- ----------- ----------- Total other income (expense) (174,234) (112,255) (152,777) (386,538) (274,911) ----------- ----------- ----------- ----------- ----------- Income before income taxes 1,178,755 362,319 1,150,719 1,950,729 2,224,950 ----------- ----------- ----------- ----------- ----------- Income taxes: Federal 406,592 127,019 387,085 654,304 743,455 State 70,405 23,365 81,863 136,499 154,458 ----------- ----------- ----------- ----------- ----------- Total income taxes 476,997 150,384 468,948 790,803 897,913 ----------- ----------- ----------- ----------- ----------- Net income 701,758 211,935 681,771 1,159,926 1,327,037 Retained earnings at beginning of period 24,417,616 23,735,845 23,735,845 22,575,919 21,248,882 ----------- ----------- ----------- ----------- ----------- Retained earnings at end of period $25,119,374 $23,947,780 $24,417,616 $23,735,845 $22,575,919 =========== =========== =========== =========== =========== See notes to financial statements. 53
54 PIEDMONT PROPANE COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 AND THE NINE MONTHS ENDED JULY 31, 2000 AND 1999 (UNAUDITED) NINE MONTHS ENDED JULY 31, YEARS ENDED OCTOBER 31, 2000 1999 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash Flows From Operating Activities: Net income $ 701,758 $ 211,935 $ 681,771 $ 1,159,926 $ 1,327,037 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,743,186 1,801,305 2,132,841 2,183,570 2,216,015 (Gain) loss on sale of fixed assets 18,032 (40,388) (64,774) (2,685) (9,884) Changes in assets and liabilities: Accounts receivable 596,560 805,192 (756,223) 568,809 664,216 Inventories 320,721 702,515 (907,385) 730,735 381,819 Prepaid expenses (65,022) 2,581,979 (26,397) (145,498) (287,817) Other assets 60,317 (38,563) (94,323) (89,301) (107,266) Accounts payable - trade 327,909 (990,486) 762,671 (1,019,111) 669,718 Income taxes payable (187,935) (107,106) (56,715) (372,197) (1,269,347) Other liabilities 2,174,104 257,694 1,478,473 (538,873) (738,912) ----------- ----------- ----------- ----------- ----------- Total adjustments 4,987,872 4,972,142 2,468,168 1,315,449 1,518,542 ----------- ----------- ----------- ----------- ----------- Net cash provided by operating activities 5,689,630 5,184,077 3,149,939 2,475,375 2,845,579 ----------- ----------- ----------- ----------- ----------- Cash Flows From Investing Activities: Capital expenditures (755,492) (1,127,200) (1,429,136) (983,941) (1,491,206) Business acquisitions -- -- -- (121,054) (1,845,645) Covenants not to compete (67,571) (51,143) (63,543) (75,143) (59,143) Proceeds from sale of property 37,105 26,651 58,699 34,713 291,554 Excess cash, net of tax payments, transferred (to) from the parent (5,303,240) (4,245,993) (645,993) (1,572,651) 235,164 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (6,089,198) (5,397,685) (2,079,973) (2,718,076) (2,869,276) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (399,568) (213,608) 1,069,966 (242,701) (23,697) Cash and cash equivalents at beginning of period 1,907,650 837,684 837,684 1,080,385 1,104,082 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 1,508,082 $ 624,076 $ 1,907,650 $ 837,684 $ 1,080,385 =========== =========== =========== =========== =========== Cash Paid During the Year for income taxes $ -- $ 3,484 $ 3,484 $ 123,750 $ 346,425 See notes to financial statements. 54
55 PIEDMONT PROPANE COMPANY NOTES TO FINANCIAL STATEMENTS (Information as of July 31, 2000, and for the nine months ended July 31, 1999 and 2000, is unaudited.) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Corporate Structure and Operations. Piedmont Propane Company was formed in 1987 and is a wholly owned subsidiary of Piedmont Natural Gas Company, Inc. (the Parent). Propane markets liquid propane and propane appliances to residential, commercial and industrial customers within and adjacent to the Parent's three-state service area. The three-state service area consists of the Piedmont region of North Carolina and South Carolina and the metropolitan Nashville, Tennessee, area. The financial statements have been prepared from the separate records maintained by us and may not necessarily be indicative of the conditions that would have existed or the results of operations if we had been operated as an unaffiliated company. Portions of certain income and expenses represent allocations made from the Parent applicable to the consolidated company as a whole. B. Long-lived Assets and Intangibles. Property, plant and equipment is stated at cost. Expenditures for maintenance and routine repairs are expensed as incurred. Depreciation is calculated using the straight-line method based on estimated useful lives of the assets ranging from five to 35 years. Intangible assets, consisting of goodwill, covenants not to compete and organizational costs, are stated at cost, net of amortization. Goodwill is amortized over 40 years using the straight-line method. Amortization expense totaled $221,817, $162,430 and $163,722 for the years ended October 31, 1997, 1998 and 1999, respectively. Noncompetition agreements with certain previous owners of acquired properties are being amortized over the terms of the agreements. Amounts payable under the noncompetition agreements total $73,142 for 2000, $16,000 for 2001, $10,000 for 2002 and none thereafter. We review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our reviews have not resulted in a material effect on results of operations or financial condition. C. Inventories. Inventories are stated at the lower of cost or market. Inventory is charged to cost of goods sold using the weighted average cost method. In addition to inventories on hand, we also enter into contracts to purchase propane to meet a portion of our supply requirements. Generally, such contracts have terms of less than one year and call for payment based on either fixed prices or market prices at the date of delivery. D. Operating Revenues. We recognize revenue from liquid propane sales when the product is delivered to customers. Service labor is recognized when the job is completed. Tank installation revenues are recognized when the tank is installed. Tank rental revenues are recognized on a monthly basis. Revenues from appliance sales are recognized when the appliance is installed. For appliances that are financed, the unearned finance revenue is recognized as the customer pays for the appliance. 55
56 E. Income Taxes. We provide deferred income taxes for differences between the book and tax basis of assets and liabilities, principally attributable to accelerated tax depreciation. F. Statement of Cash Flows. We use the indirect method to report cash flows from operating activities, which requires adjustments to net income to reconcile net cash flows provided by operating activities. We consider all highly liquid debt instruments with a maturity of three months or less as cash equivalents. G. Business Segments. We have no other reportable segments. H. Use of Estimates. We make estimates and assumptions when preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. I. Recently Issued Accounting Standards. Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), requires all derivative instruments to be recognized on the balance sheet at their fair value. Changes in the fair value of derivatives are to be recorded each period either in other comprehensive income or in current earnings depending on the use of the derivative and whether it qualifies for hedge accounting. FAS 133, as amended by SFAS No. 137 and No. 138 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. We are currently evaluating the effects of FAS 133 on financial position and results of operations. J. Unaudited Interim Results. The accompanying balance sheet as of July 31, 2000, and the statements of income and retained earnings and cash flows for the nine months ended July 31, 1999 and 2000, are unaudited. We have prepared these statements on the same basis as the audited financial statements and have included all normal recurring adjustments necessary for the fair presentation of these periods. Our business is seasonal in nature. The results of operations for the nine-month period ended July 31, 2000, do not necessarily reflect the results to be expected for the full year. 56
57 NOTE 2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at October 31, 1998 and 1999: 1998 1999 ----------- ----------- Land and improvements $ 917,724 $ 1,023,987 Buildings and improvements 1,036,057 1,140,852 Transportation equipment 8,740,233 8,899,818 Furniture and fixtures 246,691 251,548 Storage facilities 3,164,331 3,209,795 Equipment, primarily cylinders and tanks 25,017,084 25,402,051 Refueling stations 994,486 991,486 Computer equipment 412,948 623,267 Communications equipment 276,356 315,568 Tools and other small equipment 410,835 424,804 Leased property 158,727 162,555 Other 437,066 274,124 Construction work in progress -- 54,147 ----------- ----------- Gross property, plant and equipment 41,812,538 42,774,002 Less accumulated depreciation 16,459,609 17,911,237 ----------- ----------- Net property, plant and equipment $25,352,929 $24,862,765 =========== =========== Depreciation expense totaled $1,994,198, $2,021,140 and $1,969,119 for the years ended October 31, 1997, 1998 and 1999, respectively. NOTE 3. FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE The carrying amounts in the balance sheets of cash and cash equivalents, receivables and accounts payable approximated their fair values due to the short-term maturities of these financial instruments. NOTE 4. LEASES We lease certain propane equipment to nonaffiliated third parties. All existing leases are cancelable operating leases. We lease certain operational facilities from nonaffiliated third parties under noncancelable operating leases expiring in various years through 2006. Future minimum lease payments under these leases at October 31, 1999, for each of the five succeeding years and thereafter are as follows: 2000 $ 210,352 2001 125,547 2002 88,672 2003 80,272 2004 48,602 Thereafter 7,500 ---------- Total future minimum lease payments $ 560,945 ========== Rental expense under the operating leases totaled $255,127, $247,012 and $229,536 for the years ended October 31, 1997, 1998 and 1999, respectively. Certain operating leases provide for renewal. These renewal options vary from month-to-month renewals to one and two successive five-year terms at their fair rental value at the time of renewal. 57
58 NOTE 5. MARKET AND CREDIT RISKS We are subject to commodity price risks to the extent that propane market prices deviate from fixed contract settlement amounts. Because our profitability is sensitive to changes in wholesale propane costs, we generally seek to pass on increases in the cost of propane to customers. However, we can give no assurance that we will always be able to pass on product cost increases fully, particularly when product costs rise rapidly. We have financial instruments such as trade accounts receivable which could expose us to concentrations of credit risk. The credit risk from trade accounts receivable is limited because of our large customer base. NOTE 6. EMPLOYEE BENEFIT PLANS We participate with the Parent and its affiliates in a defined-benefit pension plan. Plan benefits are generally based on credited years of service and the level of compensation during the five consecutive years of the last ten years prior to retirement during which the participant received the highest compensation. Amounts allocated to us for pension costs were $274,363, $300,528 and $341,911 for the years ended October 31, 1997, 1998 and 1999, respectively. The Parent's policy is to fund the plan in an amount not in excess of the amount that is deductible for income tax purposes. Plan assets consist primarily of marketable securities and cash equivalents. As of October 31, 1998 and 1999, with respect to the entire plan, the fair value of plan assets exceeded the projected benefit obligation. We participate with the Parent and its affiliates in a postretirement benefit plan that provides health care and life insurance benefits to substantially all full-time regular employees. Amounts allocated to us for postretirement benefit costs were $77,053, $81,886 and $85,535 for the years ended October 31, 1997, 1998 and 1999, respectively. As of October 31, 1998 and 1999, with respect to the entire plan, the liability associated with such benefits was funded in irrevocable trust funds which can only be used to pay the benefits. We participate with the Parent and its affiliates in salary investment plans, which are profit-sharing plans under Section 401(a) of the Internal Revenue Code of 1986, as amended (the Tax Code), which include qualified cash or deferred arrangements under Tax Code Section 401(k). Employees who have completed six months of service are eligible to participate. Participants are permitted to defer a portion of their base salary to the plans and we match a portion of the participants' contributions. All contributions vest immediately. For the years ended October 31, 1997, 1998 and 1999, we contributed $135,792, $152,289 and $150,327, respectively, in matching contributions to the plans. NOTE 7. DEBT As of October 31, 1998 and 1999, total long-term debt, net of current maturities, of the Parent was $371,000,000 and $423,000,000, respectively. Interest expense is allocated to us on a monthly basis based on the level of certain assets and at the Parent's debt to equity ratio. Amounts allocated to us for long-term interest costs were $484,722, $409,550 and $318,150 for the years ended October 31, 1997, 1998 and 1999, respectively. The average embedded interest cost of long-term debt over the three-year period was 8.30%. We also borrow money on a short-term basis at the Parent's cost of money. Amounts allocated to us for short-term interest costs were $86,336, $158,312 and $50,886 for the years ended October 31, 1997, 1998 and 1999, respectively. NOTE 8. BUSINESS COMBINATIONS On March 11, 1997, we sold our ice business and related assets known as the Southern Ice Company for approximately $251,000. On June 20, 1997, we purchased certain assets from Lynchburg Gas, Inc., doing business as Lincoln-Moore County Propane, for approximately $770,000. We also entered into noncompetition agreements with prior owners totaling $30,003 to be paid over five years. 58
59 On August 27, 1997, we purchased certain assets from McCombs Oil Company, Inc., for approximately $1,250,000, plus liquid propane inventories. We also entered into noncompetition agreements with prior owners totaling $50,000 to be paid over five years. On November 13, 1997, we purchased certain assets from Metro Gas, Inc., for approximately $160,000. We also entered into a noncompetition agreement with a former owner for three years for $25,000 payable immediately. NOTE 9. CONTINGENCIES AND COMMITMENTS We have been named as a defendant in various legal actions arising in the normal course of business. We cannot predict with certainty the final results of these matters; however, we are of the opinion that there are no known claims that are likely to have a material adverse effect on financial condition, results of operations or cash flows. During the year ended October 31, 1997, and the period November 1, 1997 through May 31, 1998, we guaranteed up to $5,000,000 related to debt for certain working funds and other general purposes for a joint venture of a subsidiary of the Parent. As of June 1998, the joint venture was terminated and we no longer guarantee this debt. Effective July 1, 1998, a subsidiary of the Parent became a member of SouthStar Energy Services LLC (SouthStar). Effective November 1, 1998, we agreed to guaranty a portion of SouthStar's obligations to Atlanta Gas Light Company (AGL) for the pipeline capacity it furnishes SouthStar in accordance with the member's share that this subsidiary of the Parent has in SouthStar. As a condition of the indemnification agreement, we are required to maintain stockholder's equity of at least $30,000,000. On May 18, 2000, Dynegy Holdings Inc. agreed to guaranty SouthStar's obligations to AGL and our indemnification agreement is now with Dynegy Holdings Inc. We have also guaranteed up to $7,500,000 related to bank borrowings for certain working funds and other general purposes for SouthStar. NOTE 10. RELATED PARTY TRANSACTIONS The Parent performs certain engineering and payroll processing services for us for which we were billed $13,044, $10,922 and $8,442 for the years ended October 31, 1997, 1998 and 1999, respectively. We have an agreement with the Parent to purchase, transport, store, if necessary, and deliver propane for use by the Parent for an annual service fee of $50,000. The Parent purchases propane from us for operations. These purchases totaled $483,939, $269,319 and $244,569 for the years ended October 31, 1997, 1998 and 1999, respectively. NOTE 11. TAXES We file a consolidated federal income tax return with the Parent. We include in our statements of income a provision for tax expense calculated on a separate return basis. The consolidated tax liability is allocated to us based on the ratio of our taxable income to the total consolidated group. Our net deferred tax liability consists primarily of accelerated tax depreciation and amortization. The components of income tax expense for the years ended October 31, 1997, 1998 and 1999, are as follows: 1997 1998 1999 ------------------------- ------------------------- ------------------------- FEDERAL STATE FEDERAL STATE FEDERAL STATE ---------- ---------- ---------- ---------- ---------- ---------- Current $ 455,945 $ 90,828 $ 305,864 $ 101,389 $ 166,377 $ 34,399 Deferred 287,510 63,630 348,440 35,110 220,708 47,464 ---------- ---------- ---------- ---------- ---------- ---------- Total income tax expense $ 743,455 $ 154,458 $ 654,304 $ 136,499 $ 387,085 $ 81,863 ========== ========== ========== ========== ========== ========== 59
60 A reconciliation of income tax expense at the federal statutory rate to recorded income tax expense for the years ended October 31, 1997, 1998 and 1999, is as follows: 1997 1998 1999 ---------- ---------- ---------- Federal taxes at 35% $ 778,732 $ 682,755 $ 402,752 State income taxes, net of federal benefit 101,235 92,556 49,096 Other, net 17,946 15,492 17,100 ---------- ---------- ---------- Total income tax expense $ 897,913 $ 790,803 $ 468,948 ========== ========== ========== NOTE 12. ENVIRONMENTAL MATTERS Since 1967, the Parent has owned real property in Hickory, North Carolina, which was acquired in conjunction with the acquisition of Carolina Natural Gas Company (CNG). CNG operated a manufactured gas plant (MGP) facility at or near this site, but at the time of the acquisition the facility was no longer being operated. In 1982, this property was transferred to our books. The Parent has recorded an environmental liability for this site based on a generic MGP site study as no site-specific evaluation has been performed. NOTE 13. SUBSEQUENT EVENTS We signed an agreement on February 15, 2000, to form a joint venture, US Propane, L.P., combining our propane operations with the propane operations of three other companies. On June 15, 2000, US Propane announced that it would combine with Heritage Holdings, Inc., the general partner of Heritage Propane Partners, L.P. The formation of US Propane and the combination with Heritage was complete on August 10, 2000. US Propane contributed all of its assets to Heritage for approximately $181,000,000 in cash and limited partner units and purchased all of the outstanding common stock of Heritage Holdings for approximately $120,000,000. US Propane now owns all of the general partnership interest and approximately 34% of the limited partnership interest in the partnership 60
1 EXHIBIT 99.3 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements present (i) unaudited pro forma balance sheet data at June 30, 2000, giving effect to the Merger (as defined below) as if the Merger had been consummated on that date and (ii) unaudited pro forma operating data for the six months ended June 30, 2000 and the year ended December 31, 1999, giving effect to the Merger as if the Merger had been consummated on January 1, 1999. The unaudited pro forma combined balance sheet data at June 30, 2000 combines balance sheets of Peoples Gas Company (Peoples Gas) as of June 30, 2000, Heritage Propane Partners, L.P. (Heritage) as of May 31, 2000, United Cities Propane Gas, Inc. (United Cities) as of June 30, 2000, Piedmont Propane Company (Piedmont) as of July 31, 2000 and AGL Propane, Inc. (AGL) as of June 30, 2000, after giving effect to pro forma adjustments. The unaudited pro forma combined statements of operations for the six months ended June 30, 2000 and the year ended December 31, 1999, combine the results of operations for Peoples Gas' six months ended June 30, 2000, and fiscal year ended December 31, 1999, with the results of operations for Heritage's six months ended May 31, 2000, and 12 months ended November 30, 1999, United Cities' six months ended March 31, 2000, and year ended September 30, 1999, Piedmont's six months ended April 30, 2000, and year ended October 31, 1999, and AGL's six months ended March 31, 2000, and year ended September 30, 1999, after giving effect to pro forma adjustments. Immediately prior to the transaction with Heritage Holdings, Inc., TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural Gas Co., Inc., and AGL Resources, Inc. contributed each companies' propane operations, Peoples Gas, United Cities, Piedmont and AGL, respectively, to U.S. Propane L.P., (U.S. Propane) in exchange for equity interests in U.S. Propane. The merger was accounted for as an acquisition using the purchase method of accounting with Peoples Gas being the acquirer. Accordingly, Peoples Gas' assets and liabilities were recorded at historical cost and the assets and liabilities of United Cities, Piedmont and AGL were recorded at fair market value, as determined based on a valuation and appraisal. In August 2000, U.S. Propane obtained control of Heritage by acquiring Heritage Holdings, Inc., Heritage's general partner. U.S. Propane simultaneously transferred its propane operations to Heritage in exchange for cash, common units in Heritage and a limited partner interest in Heritage Operating, L.P. The merger will be accounted for as a reverse acquisition in accordance with Accounting Principles Board Opinion No. 16. Although Heritage is the surviving entity for legal purposes, U.S. Propane's propane operations will be the acquirer for accounting purposes. The assets and liabilities of Heritage will be reflected at fair value to the extent acquired by U.S. Propane in accordance with EITF 90-13. The assets and liabilities of U.S. Propane's propane operations will be reflected at historical cost, as recorded in the U.S. Propane merger described above. A final determination of purchase accounting adjustments, including the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values, has not been made. Accordingly, the purchase accounting adjustments made in connection with the development of the following summary pro forma combined financial statements are preliminary and have been made solely for purposes of developing such pro forma combined financial statements. However, management does not believe that final adjustments will be materially different from the amounts presented herein. The following unaudited pro forma combined financial statements are provided for informational purposes only and should be read in conjunction with the separate audited consolidated financial statements and related notes of Peoples Gas, United Cities, Piedmont and AGL (which are included elsewhere in this Form 8-K/A) and Heritage (which are filed with Heritage's Annual Report filed on Form 10-K with the Securities and Exchange Commission on November 29, 1999, incorporated herein by reference). The following unaudited pro forma combined financial statements are based on certain assumptions and do not purport to be indicative of the results which actually would have been achieved if the Merger had been consummated on the dates indicated or which may be achieved in the future.
2 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS (1) JUNE 30, 2000 (IN THOUSANDS) Piedmont Peoples Gas Propane AGL Propane, Company Company Inc. (Historical) (Historical) (Historical) -------------- -------------- -------------- ASSETS CURRENT ASSETS: Cash $ 11 $ 1,508 $ 1,480 Accounts receivable 4,206 1,538 1,398 Inventories 1,541 3,375 1,594 Marketable securities -- -- -- Prepaid expenses 14 2,815 264 -------------- -------------- -------------- Total current assets 5,772 9,236 4,736 PROPERTY, PLANT AND EQUIPMENT, net 40,887 23,910 21,936 DUE FROM PARENT -- 21,882 -- INTANGIBLES AND OTHER ASSETS, net 1,284 2,878 5,866 -------------- -------------- -------------- Total assets $ 47,943 $ 57,906 $ 32,538 ============== ============== ============== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Working capital facility $ -- $ -- $ -- Accounts payable 1,823 2,608 182 Payable to associated companies 21,359 3,820 133 Accrued and other current liabilities 1,205 1,791 1,561 Current maturities of long-term debt -- -- -- -------------- -------------- -------------- Total current liabilities 24,387 8,219 1,876 LONG-TERM DEBT, less current maturities -- -- -- DEFERRED INCOME TAXES 8,711 8,296 4,980 COMMITMENTS AND CONTINGENCIES -- -- -- -------------- -------------- -------------- Total liabilities 33,098 16,515 6,856 -------------- -------------- -------------- United Cities Propane Gas, Pro Forma U.S. Propane Inc. Adjustments Pro Forma (Historical) (2) Combined -------------- -------------- -------------- ASSETS CURRENT ASSETS: Cash $ 649 $ -- $ 3,648 Accounts receivable 3,044 (2,468)(3) 7,718 Inventories 1,753 -- 8,263 Marketable securities -- -- -- Prepaid expenses 39 -- 3,132 -------------- -------------- -------------- Total current assets 5,485 (2,468) 22,761 PROPERTY, PLANT AND EQUIPMENT, net 22,536 (685)(4) 138,157 29,573 (5) -- DUE FROM PARENT -- (21,882)(6) INTANGIBLES AND OTHER ASSETS, net 3,956 -- 13,984 -------------- -------------- -------------- Total assets $ 31,977 $ 4,538 $ 174,902 ============== ============== ============== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Working capital facility $ -- $ -- $ -- Accounts payable 97 -- 4,710 Payable to associated companies 16,838 (42,150)(6) -- Accrued and other current liabilities 1,197 -- 5,754 Current maturities of long-term debt 975 (975)(7) -- -------------- -------------- -------------- Total current liabilities 19,107 (43,125) 10,464 LONG-TERM DEBT, less current maturities 4,807 (3,694)(7) 1,113 DEFERRED INCOME TAXES 1,330 (23,317)(8) -- COMMITMENTS AND CONTINGENCIES -- -- -- -------------- -------------- -------------- Total liabilities 25,244 (70,136) 11,577 -------------- -------------- -------------- 2
3 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS(1) JUNE 30, 2000 (IN THOUSANDS) Piedmont Peoples Gas Propane AGL Propane, Company Company Inc. (Historical) (Historical) (Historical) ------------ ------------ ------------ PARTNERS' CAPITAL: Common unitholders $ -- $ -- $ -- Subordinated unitholders -- -- -- Class B subordinated unitholders -- -- -- General partner -- -- -- Stockholder's equity 14,845 41,391 25,682 Accumulated other comprehensive income -- -- -- ------------ ------------ ------------ Total partners' capital 14,845 41,391 25,682 ------------ ------------ ------------ Total liabilities and partners' capital $ 47,943 $ 57,906 $ 32,538 ============ ============ ============ United Cities Propane Gas, Pro Forma U.S. Propane Inc. Adjustments Pro Forma (Historical) (2) Combined ------------ ------------ ------------ PARTNERS' CAPITAL: Common unitholders $ -- $ -- $ -- Subordinated unitholders -- -- -- Class B subordinated unitholders -- -- -- General partner -- -- -- Stockholder's equity 6,733 (2,468)(3) 163,325 (685)(4) 29,573 (5) 20,268 (6) 4,669 (7) 23,317 (8) Accumulated other comprehensive income -- -- -- ------------ ------------ ------------ Total partners' capital 6,733 74,674 163,325 ------------ ------------ ------------ Total liabilities and partners' capital $ 31,977 $ 4,538 $ 174,902 ============ ============ ============ See accompanying notes. 3
4 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS(1) JUNE 30, 2000 (IN THOUSANDS) U.S. Propane Heritage Pro Forma Pro Forma Propane Adjustments Pro Forma Combined (Historical) (2) Combined ------------- ------------- ------------- ------------- ASSETS CURRENT ASSETS: Cash $ 3,648 $ 4,206 $ 180,000 (9) $ 1,842 (180,000)(10) 1,201 (12) (7,213)(14) Accounts receivable 7,718 19,489 -- 27,207 Inventories 8,263 17,857 -- 26,120 Marketable securities -- 2,697 -- 2,697 Prepaid expenses 3,132 1,608 -- 4,740 ------------- ------------- ------------- ------------- Total current assets 22,761 45,857 (6,012) 62,606 PROPERTY, PLANT AND EQUIPMENT, net 138,157 190,179 11,180 (15) 339,516 INVESTMENT IN AFFILIATE -- 5,924 -- 5,924 INTANGIBLES AND OTHER ASSETS, net 13,984 92,606 7,213 (14) 187,013 73,210 (15) ------------- ------------- ------------- ------------- Total assets $ 174,902 $ 334,566 $ 85,591 $ 595,059 ============= ============= ============= ============= LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Working capital facility $ -- $ 25,400 $ (8,605)(10) $ 16,795 Accounts payable 4,710 22,235 -- 26,945 Payable to associated companies -- -- -- -- Accrued and other current liabilities 5,754 10,703 581 (12) 21,030 2,652 (11) 1,704 (15) (364)(16) Current maturities of long-term debt -- 2,364 -- 2,364 ------------- ------------- ------------- ------------- Total current liabilities 10,464 60,702 (4,032) 67,134 4
5 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS(1) JUNE 30, 2000 (IN THOUSANDS) U.S. Propane Heritage Pro Forma Pro Forma Propane Adjustments Pro Forma Combined (Historical) (2) Combined ------------ ------------ ------------ ------------- LONG-TERM DEBT, less current maturities 1,113 225,149 180,000 (9) 356,059 (50,203)(13) DEFERRED INCOME TAXES -- -- -- -- COMMITMENTS AND CONTINGENCIES -- -- -- -- ------------ ------------ ------------ ------------- Total liabilities 11,577 285,851 125,765 423,193 ------------ ------------ ------------ ------------- PARTNERS' CAPITAL: Common unitholders -- 44,085 7,348 (11) 122,570 22,924 (13) 61,350 (15) (13,137)(16) Subordinated unitholders -- 1,050 11,742 (15) 10,277 (2,515)(16) Class B subordinated unitholders -- -- 27,279 (13) 34,169 8,767 (15) (1,877)(16) General partner -- 407 620 (12) 1,677 827 (15) (177)(16) Stockholder's equity 163,325 -- (163,325)(16) -- Accumulated other comprehensive income -- 3,173 -- 3,173 ------------ ------------ ------------ ------------- Total partners' capital 163,325 48,715 (40,174) 171,866 ------------ ------------ ------------ ------------- Total liabilities and partners' capital $ 174,902 $ 334,566 $ 85,591 $ 595,059 ============ ============ ============ ============= See accompanying notes. 5
6 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(1) TWELVE MONTHS ENDED DECEMBER 31, 1999 (IN THOUSANDS) Piedmont Peoples Gas Propane AGL Propane, Company Company Inc. (Historical) (Historical) (Historical) ------------- ------------- ------------- REVENUES: Fuel sales $ 34,045 $ 26,265 $ 20,010 Other -- 1,984 -- ------------- ------------- ------------- Total revenues 34,045 28,249 20,010 ------------- ------------- ------------- COSTS AND EXPENSES: Cost of products sold 14,849 14,383 8,311 Operating expenses 13,223 10,430 7,665 Depreciation and amortization 3,088 2,133 2,080 ------------- ------------- ------------- Total costs and expenses 31,160 26,946 18,056 ------------- ------------- ------------- OPERATING INCOME (LOSS) 2,885 1,303 1,954 OTHER INCOME (EXPENSE): Interest expense -- (406) (65) Equity in earnings of affiliate -- -- -- Gain on disposal of assets -- -- -- Other 10 254 341 ------------- ------------- ------------- INCOME (LOSS) BEFORE MINORITY INTEREST 2,895 1,151 2,230 Minority interest -- -- -- ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 2,895 1,151 2,230 Income tax benefit (expense) (1,127) (469) (961) ------------- ------------- ------------- NET INCOME (LOSS) $ 1,768 $ 682 $ 1,269 ============= ============= ============= United Cities Propane Gas, Pro Forma U.S. Propane Inc. Adjustments Pro Forma (Historical) (2) Combined ------------- ------------- ------------- REVENUES: Fuel sales $ 19,647 $ -- $ 99,967 Other 3,297 -- 5,281 ------------- ------------- ------------- Total revenues 22,944 -- 105,248 ------------- ------------- ------------- COSTS AND EXPENSES: Cost of products sold 10,895 -- 48,438 Operating expenses 9,499 -- 40,817 Depreciation and amortization 2,960 (34)(17) 11,213 986 (18) ------------- ------------- ------------- Total costs and expenses 23,354 952 100,468 ------------- ------------- ------------- OPERATING INCOME (LOSS) (410) (952) 4,780 OTHER INCOME (EXPENSE): Interest expense (1,338) 1,809 (19) -- Equity in earnings of affiliate -- -- -- Gain on disposal of assets 214 (214)(20) -- Other 252 -- 857 ------------- ------------- ------------- INCOME (LOSS) BEFORE MINORITY INTEREST (1,282) 643 5,637 Minority interest -- -- -- ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES (1,282) 643 5,637 Income tax benefit (expense) 478 2,079 (21) -- ------------- ------------- ------------- NET INCOME (LOSS) $ (804) $ 2,722 $ 5,637 ============= ============= ============= See accompanying notes. 6
7 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(1) TWELVE MONTHS ENDED DECEMBER 31, 1999 (IN THOUSANDS) Heritage U.S. Propane Propane Pro Forma Pro Forma Partners Adjustments Pro Forma Combined (Historical) (2) Combined ----------- ----------- ----------- ----------- REVENUES: Fuel sales $ 99,967 $ 170,660 $ -- $ 270,627 Other 5,281 23,692 -- 28,973 ----------- ----------- ----------- ----------- Total revenues 105,248 194,352 -- 299,600 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Cost of products sold 48,438 96,757 -- 145,195 Operating expenses 40,817 58,935 -- 99,752 Depreciation and amortization 11,213 15,226 3,252 (22) 29,691 ----------- ----------- ----------- ----------- Total costs and expenses 100,468 170,918 3,252 274,638 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) 4,780 23,434 (3,252) 24,962 OTHER INCOME (EXPENSE): Interest expense -- (16,417) (11,224)(23) (27,641) Equity in earnings of affiliate -- 873 -- 873 Gain on disposal of assets -- 505 (505)(20) -- Other 857 (302) 555 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE MINORITY INTEREST 5,637 8,093 (14,981) (1,251) Minority interest -- (454) 43 (24) (411) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 5,637 7,639 (14,938) (1,662) ----------- ----------- ----------- ----------- Income tax benefit (expense) -- -- -- -- NET INCOME (LOSS) $ 5,637 $ 7,639 $ (14,938) $ (1,662) =========== =========== =========== =========== GENERAL PARTNER'S INTEREST IN NET LOSS $ (16) =========== LIMITED PARTNERS' INTEREST IN NET LOSS $ (1,646) =========== BASIC AND DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ .65 $ (.14) =========== =========== BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 8,715 11,631 =========== =========== See accompanying notes. 7
8 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(1) SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) Piedmont Peoples Gas Propane AGL Propane, Company Company Inc. (Historical) (Historical) (Historical) ------------- ------------- ------------- REVENUES: Fuel sales $ 23,747 $ 25,284 $ 16,981 Other -- 1,174 -- ------------- ------------- ------------- Total revenues 23,747 26,458 16,981 ------------- ------------- ------------- COSTS AND EXPENSES: Cost of products sold 13,153 15,377 8,850 Operating expenses 6,650 5,712 4,001 Depreciation and amortization 1,665 1,161 1,081 ------------- ------------- ------------- Total costs and expenses 21,468 22,250 13,932 ------------- ------------- ------------- OPERATING INCOME 2,279 4,208 3,049 OTHER INCOME (EXPENSE): Interest expense -- (298) (5) Equity in earnings of affiliate -- -- -- Gain on disposal of assets -- -- -- Other (228) 187 528 ------------- ------------- ------------- INCOME BEFORE MINORITY INTEREST 2,051 4,097 3,572 Minority interest -- -- -- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 2,051 4,097 3,572 Income taxes (800) (1,628) (1,429) ------------- ------------- ------------- NET INCOME $ 1,251 $ 2,469 $ 2,143 ============= ============= ============= United Cities Propane Gas, Pro Forma Inc. Adjustments Pro Forma (Historical) (2) Combined ------------- ------------- ------------- REVENUES: Fuel sales $ 17,152 $ -- $ 83,164 Other 2,289 -- 3,463 ------------- ------------- ------------- Total revenues 19,441 -- 86,627 ------------- ------------- ------------- COSTS AND EXPENSES: Cost of products sold 10,778 -- 48,158 Operating expenses 4,557 -- 20,920 Depreciation and amortization 1,424 (17)(17) 5,807 493 (18) ------------- ------------- ------------- Total costs and expenses 16,759 476 74,885 ------------- ------------- ------------- OPERATING INCOME 2,682 (476) 11,742 OTHER INCOME (EXPENSE): Interest expense (783) 1,086 (19) -- Equity in earnings of affiliate -- -- -- Gain on disposal of assets 4 (4)(20) -- Other 150 -- 637 ------------- ------------- ------------- INCOME BEFORE MINORITY INTEREST 2,053 606 12,379 Minority interest -- -- -- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 2,053 606 12,379 Income taxes (811) 4,668 (21) -- ------------- ------------- ------------- NET INCOME $ 1,242 $ 5,274 $ 12,379 ============= ============= ============= See accompanying notes. 8
9 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(1) SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) Heritage U.S. Propane Propane Pro Forma Pro Forma Partners Adjustments Pro Forma Combined (Historical) (2) Combined ---------- ---------- ---------- ---------- REVENUES: Fuel sales $ 83,164 $ 146,432 $ -- $ 229,596 Other 3,463 12,953 -- 16,416 ---------- ---------- ---------- ---------- Total revenues 86,627 159,385 -- 246,012 ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of products sold 48,158 90,157 -- 138,315 Operating expenses 20,920 35,641 -- 56,561 Depreciation and amortization 5,807 9,602 1,626 (22) 17,035 ---------- ---------- ---------- ---------- Total costs and expenses 74,885 135,400 1,626 211,911 ---------- ---------- ---------- ---------- OPERATING INCOME 11,742 23,985 (1,626) 34,101 OTHER INCOME (EXPENSE): Interest expense -- (9,697) (5,612)(23) (15,309) Equity in earnings of affiliate -- 676 -- 676 Gain on disposal of assets -- 134 (134)(20) -- Other 637 108 -- 745 ---------- ---------- ---------- ---------- INCOME BEFORE MINORITY INTEREST 12,379 15,206 (7,372) 20,213 Minority interest -- (433) (275)(24) (708) ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 12,379 14,773 (7,647) 19,505 Income taxes -- -- -- -- ---------- ---------- ---------- ---------- NET INCOME $ 12,379 $ 14,773 $ (7,647) $ 19,505 ========== ========== ========== ========== GENERAL PARTNER'S INTEREST IN NET INCOME $ 195 ========== LIMITED PARTNERS' INTEREST IN NET INCOME $ 19,310 ========== BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT $ 1.25 $ 1.50 ========== ========== BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 9,934 12,850 ========== ========== See accompanying notes. 9
10 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS ($ IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) 1. Presentation: The unaudited pro forma condensed combined financial statements do not give any effect to any restructuring cost, potential cost savings, or other operating efficiencies that are expected to result from the Merger. The unaudited pro forma combined financial statements are based on certain assumptions and do not purport to be indicative of the results which actually would have been achieved if the Merger had been consummated on the dates indicated or which may be achieved in the future. The purchase accounting adjustments made in connection with the development of the unaudited pro forma condensed combined financial statements are preliminary and have been made solely for purposes of presenting such pro forma financial information. 2. It has been assumed that for purposes of the unaudited pro forma combined balance sheet, the following transactions occurred on June 30, 2000 and for purposes of the unaudited pro forma combined statements of operations, the following transactions occurred on January 1, 1999. The unaudited pro forma combined balance sheet data at June 30, 2000 combines balance sheets of Peoples Gas Company (Peoples Gas) as of June 30, 2000, Heritage Propane Partners, L.P. (Heritage) as of May 31, 2000, United Cities Propane Gas, Inc. (United Cities) as of June 30, 2000, Piedmont Propane Company (Piedmont) as of July 31, 2000 and AGL Propane, Inc. (AGL) as of June 30, 2000, after giving effect to pro forma adjustments. The unaudited pro forma combined statements of operations for the six months ended June 30, 2000 and the year ended December 31, 1999, combine the results of operations for Peoples Gas' six months ended June 30, 2000, and fiscal year ended December 31, 1999, with the results of operations for Heritage's six months ended May 31, 2000, and 12 months ended November 30, 1999, United Cities' six months ended March 31, 2000, and year ended September 30, 1999, Piedmont's six months ended April 30, 2000, and year ended October 31, 1999, and AGL's six months ended March 31, 2000, and year ended September 30, 1999, after giving effect to pro forma adjustments. Immediately prior to the transaction with Heritage Holdings, Inc. (HHI), TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural Gas Co., Inc., and AGL Resources, Inc. contributed each companies' propane operations, Peoples Gas, United Cities, Piedmont and AGL, respectively, to U.S. Propane L.P., (U.S. Propane) in exchange for equity interests in U.S. Propane. The Merger was accounted for as an acquisition using the purchase method of accounting with Peoples Gas being the acquirer. Accordingly, Peoples Gas' assets and liabilities were recorded at historical cost and the assets and liabilities of United Cities, Piedmont and AGL were recorded at fair market value, as determined based on a valuation and appraisal. The purchase allocations were as follows: Purchase price of Piedmont, AGL and United Cities $ 112,501 Net book value of Piedmont, AGL and United Cities 82,928 ---------- Step-up of net book value, allocated to property, plant and equipment $ 29,573 ========== In August 2000, U.S. Propane acquired all of the outstanding common stock of HHI, Heritage's General Partner for $120,000. By virtue of HHI's 2% general partner interest and a 34% limited partner interest in Heritage, U.S. Propane gained control of Heritage. Simultaneously, U.S. Propane, transferred its propane operations, consisting of its interest in four separate limited liability companies, AGL Propane, L.L.C., Peoples Gas Company, L.L.C., United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former Piedmont operations) to Heritage for $181,395 plus working capital. The $181,395 was payable $139,552 in cash, $31,843 of assumed debt, and the issuance of 372,392 Common Units of Heritage valued at $7,348 and a $2,652 limited partnership interest in Heritage's operating partnership. The purchase price and the exchange price for the common units were approved by an independent committee of the Board of Directors of HHI. The exchange price for the common units was $19.73125 per unit under a formula based on the average closing price of Heritage's common units on the New York Stock Exchange for the twenty (20) day period beginning 10
11 ten (10) days prior to the public announcement of the transaction on June 15, 2000 (the "Formula Price"). The working capital adjustment is anticipated to be settled in December 2000. For purposes of the pro forma financial statements, an additional payment of $5,000 has been assumed. Concurrent with the acquisition, Heritage borrowed $180,000 from several institutional investors and sold 1,161,814 common units and 1,382,514 Class B subordinated units in a private placement to the former shareholders of HHI based on the Formula Price resulting in net proceeds of $50,203. The total of these proceeds were utilized to finance the transaction and retire a portion of existing debt. The merger will be accounted for as a reverse acquisition in accordance with Accounting Principles Board Opinion No. 16. Although Heritage is the surviving entity for legal purposes, U.S. Propane's propane operations will be the acquirer for accounting purposes. The assets and liabilities of Heritage will be reflected at fair value to the extent acquired by U.S. Propane's propane operations, approximately 36 percent, in accordance with EITF 90-13. The assets and liabilities of U.S. Propane will be reflected at historical cost, as recorded in the U.S. Propane transaction described above. The historical financial statements of Peoples Gas will be the historical financial statements of the registrant as Peoples Gas is the acquirer in the transaction in which U.S. Propane was formed. The results of operations of Heritage, Piedmont, AGL and United Cities will be included with the results of Peoples Gas after completion of the merger on August 10, 2000. Peoples Gas has a fiscal year-end of December 31, however the registrant will continue to have an August 31 year-end. Accordingly, the eight-month period ended August 31, 2000, will be treated as a transition period under the rules of the Securities and Exchange Commission. The excess purchase price over predecessor cost was determined as follows: Net book value of Heritage at May 31, 2000 $ 48,715 Equity investment 50,203 ---------- 98,918 Percent acquired by U.S. Propane 36% ---------- Equity interest acquired $ 35,610 ========== Purchase price $ 120,000 Equity interest acquired 35,610 ---------- Excess purchase price over predecessor cost $ 84,390 ========== The excess purchase price over predecessor cost was allocated as follows: Property, plant and equipment (30 year life) $ 11,180 Customer lists (15 year life) 5,935 Goodwill (30 year life) 67,275 ---------- $ 84,390 ========== 11
12 The pro forma adjustments are as follows: 3. Reflects the elimination of receivables retained by U.S. Propane owners. 4. Reflects the elimination of a building retained by United Cities. 5. Reflects the allocation of the fair market value of the assets of Piedmont, AGL, and United Cities. 6. Reflects the elimination of intercompany receivables and payables retained by U.S. Propane owners. 7. Reflects the elimination of the debt retained by United Cities. 8. Reflects the elimination of the deferred tax liabilities of U.S. Propane as income taxes will be borne by the partners and not the Partnership. 9. Reflects the proceeds received from borrowings from institutional investors. The notes have a fixed average rate of 8.66%. 10. Reflects use of proceeds from long-term debt as follows: Cash paid to U.S. Propane for purchase of propane operations.......................$ (171,395) Excess proceeds used to pay down working capital................................... (8,605) ----------- Total........................................................$ (180,000) =========== 11. Reflects the issuance to U.S. Propane of limited partnership interest in Heritage and common units. U.S. Propane's limited partnership interest in Heritage's operating partnership....................................................................$ 2,652 Issuance of 372,392 common units of Heritage....................................... 7,348 ----------- Total........................................................$ 10,000 =========== 12. Reflects the cash contribution from U.S. Propane for the HHI General Partner interest received through the purchase of HHI's common stock. Of the total contribution of $1,201, $581 was for the 1.0101% minority interest in the Operating Partnership and $620 was for the 1% interest in the MLP. 13. Reflects the proceeds received from the private placement of 1,161,814 common units and 1,382,514 Class B subordinated units to the former shareholders of HHI. 14. Reflects the allocation to goodwill for the cash paid for acquisition costs of $2,213 and the estimated working capital payment of $5,000. 15. Reflects the allocation of the excess purchase price over predecessor costs to the property, plant and equipment of $11,180, goodwill of $67,275 and customer lists of $5,935. 16. Represents the allocation of the cash paid of $171,395, $7,348 of common units of Heritage and $2,652 of limited partnership interest in Heritage's operating partnership for U.S. Propane's propane operations by Heritage allocated to partners' capital and minority interest liability based on their ownership percentages. 17. Reflects the elimination of the depreciation for the building retained by United Cities. 12
13 18. Reflects the additional depreciation related to the step-up of net book value of Piedmont, AGL and United Cities allocated to property, plant and equipment having 30-year lives. 19. Reflects the elimination of interest expense related to debt retained by Piedmont, AGL and United Cities. 20. Reflects the elimination of the gain on sale of assets as the assets are recorded at fair market value there would not be any gain to recognize. 21. Reflects the elimination of provision for current income tax expense and benefits, as income taxes will be borne by the partners and not at the partnership level. 22. Reflect the additional depreciation and amortization related to the excess purchase price over Heritage's cost allocated to property, plant and equipment (30-years), goodwill (30 years) and customer lists (15 years). 23. Allocation of additional interest expense of $15,600 and $7,800 for the twelve and six month periods respectively, related to the issuance of $180 million of Senior Secured Notes at a fixed average rate of 8.66%. This additional expense is offset by the elimination of $4,376 and $2,188 of interest on the debt reduction of $58,808 for the twelve and six months, respectively. 24. Reflects the adjustment to minority interest expense for U.S. Propane's General Partner 1.0101% interest and their 1.0101% limited partner interest in the operating partnership on the pro forma income and adjustments. 13