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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995 Commission file number 0-1284
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
UNITED CITIES GAS COMPANY
(Exact name of registrant as specified in its charter)
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ILLINOIS & VIRGINIA 36-1801540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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5300 MARYLAND WAY, BRENTWOOD, TN 37027
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (615) 373-5310
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
Name of Each Exchange on
Title of Each Class Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. (The aggregate market value shall be computed
by reference to the price at which the stock was sold or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing) $202,266,708. (As of February 29, 1996). Excludes shares
owned by Directors and Officers (306,628) who might be deemed affiliates.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date (applicable only to
corporate registrants).
Common Stock 12,753,810 shares (As of February 29, 1996)
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DOCUMENTS INCORPORATED BY REFERENCE: LIST THE FOLLOWING DOCUMENTS IF
INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE DOCUMENT
IS INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS; (2) ANY PROXY OR
INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED PURSUANT TO RULE 424(b) OR
(c) UNDER THE SECURITIES ACT OF 1933. (THE LISTED DOCUMENTS SHOULD BE CLEARLY
DESCRIBED FOR INDENTIFICATION PURPOSES.) PART III, PROXY STATEMENT (EXCEPT
FOR THE REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS AND THE
PERFORMANCE GRAPH).
A LIST OF EXHIBITS APPEARS ON PAGE 56 HEREOF.
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TABLE OF CONTENTS
ITEM NO. CAPTION PAGE
- -------- ------- -----
PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 17
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters 18
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . 18
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . 28
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART III
10. Directors and Executive Officers of the Company. . . . . . . . . . . . . 28
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 28
12. Security Ownership of Certain Beneficial Owners and Management . . . . . 28
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 28
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . 28
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
List of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 56
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PART I
ITEM 1. BUSINESS
GENERAL
United Cities Gas Company (Cities) was incorporated under the laws of the
State of Illinois on September 21, 1929. Cities' predominant business is the
distribution of natural gas. As of December 31, 1995, Cities supplied natural
gas service to approximately 308,000 customers. In addition to its business of
natural gas distribution, Cities sells and installs gas appliances and performs
certain appliance service work.
Since 1985, Cities has significantly increased its customer base by adding
approximately 180,000 new customers to its natural gas distribution system.
The table below reflects the areas of growth through acquisitions and internal
marketing efforts, including population growth within Cities' service areas.
AREAS OF GROWTH CUSTOMERS ADDED
Acquisition of Tennessee-Virginia Energy Corporation (December, 1986).................... 17,000
Acquisition of Great River Gas Company (May, 1989)....................................... 17,000
Acquisition of Union Gas System, Inc. (December, 1989)................................... 65,000
Other acquisitions....................................................................... 6,000
Internal growth.......................................................................... 75,000
---------
180,000
=========
Cities has two wholly-owned subsidiaries. One subsidiary, United Cities
Gas Storage Company (UCG Storage), was formed as a Delaware corporation in
December 1989 to provide natural gas storage services. In 1989, a natural gas
storage field was purchased in Kentucky to supplement natural gas used by
Cities' customers in Tennessee and Illinois. In addition, natural gas storage
fields located in Kansas and included in Cities' 1989 acquisition of Union Gas
System, Inc. were sold to UCG Storage. These fields are used to supplement
natural gas used by Cities' Kansas customers.
The other subsidiary, UCG Energy Corporation (UCG Energy), incorporated
under the laws of Delaware in 1965, leases appliances, real estate and
equipment, and vehicles to Cities and others, and is engaged in exploration and
production activites. UCG Energy also owns a 45% interest in Woodward
Marketing, L.L.C. (WMLLC) which provides natural gas marketing services to
industrial customers, municipalities and local distribution companies,
including Cities. WMLLC was formed in 1995.
UCG Energy has two wholly-owned subsidiaries, United Cities Propane Gas of
Tennessee, Inc. and UCG Leasing, Inc. United Cities Propane Gas of Tennessee,
Inc., incorporated under the laws of Tennessee in 1976, is engaged in the
retail distribution of propane (LP) gas. As of December 31, 1995, the propane
operation served approximately 24,000 customers in Tennessee, Virginia and
North Carolina. UCG Leasing, Inc. was incorporated under the laws of Georgia
in 1987 and leases vehicles, equipment and real estate to Cities.
Cities and its subsidiaries, UCG Storage and UCG Energy and its
subsidiaries, are hereinafter referred to collectively as the "company".
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The following table summarizes certain information regarding the operation
of each segment of the company's business for the last three years ended
December 31,
1995 1994 1993
------------------- ------------------- ------------------
REVENUES (IN THOUSANDS)
Utility............................................. $271,860 87% $280,984 86% $287,507 86%
-------- ----- --------- ----- -------- -----
Subsidiaries:
UCG Energy Corporation -
Propane Division................................ 24,651 8% 20,788 6% 18,203 5%
Rental Division................................. 5,959 2% 6,449 2% 6,633 2%
Utility Services Division....................... 3,823 1% 11,146 4% 14,073 4%
-------- ----- --------- ----- -------- -----
Total UCG Energy Corporation.................. 34,433 11% 38,383 12% 38,909 11%
United Cities Gas Storage Company................. 7,443 2% 7,128 2% 8,837 3%
-------- ----- --------- ----- -------- -----
Total Subsidiaries............................ 41,876 13% 45,511 14% 47,746 14%
-------- ----- --------- ----- -------- -----
Total Revenues (1).................................. $313,736 100% $326,495 100% $335,253 100%
======== ===== ========= ===== ======== =====
COMMON STOCK EARNINGS
Utility............................................. $5,745 58% $7,817 65% $7,877 65%
-------- ----- --------- ----- -------- -----
Subsidiaries:
UCG Energy Corporation -
Propane Division................................ 1,123 11% 1,122 9% 1,010 8%
Rental Division................................. 1,693 17% 2,024 17% 2,170 18%
Utility Services Division....................... 634 6% 604 5% 595 5%
-------- ----- --------- ----- -------- -----
Total UCG Energy Corporation.................. 3,450 34% 3,750 31% 3,775 31%
United Cities Gas Storage Company................. 740 8% 526 4% 468 4%
-------- ----- --------- ----- -------- -----
Total Subsidiaries............................ 4,190 42% 4,276 35% 4,243 35%
-------- ----- --------- ----- -------- -----
Total Common Stock Earnings......................... $9,935 100% $12,093 100% $12,120 100%
======== ===== ========= ===== ======== =====
IDENTIFIABLE ASSETS
Utility............................................. $389,278 85% $358,364 85% $336,480 84%
-------- ----- --------- ----- -------- -----
Subsidiaries:
UCG Energy Corporation............................ 47,098 10% 39,402 9% 41,950 10%
United Cities Gas Storage Company................. 24,001 5% 23,434 6% 23,090 6%
-------- ----- --------- ----- -------- -----
Total Subsidiaries............................ 71,099 15% 62,836 15% 65,040 16%
-------- ----- --------- ----- -------- -----
Total Identifiable Assets........................... $460,377 100% $421,200 100% $401,520 100%
======== ===== ========= ===== ======== =====
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(1) Sales to affiliated companies described under "Subsidiary Operations".
For additional information, see the "Consolidated Statements of Income" for
the years ended December 31, 1995, 1994 and 1993 under Item 8. Financial
Statements and Supplementary Data.
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UTILITY OPERATIONS
GENERAL
Cities distributes natural gas under regulated rates to approximately
308,000 customers in the states of Tennessee, Kansas, Georgia, Illinois,
Virginia, Missouri, Iowa and South Carolina. Total operating revenues for the
year ended December 31, 1995 were $271,860,000, of which approximately 47% was
derived from residential customers, 25% from industrial customers, 26% from
commercial customers and 2% from other sources. The ten largest customers of
Cities accounted for 6.3% of operating revenues in 1995 and the largest of
these customers accounted for 1.9%. Cities serves a diverse industrial load
with customers engaged in the manufacture of asphalt, cars, car parts,
chemicals, electronics, food products, metal fabrication, textiles and wire,
among others. Cities also serves several colleges and a major army base.
Cities is currently structured into four operating divisions. The percent
of revenues contributed by each division for the three years ended December 31
is as follows:
DIVISIONS 1995 1994 1993
---------------- ---------------- -----------------
Virginia/East Tennessee...................... 31% 32% 31%
Georgia/South Carolina....................... 21% 22% 21%
Illinois/Tennessee/Missouri.................. 22% 21% 22%
Kansas/Iowa/Missouri......................... 26% 25% 26%
---------------- ---------------- -----------------
100% 100% 100%
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NATURAL GAS SUPPLY
To encourage more competition among natural gas suppliers, the Federal
Energy Regulatory Commission (FERC) issued Orders 636, 636-A and 636-B
(collectively, Order 636) in 1992. Order 636 required interstate pipelines to
unbundle or separate gas sales, transportation and storage services by the
1993-1994 winter heating season. The pipelines' sales services were previously
combined and sold as a single service. With the implementation of Order 636,
the pipelines discontinued their traditional merchant function. Each
distribution company is now responsible for obtaining all of its gas supply in
the open market. The unbundling of these services allows Cities more
flexibility in selecting and managing the type of services required to provide
its customers with the lowest possible priced gas while maintaining a reliable
gas supply. However, this also places an additional responsibility on Cities
to obtain its natural gas supply in the open market on a timely basis to
fulfill its commitments during peak demand periods. Management believes that,
to date, Cities has been successful in managing its portfolio of spot and term
supplies that it purchases from producers and marketers in the open market on
the thirteen interstate pipelines on which it operates, resulting in reliable
supplies at a competitive price.
Another aspect of Order 636 allowed the pipelines to set rates to recover
a higher portion of their fixed costs through monthly demand charges. As a
result, Cities is charged a higher fixed amount each month, regardless of
through-put. Since Cities must contract for pipeline capacity to meet peak
demand, this has the effect of increasing Cities' fixed cost of gas. Many
elements such as company owned gas storage facilities, peak shaving plants and
the liquefied natural gas (LNG) plant and, in some instances, storage contracts
with Cities' suppliers are being utilized to reduce these higher pipeline
demand charges. Order 636 also required pipelines to set up capacity release
mechanisms on their systems to allow holders of firm capacity and firm storage
to release these services when they are not needed. Cities is active in
releasing capacity during off peak periods and the majority of revenues
generated by this activity is used to offset pipeline demand charges. In
addition, three projects have recently been completed and various other
projects are in the preliminary stages to add additional pipeline suppliers in
several of Cities' operating areas. These projects will not only promote
competition among the pipelines, but will also provide increased reliability of
gas supply. Adding alternatives will provide bargaining power which should,
over time, decrease Cities' pipeline capacity costs. Purchased Gas Adjustment
(PGA) clauses in effect in the states in which Cities operates allow Cities to
pass through to its customers, subject to prudency and/or administrative
reviews, any increase or decrease in rates charged to Cities related to the
purchase and transportation of natural gas. Effective April 1, 1995, and for
an experimental two year
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period, the PGA clause in Tennessee was modified by an incentive rate program
which compares Cities' purchased gas prices to market prices. The gains or
losses to be recognized by Cities as a result of the incentive program are
limited to a maximum of $25,000 per month.
Considerable planning is required to project demand for the winter period.
In order to provide natural gas at the lowest possible price and to meet peak
demand, Cities must have a sufficient volume of natural gas in underground
storage with its pipeline suppliers, natural gas in UCG Storage's underground
storage facilities, and propane and LNG in its own facilities. Cities normally
injects gas into pipeline storage systems and UCG Storage's storage system
during the summer months and withdraws it in the winter months. At the present
time, the underground storage facilities of UCG Storage have a maximum daily
output capability of approximately 45,000 Mcf.
Other storage facilities owned by Cities are used to provide short-term
supplies to meet peak demand. Cities has nine propane peak shaving plants with
a total capacity of approximately 1,050,000 gallons that can produce an
equivalent of 19,459 Mcf daily and a LNG storage facility with a capacity of
500,000 Mcf which can inject a daily volume of 30,000 Mcf in the system.
Cities has the ability to serve approximately 60% of its peak day load through
the use of company owned storage facilities, storage contracts with Cities'
suppliers and peaking facilities throughout the system. This ability provides
the operational flexibility and security of supply required to meet the needs
of the highly weather sensitive firm market.
REGULATION
In each state in which Cities operates, its rates, services and operations
as a natural gas distribution company are subject to general regulation by the
state public service commission. Cities' pipeline suppliers, but not Cities,
are subject to regulation by the FERC (see "Utility Operations-Natural Gas
Supply"). Cities' rates, which vary in its different regulatory jurisdictions,
are determined by the cost of purchased gas to Cities, rate of return, type of
service and volume of use by the customer. In addition, the issuance of
securities by Cities is subject to approval by the state commissions, except in
South Carolina and Iowa. Missouri only regulates the issuance of secured debt.
Cities operates in each community where necessary under a franchise granted
by the municipality for a fixed term of years. To date, Cities has been able to
renew franchises and expects to continue to do so in the future. Cities
considers the franchises held valid and adequate for the conduct of its
business. In each of the service areas where it operates, Cities considers
that its rights to maintain gas lines through unincorporated communities over
private rights-of-way are, as a group or system, satisfactory for the adequate
conduct of the business of Cities. Cities also has all required certificates
of convenience and necessity for the operation of its properties and the
conduct of its business from the appropriate state public utility regulatory
agencies.
The Tennessee and Georgia Public Service Commissions approved the
implementation of Weather Normalization Adjustments (WNAs) effective in late
1991 and 1990, respectively. The WNAs, effective October through May each year
in Georgia and November through April each year in Tennessee, allow Cities to
increase the base rate portion of bills when weather is warmer than normal and
decrease the base rate when weather is colder than normal.
On December 8, 1995, Cities filed to increase rates on an annual basis by
$750,000 in the state of Iowa. Cities expects that any increase granted will
be effective by the fourth quarter of 1996. Effective November 15, 1995,
Cities received an annual rate increase of $2,227,000 in the state of
Tennessee. Cities had filed to increase rates by $3,951,000 on an annual
basis. Effective October 14, 1995, Cities received an annual rate increase of
$903,000 in the state of Missouri. Cities had filed to increase rates by
$1,100,000 on an annual basis. Effective September 1, 1995, Cities received an
annual rate increase of $2,700,000 in the state of Kansas. Cities had filed to
increase rates by $4,230,000 on an annual basis. Effective February 7, 1995,
Cities received an annual rate increase of $253,000 in the state of South
Carolina. Cities had filed to increase rates by $341,000 on an annual basis.
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In April 1995, Cities filed to increase rates on an annual basis by
$810,000 in the state of Virginia. Cities was granted permission by the
Virginia State Corporation Commission to implement the proposed rate increase
effective September 29, 1995. The increase is subject to refund pending a
final order by the commission which is expected in the fourth quarter of 1996.
In an order issued in November 1994, the Virginia State Corporation
Commission reduced Cities authorized rate of return in Virginia from 11.26% to
10.26%, resulting in a reduction in annual revenues of $218,000. This
reduction was effective April 1, 1993. Excess revenues of approximately
$370,000, plus interest, collected under interim rates through December 31,
1994, were refunded to Cities' Virginia customers in 1995. In addition, the
commission determined that Cities had overcollected gross receipts tax from its
customers from 1988 through mid-1993 and ordered the refund of $301,000, plus
interest. This amount was also refunded to Cities' Virginia customers in 1995.
As a part of a settlement agreement in the 1992 rate proceeding in
Tennessee, Cities agreed to a management audit. The management audit report
was issued in 1994. Management agreed with a majority of the recommendations
made by the auditors and a number of recommendations have been or are currently
in the process of being implemented. As a part of the settlement agreement in
the 1995 rate proceeding in Tennessee, Cities resolved all outstanding issues
related to the management audit. The implementation of the recommendations and
final resolution of these matters did not have a material effect on the results
of operations, financial condition or cash flows of the company.
The FERC has permitted pipelines to recover from their customers,
including Cities, the prudently incurred costs of implementing Order 636,
referred to as transition costs. Based on current information from the
pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred
$2,862,000 and $6,739,000, respectively, as its estimated share of the
remaining liability related to these transition costs. The 1995 estimate may
differ from the final amount of future transition costs recovered from Cities.
Cities has been granted permission through approved PGA filings or specific
orders in all the states in which it operates to recover these transition costs
from its customers.
Cities' pipeline suppliers have liabilities to producers for payments
under purchase contracts for quantities of gas for which deliveries have not
been taken. Pipeline suppliers received permission from the FERC to recover
from their customers, including Cities, a portion of their take-or-pay
liabilities. Cities has been granted permission in all the states in which it
operates to recover from its customers any take-or-pay costs. Based on current
information from the pipelines, as of December 31, 1995 and 1994, Cities had
accrued and deferred $1,172,000 and $2,086,000, respectively, as its estimated
share of the remaining liability related to these take-or-pay costs. The 1995
estimate may differ from the final amount of future take-or-pay costs recovered
from Cities.
Statement of Financial Accounting Standards No. 106 (SFAS 106),
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
requires Cities to record the expected costs of postretirement health and life
insurance benefits during the years the employees render service. Prior to
January 1, 1993, the effective date of Cities' adoption of SFAS 106, Cities
recognized these costs on a cash basis. Costs related to these benefits
calculated in accordance with SFAS 106 amounted to $1,691,000, $1,649,000 and
$1,331,000 in 1995, 1994 and 1993, respectively. In fiscal 1993, the amount of
expense recognized on a cash basis would have been $663,000. The accumulated
benefit obligation of $8,894,000 existing at January 1, 1993, is being
amortized over a twenty year period as allowed by SFAS 106.
Cities has received approval to recover SFAS 106 costs in South Carolina,
Kansas, Iowa, Illinois, Missouri and Tennessee. Effective January 1, 1993, the
Tennessee commission allowed Cities to defer the difference between cash
payments and SFAS 106 expense. In the 1995 rate proceeding in Tennessee,
Cities received permission to recover the deferred amount of $553,000, plus
interest, over a five year period. Cities discontinued deferring the
difference in November 1995. The Virginia commission has approved the recovery
of SFAS 106 costs in rates. However, the accumulated benefit obligation will
be recovered over forty years as opposed to the twenty year amortization period
allowed by SFAS 106. The difference
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in the amortization period allowed by the Virginia commission does not have a
material effect on the results of operations, financial condition, or cash
flows of the company. The Georgia commission did not render a decision on SFAS
106 in Cities' most recent rate proceeding in that state. As required by some
commissions, Cities has established a trust fund to accumulate the difference
between the cash payments for postretirement benefits and SFAS 106 expense.
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Set forth below is a table containing information relating to the state
regulatory bodies which have jurisdiction over Cities and its rates. Amounts
realized from rate increases may differ significantly from amounts authorized
depending on volumes of gas sold and customer mix.
REGULATORY JURISDICTION
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GEORGIA TENNESSEE VIRGINIA SOUTH CAROLINA
------------------- ------------------- ------------------- -------------------
Purchased Gas Adjustment Allowed upon filing Allowed upon filing Allowed upon filing Allowed upon filing
Weather Normalization Effective November Effective November - -
Adjustment 1990 1991
Regulatory Commission 5 commissioners 3 commissioners 3 commissioners 7 commissioners
Make Up elected at large elected at large (2) elected by General elected by legislature
Assembly on approval of merit
selection panel
Statutory Time Limit 6 months from date 6 months from date 150 days from date 6 months from date
on Rate Orders of filing of filing of filing of filing
Empowered to Grant Yes Yes Yes No
Interim Rate Relief
Latest General Rate November 1992 November 1995 November 1994 February 1995
Adjustment
Date of Application May 1992 May 1995 April 1993 August 1994
Annualized Revenue Increase $1,900,000 $2,227,000 ($218,000) $253,000
(Decrease) Authorized
Rate of Return on 10.78% 11.03% (1) 10.261% 10.73%
Investment Authorized
Rate of Return on 12.00% 12.60% (1) 11.20% 11.75%
Equity Authorized
- -------------------------------------------------------------------------------
(1) Because the 1995 rate case was stipulated, the returns on investment and
equity were not agreed upon. These rates represent the last authorized
rates.
(2) Commissioners will become appointed in 1996 and will take office July 1,
1996.
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REGULATORY JURISDICTION
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ILLINOIS MISSOURI KANSAS IOWA
------------------- ------------------- ------------------- -------------------
Purchased Gas Adjustment Allowed upon filing Allowed upon filing Allowed upon filing Allowed upon filing
Weather Normalization - - - -
Adjustment
Regulatory Commission 7 commissioners 5 commissioners 3 commissioners 3 commissioners
Make Up appointed by appointed by appointed by appointed by governor
governor governor governor with Senate approval
and minority party
representation
Statutory Time Limit 11 months from 11 months from 240 days from 10 months from
on Rate Orders date of filing date of filing date of filing date of filing
Empowered to Grant Yes Yes Yes Yes
Interim Rate Relief
Latest General Rate November 1990 October 1995 September 1995 December 1991
Adjustment
Date of Application December 1989 November 1994 January 1995 November 1991
Annualized Revenue Increase $639,000 $903,000 $2,700,000 ($55,000)
(Decrease) Authorized $108,000 (1)
Rate of Return on 11.75% 10.58% 10.638% (2) 11.31%
Investment Authorized
Rate of Return on 13.62% 12.15% 12.00% (2) 12.45%
Equity Authorized
- --------------------------------------------------------------------------------
(1) The court awarded an additional increase in rates which was effective
October 1992.
(2) Because the 1995 rate case was stipulated, the returns on investment and
equity were not agreed upon. These rates represent the last authorized
rates.
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UTILITY OPERATING STATISTICS
AVERAGE NUMBER OF CUSTOMERS(1) 1995 1994 1993
-------------- -------------- --------------
Residential............................................ 266,532 259,895 250,051
Commercial............................................. 34,435 33,861 31,849
Industrial Firm........................................ 395 395 395
Industrial Interruptible............................... 251 258 245
-------------- -------------- --------------
301,613 294,409 282,540
============== ============== ==============
ACTUAL NUMBER OF CUSTOMERS AT YEAR END(1) 307,856 300,929 292,329
============== ============== ==============
NATURAL GAS THROUGH - PUT (MCF) (IN THOUSANDS)(2)
Residential............................................ 22,901 21,352 23,055
Commercial............................................. 15,165 14,116 14,435
Industrial Firm........................................ 7,324 8,134 7,509
Industrial Interruptible............................... 11,920 11,002 11,661
-------------- -------------- --------------
57,310 54,604 56,660
Transported Volumes.................................... 17,184 12,574 11,883
-------------- -------------- --------------
Total Through-Put...................................... 74,494 67,178 68,543
============== ============== ==============
REVENUES (IN THOUSANDS)(1)
Residential............................................ $127,603 $129,519 $134,856
Commercial............................................. 70,967 73,376 74,361
Industrial Firm........................................ 27,438 33,772 31,252
Industrial Interruptible............................... 33,338 35,297 36,703
Other.................................................. 4,412 1,813 3,411
-------------- -------------- --------------
263,758 273,777 280,583
Transportation......................................... 8,102 7,207 6,924
-------------- -------------- --------------
$271,860 $280,984 $287,507
============== ============== ==============
RESIDENTIAL (AVERAGE PER CUSTOMER)
Annual Usage Mcf....................................... 86 82 92
Annual Revenue......................................... $479 $498 $539
Revenue Per Mcf........................................ $5.57 $6.07 $5.85
COMMERCIAL (AVERAGE PER CUSTOMER)
Annual Usage Mcf....................................... 440 417 453
Annual Revenue......................................... $2,061 $2,167 $2,335
Revenue Per Mcf........................................ $4.68 $5.20 $5.15
- ---------
(1) Residential, industrial firm and certain commercial customers are entitled
to receive gas service on a continuous, uninterrupted basis subject to the
application of their priority classification in the event of gas
shortages. Industrial interruptible and certain commercial customers
receive a low cost, load balancing service, which permits Cities to
interrupt service and which is limited to users with alternative fuel
sources for use when service is interrupted. Interruptible rates are
generally lower than firm rates.
(2) The following table classifies the effect of changes in volumes (Mcfs) of
natural gas delivered during 1995, 1994 and 1993.
1995 1994 1993
-------------- -------------- --------------
(IN THOUSANDS)
Prior year volumes........................ 67,178 68,543 62,713
Changes in volumes:
Residential................................. 1,549 (1,703) 2,574
Commercial................................ 1,049 (319) 1,111
Industrial Firm.............................. (810) 625 (181)
Industrial Interruptible.................... 918 (659) 1,560
Transported volumes.......................... 4,610 691 766
-------------- -------------- --------------
74,494 67,178 68,543
============== ============== ==============
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ACQUISITIONS
Effective March 1, 1994, the company purchased the natural gas system in
Palmyra, Missouri from Western Resources, Inc. for approximately $665,000. The
company also obtained a ten year non-compete agreement. Consideration for the
agreement is contingent upon volumes sold to a certain industrial customer with
payments made over a three year period, not to exceed $720,000. The system
serves approximately 1,400 natural gas customers.
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 Cities' Vandalia, Illinois
operation. Pending regulatory approval, the company expects this acquisition
to be final by the second quarter of 1996 and will not restate prior years'
consolidated financial statements due to immateriality.
SEASONAL NATURE OF BUSINESS
Cities' business is highly seasonal in nature and heavily dependent upon
weather due to Cities' substantial heating load. In order to moderate the
impact of weather on the financial results of the utility operation, Cities
sought and received approval from the Tennessee and Georgia commissions to
implement Weather Normalization Adjustments (WNAs). See "Utility
Operations-Regulation" for additional information concerning WNAs. Cities'
business will still be seasonal in nature resulting in greater earnings during
the winter months and will continue to be dependent upon weather, especially in
those states where a WNA has not been implemented. However, Cities seeks to
minimize the quarterly variations in sales volumes and earnings by sales to
industrial customers and the diversified activities of its unregulated
subsidiaries. See chart of quarterly earnings on page 47 for the years 1995
and 1994.
OTHER UTILITY OPERATIONS
In addition to its sales of natural gas, Cities engages in direct
merchandising and repair of gas appliances. The following table summarizes
revenues from these sources for 1995, 1994 and 1993.
1995 1994 1993
-------------- -------------- --------------
(IN THOUSANDS)
Appliance Sales.............................. $1,791 $2,537 $3,276
Jobbing and Service.......................... 1,288 1,256 1,148
-------------- -------------- --------------
$3,079 $3,793 $4,424
============== ============== ==============
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SUBSIDIARY OPERATIONS
UNITED CITIES GAS STORAGE COMPANY
UCG Storage is engaged in maintaining and operating gas wells for natural
gas storage. UCG Storage owns and operates storage fields in Kansas and
Kentucky. The storage fields provide a mechanism to purchase and store gas for
distribution during the winter and other times when feasible. In addition to
providing peak shaving gas, the storage facilities can also be used to balance
gas supplies, allowing extra gas to be diverted into the field when contract
demand is not needed and withdrawn when gas usage exceeds contract demand.
Included in the revenues of UCG Storage are affiliated revenues of $7,341,000,
$7,037,000 and $8,749,000 in 1995, 1994 and 1993, respectively, for storage
services and natural gas provided to Cities' customers in Tennessee, Kansas and
Illinois.
The following table provides information about the storage fields.
DAILY
FIELD CAPACITY CUSHION GAS DELIVERABILITY
- ----- -------------- -------------- --------------
(Mcf)
Kansas storage fields............................. 7,037,000 1,879,000 15,000
Kentucky storage field............................ 3,300,000 1,600,000 30,000
-------------- -------------- --------------
10,337,000 3,479,000 45,000
============== ============== ==============
UCG ENERGY CORPORATION AND SUBSIDIARIES
The activities of UCG Energy and its subsidiaries are described below.
PROPANE DIVISION
The Propane Division currently operates through United Cities Propane Gas
of Tennessee, Inc. (UCPT), a wholly-owned subsidiary of UCG Energy. The
Propane Division engages in the retail distribution of propane (LP) gas, the
wholesale supply and transportation of LP gas, the transportation of certain
products for other companies and the direct merchandising and repair of propane
gas appliances. Each town operation has its own storage facility with a total
Propane Division storage capacity of 1,830,000 gallons.
The following table contains information, as of December 31, 1995,
regarding the number of customers.
SERVICE AREAS CUSTOMERS
Jackson, TN..................................................... 1,025
Manchester, TN.................................................. 1,139
Winchester, TN.................................................. 1,239
Rock Island, TN................................................. 929
Franklin, TN.................................................... 1,335
Murfreesboro, TN................................................ 1,983
Hartsville, TN.................................................. 1,906
Maryville, TN................................................... 3,049
Sevierville, TN................................................. 1,791
Kingston, TN.................................................... 1,514
Morristown, TN.................................................. 1,431
Tazewell, TN.................................................... 166
Johnson City, TN................................................ 3,212
Mountain City, TN............................................... 1,467
Boone, NC....................................................... 1,916
---------------
Total....................................................... 24,102
===============
Effective January 1, 1996, UCPT purchased substantially all the assets of
Duncan Gas Service for approximately $4,310,000. In addition, UCPT entered
into a ten year non-compete agreement with the prior owners for $250,000, to be
paid over a ten year period. This acquisition added approximately 2,000
customers in the Johnson City, Tennessee area.
12
15
Effective May 22, 1995, UCPT purchased all of the propane transportation
assets of Transpro South, Inc., a common carrier corporation, for approximately
$218,000. In addition, UCPT entered into a ten year non-compete agreement with
the prior owner for $6,000.
Effective January 1, 1995, UCPT purchased substantially all of the assets
of Harrell Propane, Inc. for approximately $1,383,000. In addition, UCPT
entered into ten year non-compete agreements with the prior owners for
$250,000, to be paid over an eight year period. This acquisition added
approximately 1,300 propane customers in the Murfreesboro, Tennessee area.
Effective April 14, 1994, UCPT purchased all of the assets of Hurley's
Propane Gas for approximately $938,000. In addition, UCPT entered into ten
year non-compete agreements with the prior owners for $100,000, to be paid over
a five year period. This acquisition added approximately 700 propane customers
in the Morristown, Tennessee area.
Effective August 1, 1993, UCPT purchased the issued and outstanding shares
of common stock of High Country Propane, Inc. for $1,600,000, less liabilities
assumed of $820,000. In addition, UCPT obtained ten year non-compete
agreements for $100,000, to be paid over a five year period. This acquisition
added approximately 1,400 propane customers in the Boone, North Carolina area.
In 1995, 1994 and 1993, the Propane Division contributed 72%, 54% and 47%,
respectively, of UCG Energy's total revenues. Of UCG Energy's gross properties
at December 31, 1995, approximately 47% was related to the Propane Division.
RENTAL DIVISION
UCG Energy's Rental Division, which includes UCG Leasing, Inc., leases real
estate and vehicles to Cities and real estate and appliances to non-affiliated
third parties. The Rental Division's revenues were approximately 17% of UCG
Energy's total revenues in 1995, 1994 and 1993. Included in the revenues of
the Rental Division are affiliated revenues of $5,307,000, $5,827,000 and
$6,042,000 for the years 1995, 1994 and 1993, respectively, representing rental
charges to Cities for transportation equipment and office facilities. Of UCG
Energy's gross properties at December 31, 1995, approximately 53% was related
to the Rental Division.
UTILITY SERVICES DIVISION
UCG Energy's Utility Services Division is engaged in exploration and
production activities. The revenues from this division were approximately
11% in 1995, 29% in 1994 and 36% in 1993, of UCG Energy's total revenues.
Included in the Utility Services Division's revenues are affiliated revenues of
$112,000, $701,000 and $1,139,000 for the years 1995, 1994 and 1993,
respectively. These revenues represent purchases by Cities of energy-related
products from the Utility Services Division. A decision to discontinue the
distribution of energy-related products by the Utility Services Division was
made by management in June 1994. The discontinuance of this activity, which
was completed mid-1995, had no material effect on 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 up to $1,000,000 in cash 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 provides gas marketing services to
industrial customers, municipalities and local distribution companies,
including Cities. UCG Energy utilized equity accounting, effective January 1,
1995, for this acquisition. The excess of the purchase price over the value of
the net tangible assets, amounting to approximately $5,400,000, was allocated
to intangible assets consisting of customer contracts and goodwill, which are
being amortized over ten and twenty years, respectively.
13
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COMPETITION
Cities distributes natural gas primarily to residential, commercial and
high-priority industrial users and intends to aggressively seek additional
numbers of such customers. Competition exists between natural gas and other
forms of energy available to customers. Cities is experiencing competition for
each class of customer; electricity is the primary competition for residential
and commercial customers, and #2 and #6 fuel oil is the primary competition for
industrial customers. In addition, certain customers, primarily industrial, may
have the ability to by-pass Cities' distribution system by connecting directly
with a pipeline.
Cities has received approval from all the public service commissions in the
states in which it operates, except Iowa, to place into effect a negotiated
tariff rate which allows Cities to maintain industrial loads at lower margin
rates. Iowa has rules which allow for flexible rates. These rates are
competitive with the price of alternative fuels. In addition, certain
industrial customers have changed from firm to interruptible rate schedules in
order to obtain natural gas at a lower cost. Additionally, Cities has received
approval from all state commissions to provide transportation service of
customer-owned gas (see Item 1. Business - "Utility Operations-Natural Gas
Supply").
UCG Energy's propane subsidiary is in competition with other suppliers of
propane, natural gas and electricity. Competition exists in the areas of price
and service. The wholesale cost of propane is subject to fluctuations primarily
based on demand, availability of supply and product transportation costs.
Propane storage facilities can be utilized to store purchased gas when the cost
is more economical, thus enabling UCG Energy to more competitively price its
product. However, during periods of colder than normal weather, when demand is
high, UCG Energy may have to replace its supply of gas at higher costs, which
may require UCG Energy to sell at reduced margins to match its competition.
The Utility Services Division of UCG Energy, through its 45% interest in
WMLLC, competes with other natural gas brokers in obtaining natural gas supplies
for customers. The Rental Division competes with other rental companies.
UCG Storage charges rates to Cities that are subject to review by the
various commissions in the states within which the storage service is provided
to Cities. Therefore, UCG Storage's rates must be competitive with other
storage facilities. UCG Storage also stores natural gas for unrelated third
parties. As a result, UCG Storage is in competition with other companies that
store natural gas as to rates charged and deliverability of natural gas. Storage
agreements between UCG Storage and Cities give Cities first priority to any
storage services.
PERSONNEL
At December 31, 1995, the company employed 1,298 full time employees,
including 99 who are represented by a union. The agreement between the company
and the union that represents 88 employees in Kansas expires October 31, 1996,
and the company expects to renegotiate the terms of the agreement prior to the
expiration date. In addition, an election is scheduled for March 29, 1996, in
Hannibal, Missouri for 20 employees to determine if they will be represented by
a union. On March 6, 1996, the International Union of Operating Engineers
filed a petition to represent approximately 97 employees in Columbus, Georgia,
and an election is scheduled for April 19, 1996. Of the full time employees,
235 are engaged in the operations of the Illinois/Tennessee/Missouri Division,
243 in the Virginia/East Tennessee Division, 237 in the Georgia/South Carolina
Division, 274 in the Kansas/Iowa/Missouri Division, 179 administrative and
supervisory personnel in the corporate office, and 130 in UCG Energy's
operating locations. At December 31, 1995, there were 559 employees
participating in the employee stock purchase plan and 1,004 employees
participating in the company's 401k savings plan. All corporate general and
administrative functions, as well as the overseeing of engineering, marketing,
accounting, finance, operations and human resources are handled at the
company's corporate offices in Brentwood and Franklin, Tennessee. Direct
functions dealing with engineering, marketing, accounting, operations and human
resources for the service locations of each division are handled at the
division levels.
14
17
OPERATING AREAS
[MAP]
NATURAL GAS
ILLINOIS/TENNESSEE/MISSOURI DIVISION
Illinois Tennessee Missouri
- - Virden - Union city - Neelyville
- - Vandalia - Franklin +
- - Salem - Murfreesboro
- - Harrisburg - Colubmia
- - Metropolis - Shelbyville
KANSAS/IOWA/MISSOURI DIVISION
Kansas Iowa Missouri
- - Wyandotte Cty - Keokuk - Canton
- - Johnson Cty + - Hannibal
- - Yates Center - Palmyra
- - Independence
- - Coffeyville
VIRGINIA/EAST TENNESSEE DIVISION
Virginia Tennessee
- - Abingdon - Maryville
- - Marion - Morristown
- - Wytheville - Greeneville
- - Pulaski - Johnson City +
- - Radford - Kingsport
- - Blacksburg - Bristol
GEORGIA/SOUTH CAROLINA DIVISION
Georgia South Carolina
- - Gainesville - Gaffney
- - Columbus +
PROPANE
Tennessee
- - Franklin + - Hartsville - Murfreesboro
- - Rock Island - Manchester - Winchester
- - Maryville - Morristown - Johnson City
- - Mountain City - Kingston - Jackson
- - Sevierville - New Tazewell
NORTH CAROLINA
- - Boone
STORAGE FACILITIES
Natural Gas Storage Propane Bulk Storage
- - Columbus, GA (LNG) - Morristown, TN
- - Barnsley Storage, KY - Winchester, TN
(underground)
- - Liberty Storage, KS
(underground)
PIPELINE SUPPLIERS
- - East Tennessee - Columbia Gulf Transmission Co.
Natural Gas Co. - Natural Gas Pipeline Co. of America
- - Southern Natural - Panhandle Eastern Pipe Line Co.
Gas Co. - Trunkline Gas Co.
- - Williams Natural - Mississippi River Transmission Corp.
Gas Co. - ANR Pipeline Company
- - Transcontinental Gas - Tennessee Gas Pipeline Co.
Pipe Line Corp.
- - Texas Eastern
Transmission Corp.
- - Texas Gas
Transmission Corp.
* Corporate Office - Brentwood, Tennessee + Division Office
15
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EXECUTIVE OFFICERS OF THE COMPANY
HELD PRESENT OTHER POSITIONS HELD
NAME AND POSITION AGE OFFICE SINCE DURING PAST FIVE YEARS
----------------- --- ------------ ----------------------
Dwight C. Baum 83 October 1979
Chairman of the Board
Gene C. Koonce 63 October 1978
President and Chief
Executive Officer
Thomas R. Blose, Jr. 46 July 1990
Senior Vice President-
Operations and
Engineering
James B. Ford 53 April 1986
Senior Vice President
and Treasurer
Shirley M. Hawkins 56 August 1993 Senior Vice President-Administration
Senior Vice President (April 1993-July 1993)
and Secretary Vice President-Human Resources
(April 1987-March 1993)
Glenn B. Rogers 57 April 1983
Senior Vice President-
Gas Supply and Marketing
16
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ITEM 2. PROPERTIES
Cities' properties are located in operating areas as indicated on page 15,
and consist primarily of approximately 7,262 miles of distribution and
transmission mains and approximately 5,519 miles of service lines connecting
the mains to customers' premises. The company also owns and operates nine peak
shaving plants and a LNG plant, as well as underground storage fields which are
used to supplement the supply of natural gas in periods of peak demand (see
Item 1. Business -- "Utility Operations-Natural Gas Supply").
Substantially all of Cities' property is subject to the lien of the
Indenture of Mortgage securing Cities' first mortgage bonds. The following
table sets forth the percentages of property located in the various operating
divisions.
DIVISION PERCENT
--------- -------
Illinois/Tennessee/Missouri................................ 28%
Virginia/East Tennessee.................................... 25%
Georgia/South Carolina..................................... 19%
Kansas/Iowa/Missouri....................................... 28%
-----------------
100%
=================
The capital budget for the company for 1996 is approximately $36,800,000
(utility, $29,000,000 and non-utility, $7,800,000). Based on information
currently available, which is subject to change, the company anticipates
capital expenditures of approximately $31,800,000 in 1997 and $32,100,000 in
1998. These reflect the normal growth in Cities' service areas along with the
increased demands expected for natural gas and propane (LP) service.
Cities follows a regular program of improvements and additions to its
properties. Utility plant additions during 1995 amounted to approximately
$35,160,000 for system upgrading, relocations, and providing new mains, service
lines and metering equipment. During 1995, Cities completed construction of a
twenty-eight mile main which connects two of its fastest growing distribution
systems located in Middle Tennessee and is designed to provide Cities' current
customers with the lowest possible priced gas through increased gas supply
flexibility. Included in the 1995 capital expenditures is $5,700,000 related
to this project. Total utility property at December 31, 1995 amounted to
$445,058,000.
The following table sets forth information with respect to utility property
additions, excluding acquisitions, made by Cities during each of the five years
ended December 31.
GROSS NET
PERIOD ADDITIONS RETIREMENTS ADDITIONS
------ ---------- ----------- ---------
(IN THOUSANDS)
1991 $27,950 3,512 $24,438
1992 $23,484 2,531 $20,953
1993 $27,030 2,826 $24,204
1994 $30,888 2,199 $28,689
1995 $35,160 2,535 $32,625
Non-utility property additions during 1995 amounted to approximately
$4,926,000 (UCG Energy, $4,879,000 and UCG Storage, $47,000). The majority of
UCG Energy's 1995 additions are related to transportation equipment, rental
equipment and facilities and propane related equipment. The upgrading of
underground storage facilities accounts for the majority of property additions
for UCG Storage. Gross non-utility property as of December 31, 1995 amounted
to $67,423,000 (UCG Energy, $47,968,000 and UCG Storage, $19,455,000).
The company believes its facilities are suitable and adequate for the
purpose of serving the needs of its customers.
ITEM 3. LEGAL PROCEEDINGS.
Except as set forth below and in Item 1. Business - "Utility
Operations-Regulation," and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Environmental Matters,"
"Internal Revenue Service Audit" and "Contingencies," there is no material
litigation involving the company as of December 31, 1995. There are certain
claims which are adequately covered by liability insurance or reserves.
In February 1996, Cities received a letter from the Georgia Environmental
Protection Division asking Cities to submit a compliance status report for an
Americus, Georgia former manufactured gas plant site. Cities is discussing
this matter further with other parties already performing work at the site.
Management expects that expenditures, if any, related to response action at
this site will be recovered through rates or insurance, or shared among other
potentially responsible parties. Therefore, the costs of responding to this
site are not expected to materially affect the results of operations, financial
condition or cash flows of the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
17
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
APPROXIMATE NUMBER OF STOCKHOLDERS
NUMBER OF
STOCKHOLDERS OF
RECORD AS OF
TITLE OF CLASS DECEMBER 31, 1995
-----------------
Common Stock, without par value................................ 8,157
=========
The Common Stock of the company is traded over-the-counter on the NASDAQ
National Market System under the symbol UCIT. The high and low closing sales
prices, compiled from quotations supplied by the NASDAQ Monthly Statistical
Report, and the dividends paid per share, were as follows:
1995 1994
------------------------------------- -------------------------------------------
DIVIDENDS DIVIDENDS
HIGH LOW PER SHARE HIGH LOW PER SHARE
---- ---- ---------- ---- ---- ---------
1st Quarter............ 16 1/4 15 1/4 $.255 18 3/4 16 $.25
2nd Quarter............ 16 1/4 14 1/2 $.255 17 1/4 15 1/2 $.25
3rd Quarter............ 16 1/2 14 3/4 $.255 17 3/4 15 1/2 $.25
4th Quarter............ 18 3/4 15 3/4 $.255 17 1/4 15 7/16 $.255
At its regularly scheduled meeting held on February 3, 1996, the Board of
Directors declared a quarterly dividend of $.255 per share, payable March 15,
1996, to all shareholders of record on February 29, 1996. Dividends have been
paid by Cities for the past 162 consecutive quarters.
The Common Stock is entitled to dividends when, as and if declared by the
Board of Directors, subject to various limitations on the declaration or
payment of dividends imposed by the provisions of Cities' Indenture of
Mortgage. Under these provisions, none of the company's retained earnings at
December 31, 1995, was unavailable to pay dividends on the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
Utility Operating Revenues........................ $271,860 $280,984 $287,507 $265,460 $239,155
=============== ============= ============= ============= =============
Common Stock Earnings............................. $9,935 $12,093 $12,120 $10,104 $7,741
=============== ============= ============= ============= =============
Common Stock Earnings Per Share................... $0.84 $1.16 $1.19 $1.07 $0.97
=============== ============= ============= ============= =============
Total Assets...................................... $460,377 $421,200 $401,520 $370,150 $368,283
=============== ============= ============= ============= =============
Long-Term Debt.................................... $163,160 $144,344 $151,843 $157,734 $127,430
=============== ============= ============= ============= =============
Redeemable Preferred and Preference Stock......... - - - - $1,352
=============== ============= ============= ============= =============
Cash Dividends Declared Per Common Share.......... $1.02 $1.005 $0.985 $0.965 $0.93
=============== ============= ============= ============= =============
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Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------[LOGO]--------------------------------------
United Cities Gas Company (Cities) and its subsidiaries (collectively, the
company) is primarily a distributor of natural and propane gas serving
approximately 335,000 customers in parts of ten states. The financial condition
and results of operations of the company are significantly affected by the
weather and the regulatory environment in the eight states in which it
distributes natural gas. The following discussion focuses on the financial
condition and results of operations for the company for the past three years
and its capital expenditure plans for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the company's capitalization ratios consisted of 47%
common stock equity and 53% long-term debt. The company's goal is to maintain a
common stock equity ratio of approximately 50% through increased retained
earnings and the issuance of stock through the employee stock purchase,
customer stock purchase, dividend reinvestment and long-term stock plans. This
should enable the company to maintain its current credit integrity and continue
to allow access to relatively low cost financing.
Total cash provided by operations of the company totaled $25,290,000,
$27,523,000 and $11,791,000 in 1995, 1994 and 1993, respectively. Changes in
accounts receivable, gas in storage and accounts payable were primarily a
result of the weather sensitive nature of the company's business. Changes in
gas costs to be billed in the future and supplier refunds due customers were
primarily a result of the timing of the recoveries from, or refunds to,
customers of these costs through the Purchased Gas Adjustment (PGA) mechanism.
A substantial portion of the company's cash requirements is to fund its
ongoing construction program in order to provide natural gas services to a
growing customer base. Investing activities of the company include capital
expenditures for the company's utility and non-utility operations totaling
$40,l00,000, $35,100,000 and $31,000,000 in 1995, 1994 and 1993, respectively.
During 1995, Cities completed construction of a twenty-eight mile main which
connects two of its fastest growing distribution systems located in Middle
Tennessee and is designed to provide Cities' current customers with the lowest
possible priced gas through increased gas supply flexibility. Included in the
1995 and 1994 utility capital expenditures stated above is $5,700,000 and
$3,700,000, respectively, related to this project. Capital expenditures
totaling $29,000,000 for the utility operations and $7,800,000 for the
non-utility operations are budgeted for 1996. Total capital expenditures for
1997 and 1998 are expected to be approximately $31,800,000 and $32,100,000,
respectively, based on information currently available, which is subject to
change.
Because the nature of the company's business is highly seasonal and
weather sensitive, the company uses short-term debt during the non-heating
season as a means of funding its ongoing construction program and working
capital requirements. The short-term debt is retired with cash from operations
or long-term securities, whichever management deems appropriate. At December
31, 1995, the company had total short-term lines of credit of $84,000,000 in
the form of master and banker's acceptance notes bearing interest primarily at
the lesser of the prime rate or a negotiated rate during the term of each
borrowing. Under these arrangements, $32,313,000 in short-term debt was
outstanding at December 31, 1995.
The financing activities for 1995, 1994 and 1993 reflect 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
financing activities of 1995 also included common stock and long-term debt
securities issued under the company's shelf registration statement which became
effective in 1995. The shelf registration statement gives the company the
flexibility to issue from time to time in one or more public offerings up to
$200,000,000 of its securities which may include common stock, unsecured notes
and/or first mortgage bonds. In June 1995, the company issued 1,380,000 shares
of common stock under the shelf registration statement in an underwritten
public offering with net proceeds from the sale amounting to approximately
$18,900,000. In addition, $22,000,000 of medium-term notes were issued under
the shelf registration statement in the last quarter of 1995. The proceeds of
long-term debt also included a $5,000,000 term note in United Cities Propane
Gas of Tennessee, Inc. (UCPT), a wholly-owned subsidiary of UCG Energy
Corporation (UCG Energy). The proceeds of these activities were used to repay
short-term borrowings, retire
United Cities Gas Company & Subsidiaries
19
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------[LOGO]--------------------------------------
long-term debt, finance the company's construction program and for other
corporate purposes.
In 1994, the company implemented a customer stock purchase plan whereby
residents in the company's service territory can make a one-time purchase of
common stock at a 5% discount below the average market value. A participant can
invest any amount ranging from $250 to $10,000. During 1995 and 1994, 166,609
and 147,148 shares of common stock, respectively, were issued under the plan
resulting in net proceeds to the company of approximately $2,457,000 and
$2,099,000, respectively.
In May 1995, 320,512 shares of common stock valued at $5,000,000 were
issued in connection with the purchase of a 45% interest in Woodward Marketing,
L.L.C. by UCG Energy.
In 1996, funds for capital expenditures, long-term debt maturities,
sinking fund requirements and dividend payments are expected to be provided by
internally generated cash, issuance of stock through the company's various
stock purchase plans, short-term borrowings and issuances of securities under
the shelf registration statement. Although the company does not currently plan
to issue first mortgage bonds in 1996 under the shelf registration statement,
at December 31, 1995, the company had bondable property to support the issuance
of approximately $60,500,000 of first mortgage bonds.
REGULATORY MATTERS
On December 8, 1995, Cities filed to increase rates on an annual basis by
$750,000 in the state of Iowa. Cities expects that any increase granted will be
effective by the fourth quarter of 1996. Effective November 15, 1995, Cities
received an annual rate increase of $2,227,000 in the state of Tennessee.
Cities had filed to increase rates by $3,951,000 on an annual basis. Effective
October 14, 1995, Cities received an annual rate increase of $903,000 in the
state of Missouri. Cities had filed to increase rates by $1,100,000 on an
annual basis. Effective September 1, 1995, Cities received an annual rate
increase of $2,700,000 in the state of Kansas. Cities had filed to increase
rates by $4,230,000 on an annual basis. Effective February 7, 1995, Cities
received an annual rate increase of $253,000 in the state of South Carolina.
Cities had filed to increase rates by $341,000 on an annual basis.
In April 1995, Cities filed to increase rates on an annual basis by
$810,000 in the state of Virginia. Cities was granted permission by the
Virginia State Corporation Commission to implement the proposed rate increase
effective September 29, 1995. The increase is subject to refund pending a final
order by the commission which is expected in the fourth quarter of 1996.
In an order issued in November 1994, the Virginia State Corporation
Commission reduced Cities' authorized rate of return in Virginia from 11.26% to
10.26%, resulting in a reduction in annual revenues of $218,000. This reduction
was effective April 1, 1993. Excess revenues of approximately $370,000, plus
interest, collected under interim rates through December 31, 1994, were
refunded to Cities' Virginia customers in 1995. In addition, the commission
determined that Cities had overcollected gross receipts tax from its customers
from 1988 through mid-1993 and ordered the refund of $301,000, plus interest.
This amount was also refunded to Cities' Virginia customers in 1995.
As a part of a settlement agreement in the 1992 rate proceeding in
Tennessee, Cities agreed to a management audit. The management audit report was
issued in 1994. Management agreed with a majority of the recommendations made
by the auditors and a number of recommendations have been or are currently in
the process of being implemented. As a part of the settlement agreement in the
1995 rate proceeding in Tennessee, Cities resolved all outstanding issues
related to the management audit. The implementation of the recommendations and
final resolution of these matters did not have a material effect on the results
of operations, financial condition or cash flows of the company.
The Georgia and Tennessee Public Service Commissions have approved Weather
Normalization Adjustments (WNAs). The WNAs, effective October through May each
year in Georgia and November through April each year in Tennessee, allow Cities
to increase the base rate portion of customers' bills when weather is warmer
than normal and decrease the base rate when weather is colder than normal. The
net effect of the WNAs was an increase in revenues of $1,030,000, $2,050,000
and $324,000 in 1995, 1994 and 1993, respectively.
United Cities Gas Company & Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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ENVIRONMENTAL MATTERS
Cities is the owner or previous owner of manufactured gas plant sites
which were used to supply gas prior to the availability of natural gas.
Manufactured gas was an inexpensive source of fuel for lighting and heating
nationwide. As a result of the gas manufacturing process, certain by-products
and waste materials, including coal-tar, were produced and may have been
accumulated at the plant sites. This was an acceptable and satisfactory process
at the time of operations. Under current environmental protection laws and
regulations, Cities may be responsible for response action with respect to such
materials, if response action is necessary.
Cities identified a site in Columbus, Georgia, and along with other
responsible parties, has performed response action. Cities' share of response
action costs at this site totaled approximately $1,324,000. Of this amount,
$1,275,000 was requested and approved to be recovered over a three year period
in rates which were effective November 1992. Cities recovered all but
approximately $23,000 of the approved amount through October 1995. Cities will
request and expects approval to recover the remaining costs of $72,000 as an
extension of the rider or through the PGA process.
In June 1995, Cities entered into an agreement to pay $1,787,000 to Union
Electric Company (Union Electric) whereby Union Electric agreed to assume
responsibility for Cities' 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 December 31, 1995, Cities had
$1,430,000 accrued for its remaining liability related to the agreement. This
amount is to be paid in equal annual payments over each of the next four years
beginning in 1996. Cities has deferred the accrued amount and expects approval
for recovery in its current rate proceeding in Iowa.
Cities owns former manufactured gas plant sites in Johnson City and
Bristol, Tennessee and Hannibal, Missouri. Cities 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, as of December 31, 1995, Cities had incurred and
deferred for recovery $16,000 and accrued and deferred for recovery an
additional $750,000 associated with the preliminary survey and invasive study
of these sites. The Tennessee Public Service Commission granted Cities
permission to defer, until its next rate case, all costs incurred in Tennessee
in connection with state and federally mandated environmental control
requirements. In addition, based on a decision by the Missouri Public Service
Commission concerning the recovery of environmental response action costs
incurred by another company, Cities expects recovery of the costs involved in
the investigation and response action, if any, associated with the manufactured
gas plant site in Missouri.
Pursuant to the Tennessee Petroleum Underground Storage Tank Act (the
Act), Cities is required to upgrade or remove certain underground storage tanks
(USTs) situated in Tennessee. As of December 31, 1995, Cities had identified a
small number of USTs in this category in Tennessee and had incurred and
deferred for recovery $34,000 and, based on available current information,
accrued and deferred for recovery an additional $70,000 for the upgrade or
removal of these USTs. Cities has estimated that it may incur, if corrective
action is necessary, additional costs of up to $160,000 to bring the sites into
compliance with the Act. The Tennessee Public Service Commission granted Cities
permission to defer, until its next rate case, all costs incurred in connection
with state and federally mandated environmental control requirements. In
addition, Cities may be able to recover a portion of any corrective action
costs from the Tennessee Underground Storage Tank Fund for the UST sites in
Tennessee.
Cities identified three USTs in Virginia and, as of December 31, 1995,
incurred approximately $20,000 for the closure of these sites. Under current
regulation, these sites are officially closed and Cities does not anticipate
incurring any additional amounts related to these sites.
In October 1995, Cities received two Notices of Violation (NOVs) from
the Tennessee Department of Environment and Conservation (DEC) concerning
historic releases from USTs in Kingsport, Tennessee. These USTs were formerly
owned by Holston Oil Co., Inc. (Holston), which at one time was a wholly-owned
subsidiary of Tennessee-Virginia Energy Corporation (TVEC). Prior to TVEC's
merger with the company in 1986, TVEC sold the common stock of Holston to an
unrelated party. Cities has responded to the NOVs advising the DEC that Cities
is not a responsible party
United Cities Gas Company & Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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for any environmental contamination at the sites. Cities has been advised
by the DEC that the DEC will respond in several months. Cities does not
anticipate incurring any response action costs at these sites.
Cities has reviewed and commented on a proposed Consent Order from the
Kansas Department of Health and Environment (KDHE) regarding mercury
contamination at gas pipeline sites. The KDHE has identified the need to
investigate gas industry activities which utilize mercury equipment in Kansas.
Cities is cooperating with the KDHE in preparing a Consent Order and a Work
Plan for responding to mercury contamination at any site which is identified as
exceeding the KDHE's established acceptable concentration levels. As of
December 31, 1995, Cities had identified approximately 720 meter sites where
mercury may have been used and had incurred and deferred for recovery $28,000
and, based on available current information, accrued and deferred for recovery
an additional $280,000 for the investigation of these sites. Cities has
estimated that it may incur an additional amount of up to $4,100,000 over the
next seven years in responding to a future administrative order for those
sites, if any, that exceed the KDHE's established acceptable concentration
levels. Cities has received an order from the Kansas Corporation Commission
(KCC) allowing Cities to defer and seek recovery in future rate proceedings the
reasonable and prudent costs and expenses associated with the Consent Order and
Work Plan. In the order, the commission approved a Stipulation and Agreement
which provides a cap of $1,500,000 on amounts deferred with the ability to
exceed this cap if reasonable costs of response action are incurred. Based on a
decision by the KCC concerning the recovery of environmental response action
costs incurred by another company, Cities expects recovery of the costs
involved in the investigation and response action associated with the mercury
meter sites in Kansas.
Management expects that future expenditures related to response action at
any 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.
GAS SUPPLY
In 1992, the Federal Energy Regulatory Commission (FERC) issued Orders
636, 636-A and 636-B. These orders required interstate pipelines to unbundle or
separate gas sales, transportation and storage services by the 1993-1994 winter
season. The pipelines' sales services were previously combined and sold as a
single service. The unbundling of these services has allowed Cities more
flexibility in selecting and managing the type of services required to provide
its customers with the lowest possible priced gas while maintaining reliable
gas supply.
The FERC has permitted pipelines to recover from their customers,
including Cities, the prudently incurred costs of implementing these orders,
referred to as transition costs. Based on current information from the
pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred
$2,862,000 and $6,739,000, respectively, as its estimated share of the
remaining liability related to these transition costs. The 1995 estimate may
differ from the final amount of future transition costs recovered from Cities.
Cities has been granted permission through approved PGA filings or specific
orders in all the states in which it operates to recover these transition costs
from its customers.
Cities' pipeline suppliers have liabilities to producers for payments
under purchase contracts for quantities of gas for which deliveries have not
been taken. Pipeline suppliers received permission from the FERC to recover
from their customers, including Cities, a portion of their take-or-pay
liabilities. Cities has been granted permission in all the states in which it
operates to recover from its customers any take-or-pay costs. Based on current
information from the pipelines, as of December 31, 1995 and 1994, Cities had
accrued and deferred $1,172,000 and $2,086,000, respectively, as its estimated
share of the remaining liability related to these take-or-pay costs. The 1995
estimate may differ from the final amount of future take-or-pay costs recovered
from Cities.
ACQUISITIONS
Effective January 1, 1996, UCPT purchased substantially all of the assets
of Duncan Gas Service for approximately $4,310,000. In addition, UCPT entered
into a ten year non-compete agreement with the prior owners for $250,000,
United Cities Gas Company & Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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to be paid over a ten year period. This acquisition added approximately
2,000 propane customers in the Johnson City, Tennessee area.
Effective May 22, 1995, UCPT purchased all of the propane transportation
assets of Transpro South, Inc., a common carrier corporation, for approximately
$218,000. In addition, UCPT entered into a ten year non-compete agreement with
the prior owner for $6,000.
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 Cities' Vandalia, Illinois operation. Pending
regulatory approval, the company expects this acquisition to be final by the
second quarter of 1996 and will not restate prior years' consolidated financial
statements due to immateriality.
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 up to $1,000,000 in cash to be paid over a five year period.
In exchange for its own gas marketing contracts and the acquired 45% 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 provides gas marketing services to industrial
customers, municipalities and local distribution companies, including Cities.
UCG Energy utilized equity accounting, effective January 1, 1995, for the
acquisition. The excess of the purchase price over the value of the net
tangible assets, amounting to approximately $5,400,000, was allocated to
intangible assets consisting of customer contracts and goodwill, which are
being amortized over ten and twenty years, respectively.
Effective January 1, 1995, UCPT purchased substantially all of the assets
of Harrell Propane, Inc. for approximately $1,383,000. In addition, UCPT
entered into ten year non-compete agreements with the prior owners for
$250,000, to be paid over an eight year period. This acquisition added
approximately 1,300 propane customers in the Murfreesboro, Tennessee area.
Effective April 14, 1994, UCPT purchased all of the assets of Hurley's
Propane Gas for approximately $938,000. In addition, UCPT entered into ten year
non-compete agreements with the prior owners for $100,000, to be paid over a
five year period. This acquisition added approximately 700 propane customers in
the Morristown, Tennessee area.
Effective March 1, 1994, the company purchased the natural gas system in
Palmyra, Missouri from Western Resources, Inc. for approximately $665,000. The
company also obtained a ten year non-compete agreement. Consideration for the
agreement is contingent upon volumes sold to a certain industrial customer with
payments made over a three year period, not to exceed $720,000. The system
serves approximately 1,400 natural gas customers.
Effective August 1, 1993, UCPT purchased the issued and outstanding shares
of common stock of High Country Propane, Inc. for $1,600,000, less liabilities
assumed of $820,000. Additionally, UCPT obtained ten year non-compete
agreements for $100,000, to be paid over a five year period. This acquisition
added approximately 1,400 propane customers in the Boone, North Carolina area.
ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." This
statement requires new disclosures in the notes to the financial statements
about stock-based compensation plans based on the fair value of equity
instruments granted. Companies also may base the recognition of compensation
cost for instruments issued under stock-based compensation plans on
United Cities Gas Company & Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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these fair values. The company anticipates adopting SFAS 123 effective
January 1, 1996, but currently does not plan to change the method of accounting
for these plans.
In March 1995, the FASB issued Statement No. 121 (SFAS 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 SFAS 121 effective 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 Cities operates. This conclusion may
change in the future as a result of changes in regulation.
The company adopted Statement of Financial Accounting Standards No. 112
(SFAS 112), "Employers' Accounting for Postemployment Benefits," effective
January 1, 1994. This statement requires the company to accrue any obligations
which may exist to provide benefits to former or inactive employees after
employment but before retirement. Due to the limited nature of the
postemployment benefits provided by the company, most of which were already
being accrued, the implementation of SFAS 112 did not have a material effect on
the results of operations, financial condition or cash flows of the company.
Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes," was adopted by the company in 1993 and prior
periods were not restated. Implementation of SFAS 109 required conversion to
the liability method of accounting for deferred income taxes. Lower income tax
rates resulting from the Tax Reform Act of 1986 resulted in excess accumulated
deferred income taxes (ADIT) which are being amortized to reduce tax expense
for accounting and ratemaking purposes. Tax law requires that excess ADIT
related to accelerated depreciation be used to reduce tax expense over the
lives of the related assets. There is no such normalization requirement for
nonregulated excess ADIT and the related deferred tax liability was reversed in
accordance with the new statement. The cumulative increase in net income
resulting from the change in the accounting method for income taxes was
approximately $443,000, and was included in UCG Energy's net income in 1993.
Statement of Financial Accounting Standards No. 106 (SFAS 106),
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
requires the company to record the expected costs of postretirement health and
life insurance benefits during the years the employees render service. Prior to
January 1, 1993, the effective date of the company's adoption of SFAS 106, the
company recognized these costs on a cash basis. Costs related to these benefits
calculated in accordance with SFAS 106 amounted to $1,691,000, $1,649,000 and
$1,331,000 in 1995, 1994 and 1993, respectively. In 1993, the amount of expense
recognized on a cash basis would have been $663,000. The accumulated benefit
obligation of $8,894,000 existing at January 1, 1993, is being amortized over a
twenty year period as allowed by SFAS 106.
Cities has received approval to recover SFAS 106 costs in South Carolina,
Kansas, Iowa, Illinois, Missouri and Tennessee. Effective January 1, 1993, the
Tennessee commission allowed Cities to defer the difference between cash
payments and SFAS 106 expense. In the 1995 rate proceeding in Tennessee, Cities
received permission to recover the deferred amount of $553,000, plus interest,
over a five year period. Cities discontinued deferring the difference in
November 1995. The Virginia commission has approved the recovery of SFAS 106
costs in rates. However, the accumulated benefit obligation will be recovered
over forty years as opposed to the twenty year amortization period allowed by
SFAS 106. The difference in the amortization period allowed by the Virginia
commission does not have a material effect on the results of operations,
financial condition or cash flows of the company. The Georgia commission did
not render a decision on SFAS 106 in Cities' most recent rate proceeding in
that state. As required by some commissions, Cities has established a trust
fund to accumulate the difference between the cash payments for postretirement
benefits and SFAS 106 expense.
United Cities Gas Company & Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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INTERNAL REVENUE SERVICE AUDITS
The Internal Revenue Service (IRS) has reviewed the consolidated federal
income tax returns of the company for the years 1991 through 1993. In September
1995, the revenue agent issued a report proposing certain adjustments to the
company's taxable income. In December 1995, the company filed a formal protest
and disagreement with the IRS on two proposed adjustments and requested a
conference with the IRS appeals office. The adjustments proposed by the agent
would increase prior years' taxes by $595,000. Management does not agree with
the IRS agent's assertions on these two issues and intends to vigorously
protest them. However, the final outcome of this matter cannot presently be
determined.
In 1993, the IRS completed its review of the consolidated federal income
tax returns of the company for the years 1986 through 1990. The company was
assessed additional taxes of $3,100,000 and interest of $1,400,000 for the
periods reviewed. A substantial amount of the tax assessments were related to
items which were timing differences which had no effect on the results of
operations of the company. In 1993, the company expensed the interest related
to the tax assessments.
CONTINGENCIES
During 1994, Cities discovered defects in the polyethylene piping installed
in certain of its service areas. An independent laboratory is conducting a
study of the matter at the request of the gas industry and the manufacturers.
Cities also continues to closely monitor the laboratory studies. Cities
believes this problem to be manageable under normal operating maintenance and
anticipates recovering the cost from the manufacturers or through the
ratemaking process.
The company is involved in other legal or administrative proceedings
before various courts and agencies with respect to rates and other matters.
Although unable to predict the outcome of these matters, it is management's
opinion that final disposition of these proceedings will not have a material
effect on the company's results of operations, financial condition or cash
flows.
IMPACT OF INFLATION
The company experiences the effect of inflation primarily through the cost
of materials, labor and related employee benefits, and services. Since Cities
can only adjust its rates to recover these additional costs through the
regulatory process, increased costs may have a significant impact on its
results of operations. Management continually assesses the need to file for
rate increases in each of the states in which Cities operates. Cities has PGA
clauses in the states in which it operates which permit any fluctuations in gas
costs to be passed through to its customers, subject to prudency and/or
administrative reviews by the commissions in the states. Effective April 1,
1995, and for an experimental two year period, the PGA clause in Tennessee was
modified by an incentive rate program which compares Cities' purchased gas
prices to market prices. The gains or losses to be recognized by Cities as a
result of the incentive program are limited to a maximum of $25,000 per month.
RESULTS OF OPERATIONS
CONSOLIDATED COMMON STOCK EARNINGS AND DIVIDENDS
The company had consolidated common stock earnings of $9,935,000 or $.84
per share in 1995, a decrease of $2,158,000 or $.32 per share from 1994
earnings. The decrease was primarily a result of increased operating expenses,
offset slightly by an increase in operating margin. The decrease in earnings
per share also reflects a 1,383,000 increase in the average number of shares
outstanding which is primarily a result of a public stock offering in June
1995. Earnings of $12,093,000 or $1.16 per share in 1994 represented a decrease
of $27,000 or $.03 per share from 1993. The company's annual dividend paid per
share was $1.02 in 1995.
UTILITY OPERATING MARGIN
The operating margin of $112,684,000 in 1995 represents an increase of
$4,668,000 over the 1994 margin of $108,016,000. The increase in operating
margin was primarily a result of slightly colder weather during 1995 as
compared to 1994, volumes sold to new residential and commercial customers, and
rate increases granted during 1995 in several states. The operating margin
increased $1,517,000 from 1993 to 1994 as a result of volumes sold to new
residential and commercial customers; the additional revenues from certain
interruptible customers who did not go off Cities' system when curtailed during
the first quarter of 1994; the rate increase effective July 1993 in Missouri;
and the
United Cities Gas Company & Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Palmyra acquisition in March 1994. The effect of these increases was partially
offset by warmer weather during 1994.
UTILITY OPERATING EXPENSES
Operations and maintenance expenses increased $4,522,000 from $57,304,000
in 1994 to $61,826,000 in 1995. In the third quarter of 1995, the company
announced a consolidation plan under which five of Cities' 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 consolidation. The increase
in operations and maintenance expenses can also be attributed to increased
payroll and related benefits and increased outside services expense. The
increase in outside services expense is primarily a result of incremental
expenses related to addressing labor and personnel related activities,
strategic planning and the IRS audit. Operations and maintenance expenses
increased $382,000 from $56,922,000 in 1993 to $57,304,000 in 1994.
Depreciation and amortization expense increased $1,185,000 in 1995 and
$830,000 in 1994 from the prior year periods primarily due to additional plant
in service. Federal and state income taxes varied in all periods in relation to
changes in income. In addition, federal and state income taxes increased from
1994 to 1995 as a result of additional accruals to true-up current and deferred
income taxes and provide for permanent differences. Other taxes increased
$1,561,000 in 1995 and $454,000 in 1994 from the prior year periods primarily
due to property taxes on additional plant in service.
OTHER UTILITY INCOME (EXPENSE), NET OF TAX
Other utility income (expense), net of tax increased $917,000 from an
expense of $262,000 in 1994 to income of $655,000 in 1995. The increase was a
result of revenues from the incentive rate program in Tennessee and, as allowed
by certain regulatory commissions in the states in which Cities operates, there
was an increased amount of revenues recognized by Cities related to the release
of its excess firm capacity on the pipelines which serve Cities. In addition,
the increase in other utility income (expense), net of tax was a result of a
$171,000 credit 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 and increased interest income on deferred gas costs that are
to be billed in the future.
Other utility income (expense), net of tax decreased $504,000 from income
of $242,000 in 1993 to an expense of $262,000 in 1994. This decrease was
primarily a result of a 1993 adjustment to record interest income on
take-or-pay amounts in Kansas that were paid and deferred but not yet collected
from the Kansas customers. Cities received permission in 1993 from the Kansas
Corporation Commission to recover these amounts.
UTILITY INTEREST EXPENSE
Interest expense increased from $14,087,000 in 1994 to $14,299,000 in
1995. Interest on long-term debt decreased $317,000 due to the retirement of
long-term debt. Other interest expense increased $529,000 primarily as a result
of interest on additional short-term debt and other miscellaneous liabilities
outstanding during 1995. This increase was somewhat offset by a $349,000
reduction to interest expense related to the capitalization of the debt portion
of the AFUDC of the twenty-eight mile main in Middle Tennessee.
Interest expense decreased from $15,048,000 in 1993 to $14,087,000 in
1994. Interest on long-term debt decreased $405,000 due to the retirement of
long-term debt. Other interest expense decreased $556,000 primarily because of
the 1993 assessment of interest related to the settlement of the IRS audit for
the years 1986 through 1990, partially offset by increased interest on
short-term debt during 1994.
SUBSIDIARY OPERATIONS
Subsidiary operations contributed 42.2%, 35.4% and 35.0% of the company's
common stock earnings in 1995, 1994 and 1993, respectively. The following is a
discussion of the results of operations of Cities' subsidiaries, UCG Energy
Corporation and United Cities Gas Storage Company.
UCG ENERGY CORPORATION
Revenues decreased from $38,383,000 in 1994 to $34,433,000 in 1995
principally because of decreased gas brokerage sales to municipalities,
industrial and other customers. This decrease was primarily due to the transfer
of certain
United Cities Gas Company & Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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gas brokerage contracts in the Utility Services Division to WMLLC. Also
contributing to the decrease was the discontinuance of the distribution of
energy-related products in the Utility Services Division. This decrease was
partially offset by an increase in revenues by the Propane Division generated
by additional wholesale and retail volumes sold resulting from the acquisitions
of Harrell Propane, Inc. in January 1995, Transpro South, Inc. in May 1995 and
Hurley's Propane Gas in April 1994. The Rental Division experienced a decrease
in revenues due to lower rental rates on particular rental units in service as
well as the elimination of certain revenues due to the transfer of certain
rental units to Cities in 1995.
Revenues decreased from $38,909,000 in 1993 to $38,383,000 in 1994
primarily due to a decrease in gas brokerage sales to municipalities,
industrial and other customers, and a decrease in the sale of energy-related
products in the Utility Services Division. This decrease was partially offset
by an increase in revenues in the Propane Division generated by additional
wholesale volumes sold as well as additional volumes sold resulting from the
acquisitions of Hurley's Propane Gas in April 1994, and High Country Propane,
Inc. in August 1993. The Rental Division had a moderate decrease in revenues
due to lower rental rates on certain rental units in service.
Operating expenses decreased from $28,713,000 in 1994 to $25,625,000 in
1995. The decrease of $3,088,000 is related to the decrease in the cost of
sales resulting from reduced sales in the Utility Services Division. This
decrease was partially offset by an increase in the cost of sales in the
Propane Division on additional volumes sold as well as an increase in general
and administrative expenses, all principally due to the propane acquisitions
during 1995 and 1994. Operating expenses decreased from $29,387,000 in 1993 to
$28,713,000 in 1994. This $674,000 decrease can largely be attributed to the
decrease in the cost of sales as a result of reduced sales in the Utility
Services Division. This decrease was partially offset by an increase in cost of
sales in the Propane Division on additional wholesale volumes sold, as well as
additional volumes sold due to the acquisitions of Hurley's Propane Gas and
High Country Propane, Inc.
Interest expense increased from $773,000 in 1994 to $1,192,000 in 1995
primarily due to interest payments on short-term financing resulting from the
WMLLC acquisition. Contributing to this increase was interest expense on
additional short-term borrowings in the Propane Division. Interest expense
decreased from $1,049,000 in 1993 to $773,000 in 1994. This decrease was
primarily the result of the 1993 assessment of interest related to the
settlement of the IRS audit for the years 1986 through 1990. In addition,
long-term interest expense decreased in all divisions due to the retirement of
certain long-term debt.
Depreciation and amortization expense increased from $3,580,000 in 1994 to
$4,378,000 in 1995. This increase was due primarily to the amortization of the
intangible assets related to the investment in WMLLC of approximately $374,000
in the Utility Services Division. Also contributing to the increase was
increased amortization on exploration projects and depreciation on additional
plant and equipment. Depreciation and amortization expense decreased to
$3,580,000 in 1994 from $3,664,000 in 1993. The decrease was primarily due to a
1993 adjustment which increased the amortization of certain exploration
projects, somewhat offset by depreciation expense on additional plant and
equipment.
Other income of UCG Energy increased from $727,000 in 1994 to $2,330,000
in 1995 primarily as a result of investment income from WMLLC in the amount of
$1,354,000 in the Utility Services Division. Other income of UCG Energy
decreased from $801,000 in 1993 to $727,000 in 1994 due to reduced interest
income on notes receivable in the Rental Division.
Net income for UCG Energy was $3,450,000, $3,750,000 and $3,775,000 in
1995, 1994, and 1993, respectively.
UNITED CITIES GAS STORAGE COMPANY
United Cities Gas Storage Company's net income was $740,000, $526,000 and
$468,000 in 1995, 1994 and 1993, respectively. The increase in net income from
1994 to 1995 was primarily a result of increased revenues for storage services
provided primarily to Cities and a decrease in operating expenses other than
gas cost. The increase in net income from 1993 to 1994 was primarily a result
of increased revenues for storage services, partially offset by increased
operating expenses other than gas cost.
United Cities Gas Company & Subsidiaries
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
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Financial Statements:
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993............................... 30
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993........................... 31
Consolidated Balance Sheets as of December 31, 1995 and 1994......................................................... 32
Consolidated Statements of Capitalization as of December 31, 1995 and 1994........................................... 33
Consolidated Statements of Retained Earnings, Capital Surplus and Common Stock for the years ended
December 31, 1995, 1994 and 1993................................................................................ 34
Notes to Consolidated Financial Statements........................................................................... 35
Report of Independent Public Accountants............................................................................. 46
Consolidated Financial and Operating Data............................................................................ 47
Quarterly Financial Data............................................................................................. 47
Market Information................................................................................................... 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10, 11, 12, AND 13, constituting Part III of the Form 10-K, have
been omitted from this annual report pursuant to the provisions of Instruction
G to Form 10-K, since a definitive proxy statement, which is incorporated
herein by reference, except for the report of the compensation committee of the
board of directors and the performance graph, will be filed on or about April
1, 1996. Information required for executive officers is included in Part I,
Item 1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements:
See Part II, Item 8
(2) Financial Statement Schedules:
PAGE
----
Report of Independent Public Accountants.................................................. 53
Schedule
Number
--------
II Reserves........................................................................ 54
III Condensed Financial Information of Registrant................................... 55
All other schedules are not submitted because they are
not applicable or because the required information is
included in the financial statements or notes thereto.
Individual financial statements of United Cities Gas
Company are omitted as Cities is primarily an operating
company and the subsidiaries (UCG Energy Corporation,
United Cities Propane Gas of Tennessee, Inc., UCG Leasing,
Inc.,and United Cities Gas Storage Company) included in the
consolidated financial statements are wholly-owned.
28
31
(3) Exhibits filed:
A complete listing of exhibits required is given in the Exhibit Index
(page 56) which precedes the exhibits filed with this report. A list
of the compensation plans is set forth below.
10.01 Annual Incentive Compensation Plan effective January 1,
1989, as revised, (filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
and incorporated herein by reference).
10.02 Supplemental Executive Retirement Compensation Agreement,
as revised. (Page 78)
10.03 Long-Term Stock Plan of 1989, (filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1989 and incorporated herein by reference).
10.04 Directors' Deferred Compensation Plan effective February 1,
1992, (filed with the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 and incorporated
herein by reference).
10.05 Non-Employee Director Stock Plan effective February 28,
1995, (filed with the Registrant's Form 10-Q dated June 30,
1995 and incorporated herein by reference).
10.06 Key Management Deferred Compensation Plan effective January
1, 1995. (Page 96)
(b) Reports filed on Form 8-K:
The following Form 8-Ks have been filed subsequent to the filing of
the Form 10-Q dated September 30, 1995:
1. Form 8-K, Item 5 dated December 8, 1995.
2. Form 8-K, Item 5 dated December 20, 1995.
3. Form 8-K, Item 5 dated February 16, 1996.
(c) Exhibits filed:
A complete listing of exhibits required is given in the Exhibit Index
(page 56) which precedes the exhibits filed with this report.
(d) Financial Statements Omitted from Annual Report to Security Holders:
None.
29
32
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------[LOGO]--------------------------------------
For the Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------
(In Thousands, except per share data)
Utility Operating Revenues................ $271,860 $280,984 $287,507
Natural gas cost....................... 159,176 172,968 181,008
- -------------------------------------------------------------------------
Utility Operating Margin ................. 112,684 108,016 106,499
- -------------------------------------------------------------------------
Other Utility Operating Expenses:
Operations............................. 55,426 51,299 50,852
Maintenance............................ 6,400 6,005 6,070
Depreciation and amortization.......... 15,119 13,934 13,104
Federal and state income taxes......... 4,050 3,873 3,475
Other taxes............................ 12,300 10,739 10,285
- -------------------------------------------------------------------------
Total other utility operating
expenses.......................... 93,295 85,850 83,786
- -------------------------------------------------------------------------
Utility Operating Income.................. 19,389 22,166 22,713
Other Utility Income (Expense), net of tax 655 (262) 242
- -------------------------------------------------------------------------
20,044 21,904 22,955
- -------------------------------------------------------------------------
Utility Interest Expense:
Interest on long-term debt............. 12,033 12,350 12,755
Other interest expense................. 2,266 1,737 2,293
- -------------------------------------------------------------------------
Total utility interest expense...... 14,299 14,087 15,048
- -------------------------------------------------------------------------
Utility Income............................ 5,745 7,817 7,907
- -------------------------------------------------------------------------
Other Income:
Operations of UCG Energy Corporation--
Revenues............................ 34,433 38,383 38,909
Operating expenses.................. (25,625) (28,713) (29,387)
Interest expense.................... (1,192) (773) (1,049)
Depreciation and amortization....... (4,378) (3,580) (3,664)
Other income........................ 2,330 727 801
Federal and state income taxes...... (2,118) (2,294) (1,835)
- -------------------------------------------------------------------------
3,450 3,750 3,775
- -------------------------------------------------------------------------
Operations of UCG Storage Company--
Revenues............................ 7,443 7,128 8,837
Operating expenses.................. (4,905) (4,952) (6,649)
Interest expense.................... (965) (948) (987)
Depreciation and amortization....... (368) (366) (362)
Federal and state income taxes...... (465) (336) (371)
- -------------------------------------------------------------------------
740 526 468
- -------------------------------------------------------------------------
Net Income 9,935 12,093 12,150
- -------------------------------------------------------------------------
Preference Stock Dividends -- -- 30
- -------------------------------------------------------------------------
Common Stock Earnings $ 9,935 $ 12,093 $ 12,120
=========================================================================
Common Stock Earnings Per Share $ .84 $ 1.16 $ 1.19
=========================================================================
Average Number of Common Shares Outstanding 11,792 10,409 10,197
=========================================================================
Common Stock Dividends Per Share $ 1.02 $ 1.005 $ .985
=========================================================================
The accompanying notes are an integral part of these consolidated statements.
United Cities Gas Company & Subsidiaries
30
33
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------[LOGO]--------------------------------------
For the Years Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
(In Thousands)
Cash Flows from Operating Activities:
Net income ........................................................... $ 9,935 $ 12,093 $ 12,150
- -----------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 19,865 17,880 17,130
Deferred taxes ..................................................... 1,780 1,301 611
Investment tax credits, net ........................................ (364) (370) (374)
Investment income from Woodward Marketing, L.L.C. .................. (1,354) -- --
Changes in current assets and current liabilities:
Receivables ...................................................... (11,187) 7,032 (448)
Materials and supplies ........................................... 266 193 757
Gas in storage ................................................... 9,808 (468) (18,641)
Gas costs to be billed in the future ............................. 244 (7,911) (2,171)
Prepayments and other ............................................ 18 1,007 (544)
Accounts payable ................................................. 144 (8,437) 9,906
Customer deposits and advance payments ........................... (2,095) 2,190 1,540
Accrued interest ................................................. 267 (1,112) 934
Supplier refunds due customers ................................... 1,013 1,227 (4,159)
Accrued taxes .................................................... (1,955) 2,489 (7,421)
Other, net ....................................................... (1,095) 409 2,521
- -----------------------------------------------------------------------------------------------------
Total adjustments .............................................. 15,355 15,430 (359)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities ................... 25,290 27,523 11,791
- -----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Additions to property--utility ...................................... (35,160) (30,888) (27,030)
Additions to property--non-utility .................................. (4,926) (4,228) (3,937)
Investment in Woodward Marketing, L.L.C. ............................ (832) -- --
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities ....................... (40,918) (35,116) (30,967)
- -----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Short-term borrowings, net .......................................... (13,875) 23,325 22,863
Proceeds from issuance of long-term debt ............................ 27,000 -- 150
Proceeds from issuance of common stock .............................. 23,314 3,262 1,949
Long-term debt retirements .......................................... (6,347) (7,833) (4,578)
Dividends paid ...................................................... (10,206) (9,215) (8,947)
Redemption of preferred stock ....................................... -- -- (106)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities ................... 19,886 9,539 11,331
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Temporary Investments ............. 4,258 1,946 (7,845)
Cash and Temporary Investments at Beginning of Year ................... 2,744 798 8,643
- -----------------------------------------------------------------------------------------------------
Cash and Temporary Investments at End of Year ......................... $ 7,002 $ 2,744 $ 798
=====================================================================================================
Cash Paid During the Period for:
Interest, net of amounts capitalized ................................. $ 16,164 $ 16,946 $ 16,127
=====================================================================================================
Income taxes ......................................................... $ 8,623 $ 3,720 $ 11,958
=====================================================================================================
Non-Cash Investing and Financing Activities:
Dividends reinvested ................................................. $ 1,799 $ 1,254 $ 1,130
=====================================================================================================
Debt incurred to acquire assets of Harrell Propane, Inc. ............. $ 1,250 $ -- $ --
=====================================================================================================
Common stock issued for investment in Woodward Marketing, L.L.C....... $ 5,000 $ -- $ --
=====================================================================================================
The accompanying notes are an integral part of these consolidated statements.
United Cities Gas Company & Subsidiaries
31
34
CONSOLIDATED BALANCE SHEETS
- ------------------------------------[LOGO]--------------------------------------
As of December 31, 1995 1994
- ----------------------------------------------------------------------------------------------
(In Thousands)
ASSETS
Utility Plant:
Plant in service, at cost ............................................... $445,058 $403,121
Less--accumulated depreciation ........................................ 157,968 139,715
- ----------------------------------------------------------------------------------------------
287,090 263,406
- ----------------------------------------------------------------------------------------------
Non-Utility Property:
Property, plant and equipment ........................................... 67,423 71,222
Less--accumulated depreciation ........................................ 19,501 22,272
- ----------------------------------------------------------------------------------------------
47,922 48,950
- ----------------------------------------------------------------------------------------------
Current Assets:
Cash and temporary investments .......................................... 7,002 2,744
Receivables, less allowances for uncollectible accounts of $1,352 in 1995
and $1,017 in 1994 ................................................... 54,517 43,330
Materials and supplies .................................................. 4,914 5,180
Gas in storage .......................................................... 16,643 26,451
Gas costs to be billed in the future .................................... 15,713 15,957
Prepayments and other ................................................... 2,028 2,046
- ----------------------------------------------------------------------------------------------
100,817 95,708
- ----------------------------------------------------------------------------------------------
Deferred Charges:
Unamortized debt discount and expense, net .............................. 2,896 2,694
Non-compete agreements, net ............................................. 3,259 3,697
Deferred system improvement costs, net .................................. 814 1,425
Investment in Woodward Marketing, L.L.C., net ........................... 7,012 --
Other deferred charges .................................................. 10,567 5,320
- ----------------------------------------------------------------------------------------------
24,548 13,136
- ----------------------------------------------------------------------------------------------
$460,377 $421,200
==============================================================================================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity ..................................................... $146,071 $118,028
Long-term debt .......................................................... 163,160 144,344
- ----------------------------------------------------------------------------------------------
309,231 262,372
- ----------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term obligations ................................ 9,155 6,068
Notes payable ........................................................... 32,313 46,188
Accounts payable for gas costs .......................................... 24,433 26,185
Other accounts payable .................................................. 4,884 2,988
Accrued taxes ........................................................... 4,420 6,375
Customer deposits and advance payments .................................. 12,078 14,173
Accrued interest ........................................................ 3,612 3,345
Supplier refunds due customers .......................................... 6,454 5,441
Other ................................................................... 8,580 8,993
- ----------------------------------------------------------------------------------------------
105,929 119,756
- ----------------------------------------------------------------------------------------------
Deferred Credits:
Accumulated deferred income tax ......................................... 31,599 24,572
Deferred investment tax credits ......................................... 4,281 4,645
Income taxes due customers .............................................. 5,190 6,329
Other ................................................................... 4,147 3,526
- ----------------------------------------------------------------------------------------------
45,217 39,072
- ----------------------------------------------------------------------------------------------
$460,377 $421,200
==============================================================================================
The accompanying notes are an integral part of these consolidated balance
sheets.
United Cities Gas Company & Subsidiaries
32
35
CONSOLIDATED STATEMENTS OF CAPITALIZATION
- ------------------------------------[LOGO]--------------------------------------
As of December 31, 1995 1994
- ---------------------------------------------------------------------------------------
(In Thousands, except share amounts)
Common Stock Equity:
Common Stock without par value, authorized
40,000,000 shares, outstanding 12,727,280 in
1995 and 10,613,441 in 1994.................. $101,735 $ 71,622
Capital surplus................................. 22,462 22,462
Retained earnings............................... 21,874 23,944
- ---------------------------------------------------------------------------------------
Total common stock equity................ 146,071 47.2% 118,028 45.0%
- ---------------------------------------------------------------------------------------
Long-Term Debt:
First mortgage bonds--
Series N, 8.69%, due 2000.................... 10,000 14,000
Series P, 10.43%, due 2017................... 25,000 25,000
Series Q, 9.75%, due 2020.................... 20,000 20,000
Series R, 11.32%, due 2004................... 15,000 15,000
Series S, 8.71%, due 1997.................... 7,000 7,000
Series T, 9.32%, due 2021.................... 18,000 18,000
Series U, 8.77%, due 2022.................... 20,000 20,000
Series V, 7.50%, due 2007.................... 10,000 10,000
- ---------------------------------------------------------------------------------------
Total first mortgage bonds............... 125,000 129,000
Medium term notes, 6.20% through 6.67%,
due 2000 through 2025........................ 22,000 --
Senior secured storage term notes, 7.45%,
due in installments through 2007............. 9,926 10,436
Rental property adjustable rate term notes
due in installments through 1999............. 5,691 6,839
Rental property fixed rate term note,
7.9%, due in installments through 2013....... 2,292 2,423
Propane term note, 6.99%, due in installments
through 2002................................. 5,000 --
Other long-term obligations due in installments
through 2004................................. 2,406 1,714
- ---------------------------------------------------------------------------------------
172,315 150,412
Less--current requirements................... 9,155 6,068
- ---------------------------------------------------------------------------------------
Total long-term debt, excluding amounts
due within one year.................... 163,160 52.8% 144,344 55.0%
- ---------------------------------------------------------------------------------------
Total Capitalization............................. $309,231 100.0% $262,372 100.0%
=======================================================================================
The accompanying notes are an integral part of these consolidated statements.
United Cities Gas Company & Subsidiaries
33
36
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, CAPITAL SURPLUS AND COMMON STOCK
- ------------------------------------[LOGO]--------------------------------------
Retained Capital Common
(In Thousands, except share amounts) Earnings Surplus Stock
- -------------------------------------------------------------------------------------------------------------------
Balance December 31, 1992 ............................................... $20,247 $22,462 $ 63,497
Add--common stock earnings ............................................ 12,120 -- --
Common stock activity:
Sold under employee stock purchase, dividend reinvestment and
long-term stock plans (186,293 shares) ........................... -- -- 3,079
Conversion of preference stock (75,777 shares) ...................... -- -- 530
- -------------------------------------------------------------------------------------------------------------------
32,367 22,462 67,106
Deduct--common stock dividends ......................................... 10,047 -- --
- -------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 ............................................... 22,320 22,462 67,106
Add--common stock earnings ............................................ 12,093 -- --
Common stock activity:
Sold under employee stock purchase, dividend reinvestment and
long-term stock plans (299,415 shares) ........................... -- -- 4,516
- -------------------------------------------------------------------------------------------------------------------
34,413 22,462 71,622
Deduct--common stock dividends ......................................... 10,469 -- --
- -------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 ............................................... 23,944 22,462 71,622
Add--common stock earnings ............................................ 9,935 -- --
Common stock activity:
Sold under employee stock purchase, dividend reinvestment,
long-term stock, 401(k) and customer stock purchase plans
(413,327 shares) ................................................ -- -- 6,213
Issued in acquisition of Woodward Marketing, L.L.C. (320,512 shares) -- -- 5,000
Issuance of 1,380,000 shares of common stock ....................... -- -- 18,900
- -------------------------------------------------------------------------------------------------------------------
33,879 22,462 101,735
Deduct--common stock dividends ........................................ 12,005 -- --
- -------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 ............................................... $21,874 $22,462 $101,735
===================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
United Cities Gas Company & Subsidiaries
34
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION-
The consolidated financial statements include the accounts of United
Cities Gas Company (Cities) and its subsidiaries (collectively, the company).
The operations of UCG Energy Corporation (UCG Energy) and United Cities Gas
Storage Company (UCG Storage), wholly-owned subsidiaries of Cities, shown in
the accompanying Consolidated Statements of Income, include affiliated revenues
of $12,760,000, $13,565,000 and $15,930,000 for the years 1995, 1994 and 1993,
respectively.
The affiliated revenues of UCG Energy represent rental charges to Cities
for transportation equipment and office facilities and the sale of gas-related
equipment to Cities. The affiliated revenues of UCG Storage consist of charges
for natural gas storage services and natural gas sales to Cities. In
management's opinion, such intercompany charges compare favorably with terms
which Cities could obtain from other sources under comparable conditions.
SYSTEM OF ACCOUNTS-
Cities is a public utility which distributes natural gas in Tennessee,
Kansas, Georgia, Virginia, Illinois, Missouri, Iowa and South Carolina. Cities
is subject to regulation with respect to rates, service, maintenance of
accounting records and various other matters by the respective regulatory
authorities in the states in which it operates. The consolidated financial
statements are based on generally accepted accounting principles (GAAP) which
for Cities give appropriate recognition to the ratemaking and accounting
practices and policies of the various regulatory commissions.
The preparation of financial statements in conformity with GAAP
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.
BASIS OF ACCOUNTING-
The consolidated financial statements reflect actions by the regulatory
authorities in the states in which Cities operates that result in the
recognition of revenues and expenses in different time periods than those of
companies that are not regulated. As a result of the ratemaking process,
regulatory assets and liabilities are deferred in accordance with Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation."
UTILITY PLANT-
Utility plant is stated at the historical cost of construction. Such
costs include direct construction costs, payroll related costs (taxes, pensions
and other fringe benefits), administrative and general costs, and the estimated
cost of allowance for funds used during construction. The estimated cost of
allowance for funds is as follows:
1995 1994 1993
- --------------------------------------------------------------------
Debt portion of the cost of funds .... 6.5% 5.7% 5.9%
Equity portion of the cost of funds .. 4.3% 3.5% 2.0%
- --------------------------------------------------------------------
Total ................................ 10.8% 9.2% 7.9%
====================================================================
The debt portion of the cost of funds is reflected as a credit to
"Other interest expense" in the amounts of $489,000, $183,000 and $246,000 in
1995, 1994 and 1993, respectively. The equity portion of the cost of funds is
reflected in "Other income (expense), net of tax" in the amounts of $256,000,
$111,000 and $81,000 in 1995, 1994 and 1993, respectively.
DEPRECIATION AND MAINTENANCE-
Depreciation is provided in the accounts based on straight-line
composite rates of 3.6%, 3.4% and 3.6% of the cost of depreciable utility plant
in service in 1995, 1994 and 1993, respectively.
Cities follows the practice of charging to maintenance the cost of
normal repairs of property and the replacements and renewals of items
considered to be less than units of property. Replacements and renewals of
items considered to be units of property are charged to utility plant
accounts. Units of property replaced or retired are credited to the utility
plant accounts and charged to accumulated depreciation.
United Cities Gas Company & Subsidiaries
35
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
CUSTOMER RECEIVABLES AND OPERATING REVENUES-
The company is primarily engaged in the distribution and sales of
natural and propane gas to a diverse base of residential, commercial and
industrial customers in 45 operating areas in the states of Tennessee, Kansas,
Georgia, Virginia, Illinois, Missouri, Iowa, South Carolina and North Carolina.
Cities' operating revenues are based on rates approved by the regulatory
commissions in the states in which it operates. Cities follows the practice of
accruing for services rendered but unbilled at the end of the accounting
period.
The Georgia and Tennessee Public Service Commissions have approved the
implementation of Weather Normalization Adjustments (WNAs). The WNAs, effective
October through May each year in Georgia and November through April each year
in Tennessee, allow Cities to increase the base rate portion of customers'
bills when weather is warmer than normal and decrease the base rate when
weather is colder than normal. The net effect of the WNAs was an increase in
revenues of $1,030,000, $2,050,000 and $324,000 in 1995, 1994 and 1993,
respectively.
REFUNDABLE OR RECOVERABLE GAS COSTS-
Cities' refunds from pipeline suppliers and changes in cost of gas
delivered to customers, which are different from the amounts recovered through
rates, are deferred and are being refunded or recovered in accordance with
procedures approved by the state commissions. Effective April 1, 1995, and for
an experimental two year period, the Purchased Gas Adjustment (PGA) clause in
Tennessee was modified by an incentive rate program which compares Cities'
purchased gas prices to market prices. The gains or losses to be recognized by
Cities as a result of the incentive program are limited to a maximum of $25,000
per month.
INVENTORIES-
Inventories consist primarily of materials and supplies and gas in
storage. Materials and supplies include merchandise and appliances and are
valued at average cost.
Cities' liquefied natural gas and propane inventories and gas stored
underground are valued on a first-in, first-out basis. Propane owned by UCG
Energy is priced at average cost. Gas stored underground and owned by UCG
Storage is valued on a last-in, first-out (LIFO) basis. At December 31, 1995
and 1994, $3,799,000 and $4,941,000, respectively, of the total gas in storage
was valued on the LIFO basis. In accordance with Cities' PGA clauses, the
liquidation of a LIFO layer would be reflected in subsequent gas adjustments in
customer rates and does not affect the results of operations.
The categories of current gas in storage are as follows:
(In Thousands) 1995 1994
- -------------------------------------------------------------
Natural gas stored underground ............ $ 4,784 $ 7,293
Liquefied natural gas ..................... 835 1,369
Propane ................................... 830 1,130
Natural gas stored by pipeline suppliers .. 10,194 16,659
- -------------------------------------------------------------
Total gas in storage ...................... $16,643 $26,451
=============================================================
EARNINGS PER SHARE-
Primary earnings per share have been computed on the basis of the
weighted average number of shares of common stock outstanding during the year.
Fully diluted earnings per share for 1993 give effect to conversion of the
11 1/2% Cumulative Redeemable Convertible Preference Stock. Fully diluted
earnings per share are not materially different from primary earnings per
share.
FAIR VALUE OF FINANCIAL INSTRUMENTS-
The carrying amounts of cash and temporary investments, short-term debt
and accrued interest approximate fair value because of the short-term nature of
these items. Based on the current market rates offered for similar debt of the
same maturities, the fair value of the company's long-term debt, including the
current portion, exceeded the carrying amount by approximately $29,100,000 and
$5,300,000 at December 31, 1995 and 1994, respectively. Management believes
that the prepayment provisions of the company's first mortgage bonds do not
make it economically feasible to refinance the long-term debt at this time.
United Cities Gas Company & Subsidiaries
36
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
STATEMENTS OF CASH FLOWS-
For the purpose of the statements of cash flows, the company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
ACCOUNTING PRONOUNCEMENTS-
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121 (SFAS 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 SFAS 121 effective 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
Cities operates. This conclusion may change in the future as a result of
changes in regulation.
RECLASSIFICATIONS-
Certain reclassifications were made conforming prior years' financial
statements with 1995 financial statement presentation.
REGULATORY MATTERS
In April 1995, Cities filed to increase rates on an annual basis by
$810,000 in the state of Virginia. Cities was granted permission by the
Virginia State Corporation Commission to implement the proposed rate increase
effective September 29, 1995. The increase is subject to refund pending the
final order by the commission which is expected in the fourth quarter of 1996.
In an order issued in November 1994, the Virginia State Corporation
Commission reduced Cities' authorized rate of return in Virginia from 11.26% to
10.26%, resulting in a reduction in annual revenues of $218,000. This reduction
was effective April 1, 1993. Excess revenues of approximately $370,000, plus
interest, collected under interim rates through December 31, 1994, were
refunded to Cities' Virginia customers in 1995. In addition, the commission
determined that Cities had overcollected gross receipts tax from its customers
from 1988 through mid-1993 and ordered the refund of $301,000, plus interest.
This amount was also refunded to Cities' Virginia customers in 1995.
As a part of a settlement agreement in the 1992 rate proceeding in
Tennessee, Cities agreed to a management audit. The management audit report was
issued in 1994. Management agreed with a majority of the recommendations made
by the auditors and a number of recommendations have been or are currently in
the process of being implemented. As a part of the settlement agreement in the
1995 rate proceeding in Tennessee, Cities resolved all outstanding issues
related to the management audit. The implementation of the recommendations and
final resolution of these matters did not have a material effect on the results
of operations, financial condition or cash flows of the company.
In 1992, the Federal Energy Regulatory Commission (FERC) issued Orders
636, 636-A and 636-B. These orders required interstate pipelines to unbundle or
separate gas sales, transportation and storage services by the 1993-1994 winter
season. The pipelines' sales services were previously combined and sold as a
single service. The FERC has permitted pipelines to recover from their
customers, including Cities, the prudently incurred costs of implementing these
orders, referred to as transition costs. Based on current information from the
pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred
$2,862,000 and $6,739,000, respectively, as its estimated share of the
remaining liability related to these transition costs. The 1995 estimate may
differ from the final amount of future transition costs recovered from Cities.
These estimated amounts are included as a liability in "Accounts payable for
gas costs" and as a regulatory asset in "Gas costs to be billed in the future."
Cities has been granted permission through approved PGA filings or specific
orders in all the states in which it operates to recover these transition costs
from its customers.
Cities' pipeline suppliers have liabilities to producers for payments
under purchase contracts for quantities of gas for which deliveries have not
been taken. Pipeline suppliers received permission from the FERC to recover
from their customers, including Cities, a portion of their take-or-pay
liabilities. Cities has been granted permission in all the states in which it
operates to recover from its customers any take-or-pay costs. Based on current
information from the pipelines, as of December 31, 1995 and 1994, Cities had
accrued and deferred $1,172,000 and $2,086,000, respectively, as its estimated
share of the remaining liability related to these take-or-pay costs. The
United Cities Gas Company & Subsidiaries
37
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
1995 estimate may differ from the final amount of future take-or-pay costs
recovered from Cities. These estimated amounts are included as a liability in
"Accounts payable for gas costs" and as a regulatory asset in "Gas costs to be
billed in the future."
EMPLOYEE BENEFIT PLANS
PENSION-
The company has a trusteed noncontributory defined benefit pension plan
which covers substantially all full-time employees. The plan provides benefits
based on years of credited service and final average salary. The plan assets
consist principally of marketable equity securities, corporate and government
debt securities, and deposits with insurance companies. The company's policy is
to fund the plan in accordance with the requirements of the Employee Retirement
Income Security Act.
The company also has an excess benefit pension plan that is unfunded
and may provide supplemental benefits to officers of the company after
retirement.
Actuarial assumptions used for the plans are as follows:
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Weighted average discount rate .................. 7.50% 8.00% 7.00%
Rate of increase in future compensation levels .. 5.50% 5.50% 5.50%
Expected long-term rate of return ............... 9.00% 9.00% 9.50%
- -----------------------------------------------------------------------------------------------------------------------
Net periodic pension expense for the plans in fiscal 1995, 1994 and 1993
consists of the following components:
(In Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Service cost .................................... $ 3,451 $ 3,129 $ 2,879
Interest cost ................................... 4,296 3,857 3,697
Actual return on plan assets .................... (10,365) (1,067) (4,969)
Net amortization and other ...................... 5,772 (3,591) 801
- -----------------------------------------------------------------------------------------------------------------------
Net periodic pension expense .................... $ 3,154 $ 2,328 $ 2,408
=======================================================================================================================
A reconciliation of the funded status of the plans to the amounts
recognized in the company's consolidated financial statements at December 31,
1995 and 1994, is presented below:
(In Thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Vested benefit obligation ..................................... $49,048 $39,190
Nonvested benefit obligation .................................. 5,857 5,812
- ------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation ................................ 54,905 45,002
Projected salary increases. ................................... 11,596 9,661
- ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation .................................. 66,501 54,663
Plan assets at fair value ..................................... 63,732 52,966
- ------------------------------------------------------------------------------------------------------------------------
Projected obligation in excess of plan assets ................. 2,769 1,697
Unrecognized net obligation being recognized over participants'
average remaining service period .............................. (1,800) (576)
Unrecognized net transition liability ......................... (250) (309)
Unrecognized net loss ......................................... (231) (540)
Adjustment to recognize minimum liability ..................... 461 34
- ------------------------------------------------------------------------------------------------------------------------
Accrued pension expense ....................................... $ 949 $ 306
========================================================================================================================
Included in the 1995 accumulated benefit obligation and net periodic
pension expense is $576,000 of costs related to the company's consolidation
activities in its Virginia/East Tennessee Division.
United Cities Gas Company & Subsidiaries
38
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
POSTRETIREMENT BENEFITS-
The company provides postretirement health care benefits and life
insurance benefits for retired employees. Substantially all of the company's
employees will become eligible for those benefits if they reach the normal
retirement age while working for the company. Effective January 1, 1993, the
company made certain revisions to its postretirement benefits plan which limit
the company's contributions to the plan for employees retiring after December
31, 1997.
Statement of Financial Accounting Standards No. 106 (SFAS 106),
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
requires the company to record the expected costs of postretirement health and
life insurance benefits during the years the employees render service. Prior to
January 1, 1993, the effective date of the company's adoption of SFAS 106, the
company recognized these costs on a cash basis. In 1993, the amount of expense
recognized on a cash basis would have been $663,000. Net periodic
postretirement benefit expense for the company's plan in 1995, 1994 and 1993
consists of the following components:
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------
Service cost ................................. $ 120 $ 196 $ 137
Interest cost ................................ 1,051 894 749
Actual return on plan assets ................. (107) 13 (9)
Amortization of transition costs ............. 445 445 445
Other ........................................ 182 101 9
- ----------------------------------------------------------------------
Net periodic postretirement benefit expense .. $1,691 $1,649 $1,331
======================================================================
A reconciliation of the funded status of the plan to the amounts
recognized in the company's consolidated financial statements at December 31,
1995 and 1994 is presented below:
(In Thousands) 1995 1994
- -----------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees ..................................................... $10,903 $7,995
Fully eligible active plan participants ...................... 2,302 549
Other active plan participants ............................... 988 3,523
- ------------------------------------------------------------------------------------------
14,193 12,067
Plan assets at fair value, primarily listed stocks and bonds.... 2,703 697
- ------------------------------------------------------------------------------------------
Accumulated obligation in excess of plan assets................. 11,490 11,370
Unrecognized net transition obligation.......................... (7,559) (8,004)
Unrecognized net loss........................................... (4,019) (2,446)
- ------------------------------------------------------------------------------------------
Accrued (prepaid) postretirement benefit expense................ $ (88) $ 920
==========================================================================================
Actuarila assumptions used for the plan are as follows:
1995 1994 1993
- ---------------------------------------------------------------------------------------
Weighted-average discount rate ............................... 7.50% 8.50% 7.50%
Rate of increase in future compensation levels. .............. 5.50% 5.50% 5.50%
Expected long-term rate of return after estimated taxes ...... 4.25% 4.25% 4.25%
- ---------------------------------------------------------------------------------------
For measurement purposes, a 10%, 12% and 15% annual rate of increase in
the per capita cost of covered health care benefits was assumed for 1995, 1994
and 1993, respectively. In 1995, the rate was assumed to decrease gradually to
5.5% over nine years and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1995, by $1,121,000 and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for the year then ended by $82,000.
United Cities Gas Company & Subsidiaries
39
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
Cities has received approval to recover SFAS 106 costs in South
Carolina, Kansas, Iowa, Illinois, Missouri and Tennessee. Effective January 1,
1993, the Tennessee commission allowed Cities to defer the difference between
cash payments and SFAS 106 expense. In the 1995 rate proceeding in Tennessee,
Cities received permission to recover the deferred amount of $553,000, plus
interest, over a five year period. Cities discontinued deferring the difference
in November 1995. The Virginia commission has approved the recovery of SFAS 106
costs in rates. However, the accumulated benefit obligation will be recovered
over forty years as opposed to the twenty year amortization period allowed by
SFAS 106. The difference in the amortization period allowed by the Virginia
commission does not have a material effect on the results of operations,
financial condition or cash flows of the company. The Georgia commission did not
render a decision on SFAS 106 in Cities' most recent rate proceeding in that
state. As required by some commissions, Cities has established a trust fund to
accumulate the difference between the cash payments for postretirement benefits
and SFAS 106 expense.
POSTEMPLOYMENT BENEFITS AND OTHER-
The company adopted Statement of Financial Accounting Standards No. 112
(SFAS 112), "Employers' Accounting for Postemployment Benefits," effective
January 1, 1994. This statement requires the company to accrue any obligations
which may exist to provide benefits to former or inactive employees after
employment but before retirement. Due to the limited nature of the
postemployment benefits provided by the company, most of which were already
being accrued, the implementation of SFAS 112 did not have a material effect on
the results of operations, financial condition or cash flows of the company.
The company's 401(k) savings plan allows participants to make
contributions toward retirement savings. Each participant may contribute up to
15% of qualified compensation. For employee contributions up to 6% of the
participant's qualified compensation, the company will contribute 30% of the
employee's contribution. The company may also contribute up to an additional 20%
of the employee's contribution based on certain criteria specified in the plan.
Effective January 1, 1995, any additional contribution made by the company will
be through the issuance of the company's common stock. For 1995, 1994 and 1993,
the company contributed $478,000, $750,000 and $495,000, respectively, to the
401(k) plan.
INCOME TAXES
A detail of the federal and state income tax provision is set forth below:
(In Thousands) 1995 1994 1993
- ------------------------------------------------------------------------
Charged to operating expenses--
Federal income taxes--
Current ...................................... $2,244 $2,481 $1,978
Deferred, net ................................ 1,542 1,052 754
Investment tax credits, net ................... (364) (370) (374)
State income taxes--
Current ...................................... 450 496 1,250
Deferred, net ................................ 178 214 (133)
- ------------------------------------------------------------------------
4,050 3,873 3,475
- ------------------------------------------------------------------------
Charged to other income, net--
Federal income taxes--
Current ...................................... 2,450 2,039 1,892
Deferred, net ................................ 52 30 (8)
State income taxes--
Current ...................................... 410 421 449
Deferred, net ................................ 8 5 (2)
- ------------------------------------------------------------------------
2,920 2,495 2,331
- ------------------------------------------------------------------------
Total federal and state income tax provision .. $6,970 $6,368 $5,806
========================================================================
United Cities Gas Company & Subsidiaries
40
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
Income taxes differ from amounts computed by applying the statutory
rates to pre-tax income as follows:
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------
Net income ........................................... $ 9,935 $12,093 $12,150
Income tax provision ................................. 6,970 6,368 5,806
- ----------------------------------------------------------------------------------
Pre-tax income ....................................... $16,905 $18,461 $17,956
- ----------------------------------------------------------------------------------
Federal income tax at statutory rate of 34% .......... $ 5,748 $ 6,277 $ 6,105
State income tax, net ................................ 690 750 725
Additional federal income tax provision .............. 875 -- --
Additional state income tax provision ................ -- -- 465
Amortization of investment tax credits ............... (364) (370) (374)
Amortization of excess deferred income tax ........... 26 (288) (311)
Utilization of previously unrecognized tax benefits .. -- -- (287)
Cumulative effect of accounting change ............... -- -- (443)
Other, net ........................................... (5) (1) (74)
- ----------------------------------------------------------------------------------
Total federal and state income tax provision ......... $ 6,970 $ 6,368 $ 5,806
==================================================================================
The temporary differences which gave rise to the net deferred tax liability at
December 31, 1995 and 1994, were as follows:
(In Thousands) 1995 1994
- ----------------------------------------------------------------------------------
Deferred tax assets--
Unamortized investment tax credit ............................. $ 1,410 $2,406
Other ......................................................... 3,771 3,506
- ----------------------------------------------------------------------------------
5,181 5,912
- ----------------------------------------------------------------------------------
Deferred tax liabilities--
Accelerated depreciation and other plant-related differences .. 34,785 28,893
AFUDC-equity .................................................. 721 747
Regulatory tax assets ......................................... 354 514
Additional deferred federal income tax liability accrued....... 425 --
Other ......................................................... 495 330
- ----------------------------------------------------------------------------------
36,780 30,484
- ----------------------------------------------------------------------------------
Net accumulated deferred income tax liability .................. $31,599 $24,572
==================================================================================
The Internal Revenue Service (IRS) has reviewed the consolidated federal
income tax returns of the company for the years 1991 through 1993. In September
1995, the revenue agent issued a report proposing certain adjustments to the
company's taxable income. In December 1995, the company filed a formal protest
and disagreement with the IRS on two proposed adjustments and requested a
conference with the IRS appeals office. The adjustments proposed by the agent
would increase prior years' taxes by $595,000. Management does not agree with
the IRS agent's assertions on these two issues and intends to vigorously protest
them. However, the final outcome of this matter cannot presently be determined.
In 1993, the IRS completed its review of the consolidated federal income
tax returns of the company for the years 1986 through 1990. The company was
assessed additional taxes of $3,100,000 and interest of $1,400,000 for the
periods reviewed. A substantial amount of the tax assessments were related to
items which were timing differences which had no effect on the results of
operations of the company. In 1993, the company expensed the interest related to
the tax assessments.
41
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes," was adopted by the company in 1993 and prior
periods were not restated. Implementation of SFAS 109 required conversion to
the liability method of accounting for deferred income taxes. Lower income tax
rates resulting from the Tax Reform Act of 1986 resulted in excess accumulated
deferred income taxes (ADIT) which are being amortized to reduce tax expense
for accounting and ratemaking purposes. Tax law requires that excess ADIT
related to accelerated depreciation be used to reduce tax expense over the
lives of the related assets. There is no such normalization requirement for
nonregulated excess ADIT and the related deferred tax liability was reversed in
accordance with the new statement. The cumulative increase in net income
resulting from the change in the accounting method for income taxes was
approximately $443,000, and was included in UCG Energy's net income in 1993.
ENVIRONMENTAL ISSUES
Cities is the owner or previous owner of manufactured gas plant sites
which were used to supply gas prior to the availability of natural gas.
Manufactured gas was an inexpensive source of fuel for lighting and heating
nationwide. As a result of the gas manufacturing process, certain by-products
and waste materials, including coal-tar, were produced and may have been
accumulated at the plant sites. This was an acceptable and satisfactory process
at the time of operations. Under current environmental protection laws and
regulations, Cities may be responsible for response action with respect to such
materials, if response action is necessary.
Cities identified a site in Columbus, Georgia, and along with other
responsible parties, has performed response action. Cities' share of response
action costs at this site totaled approximately $1,324,000. Of this amount,
$1,275,000 was requested and approved to be recovered over a three year period
in rates which were effective November 1992. Cities recovered all but
approximately $23,000 of the approved amount through October 1995. Cities will
request and expects approval to recover the remaining costs of $72,000 as an
extension of the rider or through the PGA process.
In June 1995, Cities entered into an agreement to pay $1,787,000 to
Union Electric Company (Union Electric) whereby Union Electric agreed to
assume responsibility for Cities' 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 December 31, 1995,
Cities had $1,430,000 accrued for its remaining liability related to the
agreement. This amount is to be paid in equal annual payments over each of the
next four years beginning in 1996. Cities has deferred the accrued amount and
expects approval for recovery in its current rate proceeding in Iowa.
Cities owns former manufactured gas plant sites in Johnson City and
Bristol, Tennessee and Hannibal, Missouri. Cities 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, as of December 31, 1995, Cities had incurred and
deferred for recovery $16,000 and accrued and deferred for recovery an
additional $750,000 associated with the preliminary survey and invasive study
of these sites. The Tennessee Public Service Commission granted Cities
permission to defer, until its next rate case, all costs incurred in Tennessee
in connection with state and federally mandated environmental control
requirements. In addition, based on a decision by the Missouri Public Service
Commission concerning the recovery of environmental response action costs
incurred by another company, Cities expects recovery of the costs involved in
the investigation and response action, if any, associated with the manufactured
gas plant site in Missouri.
Pursuant to the Tennessee Petroleum Underground Storage Tank Act (the
Act), Cities is required to upgrade or remove certain underground storage tanks
(USTs) situated in Tennessee. As of December 31, 1995, Cities had identified a
small number of USTs in this category in Tennessee and had incurred and
deferred for recovery $34,000 and, based on available current information,
accrued and deferred for recovery an additional $70,000 for the upgrade or
removal of these USTs. Cities has estimated that it may incur, if corrective
action is necessary, additional costs of up to $160,000 to bring the sites into
compliance with the Act. The Tennessee Public Service Commission granted Cities
permission to defer, until its next rate case, all costs incurred in connection
with state and federally mandated environmental control requirements. In
addition, Cities may be able to recover a portion of any corrective action
costs from the Tennessee Underground Storage Tank Fund for the UST sites in
Tennessee.
Cities identified three USTs in Virginia and, as of December 31, 1995,
incurred approximately $20,000 for the closure of these sites. Under current
regulation, these sites are officially closed and Cities does not anticipate
incurring any additional amounts related to these sites.
United Cities Gas Company & Subsidiaries
42
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
In October 1995, Cities received two Notices of Violation (NOVs) from
the Tennessee Department of Environment and Conservation (DEC) concerning
historic releases from USTs in Kingsport, Tennessee. These USTs were formerly
owned by Holston Oil Co., Inc. (Holston), which at one time was a wholly-owned
subsidiary of Tennessee-Virginia Energy Corporation (TVEC). Prior to TVEC's
merger with the company in 1986, TVEC sold the common stock of Holston to an
unrelated party. Cities has responded to the NOVs advising the DEC that the
company is not a responsible party for any environmental contamination at the
sites. Cities has been advised by the DEC that the DEC will respond in several
months. Cities does not anticipate incurring any response action costs at these
sites.
Cities has reviewed and commented on a proposed Consent Order from the
Kansas Department of Health and Environment (KDHE) regarding mercury
contamination at gas pipeline sites. The KDHE has identified the need to
investigate gas industry activities which utilize mercury equipment in Kansas.
Cities is cooperating with the KDHE in preparing a Consent Order and a Work
Plan for responding to mercury contamination at any site which is identified as
exceeding the KDHE's established acceptable concentration levels. As of
December 31, 1995, Cities had identified approximately 720 meter sites where
mercury may have been used and had incurred and deferred for recovery $28,000
and, based on available current information, accrued and deferred for recovery
an additional $280,000 for the investigation of these sites. Cities has
estimated that it may incur an additional amount of up to $4,100,000 over the
next seven years in responding to a future administrative order for those
sites, if any, that exceed the KDHE's established acceptable concentration
levels. Cities has received an order from the Kansas Corporation Commission
(KCC) allowing Cities to defer and seek recovery in future rate proceedings the
reasonable and prudent costs and expenses associated with the Consent Order and
Work Plan. In the order, the commission approved a Stipulation and Agreement
which provides a cap of $1,500,000 on amounts deferred with the ability to
exceed this cap if reasonable costs of response action are incurred. Based on a
decision by the KCC concerning the recovery of environmental response action
costs incurred by another company, Cities expects recovery of the costs
involved in the investigation and response action associated with the mercury
meter sites in Kansas.
Management expects that future expenditures related to response action
at any 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.
CAPITAL STOCK
11 1/2% CUMULATIVE REDEEMABLE CONVERTIBLE PREFERENCE STOCK-
The Preference Stock was convertible to common stock at the option of
the holder at $7.00 per common share and contained a redemption feature. During
1993, 5,307 shares of the Preference Stock were converted into 75,777 shares of
common stock. Of the 6,364 shares of Preference Stock outstanding at December
31, 1992, the remaining 1,057 shares that were not converted into common stock
were redeemed at $100 per share in mid-1993.
COMMON STOCK-
As of December 31, 1995, the company had 1,386,770 shares of common
stock reserved for issuance under the company's employee and customer stock
purchase plans, the company's dividend reinvestment and stock purchase plan,
the company's 401(k) savings plan, and the company's long-term stock plan of
1989.
Under the company's long-term stock plan implemented in 1989, incentive
stock options, nonqualified stock options, stock appreciation rights,
restricted stock or any combination thereof may be granted to officers and key
employees of the company. The option price per share must be at least equal to
the fair market value of one share of common stock on the date of the grant.
The options granted become exercisable at a rate of 20% per year and expire ten
years after the date of grant. The long-term stock plan has a Stock
Appreciation Right (SAR) feature which provides optionees the right to receive
appreciation in the shares of common stock subject to such option in common
stock or cash, or a combination thereof, equal in value to the difference
between the fair market value of such shares on the date of exercise and the
option exercise price. Option and SAR transactions during the three years ended
December 31, 1995, are as follows:
United Cities Gas Company & Subsidiaries
43
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
Options Exercise Price SARs Exercise Price
- --------------------------------------------------------------------------------------
Outstanding December 31, 1992 .. 102,000 $12.50-15.125 35,700 $12.50-15.125
Granted ....................... -- -- -- --
Exercised ..................... (51,000) 12.50-15.125 (17,850) 12.50-15.125
Forfeited ..................... (4,800) 12.50-15.125 (1,680) 12.50-15.125
- --------------------------------------------------------------------------------------
Outstanding December 31, 1993 .. 46,200 $12.50-15.125 16,170 $12.50-15.125
Granted ....................... 46,000 16.00 -- --
Exercised ..................... (3,000) 12.50-15.125 (1,050) 12.50-15.125
Forfeited ..................... -- -- -- --
- --------------------------------------------------------------------------------------
Outstanding December 31, 1994 .. 89,200 $ 12.50-16.00 15,120 $12.50-15.125
Granted ....................... 39,000 15.75 -- --
Exercised ..................... (6,000) 12.50-16.00 (1,960) 12.50-15.125
Forfeited ..................... (3,700) 12.50-15.125 (210) 12.50-15.125
- --------------------------------------------------------------------------------------
Outstanding December 31, 1995 .. 118,500 $ 12.50-16.00 12,950 $12.50-15.125
======================================================================================
As of December 31, 1995 and 1994, there were 39,400 and 22,200 options,
respectively, and 10,710 and 7,770 SARs, respectively, which were exercisable.
As of December 31, 1995, 187,000 shares of common stock were reserved under the
company's long-term stock plan.
In October 1995, the FASB issued Statement No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." This statement requires new
disclosures in the notes to the financial statements about stock-based
compensation plans based on the fair value of equity instruments granted.
Companies also may base the recognition of compensation cost for instruments
issued under stock-based compensation plans on these fair values. The company
anticipates adopting SFAS 123 effective January 1, 1996, but currently does not
plan to change the method of accounting for these plans.
ACQUISITIONS
Effective May 22, 1995, United Cities Propane Gas of Tennessee, Inc.
(UCPT), a wholly-owned 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, UCPT entered into a ten year non-compete
agreement with the prior owner for $6,000.
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 up to $1,000,000 in cash 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 provides gas marketing services to
industrial customers, municipalities and local distribution companies, including
Cities. UCG Energy utilized equity accounting, effective January 1, 1995, for
the acquisition. The excess of the purchase price over the value of the net
tangible assets, amounting to approximately $5,400,000, was allocated to
intangible assets consisting of customer contracts and goodwill, which are being
amortized over ten and twenty years, respectively.
Effective January 1, 1995, UCPT purchased substantially all of the
assets of Harrell Propane, Inc. for approximately $1,383,000. In addition, UCPT
entered into ten year non-compete agreements with the prior owners for $250,000,
to be paid over an eight year period. This acquisition added approximately 1,300
propane customers in the Murfreesboro, Tennessee area.
Effective April 14, 1994, UCPT purchased all of the assets of Hurley's
Propane Gas for approximately $938,000. In addition, UCPT entered into ten year
non-compete agreements with the prior owners for $100,000, to be paid over a
five year period. This acquisition added approximately 700 propane customers in
the Morristown, Tennessee area.
Effective March 1, 1994, the company purchased the natural gas system in
Palmyra, Missouri from Western Resources, Inc. for approximately $665,000. The
company also obtained a ten year non-compete agreement. Consideration for the
agreement is contingent upon volumes sold to a certain industrial customer with
payments made over a three year period, not to exceed $720,000. The system
serves approximately 1,400 natural gas customers.
United Cities Gas Company & Subsidiaries
44
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
Effective August 1, 1993, UCPT purchased the issued and outstanding
shares of common stock of High Country Propane, Inc. for $1,600,000, less
liabilities assumed of $820,000. Additionally, UCPT obtained ten year
non-compete agreements for $100,000, to be paid over a five year period. This
acquisition added approximately 1,400 propane customers in the Boone, North
Carolina area.
LONG-TERM DEBT
The company's mortgage dated as of July 15, 1959, as amended and
supplemented, securing the first mortgage bonds issued by the company
constitutes a direct first lien on substantially all of Cities' fixed property
and franchises. The company was in compliance with the requirements of its
indentures during 1995. The company's medium-term notes, issued in 1995, are
unsecured and at December 31, 1995, bore a weighted-average interest rate of
6.45%. The company's senior secured storage term notes bear interest at a rate
of 7.45% and are secured by storage plant assets. The weighted-average interest
rate of the company's other long-term debt was approximately 6.75% at December
31, 1995. Annual maturities and sinking fund requirements of the company's first
mortgage bonds and other long-term debt for the years 1996 through 2000 are
$9,155,000, $10,661,000, $7,656,000, $7,776,000 and $8,156,000, respectively.
INTERIM FINANCING
The company has arrangements with several banks which provide, through
mid-1996, a total line of credit of $84,000,000 in the form of master and
banker's acceptance notes bearing interest primarily at the lesser of the prime
rate or a negotiated rate during the term of each borrowing. Under these
arrangements, at December 31, 1995 and 1994, the company had short-term debt
outstanding of $32,313,000 and $46,188,000, respectively, with a
weighted-average interest rate of 6.41% and 6.60%, respectively.
OTHER
In the third quarter of 1995, the company announced a consolidation plan
under which five of Cities' 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.
COMMITMENTS AND CONTINGENCIES
During 1994, Cities discovered defects in the polyethylene piping
installed in certain of its service areas. An independent laboratory is
conducting a study of the matter at the request of the gas industry and the
manufacturers. Cities also continues to closely monitor the laboratory studies.
Cities believes this problem to be manageable under normal operating maintenance
and anticipates recovering the cost from the manufacturers or through the
ratemaking process.
The company is involved in other legal or administrative proceedings
before various courts and agencies with respect to rates and other matters.
Although unable to predict the outcome of these matters, it is management's
opinion that final disposition of these proceedings will not have a material
effect on the company's results of operations, financial condition or cash
flows.
SUBSEQUENT EVENTS AND OTHER (UNAUDITED)
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 Cities' Vandalia, Illinois operation. Pending regulatory
approval, the company expects this acquisition to be final by the second quarter
of 1996 and will not restate prior years' consolidated financial statements due
to immateriality.
Effective January 1, 1996, UCPT purchased substantially all of the
assets of Duncan Gas Service for approximately $4,310,000. In addition, UCPT
entered into a ten year non-compete agreement with the prior owners for
$250,000, to be paid over a ten year period. This acquisition added
approximately 2,000 propane customers in the Johnson City, Tennessee area.
United Cities Gas Company & Subsidiaries
45
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------------[LOGO]--------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of United Cities Gas Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of United Cities Gas Company (an
Illinois corporation) and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, retained earnings, capital surplus
and common stock and cash flows for each of the three years in the period ended
December 31, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Cities Gas Company and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements,
effective January 1, 1993, the Company changed its methods of accounting for
postretirement benefits other than pensions and income taxes.
Nashville, Tennessee Arthur Andersen LLP
February 16, 1996
United Cities Gas Company & Subsidiaries
46
49
CONSOLIDATED FINANCIAL AND OPERATING DATA
- ----------------------------------[LOGO]---------------------------------------
QUARTERLY FINANCIAL DATA
(In Thousands, except per share data)
1995 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------
Utility Operating Revenues ............. $106,006 $42,246 $32,248 $91,360
Utility Operating Income (Loss)......... $ 14,883 $ (557) $(4,084) $ 9,147
Common Stock Earnings (Loss)(a)......... $ 13,327 $(3,962) $(6,916) $ 7,486
Primary Earnings (Loss) Per Share(b).... $ 1.25 $ (.35) $ (.55) $ .59
1994 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------
Utility Operating Revenues.............. $124,191 $48,352 $34,143 $74,298
Utility Operating Income (Loss)......... $ 15,572 $ (106) $(2,141) $ 8,841
Common Stock Earnings (Loss)(a)......... $ 14,236 $(3,320) $(5,210) $ 6,387
Primary Earnings (Loss) Per Share(b).... $ 1.38 $ (.32) $ (.50) $ .61
(a) The pattern of quarterly earnings (loss)is the result of the highly
seasonal nature of the business as variations in weather conditions
generally result in greater earnings during the winter months.
(b) May not add to year-end results due to changes in average number of
outstanding common shares between periods.
MARKET INFORMATION
The common stock of the company is traded over-the-counter on the
NASDAQ National Market System under the symbol UCIT. The following table
reflects the quarterly high and low closing sales prices of the common stock,
as compiled from quotations supplied by the NASDAQ Monthly Statistical Report,
and the quarterly dividends paid per share, for the years 1995 and 1994.
1995 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------
High ................. $16.25 $16.25 $16.50 $18.75
Low .................. $15.25 $14.50 $14.75 $15.75
Dividends per share .. $ .255 $ .255 $ .255 $ .255
1994 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------
High ................. $18.75 $17.25 $17.75 $17.25
Low .................. $16.00 $15.50 $15.50 $15.44
Dividends per share .. $ .250 $ .250 $ .250 $ .255
United Cities Gas Company & Subsidiaries
47
50
CONSOLIDATED FINANCIAL AND OPERATING DATA
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING REVENUES:*
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . $127,603 $129,519 $134,856
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . 70,967 73,376 74,361
Industrial--
Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,438 33,772 31,252
Interruptible . . . . . . . . . . . . . . . . . . . . . . . . 33,338 35,297 36,703
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,412 1,813 3,411
- -----------------------------------------------------------------------------------------------------------------------------
263,758 273,777 280,583
Transportation . . . . . . . . . . . . . . . . . . . . . . . . 8,102 7,207 6,924
- -----------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $271,860 $280,984 $287,507
=============================================================================================================================
OPERATING MARGIN* . . . . . . . . . . . . . . . . . . . . . . . . $112,684 $108,016 $106,499
=============================================================================================================================
NATURAL GAS THROUGH-PUT (MCF):*
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . 22,901 21,352 23,055
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . 15,165 14,116 14,435
Industrial--
Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,324 8,134 7,509
Interruptible . . . . . . . . . . . . . . . . . . . . . . . . 11,920 11,002 11,661
- -----------------------------------------------------------------------------------------------------------------------------
57,310 54,604 56,660
Transportation . . . . . . . . . . . . . . . . . . . . . . . . 17,184 12,574 11,883
- -----------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 74,494 67,178 68,543
=============================================================================================================================
Customers (average for year):
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . 266,532 259,895 250,051
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . 34,435 33,861 31,849
Industrial
Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 395 395
Interruptible . . . . . . . . . . . . . . . . . . . . . . . . 251 258 245
- -----------------------------------------------------------------------------------------------------------------------------
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . 301,613 294,409 282,540
Propane . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,359 21,693 20,498
- -----------------------------------------------------------------------------------------------------------------------------
Total customers . . . . . . . . . . . . . . . . . . . . 324,972 316,102 303,038
=============================================================================================================================
Actual Customers at December 31, . . . . . . . . . . . . . . . . 331,958 322,851 313,788
=============================================================================================================================
Propane:*
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,124 $ 18,510 $ 16,506
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 13,038 10,126 8,920
- -----------------------------------------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,086 $ 8,384 $ 7,586
=============================================================================================================================
Gross margin % of sales . . . . . . . . . . . . . . . . . . . . 41.1% 45.3% 46.0%
=============================================================================================================================
Gallons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,854 23,175 20,180
=============================================================================================================================
*In thousands
United Cities Gas Company & Subsidiaries
48
51
CONSOLIDATED FINANCIAL AND OPERATING DATA
1992 1991 1990 1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------------
$119,245 $109,081 $ 95,916 $ 79,245 $ 75,659 $ 68,668 $ 70,285
69,447 62,052 55,576 50,502 46,341 41,327 40,975
32,805 33,392 33,924 33,430 33,865 35,195 40,088
29,607 25,182 26,028 26,406 25,077 26,250 30,119
6,530 2,692 6,797 3,957 1,777 2,812 1,618
- ---------------------------------------------------------------------------------------------------------------------------
257,634 232,399 218,241 193,540 182,719 174,252 183,085
7,826 6,756 6,352 4,385 4,690 3,897 2,171
- ---------------------------------------------------------------------------------------------------------------------------
$265,460 $239,155 $224,593 $197,925 $187,409 $178,149 $185,256
===========================================================================================================================
$ 99,300 $ 87,779 $ 80,231 $ 71,536 $ 63,748 $ 57,480 $ 50,181
===========================================================================================================================
20,481 19,679 17,765 14,135 13,675 12,162 11,669
13,324 12,573 11,697 10,577 9,671 8,542 7,913
7,690 8,323 8,407 8,059 7,930 8,011 8,343
10,101 9,050 8,432 8,088 7,701 8,092 7,881
- ---------------------------------------------------------------------------------------------------------------------------
51,596 49,625 46,301 40,859 38,977 36,807 35,806
11,117 9,484 8,977 4,462 4,614 3,363 2,293
- ---------------------------------------------------------------------------------------------------------------------------
62,713 59,109 55,278 45,321 43,591 40,170 38,099
===========================================================================================================================
242,990 236,215 228,678 166,859 157,022 151,304 141,956
31,124 30,493 29,592 24,680 21,614 19,212 18,943
397 376 466 443 413 362 404
231 223 208 171 159 168 167
- ---------------------------------------------------------------------------------------------------------------------------
274,742 267,307 258,944 192,153 179,208 171,046 161,470
21,120 24,480 31,300 28,184 24,996 19,522 11,820
- ---------------------------------------------------------------------------------------------------------------------------
295,862 291,787 290,244 220,337 204,204 190,568 173,290
===========================================================================================================================
302,781 295,729 297,855 289,639 211,716 200,786 183,354
===========================================================================================================================
$ 15,194 $ 14,727 $ 16,781 $ 13,334 $ 12,394 $ 9,882 $ 6,713
8,053 7,539 9,773 5,538 5,239 4,429 3,381
- ---------------------------------------------------------------------------------------------------------------------------
$ 7,141 $ 7,188 $ 7,008 $ 7,796 $ 7,155 $ 5,453 $ 3,332
===========================================================================================================================
47.0% 48.8% 41.8% 58.5% 57.7% 55.2% 49.6%
===========================================================================================================================
19,063 16,066 17,931 17,499 16,535 13,363 8,161
===========================================================================================================================
United Cities Gas Company & Subsidiaries
49
52
CONSOLIDATED FINANCIAL AND OPERATING DATA
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
Common stock information:
Common stock earnings:*
Utility . . . . . . . . . . . . . . . . . . $ 5,745 $ 7,817 $ 7,877
UCG Energy . . . . . . . . . . . . . . . . 3,450 3,750 3,775
UCG Storage . . . . . . . . . . . . . . . . 740 526 468
- --------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . $ 9,935 $ 12,093 $ 12,120
==================================================================================================
Earnings per share . . . . . . . . . . . . . . $ .84 $ 1.16 $ 1.19
==================================================================================================
Average number of shares* . . . . . . . . . . . 11,792 10,409 10,197
==================================================================================================
Shares outstanding* . . . . . . . . . . . . . . 12,727 10,613 10,314
==================================================================================================
Dividends per share . . . . . . . . . . . . . . $ 1.02 $ 1.005 $ .985
==================================================================================================
Dividend pay-out . . . . . . . . . . . . . . . 121.4% 86.6% 82.8%
==================================================================================================
Dividend yield . . . . . . . . . . . . . . . . 5.4% 6.4% 5.3%
==================================================================================================
Market value per share:
High . . . . . . . . . . . . . . . . . . . $ 18.75 $ 18.75 $ 20.50
Low . . . . . . . . . . . . . . . . . . . . $ 14.50 $ 15.44 $ 16.00
Close . . . . . . . . . . . . . . . . . . . $ 18.75 $ 15.75 $ 18.50
==================================================================================================
Price/Earnings ratio . . . . . . . . . . . . . 22.3x 13.6x 15.5x
==================================================================================================
Return on average equity . . . . . . . . . . . . . 7.5% 10.5% 11.1%
==================================================================================================
Weather data-colder (warmer) than normal. . . . . . (2.4%) (10.2%) 2.8%
==================================================================================================
Capitalization:
Capitalization:*
Long-term debt . . . . . . . . . . . . . . $163,160 $ 144,344 $151,843
Preferred and preference stock . . . . . .
Common stock equity . . . . . . . . . . . . 146,071 118,028 111,888
- --------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . $309,231 $ 262,372 $263,731
==================================================================================================
Capitalization (percent):
Long-term debt . . . . . . . . . . . . . . 52.8% 55.0% 57.6%
Preferred and preference stock . . . . . .
Common stock equity . . . . . . . . . . . . 47.2% 45.0% 42.4%
- --------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
==================================================================================================
Total assets* . . . . . . . . . . . . . . . . . . . $460,377 $ 421,200 $401,520
==================================================================================================
*In thousands
United Cities Gas Company & Subsidiaries
50
53
CONSOLIDATED FINANCIAL AND OPERATING DATA
1992 1991 1990 1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,865 $ 4,777 $ 1,490 $ 7,140 $ 4,684 $ 3,731 $ 3,498
3,681 2,570 1,375 2,790 2,262 1,504 1,113
558 394 346 78 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
$ 10,104 $ 7,741 $ 3,211 $ 10,008 $ 6,946 $ 5,235 $ 4,611
===========================================================================================================================
$ 1.07 $ $.97 $ .44 $ 1.52 $ 1.24 $ 1.00 $ .97
===========================================================================================================================
9,459 8,000 7,238 6,572 5,621 5,251 4,768
===========================================================================================================================
10,052 8,517 7,292 7,197 5,677 5,300 5,225
===========================================================================================================================
$ .965 $ .93 $ .92 $ .88 $ .84 $ .80 $ .79
===========================================================================================================================
90.2% 95.9% 209.1% 57.9% 67.7% 80.0% 81.4%
===========================================================================================================================
5.8% 5.7% 6.8% 5.9% 6.8% 6.7% 6.6%
===========================================================================================================================
$ 16.50 $ 16.25 $ 15.63 $ 15.50 $ 13.13 $ 15.13 $ 16.50
$ 12.75 $ 12.00 $ 13.00 $ 12.25 $ 11.75 $ 11.75 $ 12.00
$ 16.50 $ 16.25 $ 13.50 $ 14.88 $ 12.38 $ 12.00 $ 12.00
===========================================================================================================================
15.4x 16.8x 30.7x 9.8x 10.0x 12.0x 12.4x
===========================================================================================================================
10.5% 9.9% 4.4% 15.9% 14.0% 11.4% 12.4%
===========================================================================================================================
(7.8%) (12.8%) (20.4%) .9% 3.5% (4.0%) (8.0%)
===========================================================================================================================
$157,734 $127,430 $ 96,521 $ 78,230 $ 69,138 $ 73,325 $ 32,274
1,352 1,483 2,203 4,871 5,156 5,483
106,206 85,953 71,118 73,204 52,279 46,964 44,790
- ---------------------------------------------------------------------------------------------------------------------------
$263,940 $214,735 $169,122 $153,637 $126,288 $125,445 $ 82,547
===========================================================================================================================
59.8% 59.4% 57.1% 50.9% 54.7% 58.5% 39.1%
-- 0.6% 0.9% 1.4% 3.9% 4.1% 6.6%
40.2% 40.0% 42.0% 47.7% 41.4% 37.4% 54.3%
- ---------------------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===========================================================================================================================
$370,150 $368,283 $338,167 $307,160 $212,629 $197,946 $166,186
===========================================================================================================================
United Cities Gas Company & Subsidiaries
51
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
UNITED CITIES GAS COMPANY
(Registrant)
By: /s/ GENE C. KOONCE
--------------------------
Gene C. Koonce
President
Dated: March 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ DWIGHT C. BAUM Chairman of the Board
- --------------------------------------
Dwight C. Baum
/s/ GENE C. KOONCE President, Principal Executive
- -------------------------------------- Officer and Director
Gene C. Koonce
/s/ JAMES B. FORD Senior Vice President and
- -------------------------------------- Treasurer and Principal
James B. Ford Financial Officer
/s/ ADRIENNE H. BRANDON Vice President and Controller
- --------------------------------------
Adrienne H. Brandon
/s/ THOMAS J. GARLAND Director March 20, 1996
- --------------------------------------
Thomas J. Garland
/s/ DALE A. KEASLING Director
- --------------------------------------
Dale A. Keasling
/s/ VINCENT J. LEWIS Director
- --------------------------------------
Vincent J. Lewis
/s/ DENNIS L. NEWBERRY, II Director
- --------------------------------------
Dennis L. Newberry, II
/s/ STIRTON OMAN, JR. Director
- --------------------------------------
Stirton Oman, Jr.
/s/ TIMOTHY W. TRIPLETT Director
- --------------------------------------
Timothy W. Triplett
/s/ GEORGE C. WOODRUFF, JR. Director
- --------------------------------------
George C. Woodruff, Jr.
/s/ JERRY H. BALLENGEE Director
- --------------------------------------
Jerry H. Ballengee
52
55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Cities Gas Company:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of United Cities Gas Company and
subsidiaries included in this Form 10-K, and have issued our report thereon
dated February 16, 1996. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedules
listed in the index are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee,
February 16, 1996
53
56
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
SCHEDULE II-RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
OTHER
BALANCE AT ADDITIONS CHANGES BALANCE AT
BEGINNING CHARGED TO INCREASE END OF
DESCRIPTION OF PERIOD INCOME DEDUCTIONS (DECREASE) PERIOD
----------- ------------ ------------ ------------ ------------- -----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 -
Deducted in the balance sheet from the
asset to which it applies:
Allowance for uncollectible accounts.................. $1,017 1,331 996 (a) - $1,352
============ ========== =========== ========= ===========
Included in the deferred credits section of
the balance sheet:
Injuries and damages reserve.......................... $774 360 - - $1,134
============ ========== =========== ========= ===========
Included in the current liabilities section
of the balance sheet:
Injuries and damages reserve.......................... $313 96 304 - $105
============ ========== =========== ========= ===========
YEAR ENDED DECEMBER 31, 1994 -
Deducted in the balance sheet from the
asset to which it applies:
Allowance for uncollectible accounts.................. $1,150 1,021 1,154 (a) - $1,017
============ ========== =========== ========= ===========
Included in the deferred credits section of
the balance sheet:
Injuries and damages reserve.......................... $1,064 60 350 - $774
============ ========== =========== ========= ===========
Included in the current liabilities section
of the balance sheet:
Injuries and damages reserve.......................... $277 36 - - $313
============ ========== =========== ========= ===========
YEAR ENDED DECEMBER 31, 1993 -
Deducted in the balance sheet from the
asset to which it applies:
Allowance for uncollectible accounts.................. $705 1,345 900 (a) - $1,150
============ ========== =========== ========= ===========
Included in the deferred credits section of
the balance sheet:
Injuries and damages reserve.......................... $959 107 2 - $1,064
============ ========== =========== ========= ===========
Included in the current liabilities section
of the balance sheet:
Injuries and damages reserve.......................... $174 156 53 - $277
============ ========== =========== ========= ===========
- ----------
(a) Represents write-off of accounts considered to be uncollectible, less
collection of accounts previously written off.
54
57
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
DIVIDENDS FROM SUBSIDIARIES.
Cash dividends declared to Cities from the registrant's wholly-owned
subsidiaries were $6,100,000 in 1995, $1,350,000 in 1994 and $1,100,000 in
1993.
55
58
LIST OF EXHIBITS
3.01 Amended Articles of Incorporation of Company, as amended April
28, 1995, (filed with the Registrant's Form 10-Q dated June 30,
1995 and incorporated herein by reference).
3.02 Amended By-Laws of Company, as amended February 3, 1996.
4.01 Indenture of Mortgage, dated as of July 15, 1959, from the
Company to First Trust of Illinois, National Association, and M.
J. Kruger, as Trustees, as amended and supplemented through
December 1, 1992, (the Indenture of Mortgage through the 20th
Supplemental Indenture, filed with the Registrant's Registration
Statement on Form S-3 (File No. 33-56983) and incorporated herein
by reference).
4.02 Form of Indenture between the Company and First Trust of
Illinois, National Association, as trustee (filed with the
Registrant's Registration Statement on Form S-3 (File No.
33-56983) and incorporated herein by reference).
10.01 Annual Incentive Compensation Plan effective January 1, 1989, as
revised, (filed with the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 and incorporated herein by
reference).
10.02 Supplemental Executive Retirement Compensation Agreement, as
revised.
10.03 Long-Term Stock Plan of 1989, (filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989
and incorporated herein by reference).
10.04 Directors' Deferred Compensation Plan effective February 1,
1992, (filed with the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by
reference).
10.05 Non-Employee Director Stock Plan effective February 28, 1995
(filed with the Registrant's Form 10-Q dated June 30, 1995 and
incorporated herein by reference).
10.06 Key Management Deferred Compensation Plan effective January 1,
1995.
11.01 Computation of Common Stock Earnings Per Share.
12.01 Computation of Ratio of Consolidated Earnings to Fixed Charges.
21. Subsidiaries of United Cities Gas Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule (SEC use only).
56