1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .
-------------- to --------------
Commission file number 0-1284-3
UNITED CITIES GAS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois and Virginia 36-1801540
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5300 Maryland Way, Brentwood, TN 37027
- --------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
(615) 373-5310
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Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes
[ ] No
At October 31, 1995, 12,665,489 shares of the common stock of the Registrant
were outstanding.
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2
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1995
Table of Contents
Item Page
Number PART I -- FINANCIAL INFORMATION Number
------
1 Financial Statements:
Consolidated Statements of Income (Unaudited) for the Three, Nine
and Twelve Months Ended September 30, 1995 and September 30, 1994. 3
Consolidated Statements of Cash Flows (Unaudited) for the Three,
Nine and Twelve Months Ended September 30, 1995 and 4
September 30, 1994.
Consolidated Balance Sheets at September 30, 1995 (Unaudited) and 5
December 31, 1994.
Consolidated Statements of Capitalization at September 30, 1995
(Unaudited) and December 31, 1994. 6
Notes to Consolidated Financial Statements. 7
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
PART II -- OTHER INFORMATION
1 Legal Proceedings. 14
5 Other Information. 14
6 Exhibits and Reports on Form 8-K. 14
List of Exhibits. 15
Signature 16
2
3
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ----------------- -------------------
(Unaudited, in thousands, except per share amounts) 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Utility Operating Revenues.............................. $32,248 $34,143 $180,500 $206,686 $254,798 $296,951
Natural gas cost..................................... 18,066 20,167 104,011 130,202 146,777 187,947
------- ------- -------- -------- -------- --------
Utility Operating Margin................................ 14,182 13,976 76,489 76,484 108,021 109,004
------- ------- -------- -------- -------- --------
Utility Other Operating Expenses:
Operations and maintenance........................... 16,139 13,790 45,903 43,434 59,773 57,167
Depreciation and amortization........................ 3,765 3,568 11,137 10,502 14,569 13,878
Federal and state income taxes....................... (4,369) (3,744) 79 1,163 2,790 3,472
Other taxes.......................................... 2,731 2,503 9,128 8,060 11,807 10,694
------- ------- -------- -------- -------- --------
Total other operating expenses..................... 18,266 16,117 66,247 63,159 88,939 85,211
------- ------- -------- -------- -------- --------
Utility Operating Income (Loss)......................... (4,084) (2,141) 10,242 13,325 19,082 23,793
Utility Other Income (Loss), Net........................ 298 (52) 471 (177) 385 27
------- ------- -------- -------- -------- --------
(3,786) (2,193) 10,713 13,148 19,467 23,820
------- ------- -------- -------- -------- --------
Utility Interest Charges:
Interest on long-term debt........................... 2,980 3,066 8,997 9,283 12,063 12,458
Other interest charges............................... 227 478 1,418 968 2,187 2,607
------- ------- -------- -------- -------- --------
Total interest charges............................. 3,207 3,544 10,415 10,251 14,250 15,065
------- ------- -------- -------- -------- --------
Utility Income (Loss)................................... (6,993) (5,737) 298 2,897 5,217 8,755
------- ------- -------- -------- -------- --------
Other Income (Loss):
Operations of UCG Energy Corporation-
Revenues.......................................... 6,135 8,284 22,962 28,010 33,335 39,527
Operating expenses................................ (4,926) (6,732) (17,703) (21,335) (25,028) (29,785)
Interest expense.................................. (380) (184) (901) (570) (1,103) (966)
Depreciation and amortization..................... (1,269) (893) (3,260) (2,645) (4,195) (3,578)
Other income, net................................. 259 167 1,572 495 1,751 674
Federal and state income taxes.................... 68 (243) (1,014) (1,500) (1,808) (2,326)
------- ------- -------- -------- -------- --------
(113) 399 1,656 2,455 2,952 3,546
------- ------- -------- -------- -------- --------
Operations of United Cities Gas Storage Company-
Revenues.......................................... 1,800 1,073 4,828 5,830 6,125 8,388
Operating expenses................................ (1,170) (544) (3,010) (4,259) (3,702) (6,216)
Interest expense.................................. (228) (228) (734) (716) (966) (961)
Depreciation...................................... (92) (91) (276) (274) (368) (365)
Federal and state income taxes.................... (120) (82) (313) (227) (422) (343)
------- ------- -------- -------- -------- --------
190 128 495 354 667 503
------- ------- -------- -------- -------- --------
Common Stock Earnings (Loss)............................ $(6,916) $(5,210) $ 2,449 $ 5,706 $ 8,836 $ 12,804
======= ======= ======== ======== ======== ========
Common Stock Earnings (Loss) Per Share.................. $ (0.55) $ (0.50) $ 0.21 $ 0.55 $ 0.79 $ 1.24
======= ======= ======== ======== ======== ========
Average Number of Common Shares Outstanding............. 12,585 10,407 11,492 10,370 11,249 10,349
======= ======= ======== ======== ======== ========
Common Stock Dividends Per Share........................ $ 0.255 $ 0.25 $ 0.765 $ 0.75 $ 1.02 $ 1.00
======= ======= ======== ======== ======== ========
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UNITED CITIES GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ------------------ -------------------
(Unaudited, in thousands) 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Cash Flows from Operating Activities:
Common stock earnings (loss)..................................... $(6,916) $(5,210) $ 2,449 $ 5,706 $ 8,836 $12,804
------- ------- ------- ------- ------- -------
Adjustments to reconcile common stock earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................................. 5,126 4,552 14,673 13,421 19,132 17,821
Deferred taxes................................................. 6 (72) 19 (216) 1,536 605
Investment tax credits, net.................................... (91) (92) (273) (277) (366) (371)
Investment income from Woodward Marketing, L.L.C............... (53) - (802) - (802) -
Changes in current assets and current liabilities:
Receivables.................................................. 2,204 2,596 28,733 33,246 2,519 (2,398)
Materials and supplies....................................... 86 308 (277) (91) 7 558
Gas in storage............................................... (7,107) (9,031) 1,338 (4,018) 4,888 (11,792)
Gas costs to be billed in the future......................... (4,792) (2,459) (1,969) (5,528) (4,352) (4,924)
Prepayments and other........................................ (226) (12) (552) 105 350 (143)
Accounts payable............................................. (1,021) (4,714) (9,924) (18,938) 577 1,888
Customer deposits and advance payments....................... 2,048 4,064 (1,160) 712 318 2,659
Accrued interest............................................. 2,669 2,538 2,330 1,351 (133) (95)
Supplier refunds due customers............................... (685) (1,684) 3,450 1,116 3,561 (2,412)
Accrued taxes................................................ (6,132) (2,786) (5,704) 324 (3,539) 2,615
Other, net................................................... (1,344) (951) (3,269) (430) (2,430) (1,546)
------- ------- ------- ------- ------- -------
Total adjustments.......................................... (9,312) (7,743) 26,613 20,777 21,266 2,465
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating activities...... (16,228) (12,953) 29,062 26,483 30,102 15,269
------- ------- ------- ------- ------- -------
Cash Flows from Investing Activities:
Additions to property - utility.................................. (8,553) (8,590) (26,351) (22,616) (34,623) (29,698)
Additions to property - non-utility.............................. (305) (1,193) (2,672) (2,639) (4,261) (3,404)
Investment in Woodward Marketing, L.L.C., net.................... - - (832) - (832) -
------- ------- ------- ------- ------- -------
Net cash used in investing activities.................... (8,858) (9,783) (29,855) (25,255) (39,716) (33,102)
------- ------- ------- ------- ------- -------
Cash Flows from Financing Activities:
Short-term borrowings - net...................................... 23,596 24,209 (9,640) 11,966 1,719 31,239
Proceeds from issuance of common stock........................... 758 385 22,468 1,010 24,720 1,520
Long-term debt retirements....................................... (484) (1,476) (5,817) (7,154) (6,496) (7,399)
Dividends paid................................................... (2,716) (2,289) (7,474) (6,853) (9,836) (9,128)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing activities...... 21,154 20,829 (463) (1,031) 10,107 16,232
------- ------- ------- ------- ------- -------
Net Increase (Decrease) in Cash
and Temporary Investments...................................... (3,932) (1,907) (1,256) 197 493 (1,601)
Cash and Temporary Investments at
Beginning of Period............................................ 5,420 2,902 2,744 798 995 2,596
------- ------- ------- ------- ------- -------
Cash and Temporary Investments at End of Period.................... $ 1,488 $ 995 $ 1,488 $ 995 $ 1,488 $ 995
======= ======= ======= ======= ======= =======
Cash Paid During the Period for:
Interest, net of amounts capitalized............................. $ 1,147 $ 1,418 $ 9,721 $10,186 $16,481 $17,063
======= ======= ======= ======= ======= =======
Income taxes..................................................... $ 2,452 $ 154 $ 7,521 $ 3,016 $ 8,225 $ 3,630
======= ======= ======= ======= ======= =======
Noncash Investing and Financing Activities:
Dividends reinvested............................................. $ 493 $ 312 $ 1,297 $ 923 $ 1,628 $ 1,219
======= ======= ======= ======= ======= =======
Debt incurred to acquire assets of Harrell Propane, Inc.......... - - $ 1,250 - $ 1,250 -
======= ======= ======= ======= ======= =======
Common stock issued in investment in Woodward Marketing, L.L.C... - - $ 5,000 - $ 5,000 -
======= ======= ======= ======= ======= =======
4
5
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In thousands) 1995 1994
------------- ------------
ASSETS (Unaudited)
Utility Plant:
Plant in service, at cost.................................. $430,954 $403,121
Less-accumulated depreciation............................ 151,136 139,715
-------- --------
279,818 263,406
-------- --------
Non-Utility Property:
Property, plant, and equipment............................. 72,806 71,222
Less-accumulated depreciation............................ 23,048 22,272
-------- --------
49,758 48,950
-------- --------
Current Assets:
Cash and temporary investments............................. 1,488 2,744
Receivables, less allowance for uncollectible accounts
of $1,029 in 1995 and $1,017 in 1994..................... 14,597 43,330
Materials and supplies..................................... 5,457 5,180
Gas in storage............................................. 25,113 26,451
Gas costs to be billed in the future....................... 17,926 15,957
Prepayments and other...................................... 2,598 2,046
-------- --------
67,179 95,708
-------- --------
Deferred Charges:
Unamortized debt discount and expense, net................. 2,773 2,694
Investment in Woodward Marketing, L.L.C. .................. 6,372 -
Non-compete agreements, net................................ 3,423 3,697
Deferred system improvement costs, net..................... 966 1,425
Other deferred charges..................................... 7,379 5,320
-------- --------
20,913 13,136
-------- --------
$417,668 $421,200
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity........................................ $140,471 $118,028
Long-term debt............................................. 137,088 144,344
-------- --------
277,559 262,372
-------- --------
Current Liabilities:
Current portion of long-term obligations................... 8,757 6,068
Notes payable.............................................. 36,548 46,188
Accounts payable for gas costs............................. 16,076 26,185
Other accounts payable..................................... 3,173 2,988
Accrued taxes.............................................. 671 6,375
Customer deposits and advance payments..................... 13,013 14,173
Accrued interest........................................... 5,675 3,345
Supplier refunds due customers............................. 8,891 5,441
Other...................................................... 8,089 8,993
-------- --------
100,893 119,756
-------- --------
Deferred Credits:
Accumulated deferred income tax............................ 24,817 24,572
Deferred investment tax credits............................ 4,372 4,645
Income taxes due customers................................. 6,113 6,329
Other...................................................... 3,914 3,526
-------- --------
39,216 39,072
-------- --------
$417,668 $421,200
======== ========
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6
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30, December 31,
(In thousands, except share amounts) 1995 1994
---------------- -------------------
Common Stock Equity: (Unaudited)
Common stock without par value, authorized
40,000,000 shares, outstanding 12,641,629 in
1995 and 10,613,441 in 1994..................................... $100,387 $ 71,622
Capital surplus................................................... 22,462 22,462
Retained earnings................................................. 17,622 23,944
-------- --------
Total common stock equity....................................... 140,471 50.6% 118,028 45.0%
-------- ----- -------- -----
Long-Term Debt:
First mortgage bonds ............................................. 125,000 129,000
Senior secured storage term notes, 7.45%, due in
installments through 2007...................................... 10,063 10,436
Rental property adjustable rate term notes due in
installments through 1999...................................... 5,981 6,839
Other long-term obligations due in installments through 2013...... 4,801 4,137
-------- --------
145,845 150,412
Less-current requirements..................................... 8,757 6,068
-------- --------
Total long-term debt, excluding amounts due within one year... 137,088 49.4% 144,344 55.0%
-------- ----- -------- -----
Total Capitalization.................................................. $277,559 100.0% $262,372 100.0%
======== ===== ======== =====
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UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The accompanying unaudited financial statements reflect all adjustments
(which are of a normal recurring nature) that are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. The statements should be read in conjunction with the Summary of
Significant Accounting Policies and Notes to Consolidated Financial Statements
included in the Company's annual report for the year ended December 31, 1994.
The Company's business is seasonal in nature resulting in greater earnings
during the winter months. The results of operations for the three and nine
month periods ended September 30, 1995 are not necessarily indicative of the
results to be expected for the full year.
In the third quarter of 1995, the Company announced a consolidation plan
under which five of the Company's local operations in its Virginia/East
Tennessee Division were consolidated into two new operating centers. As a
result of the plan implementation, costs of approximately $900,000 ($550,000
after income taxes) related to early retirement and severance programs and
employee relocation expenses were recorded in September, 1995.
In June, 1995, the Company entered into an agreement to pay $1,787,000 to
Union Electric Company (Union Electric) whereby Union Electric agreed to assume
responsibility for the Company's continuing investigation and environmental
response action obligations as outlined in the feasibility study related to a
former manufactured gas plant site in Keokuk, Iowa. At September 30, 1995, the
Company had $1,430,000 accrued for its remaining liability related to the
agreement. This amount is to be paid in equal annual payments over a four year
period beginning July 1, 1996. The Company has deferred the accrued amount and
expects approval for recovery in its next rate proceeding in Iowa.
The Company owns former manufactured gas plant sites in Johnson City and
Bristol, Tennessee and Hannibal, Missouri. The Company is unaware of any
information which suggests that these sites give rise to a present health or
environmental risk as a result of the manufactured gas process or that any
response action will be necessary. However, the Company has accrued and
deferred for recovery $750,000 associated with the preliminary survey and
invasive study of these sites.
Management expects that expenditures related to response action at any
environmental site will be recovered through rates or insurance, or shared
among other potentially responsible parties. Therefore, the costs of
responding to these sites are not expected to materially affect the results of
operations, financial condition or cash flows of the Company.
During the first quarter of 1995, UCG Energy purchased a 45% interest in
certain contracts related to the gas marketing business of Woodward Marketing,
Inc. (WMI), a Texas corporation. In exchange for the acquired interest, the
shareholders of WMI received $5,000,000 in the Company's common stock (320,512
shares) and $832,000 in cash in May, 1995, and may, if certain earnings targets
are met, receive an additional payment of $1,000,000 to be paid over a five
year period. In exchange for its own gas marketing contracts and the acquired
45% interest in the WMI gas marketing contracts, UCG Energy received a 45%
interest in a newly formed limited liability company, Woodward Marketing,
L.L.C. (WMLLC). WMI received a 55% interest in WMLLC in exchange for its
remaining 55% interest in the WMI gas marketing contracts. WMLLC will provide
gas marketing services to industrial customers, municipalities and local
distribution companies. UCG Energy utilized equity accounting, effective
January 1, 1995, for the acquisition.
On April 6, 1995, the Company signed a letter of intent to acquire all the
outstanding common stock of Monarch Gas Company (Monarch). The acquisition
will be accounted for as a pooling of interests whereby the number of shares of
the Company's common stock issued will be calculated based on the book value of
Monarch versus the book value of the Company at December 31, 1994. In
addition, the Company will enter into a $250,000, five year non-compete
agreement with the owners of Monarch. Monarch serves approximately 3,000
customers in small communities adjacent to the Company's Vandalia, Illinois
operation. The Company will not restate prior years' consolidated financial
statements due to immateriality.
In March, 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of." This Statement imposes stricter criteria for
regulatory assets by requiring that such assets be probable of future recovery
at each balance sheet date. The Company anticipates adopting this standard on
January 1, 1996, and does not expect that adoption will have a material impact
on the results of operations, financial condition or cash flows of the Company
based on the current regulatory structure in which the Company operates. This
conclusion may change in the future as a result of a change in regulation.
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8
Effective May 22, 1995, United Cities Propane Gas of Tennessee, Inc.
(UCPT), a subsidiary of UCG Energy, purchased all of the propane transportation
assets of Transpro South, Inc., a common carrier corporation, for approximately
$218,000. In addition, the subsidiary entered into a ten year non-compete
agreement with the prior owner for $6,000.
In October, 1995, UCPT signed a letter of intent to purchase all of the
propane assets of Duncan Gas Service for $4,337,000. In addition, UCPT will
enter into a ten year non-compete agreement for $250,000. This acquisition
will add approximately 2,000 customers in the Johnson City, Tennessee area.
Certain reclassifications were made conforming prior year's financial
statements with 1995 financial statement presentation.
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9
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
The Company's 1995 third quarter common stock loss was $6,916,000
compared to the third quarter 1994 loss of $5,210,000. The loss per
common share was $.55 on an additional 2,178,000 average number of shares
outstanding, compared to the loss of $.50 for the comparable period in
1994. The common stock earnings for the first nine months of 1995 were
$2,449,000 compared to $5,706,000 in 1994. Common stock earnings per
share decreased from $.55 in 1994 to $.21 in 1995 on an additional
1,122,000 average number of shares outstanding. Common stock earnings
for the twelve month period ended September 30, 1995 were $8,836,000
compared to $12,804,000 for the twelve month period ended September 30,
1994. Common stock earnings per share decreased from $1.24 in the twelve
month period in 1994 to $.79 in the twelve month period in 1995. Average
shares outstanding increased by 900,000 for the twelve month period ended
September 30, 1995.
The following table summarizes certain information regarding the
operation of each segment of the Company's business for the periods ended
September 30:
Three Months Ended Nine Months Ended Twelve Months Ended
------------------ ----------------- -------------------
(Unaudited, in thousands) 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Operating Revenues:
Utility................................. $32,248 $34,143 $180,500 $206,686 $254,798 $296,951
------- ------- -------- -------- -------- --------
Subsidiaries:
UCG Energy Corporation-
Propane Division.................... 3,997 3,776 14,840 14,858 20,769 20,719
Rental Division..................... 1,554 1,568 4,671 4,826 6,294 6,494
Utility Services Division........... 584 2,940 3,451 8,326 6,272 12,314
------- ------- -------- -------- -------- --------
Total UCG Energy Corporation...... 6,135 8,284 22,962 28,010 33,335 39,527
United Cities Gas Storage Company..... 1,800 1,073 4,828 5,830 6,125 8,388
------- ------- -------- -------- -------- --------
Total Subsidiaries................ 7,935 9,357 27,790 33,840 39,460 47,915
------- ------- -------- -------- -------- --------
Total Revenues.......................... $40,183 $43,500 $208,290 $240,526 $294,258 $344,866
======= ======= ======== ======== ======== ========
Common Stock Earnings (Loss):
Utility................................. $(6,993) $(5,737) $ 298 $ 2,897 $ 5,217 $ 8,755
------- ------- -------- -------- -------- --------
Subsidiaries:
UCG Energy Corporation-
Propane Division.................... (476) (250) (81) 448 593 1,026
Rental Division..................... 376 500 1,235 1,521 1,739 1,840
Utility Services Division........... (13) 149 502 486 620 680
------- ------- -------- -------- -------- --------
Total UCG Energy Corporation...... (113) 399 1,656 2,455 2,952 3,546
United Cities Gas Storage Company..... 190 128 495 354 667 503
------- ------- -------- -------- -------- --------
Total Subsidiaries................ 77 527 2,151 2,809 3,619 4,049
------- ------- -------- -------- -------- --------
Total Common Stock Earnings (Loss)...... $(6,916) $(5,210) $ 2,449 $ 5,706 $ 8,836 $ 12,804
======= ======= ======== ======== ======== ========
Operating Results-Utility
The utility loss increased by $1,256,000 for the third quarter and
utility earnings decreased $2,599,000 and $3,538,000, respectively, for
the nine and twelve month periods in 1995 from the comparable 1994
periods due predominantly to the factors mentioned below:
The operating margin for the 1995 third quarter increased $206,000
over the same period in 1994. The operating margin for the nine month
period ended September 30, 1995, varied only slightly from the same
previous year period and decreased $983,000 to $108,021,000 for the
twelve month period. The increase in margin for the third quarter was
primarily a result of the rate increases effective February, 1995 in
South Carolina and September, 1995 in Kansas and an increased number of
natural gas customers. The negative effect of the warmer weather in the
nine and twelve month periods ended September 30, 1995, as compared to
the previous year periods, was offset in the nine month period and
9
10
ITEM 2. CONTINUED
lessened in the twelve month period by the weather normalization
adjustments (WNAs) in Tennessee and Georgia, an increased number of
natural gas customers, the Palmyra, Missouri acquisition in March, 1994
and the rate increases in South Carolina and Kansas. In the nine and
twelve month periods ended September 30, 1995, $2,328,000 and $3,852,000,
respectively, in additional revenues were generated by the WNAs. In
comparison, the WNAs generated additional revenues of $526,000 and
$313,000 for the nine and twelve month periods ended September 30, 1994.
Operations and maintenance expenses increased $2,349,000, $2,469,000
and $2,606,000, respectively, for the quarter, nine and twelve month
periods primarily as a result of increased payroll related expenses. In
addition, operation and maintenance expenses for all periods included
approximately $900,000 of costs related to the Company's consolidation
plan implemented in the third quarter of 1995. (See discussion in
"Financial Condition, Liquidity and Capital Resources" included in this
Form 10-Q.) Depreciation and amortization expense and other taxes, which
includes property taxes, increased in all periods primarily due to
additional plant in service.
Other Income, Net increased in all periods primarily as a result of
a $171,000 credit recorded in September, 1995, for the capitalization of
the equity portion of the allowance for funds used during construction
(AFUDC) of the twenty-eight mile main in Middle Tennessee. In addition,
as allowed by certain regulatory commissions in the states in which the
Company operates, Other Income, Net increased in all periods as a result
of an increased amount of pipeline capacity release and other revenues
retained by the Company.
Interest expense decreased in the third quarter of 1995 as compared
to the same period in 1994 primarily due to a $349,000 credit recorded in
September, 1995 for the capitalization of the debt portion of the AFUDC
of the twenty-eight mile main in Middle Tennessee. Interest expense
increased in the nine month period primarily due to interest on increased
short-term debt outstanding during the period, somewhat offset by the
AFUDC adjustment and by the retirement of long-term debt. Interest
expense decreased in the twelve month period primarily due to the AFUDC
adjustment, the retirement of long-term debt and because of the
assessment of interest related to the settlement of the Internal Revenue
Service Audit for the years 1986 through 1990 which was expensed in the
fourth quarter of 1993, partially offset by interest on increased
short-term debt outstanding during the period.
The table below reflects operating revenues, gas sales volumes and
weather data for the periods ended September 30:
OPERATING STATISTICS-UTILITY
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
------------------ ----------------- -------------------
(UNAUDITED, IN THOUSANDS) 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- -----
OPERATING REVENUES:
Residential........................... $10,219 $10,574 $81,309 $93,306 $117,522 $138,908
Commercial............................ 7,524 7,901 46,547 54,429 65,495 78,093
Industrial............................ 10,966 14,264 41,324 52,730 57,663 71,158
Transportation........................ 3,010 1,389 9,234 4,725 11,716 6,507
Other Revenues........................ 529 15 2,086 1,496 2,402 2,285
------- ------- -------- -------- -------- --------
Total Operating Revenues........... $32,248 $34,143 $180,500 $206,686 $254,798 $296,951
======= ======= ======== ======== ======== ========
GAS SALES (MCF):
Residential........................... 1,274 1,318 14,285 14,871 20,766 22,876
Commercial............................ 1,633 1,547 10,021 10,107 14,030 14,770
Industrial-
Firm................................ 1,214 1,607 5,336 6,143 7,327 8,283
Interruptible....................... 2,261 2,602 7,615 8,028 10,588 11,083
------- ------- -------- -------- -------- --------
6,382 7,074 37,257 39,149 52,711 57,012
======= ======= ======== ======== ======== ========
Transported Volumes (Mcf)............... 4,465 2,902 13,272 8,813 17,034 11,844
======= ======= ======== ======== ======== ========
WEATHER DATA-COLDER (WARMER)
THAN NORMAL*.......................... ** ** (9.5%) (3.5%) (13.9%) (.7%)
======= ======= ======== ======== ======== ========
*Based on system weighted average. Data for 1995 is preliminary.
**Not meaningful for third quarter.
10
11
ITEM 2. CONTINUED
OPERATING RESULTS-NON-UTILITY
Revenues of UCG Energy Corporation (UCG Energy) decreased
$2,149,000, $5,048,000 and $6,192,000 from the third quarter, nine and
twelve month periods ended September 30, 1994, respectively. The propane
division's revenues changed moderately in all periods from 1994. The
propane division's revenues increased in the third quarter due to an
increase in wholesale propane volumes sold and increased transport
revenues, a result of the acquisition of Transpro South, Inc. in May,
1995. Revenues decreased in the nine month period because of fewer
retail propane volumes sold as a result of warmer than normal weather,
partially offset by increased wholesale and transport revenues as well as
increased jobbing and service revenues. The propane division's revenues
increased in the twelve month period due to a change in the billing date
of the facility fee from June, 1994 to October, 1994 and increased
jobbing and service revenues, partially offset by decreased retail
propane volumes sold due to warmer than normal weather. The utility
services division's revenues decreased from the third quarter, nine and
twelve month periods ended September, 1994 due to a combination of
decreased gas brokerage sales to certain industrial customers and others
primarily because of the transfer of certain gas brokerage contracts to
Woodward Marketing, L.L.C. (WMLLC) and the discontinuance of the
distribution of energy-related products. The rental division had a
moderate decrease in revenues in all periods due to lower rental rates on
certain rental units and a reduced number of rental units in service.
Operating expenses of UCG Energy, including cost of sales, decreased
$1,806,000, $3,632,000 and $4,757,000 from the third quarter, nine and
twelve month periods ended September 30, 1994, respectively. Expenses
increased in all periods in the propane division due to increases in
general and administrative expenses as well as added expenses associated
with the acquisitions of Transpro South, Inc., Harrell Propane, Inc., and
Hurley's Propane Gas. Expenses of the utility services division
decreased in all periods as a result of decreased gas brokerage sales to
certain industrial customers and others as well as the discontinuance of
the distribution of energy-related products. Expenses of the rental
division varied only slightly in all periods from the previous year.
Other income, net of UCG Energy increased $92,000, $1,077,000 and
$1,077,000 from the third quarter, nine and twelve month periods ended
September 30, 1994, respectively, primarily as a result of investment
income from WMLLC in the utility services division of $53,000 in the
third quarter and $802,000 in the nine and twelve month periods.
UCG Energy's net income decreased $512,000, $799,000 and $594,000
from the third quarter, nine and twelve month periods ended September 30,
1994, respectively. The decrease from the third quarter was due to a
combination of decreased sales in the utility services division as
mentioned above and increased expenses in the propane division, partially
offset by increased wholesale propane and jobbing and service revenues.
Contributing to the decrease in net income was an increase in
depreciation and amortization expense related to the amortization of the
investment in WMLLC and an increase in interest expense related to the
financing of that investment. The decrease from the nine month period
was the combined result of decreased retail propane sales, increased
operating expenses, increased depreciation expense due to the
acquisitions mentioned above and increased interest expense on short term
borrowings in the propane division and decreased sales in the utility
services division partially offset by investment income from WMLLC.
Contributing to the decrease in net income was an increase in
depreciation and amortization expense related to the amortization of the
investment in WMLLC and an increase in interest expense related to the
financing of that investment. The decrease from the twelve month period
was due to decreased propane sales due to warmer than normal weather,
increases in operating expenses, and increased depreciation expense, all
partially offset by the change in the billing date of the facility fee in
the propane division. Contributing to the decrease in net income was
decreased sales in the utility services division, partially offset by
investment income from WMLLC, and an increase in depreciation and
amortization expense related to the amortization of the investment in
WMLLC and an increase in interest expense related to the financing of
that investment.
Effective May 22, 1995, United Cities Propane Gas of Tennessee,
Inc., a subsidiary of UCG Energy, purchased all of the propane
transportation assets of Transpro South, Inc., a common carrier
corporation, for approximately $218,000. In addition, the subsidiary
entered into a ten year non-compete agreement with the prior owner for
$6,000.
United Cities Gas Storage Company had net income for the three, nine
and twelve month periods of $190,000, $495,000 and $667,000,
respectively, as compared to $128,000, $354,000 and $503,000 for the same
periods in 1994. The revenues of the subsidiary were primarily derived
from natural gas storage services and natural gas provided to United
Cities Gas Company.
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12
ITEM 2. CONTINUED
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total cash used in operations for the three month period ended
September 30, 1995, was $16,228,000. Total cash provided by operations
for the nine and twelve month periods ended September 30, 1995, was
$29,062,000 and $30,102,000, respectively. Changes in accounts
receivable, gas in storage and accounts payable were primarily a result
of the seasonal nature of the Company's business. There were no other
changes in significant balance sheet accounts which had a material effect
on the cash flows of the Company. The financing activities during the
nine and twelve month periods included the June, 1995 issuance of
1,380,000 shares of common stock in a public stock offering with net
proceeds from the sale amounting to approximately $18,900,000 as of
September 30, 1995. The net proceeds were used to repay short-term debt
and fund the Company's construction program. The financing activities in
all periods also reflected the retirement of long-term debt, dividend
payments, the issuance of stock through the Company's various stock
purchase plans and the net activity of short-term borrowings.
The Company has authorized as of September 30, 1995, specific
purchases and construction projects amounting to $27,059,000 of its 1995
utility capital budget of $36,868,000 and $4,182,000 of its non-utility
capital budget of $4,855,000. Total capital expenditures for 1996, 1997
and 1998 are anticipated to be approximately $33,000,000 in each year.
In the third quarter of 1995 the Company completed construction of a
twenty-eight mile main which now connects two of its fastest growing
distribution systems located in Middle Tennessee and is designed to
provide the Company's current customers with the lowest possible priced
gas through increased gas supply flexibility. Included in the 1995
utility authorized amount stated above is $5,694,000 related to this
project.
In the third quarter of 1995, the Company announced a consolidation
plan under which five of the Company's local operations in its
Virginia/East Tennessee Division were consolidated into two new operating
centers. As a result of the plan implementation, costs of approximately
$900,000 ($550,000 after income taxes) related to early retirement and
severance programs and employee relocation expenses were recorded in
September, 1995. The Company expects a reduction in annual expenses of
approximately $1,000,000 before income taxes as a result of this change.
In June, 1995, the Company entered into an agreement to pay
$1,787,000 to Union Electric Company (Union Electric) whereby Union
Electric agreed to assume responsibility for the Company's continuing
investigation and environmental response action obligations as outlined
in the feasibility study related to a former manufactured gas plant site
in Keokuk, Iowa. At September 30, 1995, the Company had $1,430,000
accrued for its remaining liability related to the agreement. This
amount is to be paid in equal annual payments over a four year period
beginning July 1, 1996. The Company has deferred the accrued amount and
expects approval for recovery in its next rate proceeding in Iowa.
The Company owns former manufactured gas plant sites in Johnson City
and Bristol, Tennessee and Hannibal, Missouri. The Company is unaware of
any information which suggests that these sites give rise to a present
health or environmental risk as a result of the manufactured gas process
or that any response action will be necessary. However, the Company has
accrued and deferred for recovery $750,000 associated with the
preliminary survey and invasive study of these sites.
Management expects that expenditures related to response action at
any environmental site will be recovered through rates or insurance, or
shared among other potentially responsible parties. Therefore, the costs
of responding to these sites are not expected to materially affect the
results of operations, financial condition or cash flows of the Company.
During the first quarter of 1995, UCG Energy purchased a 45%
interest in certain contracts related to the gas marketing business of
Woodward Marketing, Inc. (WMI), a Texas corporation. In exchange for the
acquired interest, the shareholders of WMI received $5,000,000 in the
Company's common stock (320,512 shares) and $832,000 in cash in May,
1995, and may, if certain earnings targets are met, receive an additional
payment of $1,000,000 to be paid over a five year period. In exchange for
its own gas marketing contracts and the acquired 45% interest in the WMI
gas marketing contracts, UCG Energy received a 45% interest in a newly
formed limited liability company, Woodward Marketing, L.L.C. (WMLLC).
WMI received a 55% interest in WMLLC in exchange for its remaining 55%
interest in the WMI gas marketing contracts. WMLLC will provide gas
marketing services to industrial customers, municipalities and local
distribution companies. UCG Energy utilized equity accounting, effective
January 1, 1995, for the acquisition.
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13
ITEM 2. CONTINUED
On April 6, 1995, the Company signed a letter of intent to acquire
all the outstanding common stock of Monarch Gas Company (Monarch). The
acquisition will be accounted for as a pooling of interests whereby the
number of shares of the Company's common stock issued will be calculated
based on the book value of Monarch versus the book value of the Company
at December 31, 1994. In addition, the Company will enter into a
$250,000, five year non-compete agreement with the owners of Monarch.
Monarch serves approximately 3,000 customers in small communities
adjacent to the Company's Vandalia, Illinois operation. The Company will
not restate prior years' consolidated financial statements due to
immateriality.
In October, 1995, United Cities Propane Gas of Tennessee, Inc., a
subsidiary of UCG Energy, signed a letter of intent to purchase all of
the propane assets of Duncan Gas Service for $4,337,000. In addition,
the subsidiary will enter into a ten year non-compete agreement for
$250,000. This acquisition will add approximately 2,000 customers in the
Johnson City, Tennessee area.
In March, 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." This Statement imposes
stricter criteria for regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. The Company
anticipates adopting this standard on January 1, 1996, and does not
expect that adoption will have a material impact on the results of
operations, financial condition or cash flows of the Company based on the
current regulatory structure in which the Company operates. This
conclusion may change in the future as a result of a change in
regulation.
On April 28, 1995, the Company filed to increase rates on an annual
basis by $810,000 in the state of Virginia. The proposed rate increase
became effective in late September, 1995. The increase will be subject
to refund pending the final order which is expected in the second quarter
of 1996.
Effective September 1, 1995, the Company received an annual rate
increase of $2,700,000 in the state of Kansas. The Company had filed on
January 27, 1995, to increase rates by $4,230,000 on an annual basis.
Effective October 14, 1995, the Company received an annual rate increase
of $903,000 in the state of Missouri. The Company had filed on November
8, 1994, to increase rates by $1,100,000 on an annual basis. Effective
mid-November, 1995, the Company received an annual rate increase of
$2,227,000 in the state of Tennessee. The Company had filed on May 15,
1995, to increase rates by $3,951,000 on an annual basis.
In an election held on April 7, 1995, 96 employees in Columbus,
Georgia voted not to be represented by a union.
The Company believes its short-term lines of credit are sufficient
to meet anticipated short-term requirements. At September 30, 1995, the
Company had $84,000,000 in short-term lines of credit, including master
and banker's acceptance notes, bearing interest primarily at the lesser
of prime or a negotiated rate during the term of each borrowing. At
September 30, 1995, $36,548,000 was outstanding under these arrangements.
13
14
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS.
See December 31, 1994 Form 10-K and Part I of this filing.
ITEM 5. OTHER INFORMATION.
The Board of Directors of the Company met on October 28, 1995, and
appointed Jerry H. Ballengee to serve as a director of the Company
until the shareholders' annual meeting in 1996.
(See Amended By-Laws of the Company filed with this report as Exhibit
3.01).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits-See list of Exhibits on page 15 hereof.
(b) Reports on Form 8-K.
None
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15
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
LIST OF EXHIBITS
3.01 Amended By-Laws of Company as Amended October 28, 1995.
12.01 Computation of Ratio of Consolidated Earnings to Fixed Charges.
27 Financial Data Schedule (for SEC use only).
15
16
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED CITIES GAS COMPANY
/s/ Adrienne H. Brandon
---------------------------------------
Adrienne H. Brandon
Vice President and Controller
On behalf of the Registrant
Date: November 7, 1995
16