<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
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)
------------------
ILLINOIS & VIRGINIA 36-1801540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
------------------
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
------------------- ------------------------
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)
-------------------
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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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. CAPTION PAGE
- -------- ------- -----
<S> <C> <C>
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
</TABLE>
i
<PAGE> 3
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.
<TABLE>
<CAPTION>
AREAS OF GROWTH CUSTOMERS ADDED
<S> <C>
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
=========
</TABLE>
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".
1
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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,
<TABLE>
<CAPTION>
1995 1994 1993
------------------- ------------------- ------------------
REVENUES (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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%
======== ===== ========= ===== ======== =====
</TABLE>
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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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<PAGE> 5
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:
<TABLE>
<CAPTION>
DIVISIONS 1995 1994 1993
---------------- ---------------- -----------------
<S> <C> <C> <C>
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%
================ ================ =================
</TABLE>
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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<PAGE> 6
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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<PAGE> 7
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
5
<PAGE> 8
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.
6
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This Page Intentionally Left Blank
7
<PAGE> 10
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.
<TABLE>
<CAPTION>
REGULATORY JURISDICTION
------------------------------------------------------------------------------------------
GEORGIA TENNESSEE VIRGINIA SOUTH CAROLINA
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
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
</TABLE>
- -------------------------------------------------------------------------------
(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.
8
<PAGE> 11
<TABLE>
<CAPTION>
REGULATORY JURISDICTION
------------------------------------------------------------------------------------------
ILLINOIS MISSOURI KANSAS IOWA
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
(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.
9
<PAGE> 12
<TABLE>
<CAPTION>
UTILITY OPERATING STATISTICS
AVERAGE NUMBER OF CUSTOMERS(1) 1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
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
</TABLE>
- ---------
(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.
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
10
<PAGE> 13
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.
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Appliance Sales.............................. $1,791 $2,537 $3,276
Jobbing and Service.......................... 1,288 1,256 1,148
-------------- -------------- --------------
$3,079 $3,793 $4,424
============== ============== ==============
</TABLE>
11
<PAGE> 14
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.
<TABLE>
<CAPTION>
DAILY
FIELD CAPACITY CUSHION GAS DELIVERABILITY
- ----- -------------- -------------- --------------
(Mcf)
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
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.
<TABLE>
<CAPTION>
SERVICE AREAS CUSTOMERS
<S> <C>
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
===============
</TABLE>
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
<PAGE> 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
<PAGE> 16
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
<PAGE> 17
OPERATING AREAS
[MAP]
<TABLE>
<CAPTION>
NATURAL GAS
ILLINOIS/TENNESSEE/MISSOURI DIVISION
<S> <C> <C>
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.
</TABLE>
* Corporate Office - Brentwood, Tennessee + Division Office
15
<PAGE> 18
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
HELD PRESENT OTHER POSITIONS HELD
NAME AND POSITION AGE OFFICE SINCE DURING PAST FIVE YEARS
----------------- --- ------------ ----------------------
<S> <C> <C> <C>
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
</TABLE>
16
<PAGE> 19
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.
<TABLE>
<CAPTION>
DIVISION PERCENT
--------- -------
<S> <C>
Illinois/Tennessee/Missouri................................ 28%
Virginia/East Tennessee.................................... 25%
Georgia/South Carolina..................................... 19%
Kansas/Iowa/Missouri....................................... 28%
-----------------
100%
=================
</TABLE>
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.
<TABLE>
<CAPTION>
GROSS NET
PERIOD ADDITIONS RETIREMENTS ADDITIONS
------ ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
APPROXIMATE NUMBER OF STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
STOCKHOLDERS OF
RECORD AS OF
TITLE OF CLASS DECEMBER 31, 1995
-----------------
<S> <C>
Common Stock, without par value................................ 8,157
=========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
------------------------------------- -------------------------------------------
DIVIDENDS DIVIDENDS
HIGH LOW PER SHARE HIGH LOW PER SHARE
---- ---- ---------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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
=============== ============= ============= ============= =============
</TABLE>
18
<PAGE> 21
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
<PAGE> 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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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,
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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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
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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
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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
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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
27
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................................. 53
</TABLE>
<TABLE>
<CAPTION>
Schedule
Number
--------
<S> <C> <C>
II Reserves........................................................................ 54
III Condensed Financial Information of Registrant................................... 55
</TABLE>
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
<PAGE> 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
<PAGE> 32
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------[LOGO]--------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C> <C>
(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
=========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
United Cities Gas Company & Subsidiaries
30
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------[LOGO]--------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(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 $ -- $ --
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
United Cities Gas Company & Subsidiaries
31
<PAGE> 34
CONSOLIDATED BALANCE SHEETS
- ------------------------------------[LOGO]--------------------------------------
<TABLE>
<CAPTION>
As of December 31, 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
(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
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
United Cities Gas Company & Subsidiaries
32
<PAGE> 35
CONSOLIDATED STATEMENTS OF CAPITALIZATION
- ------------------------------------[LOGO]--------------------------------------
<TABLE>
<CAPTION>
As of December 31, 1995 1994
- ---------------------------------------------------------------------------------------
(In Thousands, except share amounts)
<S> <C> <C> <C> <C>
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%
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
United Cities Gas Company & Subsidiaries
33
<PAGE> 36
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, CAPITAL SURPLUS AND COMMON STOCK
- ------------------------------------[LOGO]--------------------------------------
<TABLE>
<CAPTION>
Retained Capital Common
(In Thousands, except share amounts) Earnings Surplus Stock
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
United Cities Gas Company & Subsidiaries
34
<PAGE> 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:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
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%
====================================================================
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
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
=============================================================
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Net periodic pension expense for the plans in fiscal 1995, 1994 and 1993
consists of the following components:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=======================================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
========================================================================================================================
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
<S> <C> <C> <C>
- ----------------------------------------------------------------------
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
======================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
<S> <C> <C>
- -----------------------------------------------------------------------------------------
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
==========================================================================================
</TABLE>
Actuarila assumptions used for the plan are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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
========================================================================
</TABLE>
United Cities Gas Company & Subsidiaries
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
Income taxes differ from amounts computed by applying the statutory
rates to pre-tax income as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
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
==================================================================================
</TABLE>
The temporary differences which gave rise to the net deferred tax liability at
December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
<S> <C> <C>
- ----------------------------------------------------------------------------------
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
==================================================================================
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------[LOGO]--------------------------------------
<TABLE>
<CAPTION>
Options Exercise Price SARs Exercise Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======================================================================================
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 49
CONSOLIDATED FINANCIAL AND OPERATING DATA
- ----------------------------------[LOGO]---------------------------------------
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(In Thousands, except per share data)
1995 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
(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.
<TABLE>
<CAPTION>
1995 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
United Cities Gas Company & Subsidiaries
47
<PAGE> 50
CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=============================================================================================================================
</TABLE>
*In thousands
United Cities Gas Company & Subsidiaries
48
<PAGE> 51
CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$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
===========================================================================================================================
</TABLE>
United Cities Gas Company & Subsidiaries
49
<PAGE> 52
CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
==================================================================================================
</TABLE>
*In thousands
United Cities Gas Company & Subsidiaries
50
<PAGE> 53
CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 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
===========================================================================================================================
</TABLE>
United Cities Gas Company & Subsidiaries
51
<PAGE> 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/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
</TABLE>
52
<PAGE> 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
<PAGE> 56
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
SCHEDULE II-RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
OTHER
BALANCE AT ADDITIONS CHANGES BALANCE AT
BEGINNING CHARGED TO INCREASE END OF
DESCRIPTION OF PERIOD INCOME DEDUCTIONS (DECREASE) PERIOD
----------- ------------ ------------ ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
============ ========== =========== ========= ===========
</TABLE>
- ----------
(a) Represents write-off of accounts considered to be uncollectible, less
collection of accounts previously written off.
54
<PAGE> 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.
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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).
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<PAGE> 1
EXHIBIT 3.02
AS RESTATED
FEBRUARY 3, 1996
BY-LAWS OF
UNITED CITIES GAS COMPANY
OFFICES
1. The principal office shall be in the City of Brentwood, County
of Williamson, State of Tennessee.
2. The corporation may also have offices at such other places as
the board of directors may from time to time appoint or the business of the
corporation may require.
SEAL
3. The corporation seal shall have inscribed thereon the name of
the corporation, the year of its organization and the words "Corporate Seal,
Illinois." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
4. Except as otherwise provided herein, meetings of the shareholders
may be held at such place, either within or without the State of Illinois, as
may be designated by the board of directors and stated in the notice of the
meeting.
5. The Annual Meeting of Shareholders shall be held as near as
possible to the last Friday of April in each year, if not a legal holiday, and,
if a legal holiday, then on the next secular day following, at ten-thirty
o'clock a.m., when the shareholders shall elect, by a plurality vote, by
ballot, a board of directors, and transact such other business as may properly
be brought before the meeting.
6. The holders of a majority of the shares issued and outstanding,
and entitled to vote thereat, present in person, or represented by proxy, shall
be requisite and shall constitute a quorum at all meetings of the shareholders
for the transaction of business except as otherwise provided by law, by the
Articles of Incorporation by these by-laws. If, however, such majority shall
not be present or represented at any meeting of the shareholders, a majority of
the
<PAGE> 2
shareholders entitled to vote thereat, present in person or by proxy, shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until the requisite amount of voting shares
shall be present. At such adjourned meeting at which the requisite amount of
voting shares shall be represented any business may be transacted which might
have been transacted at the meeting as originally notified.
7. At each meeting of the shareholders every shareholder having
the right to vote shall be entitled to vote in person or by proxy appointed by
an instrument in writing subscribed by such shareholder. No proxy shall be
valid after eleven months from the date of its execution unless otherwise
provided in the proxy. Each outstanding share, regardless of class, shall be
entitled to one vote on each matter submitted to a vote at a meeting of
shareholders. In all elections for directors every shareholder shall have the
right to vote in person or by proxy for the number of shares owned by him for
as many persons as there are directors to be elected, or to cumulate said
shares and give one candidate as many votes as the number of directors
multiplied by the number of his shares shall equal, or to distribute them on
the same principle among as many candidates as he shall think fit. Except
where the books maintained by the Transfer Agent for the transfer of shares of
the corporation shall have been closed or a date shall have been fixed as a
record date for the determination of its shareholders entitled to vote, no
shares shall be voted at any election for directors which shall have been
transferred on the books maintained by said Transfer Agent within twenty days
next preceding such election of directors.
8. Written notice of the annual meeting shall be mailed at least ten,
or in case a merger or consolidation is to be acted upon at least twenty, but
not more than forty days prior to the date thereof to each shareholder entitled
to vote thereat at such address as appears on the books maintained by the
Transfer Agent for the transfer of shares of the corporation.
9. The Transfer Agent of the corporation shall make, at least ten
days before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
ten days prior to such meeting, shall be kept on file at the registered office
of
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<PAGE> 3
the corporation and shall be subject to inspection by any shareholder at any
time during usual business hours. Such list shall also be produced and kept
open at the time and place of the meeting and shall be subject to the
inspection of any shareholder during the whole time of the meeting.
10. Special meetings of the shareholders may be called only by the
chairman, by the president, by the secretary, by the board of directors, or in
the manner hereafter prescribed by the holders of not less than one-fifth of
all the outstanding shares entitled to vote on the matter for which the meeting
is called. At any time, upon written request of shareholders holding in the
aggregate one-fifth of all the outstanding shares entitled to vote on the
matter for which a meeting is called, it shall be the duty of the secretary to
call a special meeting of shareholders to be held at the registered office at
such time as the secretary may fix, not less than ten nor more than forty days
after the receipt of said request, and if the secretary shall neglect or refuse
to issue such call, shareholders making the request may do so upon no less than
forty days' written notice. Such request shall state the purpose or purposes
of the proposed meeting.
11. Persons authorized to call shareholders' meetings shall cause
written notice of the time, place and purpose of the meeting to be given all
shareholders entitled to vote at such meeting, at least ten, or in case a
merger or consolidation is to be acted upon at the meeting, at least twenty but
not more than forty days prior to the day named for the meeting, provided that
written notice given by shareholders calling a meeting in accordance with
paragraph 10 above shall be given forty days prior to the date named for the
meeting. If such written notice is placed in the United States mail, postage
prepaid, and addressed to a shareholder at his last known post office address,
notice shall be deemed to have been given him. Notice of any shareholders'
meeting may be waived by any shareholder at any time.
12. Business transacted at all special meetings shall be confined to
the object stated in the call.
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<PAGE> 4
DIRECTORS
13. The property and business of the corporation shall be managed by
its board of directors, which shall be ten (10) in number and divided into
three classes, which shall be as nearly equal in number as possible, as
provided in the Articles of Incorporation. The number of directors may be
increased or decreased by amendment to these by-laws, provided the number of
directors shall not be less than three. In case of any increase in the number
of directors, the additional directors may be elected by the shareholders at
any meeting, annual or special, duly called for that purpose, or by the board
of directors. Except as otherwise herein provided, the directors shall be
elected at the annual meeting of shareholders. Each director shall be elected
to serve until his successors shall be elected and shall qualify; provided,
however, that in no event shall any director who is first elected on or after
February 16, 1976, be permitted to serve on or after his date of retirement,
which retirement date shall be deemed to be the date of the Annual Meeting of
Shareholders of the Company next following the date on which a director has
attained age 70.
Nominations for the election of directors may be made by the board of
directors or by any shareholder entitled to vote for the election of directors.
Nominations by the board of directors may be made at any time. Nominations by
shareholders shall be made by notice in writing, delivered or mailed by first
class United States mail, postage prepaid, to the secretary of the corporation
not less than 30 days nor more than 40 days prior to any meeting of the
shareholders called for the election of directors; provided, however, that if
less than 30 days' notice of the meeting is given to shareholders, such written
notice shall be delivered or mailed, as prescribed, to the secretary of the
corporation not later than the close of the seventh day following the day on
which notice of the meeting was mailed to shareholders. Each notice of
nomination by a shareholder shall set forth (i) the name, age, business address
and, if known, residence address of each nominee proposed in such notice, (ii)
the principal occupation or employment of each such nominee and (iii) the
number of share of stock of the corporation which are beneficially owned by
each nominee. The chairman of the meeting may, if the facts warrant, determine
and declare to
4
<PAGE> 5
the meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded.
14. The directors may hold their meetings and have one or more
offices, and keep the books of the corporation in the City of Brentwood,
Tennessee, or at such other places as they may from time to time determine.
15. The entire board of directors or any individual director may, at
any special meeting of the shareholders called for that purpose in the manner
provided by Paragraph 10 and 11 hereof, be removed from office by a vote of
shareholders holding a majority of the outstanding shares entitled to a vote at
an election of directors. In case the board or any one or more directors be so
removed, new directors may be elected at the same meeting. Unless the entire
board be removed, no individual director shall be removed in case the votes of
a sufficient number of shares are cast against the resolution for his removal,
which, if cumulatively voted at an election of the whole board, would be
sufficient to elect one or more directors.
16. If the office of a any director or directors becomes vacant by
reason of death, resignation, retirement, disqualification, removal from
office, or otherwise, such vacancy or vacancies may be filled by the
affirmative vote of a majority of the remaining directors. A director thus
elected to fill any vacancy shall hold office until the next annual election
and until a successor or successors have been duly elected, unless sooner
displaced.
17. In addition to the powers and authorities by these by-laws
expressly conferred upon it, the board of directors may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
statute or by the Articles of Incorporation or by these by-laws directed or
required to be exercised or done by the shareholders.
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<PAGE> 6
EXECUTIVE COMMITTEE
18. The board of directors shall by resolution or upon recommendation
of the Chairman and approval of the majority of the entire Board, establish an
Audit Committee and a Compensation Committee and may by resolution or
resolutions, passed by a majority of the whole Board, designate one or more
additional committees, each committee to consist of two or more directors, who
shall serve at the pleasure of the Board. Such committees shall have any may
exercise such powers permitted by law as may be directed or delegated by the
board of directors from time to time. Vacancies in the membership of the
committees shall be filed by the board of directors at a regular or a special
meeting called for that purpose.
COMPENSATION OF DIRECTORS
19. Directors who are not employees of the Company shall be paid a
stated salary for their service plus a fixed sum and expenses of attendance at
each regular and special meeting of the board; PROVIDED, that nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor or
preclude the Chairman of the Board from receiving any stated salary for his
services as such. Members of special or standing committees will be allowed
like compensation for attending committee meetings. The board of directors
shall have the authority to fix the compensation of directors unless otherwise
provided by the Articles of Incorporation.
MEETINGS OF THE BOARD
20. Each newly elected board shall hold its annual meeting
immediately following the annual meeting of shareholders at the place where
such annual meeting of shareholders was held, and no notice of such annual
meeting to the new elected directors shall be necessary in order legally to
constitute the annual meeting, provided a quorum shall be present.
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<PAGE> 7
21. Regular meetings of the board of directors may be held at such
place as a majority of the directors may from time to time appoint. Notice of
such regular meeting shall be given at least five days before the meeting by
mail or telegram by the chairman of the board or in his absence, by the
president. Such notice need not specify the business to be transacted at such
regular meeting, but shall state that the meeting to be held is a regular
meeting of the board.
22. Special meetings of the board may be called by the chairman of
the board, or in his absence, by the president on five (5) days' notice to each
director, by mail or telegram, or notice may be waived by the directors.
Special meetings shall be called by the chairman of the board or by the
president or the secretary in like manner and on like notice on the written
request of two directors.
23. At all meetings of the board a majority of directors shall be
necessary and sufficient to constitute a quorum for the transaction of
business, and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the board of directors, except as
may be otherwise specifically provided by statute or by the Articles of
Incorporation or by these By-laws.
24. No business shall be transacted at any special meeting of the
board which shall not have been stated in the notice thereof, except upon
written approval of all the directors of the corporation.
OFFICERS
25. The officers of the corporation shall be elected by the directors
and shall be a chairman of the board, a president, one or more vice presidents,
a secretary and a treasurer. The board of directors may also appoint one or
more assistant secretaries and assistant treasurers. Any two of the offices of
the corporation may be held by one person except the offices of president and
secretary. The board of directors may appoint one or more assistant
secretaries and assistant treasurers to perform their respective duties and to
have such powers of the secretary and treasurer as shall from time to time be
assigned to them by the board of directors.
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<PAGE> 8
26. The chairman of the board and the president shall be a member of
the board of directors. No other officers of the corporation need be a member
of the board. No vice president who is not a director may succeed to or fill
the office of the president.
27. The board may appoint such other officers and agents as it shall
deem necessary, who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined from time to time by
the board.
28. The salaries of all elected officers of the corporation shall be
fixed by the board of directors.
29. The officers of the corporation shall hold office until their
successors are chosen and qualify in their stead. Any officer, manager or
agent elected or appointed by the board of directors may be removed at any time
by the affirmative vote of a majority of the whole board of directors, whenever
in their judgment the best interest of the corporation will be served thereby,
such removal, however, to be without prejudice to the contract rights of the
person so removed.
If the office of any officer or officers becomes vacant for any
reason, the vacancy shall be filled by the affirmative vote of a majority of
the whole board of directors.
30. The chairman of the board shall preside at all meetings of the
shareholders and the board of directors.
PRESIDENT
31. The president shall be the chief executive officer of the
corporation and shall have active supervision and general charge of the
property, business and employees of the corporation, subject, however, to the
control of the board of directors; he shall see that all resolutions and orders
of the board of directors are carried into effect; he shall exercise such other
powers and perform such other duties as shall be incident to the office of
president or as may be required by the board of directors. In the absence or
inability to act of the chairman of the board of directors, the president shall
preside at all meetings of the shareholders and the board of directors and
shall during such absence exercise all the powers of the chairman of the board.
8
<PAGE> 9
32. He shall execute bonds, mortgages, and other contracts requiring
the seal, under the seal of the corporation, but the authority to execute such
instruments may also be vested in others as provided in Paragraph 41 of these
by-laws.
33. He shall be EX OFFICIO a member of all standing committees, and
shall have the general powers and duties of supervision and management usually
vested in the office of president of a corporation.
VICE PRESIDENTS
34. Each vice president shall have such powers and perform such
duties as the board of directors may from time to time prescribe or as the
chairman of the board or the president may from time to time delegate to him.
At the request of the president, any vice president may, in the case of the
absence or inability to act of the president, temporarily act in his place. In
the case of the death of the president or in the case of his absence or
inability to act where no vice president has been designated to act temporarily
in his place, the board of directors shall designate one or more vice
presidents to perform the duties of the president.
THE SECRETARY AND ASSISTANT SECRETARIES
35. The secretary shall attend all sessions of the board and all
meetings of the shareholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose. He shall give, or cause to
be given, notice of all meetings of the shareholders and special meetings of
the board of directors, and shall perform such other duties as may be
prescribed by the board of directors or president, under whose supervision he
shall be. He shall keep in safe custody the seal of the corporation, and when
authorized by the board, affix the same to any instrument requiring it, and
when so affixed, it shall be attested by his signature or by the signature of
the assistant secretary or an assistant secretary.
9
<PAGE> 10
36. The assistant secretary, or assistant secretaries in the order of
their seniority, shall, in the absence or disability of the secretary, perform
the duties and exercise the powers of the secretary, and shall perform such
other duties as the board of directors shall prescribe.
THE TREASURER AND ASSISTANT TREASURERS
37. The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts or receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys, and other valuable effects in the name and to the credit of the
corporation in such depositaries as may be designated by the board of
directors.
38. He shall disburse the funds of the corporation as may be ordered
by the board, taking proper vouchers for such disbursements, and shall render
to the president and directors, at the regular meetings of the board, or
whenever they may require it, an account of all his transactions as treasurer
and of the financial condition of the corporation.
39. If required by the board of directors, he shall give the
corporation a bond in such sum, and with such surety or sureties as shall be
satisfactory to the board, for the faithful performance of the duties of his
office, and for the restoration to the corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his
control belonging to the corporation.
40. The assistant treasurer, or assistant treasurers in the order of
their seniority, shall, in the absence or disability of the treasurer, perform
the duties and exercise the powers of the treasurer, and shall perform such
other duties as the board of directors shall prescribe.
DUTIES OF OFFICERS MAY BE DELEGATED
41. The board of directors, except as otherwise provided in these
by-laws, may authorize any officer or officers, or agent or agents, to enter
into any bond, mortgage or contract or execute and deliver any instrument in
the name and on behalf of the corporation, and such authority may be general or
confined to specific instances; and, unless so authorized by the board of
directors or
10
<PAGE> 11
by the provisions of these by-laws, no officer, agent or employee other than
the chairman of the board of directors and the president shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable pecuniarily for any purpose or to any
allowance.
42. In case of the absence of any officer of the corporation or for
any other reason that the board may deem sufficient, the board may delegate,
for the time being, the powers or duties or any of them, of such officer to any
other officer, or to any director.
CONSIDERATION FOR SHARES
43. Without the consent of any holder of any share of the capital
stock of this corporation, the shares of stock of this corporation may be
issued by it from time to time in such number or amount of shares of said
stock, and for such consideration, not less than the par value thereof, in
labor or services actually performed, money or property, as from time to time
may be fixed and determined by the board of directors of this corporation at
any annual meeting or any special meeting called for said purpose, and the
right, power and authority of said board of directors from time to time so to
authorize and order the issuance by this corporation of the said shares of said
stock, in such number or amount of share, and for such consideration in labor,
services actually performed, money or property, as from time to time said board
may fix and determine, is hereby absolutely reserved to said board of
directors.
Payment or delivery to, or receipt by this corporation of such
consideration as may be so fixed and determined by its board of directors for
the issuance of any share or shares of its said stock, as hereinbefore in this
Paragraph 43 provided, shall operate and be construed, deemed and held: (i) to
discharge, release and satisfy fully and absolutely, all liability to this
corporation and/or to its creditors now or at any time hereafter existing, of
any subscriber for, and/or holder or any such share or shares so authorized to
be issued in any way on account of, founded upon, or
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<PAGE> 12
arising out of any subscription for, and/or purchase of, and/or issuance of a
certificate or certificates representing such share or shares, and (ii) to
constitute such share or shares as full paid and non-assessable.
CERTIFICATES REPRESENTING SHARES
44. Certificates evidencing the ownership of shares of the
corporation shall bear such serial designation (which may be a combination of
letters and numbers) as shall be prescribed by the board of directors and the
ownership thereof shall be recorded in books maintained by the Transfer Agent
for recording the transfer of shares of the corporation as they are issued.
They shall state that the corporation is organized under the laws of the State
of Illinois, the name of the person of whom issued, the number and class of
shares, and the designation of the series, if any, which such certificate
represents, the par value of each share represented by such certificate, and
such authorization number as may be prescribed by an Order or Orders of the
Illinois Commerce Commission. They shall be signed by the president or a vice
president, and the secretary or an assistant secretary, and sealed with the
seal or a facsimile seal of the corporation. In case the seal of the
corporation is changed after the certificate is sealed with the seal or a
facsimile of the seal of the corporation, but before it is issued, the
certificate may be issued by the corporation with the same effect as if the
seal had not been changed. Where such certificate is countersigned by a
transfer agent other than the corporation itself or an employee of the
corporation, or by a transfer clerk and registered by a registrar, the
signatures of the president or vice president and the secretary or assistant
secretary upon such certificate may be facsimiles, engraved or printed. In
case any officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with the same effect
as if such officer had not ceased to be such at the date of its issue.
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<PAGE> 13
Every certificate representing shares issued by the corporation shall
set forth upon the face or back of the certificate a full or summary statement
of all the designations, preferences, qualifications, limitations,
restrictions, and special or relative rights of the shares of each class
authorized to be issued, and if the corporation is authorized to issue any
preferred or special class in series, the variations in the relative rights and
preferences between the shares of each such series so far as the same have been
fixed and determined and the authority of the board of directors to fix and
determine the relative rights and preferences of subsequent series; provided
that such statement may be omitted from the certificate if it shall be set
forth upon the face or back of the certificate that such statement, in full,
will be furnished by the corporation to any shareholder upon request without
charge.
TRANSFER OF SHARES
45. Transfers of shares shall be made on the books maintained by the
Transfer Agent for the transfer of shares of the corporation only upon
surrender of the certificate therefor, endorsed by the person named in the
certificate or by attorney lawfully constituted in writing.
CLOSING OF TRANSFER BOOKS
46. The board of directors shall have power to close the stock
transfer books of the corporation for a period not exceeding forty days
preceding the date of any meeting of shareholders or the date for payment of
any dividend or distribution, or the date for the allotment of rights, or,
subject to contract rights with respect thereto, the date when any change or
conversion or exchange of shares will be made or go into effect; provided,
however, if the share transfer books shall be closed for the purpose of
determining shareholders entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least 10 days, or in the case
of a merger or consolidation at least 20 days, immediately preceding such
meeting; and provided, further, that in lieu of closing the stock transfer
books as aforesaid, the board of directors may fix in advance a date at least
10, or in the case of a merger or consolidation at least 20, but not more
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<PAGE> 14
than 40 days preceding the date of any meeting of shareholders or the date for
payment of any dividend or distribution, or the date for the allotment of
rights, or, subject to contract rights with respect thereto, the date when any
change or conversion of exchange of shares will be made or go into effect, as a
record date for the determination of the shareholders entitled to notice of,
and to vote at, any such meeting, or entitled to receive payment of any
dividend, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion or exchange of shares of capital stock,
and in such case only such shareholders as shall be shareholders of record on
the date so fixed shall be entitled to such notice of, and to vote at, such
meeting, or to receive payment of such dividend, or to receive such allotment
or rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any stock on the books of the corporation after any such record
date fixed as aforesaid.
REGISTERED SHAREHOLDERS
47. The corporation shall be entitled to treat the holder of record
of any share or shares of the corporation as the holder in fact thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
Illinois.
LOST CERTIFICATES
48. Any person claiming a certificate of stock to be lost or
destroyed, shall make an affidavit or affirmation of that fact and advertise
the same in such manner as the board of directors may require. The owner of a
lost or destroyed certificate(s), or his legal representative will give the
corporation a bond, sufficient to indemnify the corporation against any claim
that may be made against it on account of the alleged loss of any such
certificate. A new certificate of the same tenor and for the same number of
shares as the one alleged to be lost or destroyed, may be issued without
requiring any bond, when, in the judgment of the directors it is proper so to
do.
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INSPECTION OF BOOKS
49. The directors shall determine from time to time whether and, if
allowed, when and under what conditions and regulations the accounts and books
for the corporation (except as may by statute be specifically open to
inspection) or any of them shall be open to the inspection of the shareholders,
and the shareholders' rights in this respect are and shall be restricted and
limited accordingly.
CHECKS
50. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers as the board of directors may from
time to time designate.
FISCAL YEAR
51. The fiscal year shall begin the first day of January in each
year.
DIVIDENDS
52. Dividends upon shares of the corporation, subject to the
provisions of the Articles of Incorporation, may be declared by the board of
directors at any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property, or in shares of the corporation, and shall be paid
only out of the surplus of the aggregate of the assets of the corporation over
the aggregate of its liabilities, including in the latter the amount of its
capital shares.
Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conductive to the interests of the
corporation.
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DIRECTORS' ANNUAL STATEMENT
53. The board of directors shall present at each annual meeting and
when called for by vote of the shareholders at any special meeting of the
shareholders, a full and clear statement of the business and condition of the
corporation.
NOTICES
54. Whenever under the provisions of these by-laws notice is required
to be given to any director, officer or shareholder, it shall not be construed
to mean any requirement for personal notice, but such notice may be given in
writing, by mail, by depositing the same in the post office or letter box, in a
postpaid, sealed wrapper, addressed to such shareholder, officer or director at
such address as appears on the books of the corporation, or, in default of
other address, to such director, officer or shareholder at the General Post
Office in the City of Chicago, Illinois, and such notice shall be deemed to be
given at the time when same shall be thus mailed.
55. The notice provided for in these by-laws of any general or
special meeting of the shareholders, or general or special meeting of the
directors, may be waived in writing by the shareholders or directors,
respectively.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
56. Each director or officer of the corporation, each former director
or officer, and any person who serves or has served at the request of the
corporation as a director or officer of another corporation in which the
corporation owned shares of the capital stock or of which it was a creditor,
shall be indemnified by the corporation against any costs and expenses which
may be imposed upon or actually and necessarily incurred by him (and for which
he is not otherwise reimbursed), including the amount of any judgments or
fines, in connection with the defense of any action, suit or proceeding,
whether criminal or civil, in which he may be named as a party by reason of his
being or having been such director or officer, or by reason of any action
alleged to have been taken or omitted by him in either such capacity; provided,
however, that the
16
<PAGE> 17
corporation shall not indemnify any such person against any costs or expenses
imposed upon or incurred by him in relation to matters as to which he shall be
finally adjudged to be liable for negligence or misconduct in the performance
of duty. In the event of a settlement of any such action, suit or proceeding
prior to final adjudication, or in the event of a settlement or any claim made
against any such person by reason of his being or having been such director or
officer, such person shall be indemnified against any costs and expenses
actually incurred by him, including any amount paid to effect such settlement,
if the corporation is advised by independent counsel selected or approved by
its board of directors that he acted without negligence or misconduct in the
performance of duty and that such costs and expenses are not unreasonable. In
the event of a criminal action, suit or proceeding, a conviction or judgment
(whether based on a plea of guilty or nolo contendere or its equivalent, or
after trial) shall not be deemed an adjudication that such person is liable for
negligence or misconduct in the performance of duty if he acted in good faith
in what he considered to be the best interests of the corporation or such other
corporation or such other corporation and with no reasonable cause to believe
that the action was illegal.
The right of indemnification in this Paragraph 56 provided shall
insure to each person referred to in the first paragraph of this Paragraph 56
whether or not he is such director or officer at the time such costs or
expenses are imposed or incurred, and whether or not the claim asserted against
him is based on matters which antedate the adoption of these by-laws; and in
the event of his death or incapacity shall extend to his legal representatives.
Each person who shall act as a director or officer of the corporation, or if
any such other corporation at the request of the corporation, shall be deemed
to be doing so in reliance upon such right of indemnification; and such right
shall not be exclusive of any other right which he may have.
None of the provisions of this Paragraph 56 shall be construed as a
limitation upon the right of the corporation to exercise its general power to
enter into a contract or undertaking of indemnity with a director or officer in
any proper case not provided for herein. The provisions of Paragraph 56 shall
be subject to any limitations contained in applicable statutory laws.
17
<PAGE> 18
VOTING SHARE IN OTHER CORPORATIONS
57. Unless otherwise ordered by the shareholders, the chairman of the
board, the president or a vice president shall have full power and authority in
behalf of the corporation to attend, and to act and to vote, at any meeting of
shareholders of any corporation in which this corporation may hold shares, and
in connection with such meeting shall possess and may exercise in behalf of the
corporation any and all rights and powers incident to the ownership of such
shares, including the power to appoint proxies therefor and to execute any and
all instruments for that purpose. The directors may, from time to time by
resolution, direct the manner in which shares may be voted or confer these
powers upon any other person or persons.
AMENDMENTS
58. These by-laws may be altered or amended only in the manner
prescribed by the Articles of Incorporation.
* * * * * * * * * * * * * * * * * *
18
<PAGE> 1
EXHIBIT 10.02
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
MASTER AGREEMENT
FOR THE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
("SERP")
(AS OF JANUARY 1, 1995)
<PAGE> 2
The Plan hereby established under this Master Agreement shall be
designated as the United Cities Gas Company and Subsidiaries Supplemental
Executive Retirement Plan.
The purpose of the Plan is to advance the interest of the Sponsor and
the Adopting Employers by enabling the Sponsor and the Adopting Employers (if
any) to provide benefits in excess of the benefits payable under a retirement
plan qualified for tax-favorable treatment under Sections 401(a) of the Code.
Such excess benefits may be payable under this Plan to certain officers who
have been designated as eligible for this Plan by their Employer in the event
of Early or Normal Retirement, Disability Retirement or death as provided
herein.
This Plan is available only to a select group of management or highly
compensated Employees and is not qualified under the Code. It is intended to
be an unfunded and unsecured "top hat" plan under the provisions of ERISA, and
thereby exempt from many of ERISA's reporting and disclosure, participation and
vesting, and funding and fiduciary requirements of ERISA under ERISA Sections
201(2), 301(a)(3) and 401(a)(1), respectively. Also because benefits under the
Plan are unfunded and unsecured, any benefits under the Plan are excluded from
the definition of "property" described in Code Regulation Section 1.83-3(e).
The Plan will be subject to FICA (and FUTA) taxes at the latter of (1) the date
on which the services are performed for which such credits are given or (2) the
date there is no substantial risk of forfeiture with respect to the benefits
which have accrued. The Plan is not maintained solely, nor is any part of it
maintained separately, to provide benefits limited by Section 415 of the Code.
The restriction on the compensation that can be taken into consideration for
determining benefits under a qualified plan imposed by Section 401(a)(17) of
the Code ($150,000 for a plan year beginning in 1994) is the principal
limitation on benefits that may be payable under this Plan as "excess" benefits
as that term is used above. The Plan shall be associated with a "Rabbi" trust.
The provisions of the Plan shall apply only to persons who become
eligible for participation in the Plan on or after the Effective Date of the
Plan and during its continuation. The Plan replaces any prior Plan, or
contract or agreement, providing for nonqualified benefits by and between the
Employer and any Participant of this Plan other than the United Cities Gas
Company and Subsidiaries Executive Deferred Compensation Plan. However, this
Plan does not otherwise limit, offset, restrict or decrease benefits to which
Participants under this Plan may otherwise be entitled as employees of the
Employer.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 MEMBERSHIP IN THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Membership Following Re-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 3 FINANCING THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.1 Establishing and Maintaining the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.2 Contributions by Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.3 Annual Contributions by the Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.4 Creation of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 4 BENEFIT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.2 Retirement Benefits (including Early Retirement and Disability Retirement) . . . . . . . . . . . . 7
4.3 Death After Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.4 Death Before Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.5 Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 5 AMENDMENT AND TERMINATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1 Amendment of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.2 Termination of the Plan by the Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.3 Termination of Plan With Respect to an Adopting Employer . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 6 PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.1 Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.2 Powers and Duties of the Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.3 Administrator Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.4 Claims Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 7 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.1 Alienation or Assignment of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.2 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.3 Construction of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.4 Correction of Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.5 Legally Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.6 Right of Employer to Discharge Eligible Executives and Participants . . . . . . . . . . . . . . . . 12
7.7 Limitation on Liability; Legal Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.8 Indemnification by Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.9 Application of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.10 Severability of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
7.11 Deferred Compensation not to be Taken Into Consideration by Other Plans . . . . . . . . . . . . . . 13
7.12 Benefits Payable Only From General Corporate Assets; Unsecured General
Creditor Status of Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.13 No Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.14 Parties Bear Own Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.15 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE> 5
ARTICLE 1 DEFINITIONS
The following terms when used herein, unless the context clearly
indicates otherwise, shall have the meanings set forth below:
1.1 "ACCRUED BENEFIT" shall mean with respect to a Participant
eligible (or deemed to be eligible hereunder) to receive a Retirement Benefit
under this Plan, a monthly benefit equal to the percentage of the monthly Base
Salary of the Participant described below according to the age attained by, and
the Years of Service credited to, the Participant on the date of Retirement,
payable monthly as of the first day of each calendar month for the life of the
Participant as a straight (i.e., single) life annuity.
<TABLE>
<CAPTION>
PARTICIPANT'S ATTAINED PERCENTAGE MINIMUM REQUIRED
AGE AT RETIREMENT OF BASE SALARY YEARS OF SERVICE
---------------------- -------------- ----------------
<S> <C> <C>
65 or greater 70% 10
64 65% 10
63 60% 10
62 55% 10
61 or less Zero% 10
</TABLE>
Further notwithstanding the foregoing, all Retirement Benefits and the
Survivor Benefit (i.e., the actuarial value thereof) shall be reduced and
offset by the actuarial value of the following other benefits payable to, or
with respect to, the Participant, (to the extent such other benefits have not
previously reduced or offset Retirement Benefits under this Plan):
(a) Benefits (including the death and disability
benefits) attributable to Employer contributions (other than salary
deferrals made by the Employer at the direction of Employees) from the
Retirement Plan for Employees of United Gas Company (or any successor
plan thereto) as qualified for tax-favorable treatment under Section
401(a) of the Code;
(b) Retirement benefits (including the death benefit)
from the Federal Social Security Administration;
(c) Disability benefits from the Federal Social Security
Administration.
1.2 "ACTIVE PARTICIPANT" shall mean, with respect to a Plan Year,
an individual who has not ceased to be a Participant of the Plan as described
at Section 2.2 hereof.
1.3 "ADMINISTRATIVE COMMITTEE" shall mean the committee described
at Section 6.1 which is appointed by the Board of Directors of the Sponsor to
administer the Plan.
-1-
<PAGE> 6
1.4 "ADOPTING EMPLOYER" shall mean any business organization or
corporation affiliated with the Sponsor through ownership by the Sponsor which
is authorized by the Board of Directors of the Sponsor to adopt the Plan, and
which subsequently adopts the Plan in writing.
1.5 "BASE SALARY" shall mean the base salary paid to the
Participant in the calendar month immediately before the Participant actually
takes Retirement, or in the event of the Participant's death before actually
taking Retirement, the base salary paid to the Participant in the calendar
month immediately before the Participant's death occurred.
1.6 "BENEFICIARY" shall mean the payee of the Survivor Benefit
designated by a Participant in his or her last Joinder Agreement according to
the records of the Employer. If for any reason no Beneficiary designation was
made in the Joinder Agreement, or the designation is defective, incomplete or
unintelligible, or both the primary and alternate Beneficiary predecease the
Participant, the Survivor Benefit shall be paid to the Participant's then
living current legal spouse as Beneficiary, or if the Participant is not
survived by such a legal spouse, then the Survivor Benefit shall be paid to the
then living children of the Participant, if any, each as Beneficiary in equal
shares (per stirpes if a child shall survive the Participant, but die before
the payment of the death benefit hereunder) and if no living children, the
Survivor Benefit shall be paid in a single lump sum to the estate of the
Participant as Beneficiary.
1.7 "CHANGE IN CONTROL" shall mean the following:
(a) with respect to the Employer then employing the
Participant, (i) the sale of all or substantially all of the assets of
the Employer to one or more of the same persons or entities which,
immediately prior to the sale, did not own, directly or indirectly,
collectively more than fifty percent (50%) of the Employer or (ii) the
merger or consolidation of the Sponsor into another business
organization or corporation after which more than fifty percent (50%)
of the ownership of the merged or consolidated successor organization
or corporation is not held by one or more of the same persons or
entities which owned more than fifty percent (50%) of the Employer
immediately prior to the merger or consolidation, or
(b) if at any time after an Eligible Executive becomes a
Participant in this Plan, a change in the identity of the President of
the Sponsor or the cessation of the President's actuary, in fact, as
the chief executive officer of the Sponsor.
1.8 "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
1.9 "COMMITTEE" shall mean the Administrative Committee.
-2-
<PAGE> 7
1.10 "DISCOUNT FACTOR" shall mean, in order to determine the single
lump sum present value of a series of future benefit payments hereunder, the
annual interest rate on thirty (30) year Treasury bonds reported by the Wall
Street Journal to be in effect on the first day of the month immediately
preceding the month with respect to which the calculation is made.
1.11 "DISABILITY" shall mean a "Disability" as that term is defined
in the Retirement Plan for Employees of United Cities Gas Company qualified for
tax-favorable treatment under Code Section 401(a) which is maintained by the
Employer. If there ever is any uncertainty as to the definition to use for
"Disability" hereunder, it shall be resolved by the Committee, whose decision
shall be final.
1.12 "DISABILITY RETIREMENT" shall mean the termination of the
employment of a Participant with the Employer described at Section 1.27(a)
herein.
1.13 "DISABLED" shall mean a Participant who suffers a Disability.
1.14 "EFFECTIVE DATE" shall mean January 1, 1995, the date as of
which the Plan is established; provided, however, that the term shall mean for
an Eligible Executive the effective date of adoption of the Plan by his
Adopting Employer if such date is later than January 1, 1995.
1.15 "EARLY RETIREMENT" shall mean the termination of the
employment of a Participant with the Employer described at Section 1.27(b)
herein.
1.16 "ELIGIBLE EXECUTIVE" shall mean an employee of an Employer (i)
who holds the title of President, Senior Vice President or Corporate Vice
President, as bestowed on him by the Board of Directors for the Employer for
which he or she works; (ii) who holds such title as of the date of his or her
Retirement, or if earlier, his or her death; and (iii) who has attained the age
of thirty five (35) on such date.
1.17 "EMPLOYEE" shall mean a person who is receiving remuneration
for services rendered to the Employer as a common-law employee or pursuant to a
written employment contract (or who would be receiving remuneration except for
leave of absence authorized in advance).
1.18 "EMPLOYER" shall mean the Sponsor and/or an Adopting Employer,
as required by the context.
1.19 "ERISA" shall mean Public Law 93-406, popularly known as the
"Employee Retirement Income Security Act of 1974," as amended from time to
time.
1.20 "JOINDER AGREEMENT" shall mean the agreement executed by an
Eligible Executive by which he or she becomes a Participant of the Plan and
accepts all the terms, provisions and conditions of this Master Agreement. The
Joinder Agreement, itself, is an integral part of the Master Agreement and Plan
and is incorporated herein by reference as if fully set forth herein.
-3-
<PAGE> 8
1.21 "JOINT ANNUITANT" shall mean that person designated by a
Participant to receive the survivor annuity on the Participant's death in the
event the Participant has made an effective election to receive his or her
Retirement Benefit in the form of a fifty percent (50%) joint and survivor
annuity and the person so designated survives the Participant. The identity of
the Joint Annuitant cannot be changed once the payment of Retirement Benefits
is begun.
1.22 "MASTER AGREEMENT" shall mean this document which establishes
the Plan and which together with a Participant's Joinder Agreement and the
Trust reflects the Agreement between the Participant and the Employer.
1.23 "PARTICIPANT" shall mean an Eligible Employee who begins to
participate in the Plan as described in Section 2.2 hereof.
1.24 "NORMAL RETIREMENT" shall mean the termination of the
employment of a Participant with the Employer described at Section 1.27(c)
herein.
1.25 "PLAN" shall mean this Plan, the United Cities Gas and
Subsidiaries Supplemental Executive Retirement Plan, as established by this
Master Agreement effective as of January 1, 1995, and as it may be amended from
time to time. Each Joinder Agreement and the Trust shall be an integral part
of this Plan and are incorporated herein by reference as if fully set forth
herein.
1.26 "PLAN YEAR" shall mean the twelve (12) consecutive month
period which is the fiscal year of the Plan. The Plan Year shall be January 1
through December 31.
1.27 "RETIREMENT" shall mean the first occurring of the following:
(a) the termination of the Participant's employment with
the Employer on or after the Participant attains age 35 on account of
Disability upon the determination by the Committee that a Participant
is Disabled for purposes of this Plan (also known as "Disability
Retirement");
(b) the termination of the Participant's employment with
the Employer on or after the Participant attains age 62, but prior to
his or her attaining age 65, upon the election in writing in advance
by a Participant to take Early Retirement (also known as "Early
Retirement"); or
(c) the termination of the Participant's employment with
the Employer on or after the Participant attains age 65, upon the
election in writing in advance by a Participant to take Normal
Retirement (also known as "Normal Retirement").
The term "Retirement" shall comprehensively mean Disability
Retirement, Early Retirement and Normal Retirement.
-4-
<PAGE> 9
1.28 "RETIREMENT BENEFIT" shall mean the Participant's Accrued
Benefit determined at the date of actual termination of employment with the
Employer under certain circumstances in which the Participant is eligible for
Retirement.
1.29 "SERP" shall be another name for this Plan and stands for
"Supplemental Executive Retirement Plan."
1.30 "SPONSOR" shall mean United Cities Gas Company and any
business organization or corporation with which it may be merged, consolidated,
or succeeded, provided such successor adopts the Plan in writing.
1.31 "SURVIVOR BENEFIT" shall mean the Survivor Benefit which will
be payable after the death of the Participant if the Participant dies while
still in the employ of the Employer prior to his or her actually taking Early,
Normal, or Disability Retirement.
1.32 "TRUST " OR "TRUST FUND" shall mean the irrevocable grantor
trust established by the Employer in conjunction with this Plan to hold Plan
assets on a pooled and unsegregated basis to pay benefits hereunder. The Trust
is an integral part of the Master Agreement and Plan and is incorporated herein
by reference as if fully set forth herein.
1.33 "TRUSTEE" shall mean the party or parties who accept the
duties of trustee by executing the Trust.
1.33 "YEARS OF SERVICE" shall mean a twelve (12) consecutive month
period of continuous employment by the Employee with the Employer as a
"full-time" Employee (as that term is uniformly defined by the Employer with
respect to all Employees for any period in question), and shall include such
employment prior to the Effective Date of this Plan.
ARTICLE 2 MEMBERSHIP IN THE PLAN
2.1 ELIGIBILITY. Each Employee who has met the requirement to be
considered an Eligible Executive on the Effective Date shall immediately be
considered to be an Eligible Executive for this Plan, and each Employee who
meets the eligibility requirement after the Effective Date shall be eligible to
become a Participant on the first day of the month coincident with or next
following the date he or she becomes an Eligible Executive.
Upon its determination that an Employee has met the requirement to
become an Eligible Executive, the Administration Committee shall forward to
each Eligible Executive a copy of this Master Agreement and Plan and a Joinder
Agreement to be executed by the Eligible Executive.
2.2 PARTICIPATION. An Employee shall become a Participant on the
first day he or she is an Eligible Executive and has filed his properly
completed Joinder Agreement with the Committee.
-5-
<PAGE> 10
In the event that a person ceases to be an Eligible Executive or the
Participant's employment with the Employer terminates for any reason, he or she
shall thereupon immediately cease to be a Participant, and benefits payable
with respect to the person, if any, shall be governed by the provisions of this
Plan.
2.3 MEMBERSHIP FOLLOWING RE-EMPLOYMENT. Any former Eligible
Executive or Participant who, subsequent to the Effective Date, ceased to be an
Employee of any Employer but is rehired by an Employer after a period of time
during which the former Eligible Executive or Participant was not an Employee
of any Employer (i.e., the termination from one Employer and rehire by the next
Employer was not just a transfer between Employers which have adopted this
Plan), and thereafter such rehired Employee would again be considered to be an
Eligible Executive shall be eligible to be a Participant in the Plan again only
upon specific authorization by the Board of Directors of the rehiring Employer.
ARTICLE 3 FINANCING THE PLAN
3.1 ESTABLISHING AND MAINTAINING THE PLAN AND THE PAYMENT OF
BENEFITS THEREUNDER. The Sponsor and the Adopting Employers shall bear the
administrative cost of establishing and operating the Plan and its associated
Trust. The administrative costs of the Plan shall be borne by each Employer on
a per capita basis each Plan Year: that is, each Employer shall bear that
fraction of the total administrative costs for each Plan Year obtained by
dividing the number of Participants in the Plan who are Employees of that
Employer at any time during the Plan Year by the number of Employees of all
such Employees of the Employers that Plan Year. The cost of providing benefits
under this Plan shall be the expense each Employer recognizes each year in
accordance with Section 3.3 hereof.
3.2 CONTRIBUTIONS BY PARTICIPANTS. No contributions by
Participants shall be required for participation in the Plan nor shall
contributions by Participants be permitted hereunder.
3.3 ANNUAL CONTRIBUTIONS BY THE EMPLOYER. Retirement and Survivor
Benefits payable under this Plan shall be completely paid for by the Employer.
The earliest date a Participant could take Retirement under this Plan
is age 62 (although if the Participant remains an Active Participant of this
Plan thereafter he or she may continue to accrue a greater Accrued Benefit each
Plan Year until age 65). In order to assist it to set aside a sufficient sum by
the time the Participants attain age 62 to pay the anticipated stream of
Retirement Benefits that the Participants may become entitled to at age 62 (and
thereafter if they continue to accrue a further Accrued Benefit) the Employer
shall set aside in the Trust Fund each Plan Year an amount at least equal to
the expense the Employer recognizes under Financial Accounting Standard Number
87 ("FAS 87") for that year. Such contribution shall be made at the time the
expense is determined. Separate accounts shall be established on the books of
the Plan for each Participant which shall be credited each year with that
portion of the FAS 87 expense attributable to the Participant.
-6-
<PAGE> 11
Notwithstanding the foregoing, however, the Employer's contribution
each year shall also be at least sufficient to provide the Survivor Benefit
each Participant would be eligible for under the Plan if he or she were to die
in that Plan Year. All benefits including the Survivor Benefit, may be
provided for through the purchase by the Plan of insurance on the life of the
Participant. Any such policy of life insurance shall be owned by the Trust
(and payable thereto). If life insurance is purchased, the Survivor Benefit
may be paid from the proceeds of such policy if not paid directly from the
Trust Fund.
3.4 CREATION OF TRUST. In conjunction with this Plan, the
Employer shall establish an irrevocable grantor trust. Contributions set aside
to pay benefits under this Plan shall be contributed to the Trust as provided
herein. These contributions shall be the assets which compose the Trust Fund
and though held in the Trust irrevocably (except as provided in the Trust), the
Trust Fund assets remain the property of the Employer making any contribution
thereto, and subject to the claims of the Employer's general creditors.
ARTICLE 4 BENEFIT PROVISIONS
4.1 GENERAL PROVISIONS.
(a) Written Application. The Committee may require written
application, in such form and manner as it may establish, before benefits are
paid hereunder.
(b) Payment of Benefits. When the payment of a benefit is
referenced herein, what is meant is the payment from the Trust Fund (or life
insurance owned by the Trust) of the benefit described herein (or if not paid
from the Trust Fund, then paid from the general assets of the Employer).
4.2 RETIREMENT BENEFITS (INCLUDING EARLY RETIREMENT AND DISABILITY
RETIREMENT). Upon Early Retirement, Normal Retirement, or Disability
Retirement, the retired former Participant shall become entitled to a
Retirement Benefit equal to his or her Accrued Benefit. The normal form of a
Retirement Benefit shall be a straight (i.e., single) life annuity. However,
before payment of Retirement Benefits are to begin, the Participant may elect,
in a manner and within a time period acceptable to the Administrative
Committee, to receive the actuarial equivalent of his or her Accrued Benefit,
instead of in the normal form of payment, in the form of a fifty percent (50%)
joint and survivor annuity, with the Participant's designated Joint Annuitant,
if he or she should survive the Participant, to receive fifty percent (50%) of
the adjusted monthly annuity benefit paid to the Participant, and benefits to
cease on the last to die of the Participant and the Participant's designated
Joint Annuitant. Furthermore, before payment of Retirement Benefits are to
begin, the Participant may elect in a manner and within a time period
acceptable to the Administrative Committee to have the actuarial equivalent of
the Participant's Accrued Benefit payable instead in an optional form, or
partly in a lump sum and the remainder in another optional form, permitted
under the Retirement Plan for Employees of United Cities Gas Company, or any
successor plan thereto (the "Qualified Retirement Plan"). In such election,
any spousal consent or waiver required under that Qualified Retirement Plan in
order for the Participant to elect an optional form of payment
-7-
<PAGE> 12
shall not be required in order to elect such optional form of payment of the
actuarially equivalent value of the Benefit under this Plan; however, just as
in the Qualified Retirement Plan, no lump sum payment of all or any portion of
an Accrued Benefit with an actuarial equivalent of more than $10,000 shall be
permitted. The optional form of benefit payment elected under this Plan may,
or may not, as determined by the Participant, be the same optional form
actually elected by the Participant under the Qualified Retirement Plan.
If the Retirement Benefit is to be paid monthly, then the
Retirement Benefit shall commence on the first day of the month following the
month in which Retirement occurs. If the Retirement Benefit is to be paid in a
lump sum, then the Retirement Benefit shall be paid on the first day of the
month following the month in which Retirement occurs.
4.3 DEATH AFTER RETIREMENT. If a retired Participant dies after
taking Early or Normal Retirement, or after Disability Retirement, no further
benefit will be paid with respect to the deceased Participant unless prior to
death, the Participant was receiving, or elected to receive, a benefit form
which would continue payments after his or her death.
4.4 DEATH BEFORE RETIREMENT. If a Participant dies before
Retirement while still employed by the Employer, a Survivor Benefit shall be
paid with respect to the deceased Participant. This Survivor Benefit shall be
equal to the single lump sum present value (determined by using the Discount
Factor) of the Accrued Benefit the Participant would have received if instead
of dying, the Participant is deemed to have become entitled to a Normal
Retirement Benefit on his or her date of death (crediting the deceased
Participant with ten (10) Years of Service if he or she did not have such on
death, and further treating the deceased Participant as having attained age 65,
regardless of the Participant's actual age at death, but not projecting the
deceased Participant's expected increases in Base Salary until age 65), or if
greater, an amount equal to one hundred (100) monthly payments in the aggregate
of such monthly Normal Retirement Benefit. The value of this Survivor Benefit
shall be paid as directed by the Participant in the Participant's last Joinder
Agreement of record, either in a lump sum or in as equal as possible monthly
payments for ten (10) years (or instead of ten (10) years, if the Beneficiary
is a person under age 21, then until the Beneficiary attains age 21, if such
would be longer than ten (10) years).
This Survivor Benefit shall commence (if payable monthly), or be paid
(if payable in a single lump sum) to the deceased Participant's Beneficiary as
soon as administratively practicable after the date of death.
4.5 CHANGE IN CONTROL. This Section shall apply if a Change in
Control occurs while a Participant is employed by the Employer prior to a
Participant's actual Retirement or death. If the Participant would not actually
be eligible for Normal Retirement on the date of the Change in Control because
the Participant's then current age is too young or the Participant has not been
credited with ten (10) years of service, then notwithstanding the Participant's
age or Year of Service the eventual benefit the Participant shall receive
under this Plan shall not be less than that benefit he or she would receive if,
as of the date of the Change in Control, the Participant were deemed to have
just attained age 65, been credited with ten (10) Years of
-8-
<PAGE> 13
Service, and therefore were eligible for and took Normal Retirement providing
an Accrued Benefit of seventy percent (70%) of Base Salary. (Salary increases
shall not be projected in this case, however.) The payment of the
Participant's benefit under this Section will not commence until the
Participant's employment with the Employer actually terminates, but shall
commence or be paid at that time if the Participant is not otherwise eligible
for a greater benefit from this Plan on termination of employment with the
Employer (including a death benefit to his or her survivor as a Survivor
Benefit pursuant to Section 4.3 hereof).
ARTICLE 5 AMENDMENT AND TERMINATION OF THE PLAN
5.1 AMENDMENT OF PLAN. The Board of Directors of the Sponsor
shall have the right at any time, and from time to time, to modify, alter or
amend the Plan in whole or in part by instrument in writing duly executed;
provided, however, that no benefit may be modified, altered or eliminated with
respect to which any Participant, former or deceased, or Beneficiary is then
entitled to payment at that time because of Retirement, death or Change in
Control (unless the Participant or Beneficiary agrees in writing thereto).
An executed copy of any amendment to the Plan shall be furnished to
Participants and Beneficiaries in-pay status as soon as practicable after the
date of adoption thereof.
5.2 TERMINATION OF THE PLAN BY THE SPONSOR. In the event the
Sponsor concludes that it is impossible or inadvisable to continue the Plan,
the Board of Directors of the Sponsor shall have the right to terminate the
Plan by an appropriate resolution, resolutions or actions which shall specify
the date of termination; provided, however, that no benefit may be modified,
altered or eliminated with respect to which any Participant, former or
deceased, or Beneficiary is then entitled to payment at that time because of
Retirement, death or Change in Control (unless the Participant or Beneficiary
agrees in writing thereto).
A certified copy of such resolution, resolutions or action shall be
delivered to Participants and Beneficiaries in-pay status as soon as possible
thereafter.
5.3 TERMINATION OF PLAN WITH RESPECT TO AN ADOPTING EMPLOYER.
Each Adopting Employer reserves the right to terminate the Plan at any time
with respect to Eligible Executives of the Adopting Employer by resolution or
action of its proprietor, partners or board of directors as the executive
policy-making body may be in that Adopting Employer. However, no benefit may
be modified, altered or eliminated with respect to which any Participant,
former or deceased, or Beneficiary is then entitled to payment at that time
because of Retirement, death or Change on Control (unless the Participant or
Beneficiary agrees in writing thereto).
ARTICLE 6 PLAN ADMINISTRATION
6.1 PLAN ADMINISTRATION. This Plan shall be administered by the
Administrative Committee appointed by the Board of Directors of the Sponsor,
which shall be composed of individuals who accept this responsibility.
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<PAGE> 14
Members of the Committee shall serve without compensation, but the
reasonable expenses of the Committee in discharging its responsibilities shall
be borne by the Sponsor.
6.2 POWERS AND DUTIES OF THE COMMITTEE. The Committee shall
administer and supervise the operation of the Plan in accordance with the terms
and provisions of the Plan.
The Committee shall have all powers necessary for the performance of
its duties, which duties shall be as follows:
(a) to interpret and construe the provisions of the Plan,
supplying any omissions and resolving any inconsistencies therein, and
to determine issues of fact and the application of the law with
respect to the Plan, its Participants and Beneficiaries.
(b) to determine the eligibility of Eligible Executives
for membership in the Plan, and to notify such Eligible Executives of
their eligibility and the requirements for such participation;
(c) to determine and certify eligibility for benefits
under the Plan, and to determine the amount, manner and time of the
payment of such benefits;
(d) to prepare and distribute, in such manner as the
Committee determines to be appropriate, information explaining the
Plan;
(e) to require a Eligible Executive to complete and file
with the Committee a Joinder Agreement in order to become a
Participant in the Plan;
(f) to adopt such rules as it deems necessary, desirable
or appropriate for the administration of the Plan, provided such rules
are consistent with the terms and provisions of the Plan; all rules
and decisions of the Committee shall be uniformly and
nondiscriminatorily applied to all Participants, former Participants
and Beneficiaries in similar circumstances unless expressly provided
otherwise herein; and
(g) to appoint such agents as it may need in the
performance of its duties.
6.3 ADMINISTRATOR PROCEDURES. The Committee shall elect one of
its members as chairman and shall appoint a secretary, who may or may not be a
Committee member. The secretary shall forward all necessary communication to
the Participants. The Committee may adopt such bylaws and regulations as it
deems desirable for the conduct of its affairs. All decisions of the Committee
shall be made by majority vote of a those present.
6.4 CLAIMS PROCEDURE. If, upon application for benefits made by a
Participant, former Participant or Beneficiary pursuant to Section 4.1(a), the
Committee shall determine that benefits applied for shall be denied either in
whole or in part, the following provisions shall govern:
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<PAGE> 15
(a) Notice of Denial. The Committee shall, upon its
denial of a claim for benefits under the Plan, provide the applicant
with written notice of such denial setting forth (i) the specific
reason or reasons for the denial, (ii) specific reference to pertinent
Plan provisions upon which the denial is based, (iii) a description
of any additional material or information necessary for the claimant
to perfect the claim, and (iv) an explanation of the claimant's rights
with respect to the claims review procedure as provided in subsection
(b) of this Section.
(b) Claims Review. Every claimant with respect to whom a
claim is denied shall, upon written notice of such denial, have the
right to (i) request a review of the denial of benefits by written
notice delivered to the Committee, (ii) review pertinent documents,
and (iii) submit issues and comments in writing.
(c) Decision on Review. The Committee shall, upon
receipt of a request for review submitted by the claimant in
accordance with subsection (b), appoint a special committee for the
purpose of conducting such review, and provide the claimant with
written notice of the decision reached by the said committee setting
forth the specific reasons for the decision and specific references to
the provisions of the Plan upon which the decision is based. Such
notice shall be delivered to the claimant not later than 60 days
following the receipt of the claimant's request, or, in the event that
the committee shall determine that a hearing is needed, no later than
120 days following the receipt of such request.
(d) Arbitration. If the Participant or Beneficiary is
still not satisfied with the decision after review, such claim shall
be reviewed by an arbitrator whose decision thereon shall be final and
binding on all parties. The arbitrator shall be selected by, and be
subject to the appropriate rules of, the American Arbitration
Association. The arbitration shall be held in Nashville, Tennessee.
The costs and expenses of the arbitration shall be borne entirely by
the Employer, which upon the claim of a Participant or Beneficiary
being made to it in writing hereunder, shall be under an affirmative
duty to arrange for and institute such arbitration within thirty (30)
days.
ARTICLE 7 MISCELLANEOUS PROVISIONS
7.1 ALIENATION OR ASSIGNMENT OF BENEFITS. All of the benefits and
amounts payable hereunder are expressly declared to be unassignable and
nontransferable. The right of any Participant, former Participant or
Beneficiary in any benefit or amount hereunder, prior to actual payment hereof,
may not be anticipated, conveyed, assigned, mortgaged or encumbered by any
Participant, former Participant or Beneficiary either by voluntary or
involuntary action or by operation of law or in the event of bankruptcy,
insolvency or death of the Participant, former Participant or Beneficiary; nor
shall any such right or interest be in any manner subject to levy, attachment,
execution, garnishment or any other seizure under legal, equitable or other
process, by a creditor of, or other entity claiming payment from or through,
any Participant, former Participant or Beneficiary.
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<PAGE> 16
7.2 HEADINGS. The headings and sub-headings of Articles and
Sections are included solely for convenience of reference, and if there be any
conflict between such headings and the text of the Plan, the text shall
control.
7.3 CONSTRUCTION OF THE PLAN. All legal questions pertaining to
the Plan shall be determined in accordance with the laws of the State of
Tennessee, to the extent that federal law is not controlling, and all
contributions hereunder shall be deemed to have been made in that State.
In the construction of the Plan, the masculine gender shall include
the feminine, and the singular shall include the plural, unless the context
clearly indicates otherwise.
7.4 CORRECTION OF ERRORS. If any error or change in records
results in any Participant or former Participant receiving from the Plan more
or less than he or she would have been entitled to receive had the records been
correct or had the error not been made, the Committee, upon discovery of such
error, shall correct the error by adjusting, as far as practicable, the
payments in such a manner that the benefits to which such person was correctly
entitled shall be paid.
7.5 LEGALLY INCOMPETENT. If any Participant or former Participant
is in the judgment of the Retirement Committee legally incapable of personally
receiving and giving a valid receipt for any payment due him hereunder, the
Committee may, unless and until claim shall have been made by a guardian or
conservator of such person duly appointed by a court of competent jurisdiction,
direct that such payment, or any part thereof, be made to such person or to
such person's spouse, child, parent, brother or sister, or other person deemed
by the Committee to be a proper person to receive such payment. Any payment so
made shall be, to the extent of the payment, a complete discharge to the
Employer (and each of them) of any liabilities under the Plan.
7.6 RIGHT OF EMPLOYER TO DISCHARGE ELIGIBLE EXECUTIVES AND
PARTICIPANTS. The adoption and maintenance of the Plan shall not be deemed to
constitute an employment contract between the Employer and any Eligible
Executive or member, or to be a consideration for, or an inducement or
condition of, the employment of any person, or to add or modify any previous
employment agreement between the Employer and Eligible Executive or
Participant.
7.7 LIMITATION ON LIABILITY; LEGAL ACTIONS. It is expressly
understood and agreed by each Eligible Executive, for himself and his heirs,
assigns and beneficiaries as a condition of eligibility under the Plan that
except for its or their willful neglect or fraud, the Employer shall be in no
way subject to any suit or litigation, or to any legal liability, for any cause
or reason or thing whatsoever in connection with the Plan or its operation, and
each such Eligible Executive hereby shall be deemed to have released the
Employer, the Committee and all their officers and agents from any and all
liability or obligation.
-12-
<PAGE> 17
7.8 INDEMNIFICATION BY SPONSOR. The right of indemnification
granted to each director, officer or employee of the Sponsor under the by-laws
of the Sponsor, as from time to time amended, shall apply to any action taken
by the Committee or by any individual member of the Committee in connection
with the Plan.
7.9 APPLICATION OF PLAN PROVISIONS. The provisions of the Plan
shall apply only to Participants who terminate employment with the Employer on
or after the Effective Date and during its continuation.
7.10 SEVERABILITY OF PLAN PROVISIONS. All provisions of this
Agreement are severable, and should any part or provision be ruled illegal or
void, all other parts and provisions shall remain in full force and effect.
7.11 DEFERRED COMPENSATION NOT TO BE TAKEN INTO CONSIDERATION BY
OTHER PLANS. Any deferred compensation payable hereunder shall not be deemed
salary or other compensation to the Participant for purposes of computing
benefits to which the Participant may be entitled under any other employee
benefit plan sponsored and maintained by the Employer for the benefit of its
Employees.
7.12 BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED
GENERAL CREDITOR STATUS OF PARTICIPANT.
(a) The payments to the Participant or the Participant's
Beneficiary hereunder shall be made from assets which shall continue,
for all purposes, to be a part of the general, unrestricted assets of
the Employer (even if in the Trust); no person or entity shall have
nor acquire any interest in any such assets by virtue of the
provisions of this Plan. The Employer's obligation hereunder shall be
an unfunded and unsecured promise to pay money in the future. To the
extent that the Participant or any person or entity acquires a right
to receive payments from the Employer under the provisions hereof,
such right shall be no greater than the right of any unsecured general
creditor of the Employer; no such person or entity shall have nor
require any legal or equitable right, interest or claim in or to any
property or assets of the Employer.
(b) In the event that, in its discretion, the Employer
purchases an insurance policy or policies insuring the life of the
Participant (or any other property) to allow the Employer to recover
the cost of providing the benefits, in whole, or in part, hereunder,
neither the Participant, the Participant's Beneficiary, any other
beneficiary or any other person or entity shall have nor acquire any
rights whatsoever therein or in the proceeds therefrom. The Employer
shall be the sole owner and beneficiary of any such policy or policies
and, as such, shall possess and, may exercise all incidents of
ownership therein. No such policy, policies or other property shall
be held in any trust for the Participant or any other person or entity
nor as collateral security for any obligation of the Employer
hereunder.
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<PAGE> 18
7.13 NO REPRESENTATION. The Employer makes no representation,
guarantee, warranty, or other assurance of any kind to the Participant or any
other person regarding the federal, state or local tax consequences of this
Agreement or any payments hereunder.
7.14 PARTIES BEAR OWN EXPENSES. The Employer and the Participant
shall bear its and his, respective, own legal, accounting, actuarial, and all
other expenses, if any, incurred in connection with the negotiation, drafting,
preparation, review, execution, interpretation, and construction of this
Agreement, including any costs connected with securing any administrative or
judicial rulings (including any Internal Revenue Service private letter
rulings), decisions, or orders construing the prospective, current, or past
effect of this Plan at any time.
7.15 ENTIRE AGREEMENT. This instrument contains the entire
agreement between the parties. It may not be amended or modified orally, but
only by agreement in writing signed by each of the parties.
***************
IN WITNESS WHEREOF, the Sponsor has caused this Plan to be executed by
its duly authorized representative as of the 2nd day of January, 1995.
UNITED CITIES GAS COMPANY
By: /s/ Shirley M. Hawkins
----------------------------------------
Title: Sr. V.P./Secretary
-------------------------------------
-14-
<PAGE> 1
EXHIBIT 10.06
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
MASTER AGREEMENT
FOR THE
SELECT KEY AND/OR MANAGEMENT EMPLOYEE
DEFERRED COMPENSATION PLAN
("DCP")
(AS OF JANUARY 1, 1995)
<PAGE> 2
The Plan hereby established under this Master Agreement shall be
designated as the United Cities Gas Company and Subsidiaries Key Management
Deferred Compensation Plan.
The purpose of the Plan is to advance the interest of the Sponsor and
the Adopting Employer by encouraging and enabling the Sponsor and the Adopting
Employer to attract, motivate and retain select key executives and/or
management Employees who are eligible for Incentive Compensation and who, in
recognition of their contributions to the success of the Employer, have been
designated as eligible under this Plan by the President and CEO of the Employer
to defer up to 100 percent of such Incentive Compensation in order to provide a
later deferred compensation benefit in the event of termination of service (to
the extent the Eligible Participant is vested in a benefit), or in the event of
death or Disability. The Plan also permits Eligible Participants to defer up
to $30,000 of their Base Salary from current taxation in order to provide such
benefits.
This Plan is available only to a select group of management or highly
compensated Employees and is not qualified under the Code. It is intended to
be an unfunded and unsecured "top hat" plan under the provisions of ERISA, and
thereby exempt from many of ERISA's reporting and disclosure, participation and
vesting, and funding and fiduciary requirements of ERISA under ERISA Sections
201(2), 301(a)(3) and 401(a)(1), respectively. Also because benefits under the
Plan are unfunded and unsecured, any benefits under the Plan are excluded from
the definition of "property" described in Code Regulation Section 1.83-3(e).
The Plan will be subject to FICA (and FUTA) at the later of (1) the date on
which the services are performed, or (2) the date on when there is no
substantial risk of forfeiture with respect to the benefits which have accrued.
The Plan is not maintained solely, nor is any part of it maintained separately,
to provide benefits limited by Section 415 of the Code. The Plan may be
associated with a "Rabbi" trust.
The provisions of the Plan shall apply only to persons who become
eligible for participation in the Plan on or after the Effective Date of the
Plan and during its continuation. The Plan replaces any prior Plan, or
contract or agreement, providing for nonqualified benefits by and between the
Employer and any Participant of this Plan other than the United Cities Gas
Company and Subsidiaries Supplemental Executive Retirement Plan. However, this
Plan does not otherwise limit, offset, restrict or decrease benefits to which
Participants under this Plan may otherwise be entitled as employees of the
Employer.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 PARTICIPATION IN THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Participation Following Re-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 3 FINANCING THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Establishing and Maintaining the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2 Salary Deferrals by Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 Annual Earnings Contributions by the Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Creation of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 4 BENEFIT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 Termination of Employment Before Disability or Death . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 Discretionary Payment in the Event of Financial Need . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 5 AMENDMENT AND TERMINATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.1 Amendment of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.2 Termination of the Plan by the Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.3 Termination of Plan With Respect to an Adopting Employer . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 6 PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1 Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.2 Powers and Duties of the Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.3 Administrator Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.4 Claims Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 7 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.1 Alienation or Assignment of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.2 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.3 Construction of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.4 Correction of Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.5 Legally Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.6 Right of Employer to Discharge Eligible Employees and Participants . . . . . . . . . . . . . . . . 11
7.7 Limitation on Liability; Legal Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.8 Indemnification by Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.9 Application of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.10 Severability of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
7.11 Deferred Compensation not to be Taken Into Consideration by Other Plans . . . . . . . . . . . . . . 11
7.12 Benefits Payable Only From General Corporate Assets; Unsecured General
Creditor Status of Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.13 No Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.14 Parties Bear Own Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.15 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
<PAGE> 5
ARTICLE 1 DEFINITIONS
The following terms when used herein, unless the context clearly
indicates otherwise, shall have the meanings set forth below:
1.1 "ACCOUNTS" shall mean both the Employee Contribution Account
and the Employer Contribution Account.
1.2 "ADMINISTRATIVE COMMITTEE" shall mean the committee described
at Section 6.1 which is appointed by the Board of Directors of the Sponsor to
administer the Plan.
1.3 "ADOPTING EMPLOYER" shall mean any business organization or
corporation affiliated with the Sponsor through ownership by the Sponsor which
is authorized by the Board of Directors of the Sponsor to adopt the Plan, and
which subsequently adopts the Plan in writing.
1.4 "BASE SALARY" shall mean, with respect to all Employers an
Employee may work for as a Participant for a Plan Year, the regular salary
budgeted for the Participant for the Plan Year (adding back in, for purposes of
determining the amount to defer pursuant to his or her Joinder Agreement, the
Salary Deferrals the Participant elects to make under this Plan) which is paid
to the Participant, or which would be paid to the Participant but for his or
her election under this Plan to defer such payment as a Salary Deferral. Base
Salary shall not include amounts paid as severance pay (even though such
severance pay takes the form of regular salary payments), the characterization
of such pay as severance pay to be conclusively evidenced by the fact that the
Employee performs no usual services of a material nature for the Employer at
the explicit request of the Employer.
1.5 "BENEFICIARY" shall mean the payee of the death benefit
designated by a Participant in his or her last Joinder Agreement according to
the records of the Employer. If for any reason no Beneficiary designation was
made in the Joinder Agreement, or the designation is defective, incomplete or
unintelligible, or both the primary and alternate Beneficiary predecease the
Participant, the Death Benefit yet unpaid shall be paid to the Participant's
then living legal spouse as Beneficiary, or if the Participant is not survived
by a legal spouse, then the Death Benefit shall be paid to the then living
children of the Participant, if any, each as Beneficiary in equal shares (per
stirpes if a child shall survive the Participant, but die before the payment of
the death benefit hereunder) and if no living children, the Death Benefit shall
be paid in a single lump sum to the estate of the Participant as Beneficiary.
1.6 "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
1.7 "COMMITTEE" shall mean the Administrative Committee.
1.8 "DISABILITY" shall mean any physical or mental impairment
which, in the opinion of the Committee, is expected to result in total or
permanent disability.
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1.9 "EARNINGS FACTOR" shall mean the rate of earnings that is to
be credited to the balance of each Employer Contribution Account for a Plan
Year pursuant to Section 3.3 hereof.
1.10 "EFFECTIVE DATE" shall mean January 1, 1995, the date the Plan
is established; provided, however, that the term shall mean for an Eligible
Participant the effective date of adoption of the Plan by his Adopting Employer
if such date is later than January 1, 1995.
1.11 "EMPLOYEE CONTRIBUTION ACCOUNT" shall mean the bookkeeping
account established pursuant to Section 3.1(b) hereof to which shall be
credited Salary Deferrals of a Participant pursuant to Section 3.2.
1.12 "ELIGIBLE SELECT KEY AND/OR MANAGEMENT EMPLOYEE" shall mean an
Employee who has been designated as eligible for the Plan by the President and
CEO of the Sponsor.
1.13 "EMPLOYEE" shall mean a person who is receiving remuneration
for services rendered to the Employer as a common-law employee or pursuant to a
written employment contract (or who would be receiving remuneration except for
leave of absence authorized in advance).
1.14 "EMPLOYER" shall mean the Sponsor and/or an Adopting Employer,
as required by the context.
1.15 "EMPLOYER CONTRIBUTION ACCOUNT" shall mean the bookkeeping
account established pursuant to Section 3.1(b) hereof to which shall be
credited earnings (or losses) pursuant to Section 3.3
1.16 "ERISA" shall mean Public Law 93-406, popularly known as the
"Employee Retirement Income Security Act of 1974," as amended from time to time.
1.17 "INCENTIVE COMPENSATION" shall mean a bonus which is paid in
excess of Base Salary to the Participant, or which would be paid to the
Participant but for his or her election under this Plan to defer such payment
for the performance of services to the Employer which resulted in the
attainment of goals established by the Employer either for the Participant or
for the business of the Employer itself.
1.18 "JOINDER AGREEMENT" shall mean the agreement executed by a
select Key and/or Management Employee by which he or she becomes a Participant
of the Plan by electing to defer Base Salary and/or Incentive Compensation
under the Plan and accepting all the terms, provisions and conditions of this
Master Agreement. The Joinder Agreement is an integral part of the Master
Agreement and Plan and is incorporated herein by reference as if fully set
forth herein.
1.19 "MASTER AGREEMENT" shall mean this document which establishes
the Plan and which together with a Participant's Joinder Agreement reflects the
agreement between the Participant and the Employer.
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1.20 "PARTICIPANT" shall mean a Select Key and/or Management
Employee who has become a Participant in this Plan as provided.
1.21 "PLAN" shall mean this Plan, the United Cities Gas Company and
Subsidiaries Key Management Deferred Compensation Plan, as established by this
Master Agreement effective January 1, 1995, and as it may be amended from time
to time.
1.22 "PLAN YEAR" shall mean the twelve (12) consecutive month
period which is the fiscal year of the Plan. The Plan Year shall be January 1
through December 31.
1.23 "SALARY DEFERRALS" shall mean those contributions credited to
the Employee Contribution Account by the Employer at the election of a
Participant rather than receiving such credited amounts as Base Salary or
Incentive Compensation. The election of a Participant to make a Salary
Deferral must be made prior to the performance of the services for which the
deferred Base Salary would have been paid or the year in which the incentive
bonus would have been earned but for the election to defer.
1.24 "SPONSOR" shall mean United Cities Gas Company and any
business organization or corporation with which it may be merged, consolidated
or succeeded, provided such successor adopts this Plan in writing.
1.25 "TRUST" OR "TRUST FUND" shall mean the irrevocable grantor
trust established by the Employer in conjunction with this Plan to hold Plan
assets on a pooled and unsegregated basis to pay benefits hereunder. The Trust
is an integral part of the Master Agreement and Plan and is incorporated herein
by reference as if fully set forth herein.
1.26 "TRUSTEE" shall mean the party or parties who accept the
duties of trustee by executing the Trust.
ARTICLE 2 PARTICIPATION IN THE PLAN
2.1 ELIGIBILITY. Each Employee who has met the requirement to be
considered an Eligible Select Key and/or Management Employee on the Effective
Date shall immediately be considered to be an Eligible Select Key and/or
Management Employee for this Plan, and each Employee who meets the eligibility
requirement to be an Eligible Select Key and/or Management Employee after the
Effective Date shall be eligible to become an Eligible Select Key and/or
Management Employee on the first day of the month coincident with or next
following the date he becomes an Eligible Select Key and/or Management
Employee.
Upon its determination that an Employee has met the requirement to
become a Select Key and/or Management Employee, the Administration Committee
shall forward to each Eligible Select Key and/or Management Employee a copy of
this Master Agreement and Plan and a Joinder Agreement to be executed by the
Eligible Select Key and/or Management Employee.
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2.2 PARTICIPATION. An Eligible Select Key and/or Management
Employee shall become a Participant on the first day on which he or she is an
Eligible Select Key and/or Management Employee and has filed his or her Joinder
Agreement with the Committee electing to defer Base Salary and/or Incentive
Compensation under the Plan.
In the event that a person ceases to be an Eligible Select Key and/or
Management Employee, he or she shall thereupon immediately cease to be a
Participant, but balances credited to the Accounts of that person on such date
shall not be affected.
2.3 PARTICIPATION FOLLOWING RE-EMPLOYMENT. Any former Eligible
Select Key and/or Management Employee or Participant who had satisfied,
subsequent to the Effective Date, the requirements for participation and who is
re-employed following termination of employment with the Employer, shall be
eligible for continued membership in the Plan only upon specific authorization
by the Committee.
ARTICLE 3 FINANCING THE PLAN
3.1 ESTABLISHING AND MAINTAINING THE PLAN.
(a) Administrative Expenses. The Sponsor and the Adopting
Employers shall bear the administrative cost of establishing and operating the
Plan. The administrative costs of the Plan shall be borne by each Employer on
a per capita basis each Plan Year: that is, each Employer shall bear that
fraction of the total administrative costs for each Plan Year obtained by
dividing the number of Accounts maintained by that Employer at any time during
the Plan Year as described in subsection (c) below by the number of such
Accounts in the aggregate maintained by all Employers that Plan Year.
(b) Establishment of Accounts. The Employer shall establish, for
each Participant it employs, two accounts in its books, the first to be
entitled the "Employee Contribution Account" and the second to be entitled the
"Employer Contribution Account". The Employee Contribution Account shall be
credited with the Participant's Salary Deferrals as described in Section 3.2
and the Employer Contribution Account shall be credited with earnings (and
debited for losses) as described in Section 3.3, and debited for payment of
benefits based on credited balances in the Accounts as described in Article 4.
(c) Universal Payment and Forfeitures of Benefits Among Employers.
Each separate Account established under subsection (b) above by an Employer for
whom an Employee works while a Participant in this Plan shall be maintained by
each Employer and credited with earnings (or losses) pursuant to Section 3.3
hereof each Plan Year until such time as a final payment of benefits is to be
made, or a Forfeiture occurs, with respect to the Participant. When any
benefits are to be paid, or Forfeiture occur, the terms of the Plan shall be
applied as if the Participant then were employed by all the Employers for which
he or she had worked at any time while a Participant, and benefits will be paid
from, or Forfeitures occur in, all the Accounts maintained with respect to the
Participant.
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3.2 SALARY DEFERRALS BY PARTICIPANTS. In advance of each calendar
month in a Plan Year, a Participant may elect to defer his or her Base Salary
as Salary Deferrals (in one percent (1%) increments), up to an amount in the
aggregate in the Plan Year not to exceed $30,000. At the end of each calendar
month, instead of paying the Participant an amount equal to the Salary Deferral
elected by the Participant, the Employer shall credit the bookkeeping account
entitled the "Employee Contribution Account" in the name of each Participant
who makes such Salary Deferral with an amount equal to the Salary Deferral
elected for the month. Deferrals may be commenced, increased, reduced or
stopped at any time prior to the beginning of a month on a prospective basis.
In advance of any period for which Incentive Compensation may be
earned, the Participant may also elect to defer an amount (also in one percent
(1%) increments) up to one hundred percent (100%) of his or her Incentive
Compensation which he or she may earn. Instead of paying to the Participant
the Incentive Compensation the Participant elected to defer, the Employer shall
credit the Participant's Employee Contributions Account with such Compensation
Deferral. Once elected, the Compensation Deferrals which may be made by the
Participant for the Incentive Compensation period may not be changed in any
way.
The election to permit or not to permit Salary Deferrals of Base
Salary or Incentive Compensation shall remain in effect until changed. The
election to permit Salary Deferrals of Base Salary is not contingent upon an
election to permit Salary Deferrals of Incentive Compensation, and vice versa.
All Salary Deferrals by Participants shall be deposited in the Trust
as soon as possible after made.
Earnings on balances credited to the Employee Contribution Accounts of
Participants shall be credited to the Employer Contribution Accounts of
Participants as described in Section 3.3 hereof.
3.3 ANNUAL EARNINGS CONTRIBUTIONS BY THE EMPLOYER. The Employer
shall credit the Employer Contribution Accounts of Participants with imputed
earnings (and debit such Accounts for losses) using an Earnings Factor as
described herein.
As of the end of each calendar month the Plan is in existence until
both of the Participant's Accounts are completely paid out, the Committee shall
credit (or debit) the Employer Contribution Account of each Participant, former
Participant or Beneficiary with an amount of imputed earnings using an
"Earnings Factor." The Earnings Factor shall be the Trustee's prime rate most
recently published in the Wall Street Journal as of the last business day of
the month. This Earnings Factor for the Employer Contribution Accounts shall
be multiplied by the balance credited to each Participant's, former
Participant's or Beneficiary's Employer Contribution Account as of the first
day of the month for which the determination is being made. The resulting
amount determined pursuant to this section with respect to each Participant,
former Participant or Beneficiary, if earnings are positive, shall be deposited
in the Trust by the Employer as soon as practicable and shall be credited to
his or her Employer Contribution Account as soon as administratively possible
after its determination. If earnings
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are negative, the Employer Contribution Account shall be debited, but no Trust
assets shall be removed from the Trust. Instead, future deposits to the Trust
called for above shall be offset by these amounts.
3.4 CREATION OF TRUST. In conjunction with this Plan, the
Employer shall establish an irrevocable grantor trust. Contributions set aside
to pay benefits under this Plan shall be contributed to the Trust as provided
herein. These contributions shall be the assets which compose the Trust Fund
and though held in the Trust irrevocably (except as provided in the Trust), the
Trust Fund assets remain the property of the Employer making any contribution
thereto, and subject to the claims of the Employer's general creditors.
ARTICLE 4 BENEFIT PROVISIONS
4.1 GENERAL PROVISIONS.
(a) Written Application. The Committee may require written
application, in such form and manner as it may establish, before benefits are
paid hereunder.
(b) Payment of the Accounts. When the payment of the Accounts is
referenced herein, what is meant is the payment from the Trust (or if not the
Trust, from the general assets of the Sponsor or the Adopting Employer) of the
book value of the Accounts as reflected in the records of the Plan.
4.2 TERMINATION OF EMPLOYMENT BEFORE DISABILITY OR DEATH.
(a) In General. A Participant whose employment with the Employer
terminated for a reason other than his or her Disability or death will receive
a payment in cash as described in this Section equal to the aggregate balance
of his or her Employee Contribution Account and his or her Employer
Contribution Account.
(b) Payment Terms. The benefit hereunder shall be payable within
30 days of the date in which the Participant's employment with the Employer
terminated. Payment shall be made in the form of a single lump sum in cash.
Alternatively, at the discretion of the Committee, provided one year's advance
notice in writing is given by the Participant, an amount in cash equal to the
aggregate balance of the Participant's Accounts either shall be paid in monthly
installments in as equal amounts as possible (installments being subject to
change at any time to effect this purpose) over a period of sixty (60) months
or shall be paid as follows: an amount equal to twenty-five percent (25%) of
the balance of the Accounts in the aggregate to be paid in a single, lump sum
as soon as administratively feasible and the remainder of the balance of the
Accounts over sixty (60) monthly installments in as equal installments as
possible until the balance of the Accounts in the aggregate is zero (0).
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4.3 DISABILITY.
(a) In General. A Participant who suffers a Disability before his
or her death or other termination of employment with the Employer shall receive
a Disability benefit. The Disability benefit shall be the payment of an amount
in cash equal to the aggregate balance of the Employer and Employee Accounts of
the Participant on his or her date of Disability.
(b) Payment Terms. The Disability benefit shall be payable in a
single, lump sum as soon as administratively feasible but no later than 30 days
after the determination is made that the Participant is disabled.
4.4 DEATH.
(a) In General. A Participant who dies while employed by the
Employer shall receive a death benefit. The death benefit shall be the
payment, as set forth in this Section, of an amount in cash equal to the
aggregate balance of the Employer and Employee Accounts of the deceased
Participant on his or her date of death.
(b) Payment Terms. The death benefit shall be payable in a single
lump sum as soon as administratively feasible but no later than 30 days after
the Participant's death. Payment of the death benefit shall be made to the
Beneficiary designated by the Participant in his or her last Joinder Agreement
according to the records of the Employer.
4.5 DISCRETIONARY PAYMENT IN THE EVENT OF FINANCIAL NEED. A
payment of an amount in cash equal to all or part of a Participant's Accounts
in the aggregate while he or she is employed by the Employer may be permitted.
Such a payment, however, shall be at the sole discretion of the Committee. The
Committee shall determine what, if any, standard to set for such a payment, or
may set no fixed standard, and decide each request on a case by case basis,
with any previous payment serving as no precedent or authority for a later
request for payment. Each such payment shall result in a debit to the
Participant's Accounts in an amount equal to the payment when made. To the
extent possible, this debit first shall be applied against the Participant's
Employer Contribution Account.
If a Participant subsequently incurs another financial need, the
Committee may, or may not, in its sole discretion, permit another payment to be
made in the case of this later event of financial need, but in no event may the
Committee permit a payment of an amount in cash in excess of the remaining
balance of the Participant's Accounts in the aggregate.
ARTICLE 5 AMENDMENT AND TERMINATION OF THE PLAN
5.1 AMENDMENT OF PLAN. The Board of Directors of the Sponsor
shall have the right at any time, and from time to time, to modify, alter or
amend the Plan in whole or in part by instrument in writing duly executed;
provided, however, that in no event shall the Board of Directors have the right
to change, in any way, either the form or the amount of the payment of any
benefits hereunder to a Participant or former Participant, and all benefits to
a former
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Participant in - pay status shall continue as provided hereunder without regard
to the amendment of the Plan by the Sponsor.
An executed copy of any amendment to the Plan shall be furnished to
Participants and former Participants with credited Account balances as soon as
practicable after the date of adoption thereof.
5.2 TERMINATION OF THE PLAN BY THE SPONSOR. In the event the
Sponsor concludes that it is impossible or inadvisable to continue the Plan,
the Board of Directors of the Sponsor shall have the right to terminate the
Plan by an appropriate resolution, resolutions or actions which shall specify
the date of termination; provided, however, that in no event shall the Board of
Directors have the right to change, in any way, either the form or the amount
of the payment of any benefits hereunder to a Participant or former
Participant, and all such benefits to a former Participant shall continue as
provided hereunder without regard to the termination of the Plan by the
Sponsor.
A certified copy of such resolution, resolutions or action shall be
delivered to Participants and former Participants with credited Account
balances, and as soon as possible thereafter.
5.3 TERMINATION OF PLAN WITH RESPECT TO AN ADOPTING EMPLOYER.
Each Adopting Employer reserves the right to terminate the Plan at any time
with respect to Eligible Employees of the Adopting Employer by resolution or
action of its proprietor, partners or board of directors as the executive
policy-making body may be in that Adopting Employer. However, in no event
shall an Adopting Employer have the right to change, in any way, either the
form or the amount of the payment of any benefits hereunder to a Participant or
former Participant, and all such benefits to a Participant or former
Participant shall continue as provided hereunder without regard to the
termination of the Plan by the Adopting Employer.
ARTICLE 6 PLAN ADMINISTRATION
6.1 PLAN ADMINISTRATION. This Plan shall be administered by the
Administrative Committee appointed by the Board of Directors of the Sponsor who
accept this responsibility.
Participants of the Committee shall serve without compensation, but
the reasonable expenses of the Committee in discharging its responsibilities
shall be borne by the Sponsor.
6.2 POWERS AND DUTIES OF THE COMMITTEE. The Committee shall
administer and supervise the operation of the Plan in accordance with the terms
and provisions of the Plan.
The Committee shall have all powers necessary for the performance of
its duties, which duties shall be as follows:
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(a) to interpret and construe the provisions of the Plan,
supplying any omissions and resolving any inconsistencies therein, and
to determine issues of fact and the application of the law with
respect to the Plan, its Participants and Beneficiaries.
(b) to determine the eligibility of Employees for
participation in the Plan, and to notify such Eligible Employees of
their eligibility and the requirements for such participation;
(c) to determine and certify eligibility for benefits
under the Plan, and to determine the amount, manner and time of the
payment of such benefits;
(d) to prepare and distribute, in such manner as the
Committee determines to be appropriate, information explaining the
Plan;
(e) to require an Eligible Employee to complete and file
with the Committee a Joinder Agreement in order to become a
Participant in the Plan;
(f) to adopt such rules as it deems necessary, desirable
or appropriate for the administration of the Plan, provided such rules
are consistent with the terms and provisions of the Plan; all rules
and decisions of the Committee shall be uniformly and
nondiscriminatorily applied to all Participants, former Participants
and Beneficiaries in similar circumstances unless expressly provided
otherwise herein; and
(g) to appoint such agents as it may need in the
performance of its duties.
6.3 ADMINISTRATOR PROCEDURES. The Committee shall elect one of
its members as chairman and shall appoint a secretary, who may or may not be a
Committee member. The secretary shall forward all necessary communication to
the Participants. The Committee may adopt such bylaws and regulations as it
deems desirable for the conduct of its affairs. All decisions of the Committee
shall be made by majority vote of the Committee present.
6.4 CLAIMS PROCEDURE. If, upon application for benefits made by a
Participant, former Participant or Beneficiary pursuant to Section 4.1(a), the
Committee shall determine that benefits applied for shall be denied either in
whole or in part, the following provisions shall govern:
(a) Notice of Denial. The Committee shall, upon its
denial of a claim for benefits under the Plan, provide the applicant
with written notice of such denial setting forth (i) the specific
reason or reasons for the denial, (ii) specific reference to pertinent
Plan provisions upon which the denial is based, (iii) a description
of any additional material or information necessary for the claimant
to perfect the claim, and (iv) an explanation of the claimant's rights
with respect to the claims review procedure as provided in subsection
(b) of this Section.
(b) Claims Review. Every claimant with respect to whom a
claim is denied shall, upon written notice of such denial, have the
right to (i) request a review of the
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denial of benefits by written notice delivered to the Committee, (ii)
review pertinent documents, and (iii) submit issues and comments in
writing.
(c) Decision on Review. The Committee shall, upon
receipt of a request for review submitted by the claimant in
accordance with subsection (b), appoint a special committee for the
purpose of conducting such review, and provide the claimant with
written notice of the decision reached by the said committee setting
forth the specific reasons for the decision and specific references to
the provisions of the Plan upon which the decision is based. Such
notice shall be delivered to the claimant not later than 60 days
following the receipt of the claimant's request, or, in the event that
the committee shall determine that a hearing is needed, no later than
120 days following the receipt of such request.
ARTICLE 7 MISCELLANEOUS PROVISIONS
7.1 ALIENATION OR ASSIGNMENT OF BENEFITS. All of the benefits and
amounts payable hereunder are expressly declared to be unassignable and
nontransferable The right of any Participant, former Participant or
Beneficiary in any benefit or amount hereunder, prior to actual payment hereof,
may not be anticipated, conveyed, assigned, mortgaged or encumbered by any
Participant, former Participant or Beneficiary either by voluntary or
involuntary action or by operation of law or in the event of bankruptcy,
insolvency or death of the Participant, former Participant or Beneficiary; nor
shall any such right or interest be in any manner subject to levy, attachment,
execution, garnishment or any other seizure under legal, equitable or other
process, by a creditor of, or other entity claiming payment from or through,
any Participant, former Participant or Beneficiary.
7.2 HEADINGS. The headings and sub-headings of Articles and
Sections are included solely for convenience of reference, and if there be any
conflict between such headings and the text of the Plan, the text shall
control.
7.3 CONSTRUCTION OF THE PLAN. All legal questions pertaining to
the Plan shall be determined in accordance with the laws of the State of
Tennessee, to the extent that federal law is not controlling, and all
contributions hereunder shall be deemed to have been made in that State.
In the construction of the Plan, the masculine gender shall include
the feminine, and the singular shall include the plural, unless the context
clearly indicates otherwise.
7.4 CORRECTION OF ERRORS. If any error or change in records
results in any Participant or former Participant receiving from the Plan more
or less than he would have been entitled to receive had the records been
correct or had the error not been made, the Committee, upon discovery of such
error, shall correct the error by adjusting, as far as practicable, the
payments in such a manner that the benefits to which such person was correctly
entitled shall be paid.
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7.5 LEGALLY INCOMPETENT. If any Participant or former Participant
is in the judgment of the Administrative Committee legally incapable of
personally receiving and giving a valid receipt for any payment due him
hereunder, the Committee may, unless and until claim shall have been made by a
guardian or conservator of such person duly appointed by a court of competent
jurisdiction, direct that such payment, or any part thereof, be made to such
person or to such person's spouse, child, parent, brother or sister, or other
person deemed by the Committee to be a proper person to receive such payment.
Any payment so made shall be, to the extent of the payment, a complete
discharge to the Employer (and each of them) of any liabilities under the Plan.
7.6 RIGHT OF EMPLOYER TO DISCHARGE ELIGIBLE EMPLOYEES AND
PARTICIPANTS. The adoption and maintenance of the Plan shall not be deemed to
constitute an employment contract between the Employer and any Eligible
Employee or Participant, or to be a consideration for, or an inducement or
condition of, the employment of any person, or to add or modify any previous
employment agreement between the Employer and Eligible Employee or Participant.
The Plan also shall not be construed to indicate any amount of Incentive
Compensation will be earned with respect to a Participant as a matter of right,
or that the Participant even has a right to earn Incentive Compensation merely
because this Plan provides for the deferral of Incentive Compensation if it is
earned.
7.7 LIMITATION ON LIABILITY; LEGAL ACTIONS. It is expressly
understood and agreed by each Eligible Employee, for himself and his heirs,
assigns and beneficiaries as a condition of eligibility under the Plan that
except for its or their willful neglect or fraud, the Employer shall be in no
way subject to any suit or litigation, or to any legal liability, for any cause
or reason or thing whatsoever in connection with the Plan or its operation, and
each such Eligible Employee hereby shall be deemed to have released the
Employer, the Committee and all their officers and agents from any and all
liability or obligation.
7.8 INDEMNIFICATION BY SPONSOR. The right of indemnification
granted to each director, officer or employee of the Sponsor under the by-laws
of the Sponsor, as from time to time amended, shall apply to any action taken
by the Committee or by any individual member of the Committee in connection
with the Plan.
7.9 APPLICATION OF PLAN PROVISIONS. The provisions of the Plan
shall apply only to Participants who terminate employment with the Employer on
or after the Effective Date and during its continuation.
7.10 SEVERABILITY OF PLAN PROVISIONS. All provisions of this
Agreement are severable, and should any part or provision be ruled illegal or
void, all other parts and provisions shall remain in full force and effect.
7.11 DEFERRED COMPENSATION NOT TO BE TAKEN INTO CONSIDERATION BY
OTHER PLANS. Any deferred compensation payable hereunder shall not be deemed
salary or other compensation to the Participant for purposes of computing
benefits to which the Participant may be entitled under any other employee
benefit plan sponsored and maintained by the Employer for the benefit of its
Employees.
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7.12 BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED
GENERAL CREDITOR STATUS OF PARTICIPANT.
(a) The payments to the Participant or the Participant's
Beneficiary hereunder shall be made from assets which shall continue,
for all purposes, to be a part of the general, unrestricted assets of
the Employer; no person or entity shall have nor acquire any interest
in any such assets by virtue of the provisions of this Plan. The
Employer's obligation hereunder shall be an unfunded and unsecured
promise to pay money in the future. To the extent that the
Participant or any person or entity acquires a right to receive
payments from the Employer under the provisions hereof, such right
shall be no greater than the right of any unsecured general creditor
of the Employer; no such person or entity shall have nor require any
legal or equitable right, interest or claim in or to any property or
assets of the Employer.
(b) In the event that, in its discretion, the Employer
purchases an insurance policy or policies insuring the life of the
Participant (or any other property) to allow the Employer to recover
the cost of providing the benefits, in whole, or in part, hereunder,
neither the Participant, the Participant's Beneficiary, any other
beneficiary or any other person or entity shall have nor acquire any
rights whatsoever therein or in the proceeds therefrom. The Employer
shall be the sole owner and beneficiary of any such policy or policies
and, as such, shall possess and, may exercise all incidents of
ownership therein. No such policy, policies or other property shall
be held in any trust for the Participant or any other person or entity
nor as collateral security for any obligation of the Employer
hereunder.
7.13 NO REPRESENTATION. The Employer makes no representation,
guarantee, warranty, or other assurance of any kind to the Participant or any
other person regarding the federal, state or local tax consequences of this
Agreement or any payments hereunder.
7.14 PARTIES BEAR OWN EXPENSES. The Employer and the Participant
shall bear its and his, respective, own legal, accounting, actuarial, and all
other expenses, if any, incurred in connection with the negotiation, drafting,
preparation, review, execution, interpretation, and construction of this
Agreement, including any costs connected with securing any administrative or
judicial rulings (including any Internal Revenue Service private letter
rulings), decisions, or orders construing the prospective, current, or past
effect of this Plan at any time.
7.15 ENTIRE AGREEMENT. This instrument contains the entire
agreement between the parties. It may not be amended or modified orally, but
only by agreement in writing signed by each of the parties.
******************
-12-
<PAGE> 17
IN WITNESS WHEREOF, the Sponsor has caused this Plan to be executed by
its duly authorized representative as of the 2nd day of January, 1995.
UNITED CITIES GAS COMPANY
By: /s/ Shirley M. Hawkins
----------------------------------------
Title: Sr. V.P./Secretary
-------------------------------------
-13-
<PAGE> 1
EXHIBIT 11.01
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF COMMON STOCK EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Common Stock Earnings.............................. $9,935,000 $12,093,000 $12,120,000
Add-Preference Stock Dividends..................... - - 30,000
------------- -------------- --------------
Common Stock Earnings after Conversions............ $9,935,000 $12,093,000 $12,150,000
============= ============== ==============
Average Number of Common Shares Outstanding
During the Period................................ 11,791,556 10,409,040 10,197,400
Add-Conversion of 11 1/2% Preference Stock......... - - -
------------- -------------- --------------
Average Number of Common Shares Outstanding
After Conversions................................ 11,791,556 10,409,040 10,197,400
============= ============== ==============
Common Stock Earnings -
Primary........................................ $0.84 $1.16 $1.19
============= ============== ==============
Fully Diluted.................................. $0.84 $1.16 $1.19
============= ============== ==============
</TABLE>
<PAGE> 1
EXHIBIT 12.01
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
(In thousands, except ratio amounts)
1995 1994 1993 1992 1991
------------ ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Fixed Charges, as defined:
Interest on long-term debt.................... $13,697 $14,026 $14,553 $12,965 $11,111
Amortization of debt discount................. 227 227 220 181 233
----------- ------------ ------------- -------------- --------------
Total...................................... $13,924 $14,253 $14,773 $13,146 $11,344
=========== ============ ============= ============== ==============
Earnings, as defined:
Net income.................................... $9,935 $12,093 $12,150 $10,218 $7,875
Taxes on income............................... 6,970 6,503 5,681 5,171 2,564
Fixed charges, as above....................... 13,924 14,253 14,773 13,146 11,344
----------- ------------ ------------- -------------- --------------
Total............................................ $30,829 $32,849 $32,604 $28,535 $21,783
=========== ============ ============= ============== ==============
Ratio of Consolidated Earnings to Fixed Charges.. 2.21 2.30 2.21 2.17 1.92
=========== ============ ============= ============== ==============
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF UNITED CITIES GAS COMPANY
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION PERCENT OF STOCK
---- ------------- ----------------
<S> <C> <C>
United Cities Gas Storage Company................................... Delaware 100%
UCG Energy Corporation.............................................. Delaware 100%
United Cities Propane Gas of Tennessee, Inc. (wholly-
owned subsidiary of UCG Energy Corporation)....................... Tennessee 100%
UCG Leasing, Inc. (wholly-owned subsidiary
of UCG Energy Corporation)........................................ Georgia 100%
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Annual Report on Form 10-K for the year ended
December 31, 1995 into the Company's previously filed Registration Statements
on Form S-8 for the Company's Employee Stock Purchase Plan (File No.
33-54759), on Form S-3 for the Company's Dividend Reinvestment and Stock
Purchase Plan (File No. 333-01221), on Form S-3 for the Company's shelf
registration (File No. 33-56983) and on Form S-3 for the Company's Customer
Stock Purchase Plan (File No. 33-56799).
ARTHUR ANDERSEN LLP
Nashville, Tennessee,
March 15, 1996
<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, capitalization and retained earnings, capital surplus and common stock,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 287,090
<OTHER-PROPERTY-AND-INVEST> 47,922
<TOTAL-CURRENT-ASSETS> 100,817
<TOTAL-DEFERRED-CHARGES> 24,548
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 460,377
<COMMON> 101,735
<CAPITAL-SURPLUS-PAID-IN> 22,462
<RETAINED-EARNINGS> 21,874
<TOTAL-COMMON-STOCKHOLDERS-EQ> 146,071
0
0
<LONG-TERM-DEBT-NET> 163,160
<SHORT-TERM-NOTES> 32,313
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 9,155
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 109,678
<TOT-CAPITALIZATION-AND-LIAB> 460,377
<GROSS-OPERATING-REVENUE> 271,860
<INCOME-TAX-EXPENSE> 4,050
<OTHER-OPERATING-EXPENSES> 248,421
<TOTAL-OPERATING-EXPENSES> 252,471
<OPERATING-INCOME-LOSS> 19,389
<OTHER-INCOME-NET> 4,845
<INCOME-BEFORE-INTEREST-EXPEN> 24,234
<TOTAL-INTEREST-EXPENSE> 14,299
<NET-INCOME> 9,935
0
<EARNINGS-AVAILABLE-FOR-COMM> 9,935
<COMMON-STOCK-DIVIDENDS> 12,005
<TOTAL-INTEREST-ON-BONDS> 11,978
<CASH-FLOW-OPERATIONS> 25,290
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
