<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1994.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
-------------- --------------
Commission file number 0-1284-3
UNITED CITIES GAS COMPANY
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois and Virginia 36-1801540
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5300 Maryland Way, Brentwood, TN 37027
- - --------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
(615) 373-5310
- - --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes
[ ] No
At October 31, 1994, 10,479,975 shares of the common stock of the Registrant
were outstanding.
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UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1994
Table of Contents
<TABLE>
<CAPTION>
Item Page
Number PART I -- FINANCIAL INFORMATION Number
------ ------
<S> <C> <C>
1 Financial Statements:
Consolidated Statements of Income (Unaudited) for the Three, Nine and
Twelve Months Ended September 30, 1994 and September 30, 1993. 3
Consolidated Statements of Cash Flows (Unaudited) for the Three, Nine
and Twelve Months Ended September 30, 1994 and September 30, 1993. 4
Consolidated Balance Sheets at September 30, 1994 (Unaudited) 5
and December 31, 1993.
Consolidated Statements of Capitalization at September 30, 1994
(Unaudited) and December 31, 1993. 6
Notes to Consolidated Financial Statements. 7
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
PART II -- OTHER INFORMATION
1 Legal Proceedings. 13
6 Exhibits and Reports on Form 8-K. 13
List of Exhibits. 14
Signature 15
11.01 Computation of Common Stock Earnings Per Share. 16
12.01 Computation of Ratio of Consolidated Earnings To Fixed Charges 17
27.01 Financial Data Schedule 18
</TABLE>
2
<PAGE> 3
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- ---------------------- ---------------------
(Unaudited, in thousands, except per share amounts) 1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues.........................................$ 34,143 $ 31,838 $ 206,686 $ 197,242 $ 296,951 $ 290,548
Natural gas cost........................................ 20,167 18,596 130,202 123,263 187,947 184,456
--------- --------- ---------- --------- ---------- ---------
Operating Margin........................................... 13,976 13,242 76,484 73,979 109,004 106,092
--------- --------- ---------- --------- ---------- ---------
Other Operating Expenses:
Operations and maintenance.............................. 13,790 14,145 43,434 43,190 57,167 58,345
Depreciation and amortization........................... 3,568 3,310 10,502 9,727 13,878 11,860
Federal and state income taxes.......................... (3,744) (3,990) 1,163 1,165 3,472 4,304
Other taxes............................................. 2,503 2,258 8,060 7,652 10,694 10,230
--------- --------- ---------- --------- ---------- ---------
Total other operating expenses........................ 16,117 15,723 63,159 61,734 85,211 84,739
--------- --------- ---------- --------- ---------- ---------
Operating Income (Loss).................................... (2,141) (2,481) 13,325 12,245 23,793 21,353
--------- --------- ---------- --------- ---------- ---------
Other Income (Loss):
Operations of UCG Energy Corporation-
Revenues............................................. 8,284 9,222 28,010 27,392 39,527 37,785
Operating expenses................................... 6,588 7,451 20,879 20,463 29,200 27,773
Interest expense..................................... 184 214 570 653 966 872
Depreciation and amortization........................ 870 859 2,606 2,583 3,489 3,387
Federal and state income taxes....................... 243 276 1,500 1,009 2,326 1,789
--------- --------- ---------- --------- ---------- ---------
399 422 2,455 2,684 3,546 3,964
--------- --------- ---------- --------- ---------- ---------
Operations of United Cities Gas Storage Company......... 128 118 354 320 503 371
--------- --------- ---------- --------- ---------- --------
Other income (loss), net................................ (52) 154 (177) 38 27 128
--------- --------- ---------- --------- ---------- --------
Income (Loss) Before Interest Charges...................... (1,666) (1,787) 15,957 15,287 27,869 25,816
--------- --------- ---------- --------- ---------- --------
Interest Charges:
Interest on long-term debt.............................. 3,066 3,176 9,283 9,581 12,458 12,635
Other interest charges.................................. 478 207 968 654 2,607 1,280
--------- --------- ---------- --------- ---------- ---------
Total interest charges................................ 3,544 3,383 10,251 10,235 15,065 13,915
--------- --------- ---------- --------- ---------- ---------
Net Income (Loss).......................................... (5,210) (5,170) 5,706 5,052 12,804 11,901
Preferred and Preference Stock Dividends................... - - - 30 - 48
--------- --------- ---------- --------- ---------- ---------
Common Stock Earnings (Loss)...............................$ (5,210) $ (5,170) $ 5,706 $ 5,022 $ 12,804 $ 11,853
========= ========= ========== ========= ========== =========
Common Stock Earnings (Loss) Per Share.....................$ (0.50) $ (0.50) $ 0.55 $ 0.49 $ 1.24 $ 1.17
========= ========= ========== ========= ========== =========
Average Number of Common Shares Outstanding................ 10,407 10,248 10,370 10,167 10,349 10,132
========= ========= ========== ========= ========== =========
Common Stock Dividends Per Share...........................$ .25 $ .245 $ .75 $ .735 $ 1.00 $ .98
========= ========= ========== ========= ========== =========
</TABLE>
3
<PAGE> 4
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
--------------------- ------------------- -------------------
(Unaudited, in thousands) 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)..............................................$ (5,210) $ (5,170) $ 5,706 $ 5,052 $ 12,804 $ 11,901
-------- --------- --------- --------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 4,562 4,305 13,421 12,735 17,816 15,771
Deferred taxes............................................... (72) (192) (216) (210) 605 1,926
Investment tax credits, net.................................. (92) (93) (277) (280) (371) (378)
Loss (gain) on sale of assets................................ 4 2 (3) 17 2 35
Changes in current assets and current liabilities:
Receivables................................................ 2,596 4,583 33,246 35,196 (2,398) 929
Materials and supplies..................................... 308 (75) (91) 108 558 332
Gas in storage............................................. (9,031) (8,038) (4,018) (10,867) (11,792) (9,546)
Gas costs to be billed in the future....................... (2,459) (2,609) (5,528) (2,775) (4,924) (3,510)
Prepayments and other...................................... (12) 658 105 (296) (143) 1
Accounts payable........................................... (4,714) 782 (18,938) (10,920) 1,888 2,529
Customer deposits and advance payments..................... 4,064 2,770 712 (407) 2,659 (703)
Accrued interest........................................... 2,538 2,234 1,351 2,380 (95) 337
Supplier refunds due customers............................. (1,684) (3,307) 1,116 (631) (2,412) 312
Accrued taxes.............................................. (2,786) (5,338) 324 (9,712) 2,615 (7,881)
Other, net................................................. (965) (2,305) (427) 3,615 (1,543) 7,947
-------- --------- --------- --------- --------- ---------
Total adjustments........................................ (7,743) (6,623) 20,777 17,953 2,465 8,101
-------- --------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities.... (12,953) (11,793) 26,483 23,005 15,269 20,002
-------- --------- --------- --------- --------- ---------
Cash Flows from Investing Activities:
Additions to property - utility................................ (8,590) (7,119) (22,616) (19,948) (29,698) (26,058)
Additions to property - non-utility............................ (1,193) (681) (2,639) (3,172) (3,404) (3,892)
-------- --------- --------- --------- --------- ---------
Net cash used in investing activities.................. (9,783) (7,800) (25,255) (23,120) (33,102) (29,950)
-------- --------- --------- --------- --------- ---------
Cash Flows from Financing Activities:
Short-term borrowings - net.................................... 24,209 3,590 11,966 3,590 31,239 1,996
Proceeds from issuance of long-term debt....................... - - - 150 - 17,150
Proceeds from issuance of common stock......................... 385 361 1,010 1,439 1,520 1,667
Long-term debt retirements..................................... (1,476) (847) (7,154) (4,333) (7,399) (4,716)
Dividends paid................................................. (2,289) (2,229) (6,853) (6,672) (9,128) (8,885)
Redemption of preferred stock.................................. - - - (106) - (106)
-------- --------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.... 20,829 875 (1,031) (5,932) 16,232 7,106
-------- --------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash and Temporary Investments.......... (1,907) (18,718) 197 (6,047) (1,601) (2,842)
Cash and Temporary Investments at Beginning of Period.............. 2,902 21,314 798 8,643 2,596 5,438
-------- --------- --------- --------- --------- ---------
Cash and Temporary Investments at End of Period....................$ 995 $ 2,596 $ 995 $ 2,596 $ 995 $ 2,596
======== ========= ========= ========= ========= =========
Cash Paid During the Period for:
Interest, net of amounts capitalized...........................$ 1,418 $ 1,746 $ 10,186 $ 9,250 $ 17,063 $ 15,458
======== ========= ========= ========= ========= =========
Income taxes...................................................$ 154 $ 4,303 $ 3,016 $ 11,344 $ 3,630 $ 12,020
======== ========= ========= ========= ========= =========
Noncash Investing and Financing Activities:
Dividends reinvested...........................................$ 312 $ 283 $ 923 $ 834 $ 1,219 $ 1,097
======== ========= ========= ========= ========= =========
</TABLE>
4
<PAGE> 5
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
ASSETS (Unaudited)
Utility Plant:
Plant in service, at cost........................................$ 395,398 $ 374,205
Less-accumulated depreciation.................................. 137,113 127,856
------------ -----------
258,285 246,349
------------ -----------
Non-Utility Property:
Property, plant, and equipment................................... 70,657 68,082
Less-accumulated depreciation.................................. 21,769 19,843
------------ -----------
48,888 48,239
------------ -----------
Current Assets:
Cash and temporary investments................................... 995 798
Receivables, less allowance for uncollectible accounts
of $1,141 in 1994 and $1,150 in 1993........................... 17,116 50,362
Materials and supplies........................................... 5,464 5,373
Gas in storage................................................... 30,001 25,983
Gas costs to be billed in the future............................. 13,574 8,046
Prepayments and other............................................ 2,948 3,053
------------ -----------
70,098 93,615
------------ -----------
Deferred Charges:
Unamortized debt discount and expense, net....................... 2,630 2,788
Non-compete agreements, net...................................... 3,519 3,952
Deferred system improvement costs, net........................... 1,578 2,036
Other deferred charges........................................... 5,019 4,541
------------ -----------
12,746 13,317
------------ -----------
$ 390,017 $ 401,520
============ ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity..............................................$ 111,751 $ 111,888
Long-term debt................................................... 145,046 151,843
------------ -----------
256,797 263,731
------------ -----------
Current Liabilities:
Current portion of long-term obligations......................... 6,045 6,402
Notes payable.................................................... 34,829 22,863
Accounts payable for gas costs................................... 15,933 33,271
Other accounts payable........................................... 2,739 4,339
Accrued taxes.................................................... 4,210 3,886
Customer deposits and advance payments........................... 12,695 11,983
Accrued interest................................................. 5,808 4,457
Supplier refunds due customers................................... 5,330 4,214
Other............................................................ 7,889 7,630
------------ -----------
95,478 99,045
------------ -----------
Deferred Credits:
Accumulated deferred income tax.................................. 22,985 23,142
Deferred investment tax credits.................................. 4,738 5,015
Income taxes due customers....................................... 6,401 6,617
Other............................................................ 3,618 3,970
------------ -----------
37,742 38,744
------------ -----------
$ 390,017 $ 401,520
============ ===========
</TABLE>
5
<PAGE> 6
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except share amounts) 1994 1993
------------------ -------------------
<S> <C> <C> <C> <C>
Common Stock Equity: (Unaudited)
Common stock without par value, authorized
40,000,000 shares, outstanding 10,434,413 in
1994 and 10,314,026 in 1993.......................................$ 69,039 $ 67,106
Capital surplus..................................................... 22,462 22,462
Retained earnings................................................... 20,250 22,320
--------- ----------
Total common stock equity......................................... 111,751 43.5% 111,888 42.4%
--------- ------- ---------- -------
Long-Term Debt:
First mortgage bonds ............................................... 129,000 133,955
Senior secured storage term notes due in
installments through 2007........................................ 10,555 10,895
Rental property adjustable rate term notes due in
installments through 1999........................................ 9,786 9,043
Other long-term obligations due in installments through 2013........ 1,750 4,352
--------- ----------
151,091 158,245
Less-current requirements....................................... 6,045 6,402
--------- ----------
Total long-term debt, excluding amounts due within one year..... 145,046 56.5% 151,843 57.6%
--------- ------- ---------- -------
Total Capitalization....................................................$ 256,797 100.0% $ 263,731 100.0%
========= ======= ========== =======
</TABLE>
6
<PAGE> 7
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The accompanying unaudited financial statements reflect all adjustments
(which are of a normal recurring nature) that are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. The statements should be read in conjunction with the Summary of
Significant Accounting Policies and Notes to Consolidated Financial Statements
included in the Company's annual report for the year ended December 31, 1993.
The Company's business is seasonal in nature resulting in greater earnings
during the winter months. The results of operations for the three month and
nine month periods ended September 30, 1994 are not necessarily indicative of
the results to be expected for the full year.
The Company was named, along with 17 other defendants, in a class action,
anti-trust case filed March 5, 1993 in the United States District Court for the
Eastern District of Tennessee, Knoxville Division (the Court). This action
involves alleged price-fixing in the 1980's in eastern Tennessee by Holston Oil
Co., Inc. (Holston), which at the time of the alleged events was a wholly-owned
subsidiary of Tennessee-Virginia Energy Corporation (TVEC). Subsequent to the
alleged events and prior to TVEC's merger with the Company in 1986, TVEC sold
the common stock of Holston to an unrelated party. The Company has filed a
Motion for Summary Judgment with regard to the entire matter and is awaiting
the Court's ruling. The Court denied the plaintiffs' class certification
motions, but granted the plaintiffs the right to pursue individual claims
against the defendants, including the Company. The Tennessee attorney general
has also filed a motion for class certification on behalf of all business in
the east Tennessee area. The Company has or will file a Motion for Summary
Judgment with regard to each claim filed. The matter is at the early stages of
discovery and management cannot predict the outcome. The Company intends to
vigorously defend this matter.
The Company 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, the Company may be responsible for response action with
respect to such materials, if response action is necessary.
The Company identified a site in Columbus, Georgia, and along with other
responsible parties, has performed response action. The Company's share of
response action costs at this site totaled approximately $1,324,000. Of the
amount, $1,275,000 was requested and approved to be recovered over a three year
period in rates which were effective November, 1992. The approved amount did
not include carrying costs on the deferred balance. The Company will request
and expects approval to recover the remaining costs in its next rate proceeding
in Georgia.
The Company has joined with three other potentially responsible parties
(PRPs) to fund a remedial investigation and feasibility study of a site in
Keokuk, Iowa. The Company has incurred costs totaling $125,000 and has, based
on available current information, accrued an additional $644,000 for its share
of possible remedial action. The Company has deferred these costs and expects
approval for recovery in its next rate proceeding in Iowa. The Company has
estimated that it could be responsible for additional costs, if certain
conditions exist, of up to $731,000 related to its share of remedial action at
this site.
The Company owns or may be the successor in interest to the previous owner
of four additional former manufactured gas plant sites. The Company is unaware
of any information which suggests that these sites give rise to a present
environmental risk as a result of the manufactured gas process or that any
response action will be necessary. Accordingly, the Company has not accrued
any liabilities associated with these four sites.
Pursuant to the Tennessee Petroleum Underground Storage Tank Act (the
Act), the Company is required to upgrade or remove certain underground storage
tanks (USTs) situated in Tennessee before December 22, 1994. As of September
30, 1994, the Company has identified six USTs in this category in Tennessee and
has incurred $7,000 and has, based on available current information, accrued an
additional $70,000 for the upgrade or removal of these USTs. The Company has
estimated that it may incur, if certain conditions exist requiring corrective
action, additional costs of up to $380,000 to bring the sites into compliance
with the Act. On October 4, 1994, the Tennessee Public Service Commission
granted the Company permission to defer, until its next rate case, all costs
incurred in connection with complying with the Act. In addition, the Company
expects to recover a portion of the corrective action costs from the State of
Tennessee Trust Fund for all of the UST sites in Tennessee.
7
<PAGE> 8
The Company has received 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. The Company is
cooperating with the KDHE in preparing a Consent Order and a Work Plan for the
remediation of mercury contamination at any site which is identified as
exceeding the KDHE's established acceptable concentration levels. The Company
has identified approximately 720 meter sites where mercury may have been used
and has, based on available current information, accrued and deferred for
recovery $280,000 as of September 30, 1994 for the investigation of these
sites. The Company 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. Based on a recent decision by the
Kansas State Corporation Commission concerning the recovery of costs associated
with the remediation of a manufactured gas plant site, the Company expects
recovery of the costs involved in the investigation and remediation of the
mercury meter sites in Kansas.
Management expects that expenditures related to response action at any
site will be recovered through rates or insurance, or shared among other PRPs.
Therefore, the costs of responding to these sites are not expected to
materially affect the results of operations or financial condition of the
Company.
The Company has discovered defective polyethylene piping installed in
certain of its service areas and has notified both the manufacturers and state
regulatory commissions. An independent laboratory is conducting a study of the
matter at the request of the gas industry and the Company continues to
investigate the issue. The Company is unable to predict the extent of the
problem or the expense which will be incurred to repair the defective piping
but anticipates paying the cost as a normal maintenance expense and recovering
such cost through the rate-making process.
On October 19, 1994, UCG Energy Corporation (UCG Energy), a wholly owned
subsidiary of the Company, signed a letter of intent to acquire a 45% interest
in a limited liability company that would be formed by Woodward Marketing Inc.,
and its two shareholders. Woodward Marketing, Inc., is a Texas corporation
providing gas marketing services to industrial customers, municipalities and
local distribution companies. In exchange for the acquired interest, Woodward
Marketing, Inc., would receive $5,000,000 in the Company's common stock and
$750,000 in cash. Other conditions outlined in the acquisition proposal
include the transfer of gas contracts from UCG Energy to the newly formed
limited liability company, as well as the potential payment of $1,000,000 to be
paid over a five-year period if certain earnings targets are met. The proposed
acquisition is subject to the completion of a definitive purchase agreement and
approval by various regulatory authorities as to the issuance of common stock.
The targeted completion date for the transaction is on or before December 31,
1994.
In 1991, the Illinois Commerce Commission ordered the Company to refund
approximately $260,000 related to the reconciliation of the Purchased Gas
Adjustment recovery mechanism for 1988. The Company filed an appeal with the
Appellate Court of Illinois which in September, 1992, issued a decision
upholding the commission's decision. The Company filed an appeal with the
Illinois Supreme Court which in September, 1994, upheld the commission's and
lower court's decision. The Company has asked for rehearing of this decision.
The Company was granted a stay of the commission's order by the Appellate
Court, including the refund obligation, pending the outcome of the appeal
process. In management's opinion, the outcome of the appeal process will not
have a material effect on the results of operations or financial condition of
the Company.
Certain reclassifications were made conforming prior year's financial
statements with 1994 financial statement presentation.
8
<PAGE> 9
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company's 1994 third quarter common stock loss was $5,210,000
compared to the third quarter 1993 loss of $5,170,000. The loss per
common share was $.50 for the third quarter in both 1994 and 1993. The
common stock earnings for the first nine months of 1994 were $5,706,000
compared to $5,022,000 in 1993. Common stock earnings per share
increased from $.49 in the nine month period in 1993 to $.55 in 1994 on
an additional 203,000 average number of shares outstanding. Common stock
earnings for the twelve month period ended September 30, 1994 were
$12,804,000 compared to $11,853,000 for the twelve month period ended
September 30, 1993. Common stock earnings per share increased from $1.17
in the twelve month period in 1993 to $1.24 in the twelve month period in
1994. Average number of shares outstanding increased by 217,000 for the
twelve month period ended September 30, 1994.
The following table summarizes certain information regarding the
operation of each segment of the Company's business for the periods ended
September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
-------------------- ---------------------- ----------------------
(Unaudited, in thousands) 1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Utility...............................$ 34,143 $ 31,838 $ 206,686 $ 197,242 $ 296,951 $ 290,548
--------- -------- ---------- --------- ---------- ---------
Subsidiaries:
UCG Energy Corporation-
Propane Division................... 3,776 3,426 14,858 12,343 20,719 17,771
Rental Division.................... 1,568 1,650 4,826 4,964 6,494 6,779
Utility Services Division.......... 2,940 4,146 8,326 10,085 12,314 13,235
--------- -------- ---------- --------- ---------- ---------
Total UCG Energy Corporation..... 8,284 9,222 28,010 27,392 39,527 37,785
United Cities Gas Storage Company.... 1,073 1,490 5,830 6,278 8,388 8,808
--------- -------- ---------- --------- ---------- ---------
Total Subsidiaries............... 9,357 10,712 33,840 33,670 47,915 46,593
--------- -------- ---------- --------- ---------- ---------
Total Revenues........................$ 43,500 $ 42,550 $ 240,526 $ 230,912 $ 344,866 $ 337,141
========= ======== ========== ========= ========== =========
Common Stock Earnings (Loss):
Utility...............................$ (5,737) $ (5,710) $ 2,897 $ 2,018 $ 8,755 $ 7,518
--------- -------- ---------- --------- ---------- ---------
Subsidiaries:
UCG Energy Corporation-
Propane Division................... (250) (192) 448 432 1,026 905
Rental Division.................... 500 469 1,521 1,851 1,840 2,488
Utility Services Division.......... 149 145 486 401 680 571
--------- -------- ---------- --------- ---------- ---------
Total UCG Energy Corporation..... 399 422 2,455 2,684 3,546 3,964
United Cities Gas Storage Company.... 128 118 354 320 503 371
--------- -------- ---------- --------- ---------- ---------
Total Subsidiaries............... 527 540 2,809 3,004 4,049 4,335
--------- -------- ---------- --------- ---------- ---------
Total Common Stock Earnings (Loss)....$ (5,210) $ (5,170) $ 5,706 $ 5,022 $ 12,804 $ 11,853
========= ======== ========== ========= ========== =========
</TABLE>
OPERATING RESULTS-UTILITY
The utility loss increased slightly for the third quarter and
utility income increased by $879,000 and $1,237,000, respectively, for
the nine and twelve month periods in 1994 from the comparable 1993
periods due predominantly to the factors mentioned below:
The operating margin increased from $13,242,000 in the third quarter
of 1993 to $13,976,000 in the third quarter of 1994. The operating
margin for the nine month period ended September 30, 1994 was $76,484,000
compared to $73,979,000 for the same period in 1993, and the margin
increased $2,912,000 to $109,004,000 for the twelve months ended
September 30, 1994. The increase in margin in all periods can be
attributed to volumes sold to an increased number of residential and
commercial natural gas customers and the Palmyra acquisition in March
1994. In addition, the increased margin in the nine and twelve month
periods reflects rate increases in certain jurisdictions and the
additional revenues from certain interruptible customers who did not go
off the Company's system when curtailed during the extremely cold weather
in the first quarter of 1994.
9
<PAGE> 10
Item 2. Continued
Operations and maintenance expenses other than natural gas cost
decreased $355,000 for the third quarter and increased $244,000 for the
nine month period ended September 30, 1994. Operations and maintenance
expenses for the twelve month period ended September 30, 1994 decreased
$1,178,000. This decrease reflects the December, 1992 adjustment to
expense the difference in the approved amount of system improvement costs
in Kansas and the amount previously deferred.
Depreciation and amortization expense increased in the third
quarter, nine and twelve month periods primarily due to depreciation
expense on additional plant in service. Interest expense increased
slightly in the quarter and nine month periods. Interest expense
increased $1,150,000 in the twelve month period primarily as a result of
interest assessed on additional income taxes related to the 1993
settlement of the Internal Revenue Service audit.
The table below reflects operating revenues, gas sales volumes and
weather data for the periods ended September 30:
OPERATING STATISTICS-UTILITY
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
-------------------- ---------------------- ----------------------
(Unaudited, in thousands) 1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Residential.........................$ 10,574 $ 9,934 $ 93,306 $ 89,254 $ 138,908 $ 133,984
Commercial........................... 7,901 7,080 54,429 50,697 78,093 76,035
Industrial........................... 14,264 13,199 52,730 49,527 71,158 70,049
Transportation....................... 1,389 1,494 4,725 5,142 6,507 6,931
Other Revenues....................... 15 131 1,496 2,622 2,285 3,549
--------- -------- ---------- --------- ---------- ---------
Total Operating Revenues.........$ 34,143 $ 31,838 $ 206,686 $ 197,242 $ 296,951 $ 290,548
========= ======== ========== ========= ========== =========
Gas Sales (Mcf):
Residential.......................... 1,318 1,269 14,871 15,049 22,876 22,628
Commercial........................... 1,547 1,412 10,107 9,773 14,770 14,340
Industrial-
Firm............................... 1,607 1,335 6,143 5,369 8,283 7,342
Interruptible...................... 2,602 2,622 8,028 8,606 11,083 11,726
--------- -------- ---------- --------- ---------- ---------
7,074 6,638 39,149 38,797 57,012 56,036
========= ======== ========== ========= ========== =========
Transported Volumes (Mcf).............. 2,902 2,686 8,813 8,851 11,844 11,588
========= ======== ========== ========= ========== =========
Weather Data-colder (warmer)
than normal*......................... ** ** (3.5%) 2.1% (.7%) 1.4%
========= ======== ========== ========= ========== =========
</TABLE>
*Based on system weighted average. Data for 1994 is preliminary.
**Not meaningful for third quarter.
OPERATING RESULTS-SUBSIDIARIES
Revenues of UCG Energy Corporation (UCG Energy) decreased $938,000
from the third quarter ended September 30, 1993 and increased $618,000
and $1,742,000 from the nine and twelve month periods then ended. The
propane division's revenues increased from the third quarter, nine and
twelve month periods ended September 30, 1993 due to additional propane
volumes sold during those periods. The utility services division's
revenues decreased in all periods from 1993 predominantly due to
decreased brokerage sales to certain industrial customers, local
distribution companies and others. Utility services' distribution sales
of American Meter Company and other companies' products were lower during
the nine and twelve month periods than comparative periods in 1993. The
rental division's revenues decreased in all periods from last year due to
lower rental rates on new rental units placed into service and the
retirement of certain rental units at higher rental rates.
Expenses of UCG Energy, including cost of sales, decreased $863,000
from the third quarter ended September 30, 1993 and increased $416,000
and $1,427,000 from the nine and twelve month periods then ended.
Expenses increased in all periods in the propane division primarily due
to the cost of additional volumes sold, normal increases in operating
expenses, the acquisition of High Country Propane, Inc. in Boone, NC and
the acquisition of Hurley's Propane Gas in Morristown, TN. Expenses in
the utility services division decreased in all periods from 1993 due to
lower sales levels.
10
<PAGE> 11
Item 2. Continued
UCG Energy's net income for the third quarter, nine and twelve month
periods ended September 30, 1994 was $399,000, $2,455,000 and $3,546,000,
respectively. This represents a decrease of $23,000, $229,000 and
$418,000, respectively, from comparative periods ended September 30,
1993. The decrease in the third quarter is principally due to increased
expenses in the propane division. The decrease in the nine and twelve
month periods is primarily the result of the cumulative effect of a
change in accounting principle that resulted from the adoption in 1993 of
Statement No. 109 "Accounting for Income Taxes" issued by the Financial
Accounting Standards Board. The effect of the implementation of the
statement amounted to approximately $443,000 in 1993.
United Cities Gas Storage Company had net income for the three, nine
and twelve month periods of $128,000, $354,000 and $503,000,
respectively, as compared to $118,000, $320,000 and $371,000 for the same
periods in 1993. The revenues of the subsidiary were primarily derived
from natural gas storage services and natural gas provided to United
Cities Gas Company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total cash used in operations for the three month period ended
September 30, 1994 was $12,953,000. Total cash provided by operations
for the nine and twelve month periods ended September 30, 1994 was
$26,483,000 and $15,269,000, respectively. The financing activities of
all periods reflect the retirement of long-term debt, dividend payments
and the net activity of short-term borrowings.
The Company has authorized as of September 30, 1994, specific
purchases and construction projects amounting to $22,174,000 of its 1994
utility capital budget of $28,200,000 and $3,069,000 of its non-utility
capital budget of $3,400,000. The Company anticipates incurring capital
expenditures of approximately $32,000,000 for each of 1995, 1996 and
1997. In addition, the Company is constructing a twenty-eight mile main
which will connect two of its distribution systems in Middle Tennessee.
The project has an estimated cost of approximately $8,200,000 and is
scheduled to be completed by the fall heating season of 1995. As of
September 30, 1994, capital expenditures of $4,537,000 had been
authorized related to this project.
The Company was named, along with 17 other defendants, in a class
action, anti-trust case filed March 5, 1993 in the United States District
Court for the Eastern District of Tennessee, Knoxville Division (the
Court). This action involves alleged price-fixing in the 1980's in
eastern Tennessee by Holston Oil Co., Inc. (Holston), which at the time
of the alleged events was a wholly-owned subsidiary of Tennessee-Virginia
Energy Corporation (TVEC). Subsequent to the alleged events and prior to
TVEC's merger with the Company in 1986, TVEC sold the common stock of
Holston to an unrelated party. The Company has filed a Motion for
Summary Judgment with regard to the entire matter and is awaiting the
Court's ruling. The Court denied the plaintiffs' class certification
motions, but granted the plaintiffs the right to pursue individual claims
against the defendants, including the Company. The Tennessee attorney
general has also filed a motion for class certification on behalf of all
business in the east Tennessee area. The Company has or will file a
Motion for Summary Judgment with regard to each claim filed. The matter
is at the early stages of discovery and management cannot predict the
outcome. The Company intends to vigorously defend this matter.
The Company 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, the Company may be
responsible for response action with respect to such materials, if
response action is necessary.
The Company identified a site in Columbus, Georgia, and along with
other responsible parties, has performed response action. The Company's
share of response action costs at this site totaled approximately
$1,324,000. Of the amount, $1,275,000 was requested and approved to be
recovered over a three year period in rates which were effective
November, 1992. The approved amount did not include carrying costs on
the deferred balance. The Company will request and expects approval to
recover the remaining costs in its next rate proceeding in Georgia.
The Company has joined with three other potentially responsible
parties (PRPs) to fund a remedial investigation and feasibility study of
a site in Keokuk, Iowa. The Company has incurred costs totaling $125,000
and has, based on available current information, accrued an additional
$644,000 for its share of possible remedial action. The Company has
deferred these costs and expects approval for recovery in its next rate
proceeding in Iowa. The Company has estimated that it could be
responsible for additional costs, if certain conditions exist, of up to
$731,000 related to its share of remedial action at this site.
11
<PAGE> 12
Item 2. Continued
The Company owns or may be the successor in interest to the previous
owner of four additional former manufactured gas plant sites. The
Company is unaware of any information which suggests that these sites
give rise to a present environmental risk as a result of the manufactured
gas process or that any response action will be necessary. Accordingly,
the Company has not accrued any liabilities associated with these four
sites.
Pursuant to the Tennessee Petroleum Underground Storage Tank Act
(the Act), the Company is required to upgrade or remove certain
underground storage tanks (USTs) situated in Tennessee before December
22, 1994. As of September 30, 1994, the Company has identified six USTs
in this category in Tennessee and has incurred $7,000 and has, based on
available current information, accrued an additional $70,000 for the
upgrade or removal of these USTs. The Company has estimated that it may
incur, if certain conditions exist requiring corrective action,
additional costs of up to $380,000 to bring the sites into compliance
with the Act. On October 4, 1994, the Tennessee Public Service
Commission granted the Company permission to defer, until its next rate
case, all costs incurred in connection with complying with the Act. In
addition, the Company expects to recover a portion of the corrective
action costs from the State of Tennessee Trust Fund for all of the UST
sites in Tennessee.
The Company has received 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. The Company is cooperating with the KDHE in preparing a Consent
Order and a Work Plan for the remediation of mercury contamination at any
site which is identified as exceeding the KDHE's established acceptable
concentration levels. The Company has identified approximately 720 meter
sites where mercury may have been used and has, based on available
current information, accrued and deferred for recovery $280,000 as of
September 30, 1994 for the investigation of these sites. The Company 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. Based on a recent decision by the Kansas State
Corporation Commission concerning the recovery of costs associated with
the remediation of a manufactured gas plant site, the Company expects
recovery of the costs involved in the investigation and remediation of
the mercury meter sites in Kansas.
Management expects that expenditures related to response action at
any site will be recovered through rates or insurance, or shared among
other PRPs. Therefore, the costs of responding to these sites are not
expected to materially affect the results of operations or financial
condition of the Company.
The Company has discovered defective polyethylene piping installed
in certain of its service areas and has notified both the manufacturers
and state regulatory commissions. An independent laboratory is
conducting a study of the matter at the request of the gas industry and
the Company continues to investigate the issue. The Company is unable to
predict the extent of the problem or the expense which will be incurred
to repair the defective piping but anticipates paying the cost as a
normal maintenance expense and recovering such cost through the
rate-making process.
On October 19, 1994, UCG Energy Corporation (UCG Energy), a wholly
owned subsidiary of the Company, signed a letter of intent to acquire a
45% interest in a limited liability company that would be formed by
Woodward Marketing, Inc., and its two shareholders. Woodward Marketing,
Inc., is a Texas corporation providing gas marketing services to
industrial customers, municipalities and local distribution companies.
In exchange for the acquired interest, Woodward Marketing, Inc., would
receive $5,000,000 in the Company's common stock and $750,000 in cash.
Other conditions outlined in the acquisition proposal include the
transfer of gas contracts from UCG Energy to the newly formed limited
liability company, as well as the potential payment of $1,000,000 to be
paid over a five-year period if certain earnings targets are met. The
proposed acquisition is subject to the completion of a definitive
purchase agreement and approval by various regulatory authorities as to
the issuance of common stock. The targeted completion date for the
transaction is on or before December 31, 1994.
In 1991, the Illinois Commerce Commission ordered the Company to
refund approximately $260,000 related to the reconciliation of the
Purchased Gas Adjustment recovery mechanism for 1988. The Company filed
an appeal with the Appellate Court of Illinois which in September, 1992,
issued a decision upholding the commission's decision. The Company filed
an appeal with the Illinois Supreme Court which in September, 1994,
upheld the commission's and lower court's decision. The Company has
asked for rehearing of this decision. The Company was granted a stay of
the commission's order by the Appellate Court, including the refund
obligation, pending the outcome of the appeal process. In management's
opinion, the outcome of the appeal process will not have a material
effect on the results of operations or financial condition of the
Company.
The Company believes its short-term lines of credit are sufficient
to meet anticipated short-term requirements. At September 30, 1994, the
Company had $84,000,000 in short-term lines of credit, including master
and banker's acceptance notes, bearing interest primarily at the lesser
of prime or a negotiated rate during the term of each borrowing. At
September 30, 1994, $34,829,000 was outstanding under these arrangements.
12
<PAGE> 13
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
For The Three Months Ended September 30, 1994
Item 1. Legal Proceedings.
See December 31, 1993 Form 10-K
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits-See list of Exhibits on page 14 hereof.
(b) Reports on Form 8-K.
None
13
<PAGE> 14
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
LIST OF EXHIBITS
11.01 Computation of Common Stock Earnings Per Share. (Page 16).
12.01 Computation of Ratio of Consolidated Earnings to Fixed Charges.
(Page 17).
27.01 Financial Data Schedule. (Page 18). (For the SEC use only)
14
<PAGE> 15
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED CITIES GAS COMPANY
/s/ James B. Ford
---------------------------------------
James B. Ford
Senior Vice President and Treasurer
and Chief Financial Officer
On behalf of the Registrant
Date: November 9, 1994
15
<PAGE> 1
Exhibit 11.01
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF COMMON STOCK EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------------- ---------------------- ----------------------
(Unaudited, in thousands, except per share amounts) 1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Common Stock Earnings (Loss)........................... $ (5,210) $ (5,170) $ 5,706 $ 5,022 $ 12,804 $ 11,853
Add: Preference Stock Dividends....................... - - - 30 - 48
---------- --------- ---------- --------- ---------- ---------
Common Stock Earnings (Loss) after Conversion.......... $ (5,210) $ (5,170) $ 5,706 $ 5,052 $ 12,804 $ 11,901
========== ========= ========== ========= ========== =========
Average Number of Common Shares Outstanding
During the Period................................... 10,407 10,248 10,370 10,167 10,349 10,132
Add: Conversion of 11 1/2% Preference Stock**......... - - - - - -
---------- --------- ---------- --------- ---------- ---------
Average Number of Common Shares Outstanding
after Conversion.................................... 10,407 10,248 10,370 10,167 10,349 10,132
========== ========= ========== ========= ========== =========
Common Stock Earnings (Loss) per Share:
Primary............................................. $ (0.50) $ (0.50) $ 0.55 $ 0.49 $ 1.24 $ 1.17
========== ========= ========== ========= ========== =========
Fully Diluted....................................... $ (0.50) $ (0.50) $ 0.55 $ 0.50 * $ 1.24 $ 1.17
========== ========= ========== ========= ========== =========
</TABLE>
* This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
** There was no 11-1/2% Preference Stock outstanding at September 30, 1994 and
1993.
16
<PAGE> 1
Exhibit 12.01
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED
<TABLE>
<CAPTION>
(Unaudited, in thousands, except ratio amounts)
9-30-94 12-31-93 12-31-92 12-31-91 12-31-90 12-31-89
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges, as defined:
Interest on long-term debt.......................... $ 14,132 $ 14,553 $ 12,965 $ 11,111 $ 9,009 $ 6,663
Amortization of debt discount....................... 226 220 181 233 231 161
---------- --------- ---------- --------- ---------- ---------
Total............................................ $ 14,358 $ 14,773 $ 13,146 $ 11,344 $ 9,240 $ 6,824
========== ========= ========== ========= ========== =========
Earnings, as defined:
Net income.......................................... $ 12,804 $ 12,150 $ 10,218 $ 7,875 $ 3,373 $ 10,310
Taxes on income..................................... 6,141 5,681 5,171 2,564 532 4,811
Fixed charges, as above............................. 14,358 14,773 13,146 11,344 9,240 6,824
---------- --------- ---------- --------- ---------- ---------
Total............................................ $ 33,303 $ 32,604 $ 28,535 $ 21,783 $ 13,145 $ 21,945
========== ========= ========== ========= ========== =========
Ratio of Consolidated Earnings to Fixed Charges........ 2.32 2.21 2.17 1.92 1.42 3.22
========== ========= ========== ========= ========== =========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME, CASH
FLOWS AND CAPITALIZATION, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 258,285
<OTHER-PROPERTY-AND-INVEST> 48,888
<TOTAL-CURRENT-ASSETS> 70,098
<TOTAL-DEFERRED-CHARGES> 12,746
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 390,017
<COMMON> 69,039
<CAPITAL-SURPLUS-PAID-IN> 22,462
<RETAINED-EARNINGS> 20,250
<TOTAL-COMMON-STOCKHOLDERS-EQ> 111,751
0
0
<LONG-TERM-DEBT-NET> 145,046
<SHORT-TERM-NOTES> 34,829
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 6,045
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 92,346
<TOT-CAPITALIZATION-AND-LIAB> 390,017
<GROSS-OPERATING-REVENUE> 206,686
<INCOME-TAX-EXPENSE> 1,163
<OTHER-OPERATING-EXPENSES> 192,198
<TOTAL-OPERATING-EXPENSES> 193,361
<OPERATING-INCOME-LOSS> 13,325
<OTHER-INCOME-NET> 2,632
<INCOME-BEFORE-INTEREST-EXPEN> 15,957
<TOTAL-INTEREST-EXPENSE> 10,251
<NET-INCOME> 5,706
0
<EARNINGS-AVAILABLE-FOR-COMM> 5,706
<COMMON-STOCK-DIVIDENDS> 7,776
<TOTAL-INTEREST-ON-BONDS> 9,283
<CASH-FLOW-OPERATIONS> 26,483
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
