<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
<TABLE>
<CAPTION>
(MARK ONE)
<C> <C>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-1284
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
UNITED CITIES GAS COMPANY
(Exact name of registrant as specified in its charter)
------------------
<TABLE>
<C> <C>
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)
</TABLE>
Registrant's Telephone Number, including area code: (615) 373-5310
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------- ------------------------
<C> <C>
None None
</TABLE>
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)
$303,595,819. (As of February 28, 1997). Excludes shares owned by Directors and
Officers (326,189) 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 13,245,160 shares (As of February 28, 1997)
------------------
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 IDENTIFICATION 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.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. CAPTION PAGE
-------- ------- ----
<S> <C> <C>
PART I
1. Business ..................................................................................... 1
2. Properties ................................................................................... 16
3. Legal Proceedings ............................................................................ 16
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, 1996, Cities supplied natural
gas service to approximately 320,000 customers. In addition to its business of
natural gas distribution, Cities sells and installs gas appliances and performs
certain appliance service work.
Since 1986, Cities has significantly increased its customer base by adding
approximately 166,000 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 Great River Gas Company (May 1989) ........... 17,000
Acquisition of Union Gas System, Inc (December 1989) ........ 65,000
Other acquisitions .......................................... 9,000
Internal growth ............................................. 75,000
--------------
166,000
==============
</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. 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, 1996, the propane operation
served approximately 27,000 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 herein referred to collectively as the "company".
On July 19, 1996, the company and Atmos Energy Corporation (Atmos) entered
into a definitive agreement whereby the company will be merged with and into
Atmos, with Atmos as the surviving corporation. Under the definitive agreement,
one share of Atmos stock will be exchanged for each share of the company's
stock. The transaction is expected to be accounted for as a pooling of
interests. The transaction was approved by the shareholders of the company and
Atmos on November 12, 1996. Pending approval by appropriate regulatory bodies,
the company expects to close the transaction during the second quarter of 1997.
Atmos is based in Dallas, Texas, and currently provides natural gas service to
approximately 673,000 customers in Texas, Colorado, Kansas, Missouri, Louisiana
and Kentucky.
1
<PAGE> 4
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>
1996 1995 1994
------------------- ------------------- -------------------
REVENUES (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Utility ..................................... $353,382 88% $271,860 87% $280,984 86%
-------- -------- -------- -------- -------- --------
Subsidiaries:
UCG Energy Corporation -
Propane Division ........................ 38,373 9% 24,651 8% 20,788 6%
Rental Division ......................... 4,204 1% 5,959 2% 6,449 2%
Utility Services Division ............... 1,325 1% 3,823 1% 11,146 4%
-------- -------- -------- -------- -------- --------
Total UCG Energy Corporation .......... 43,902 11% 34,433 11% 38,383 12%
United Cities Gas Storage Company ......... 5,664 1% 7,443 2% 7,128 2%
-------- -------- -------- -------- -------- --------
Total Subsidiaries .................... 49,566 12% 41,876 13% 45,511 14%
-------- -------- -------- -------- -------- --------
Total Revenues (1) .......................... $402,948 100% $313,736 100% $326,495 100%
======== ======== ======== ======== ======== ========
COMMON STOCK EARNINGS
Utility ..................................... $ 12,791 74% $ 5,745 58% $ 7,817 65%
-------- -------- -------- -------- -------- --------
Subsidiaries:
UCG Energy Corporation -
Propane Division ........................ 1,276 8% 1,123 11% 1,122 9%
Rental Division ......................... 1,237 7% 1,693 17% 2,024 17%
Utility Services Division ............... 1,092 6% 634 6% 604 5%
-------- -------- -------- -------- -------- --------
Total UCG Energy Corporation .......... 3,605 21% 3,450 34% 3,750 31%
United Cities Gas Storage Company ......... 806 5% 740 8% 526 4%
-------- -------- -------- -------- -------- --------
Total Subsidiaries .................... 4,411 26% 4,190 42% 4,276 35%
-------- -------- -------- -------- -------- --------
Total Common Stock Earnings ................. $ 17,202 100% $ 9,935 100% $ 12,093 100%
======== ======== ======== ======== ======== ========
IDENTIFIABLE ASSETS
Utility ..................................... $429,974 84% $389,278 85% $358,364 85%
-------- -------- -------- -------- -------- --------
Subsidiaries:
UCG Energy Corporation .................... 58,583 11% 47,098 10% 39,402 9%
United Cities Gas Storage Company ......... 25,092 5% 24,001 5% 23,434 6%
-------- -------- -------- -------- -------- --------
Total Subsidiaries .................... 83,675 16% 71,099 15% 62,836 15%
-------- -------- -------- -------- -------- --------
Total Identifiable Assets ................... $513,649 100% $460,377 100% $421,200 100%
======== ======== ======== ======== ======== ========
</TABLE>
- -----------
(1) Sales to affiliated companies described under "Subsidiary Operations".
For additional information, see the "Consolidated Statements of Income" for
the years ended December 31, 1996, 1995 and 1994 under Item 8. Financial
Statements and Supplementary Data.
2
<PAGE> 5
UTILITY OPERATIONS
GENERAL
Cities distributes natural gas under regulated rates to approximately
320,000 customers in the states of Tennessee, Kansas, Georgia, Illinois,
Virginia, Missouri, Iowa and South Carolina. Total operating revenues for the
year ended December 31, 1996 were $353,382,000, of which approximately 47% was
derived from residential customers, 24% from industrial customers, 27% from
commercial customers and 2% from other sources. The ten largest customers of
Cities accounted for 5.5% of operating revenues in 1996 and the largest of these
customers accounted for 1.6%. Cities serves a diverse industrial load with
customers engaged in the manufacture or production of asphalt, cars, car parts,
chemicals, electronics, food products, metals, 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 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Virginia/East Tennessee .......... 32% 31% 32%
Georgia/South Carolina ........... 20% 21% 22%
Illinois/Tennessee/Missouri ...... 22% 22% 21%
Kansas/Iowa/Missouri ............. 26% 26% 25%
-------- -------- --------
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 a liquefied
natural gas (LNG) plant and, in some instances, storage contracts with Cities'
suppliers are being utilized by Cities 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. Cities also maximizes its capacity
release revenues by assigning certain of its pipeline transportation and storage
contracts to agents, including WMLLC. Because of the nature of their business,
these agents are able to utilize these contracts for customers not on Cities'
system, thereby resulting in higher capacity release revenues and lower gas
costs to Cities. In addition, several projects have recently been completed and
another project is in the preliminary stage to add additional pipeline suppliers
in several of Cities' operating areas. These projects not only promote
competition among the pipelines, but also provide increased reliability of gas
supply. Adding alternatives provides bargaining power which may decrease Cities'
pipeline capacity costs.
3
<PAGE> 6
Purchased Gas Adjustment (PGA) clauses in effect in the states in which
Cities operates allow Cities to pass through to its customers, subject to an
incentive rate program in Tennessee and prudency and/or administrative reviews
in the other seven states, 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 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 recognized by Cities as a result of
the incentive program were limited to a maximum of $25,000 per month in the plan
year ended March 31, 1996, and limited to a maximum of $600,000 per year in the
plan year ending March 31, 1997. Cities recognized gains related to the
incentive program in Tennessee of $675,000 and $213,000 for fiscal 1996 and
1995, respectively. On March 5, 1997, the Tennessee Court of Appeals (the Court)
issued a decision reversing and remanding the Tennessee Regulatory Authority's
(formerly the Tennessee Public Service Commission) order which approved the
incentive rate program for the plan year ending March 31, 1997. The Court found
a procedural fault in how the Tennessee Regulatory Authority arrived at the
order. At this time, further hearings have not been scheduled. An incentive rate
program similar to the Tennessee program has also been approved in Georgia for
an experimental two-year period and is expected to be effective by the second
quarter of 1997.
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.
4
<PAGE> 7
The Georgia Public Service Commission and the Tennessee Regulatory Authority
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 a decrease in revenues of
$2,612,000 in 1996 and an increase in revenues of $1,030,000 and $2,050,000 in
1995 and 1994, respectively.
On November 11, 1996, Cities filed to increase rates on an annual basis by
$1,234,000 in the state of Illinois. Cities expects that any increase granted
will be effective by the fourth quarter of 1997. Effective December 2, 1996,
Cities received an annual rate increase of $3,160,000 in the state of Georgia.
Cities had filed to increase rates by $5,003,000 on an annual basis. Effective
May 17, 1996, Cities received an annual rate increase of $410,000 in the state
of Iowa. Cities had filed to increase rates by $750,000 on an annual basis.
Included in the rate increase in Iowa was the recovery of $1,787,000 over a
ten-year period related to Cities' agreement with 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 pertaining to a manufactured gas plant site in
Keokuk, Iowa.
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
which is expected by mid-1997.
5
<PAGE> 8
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 appointed by elected by General elected by legislature
Governor and Assembly on approval of merit
General Assembly 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 December 1996 November 1995 November 1994 February 1995
Adjustment
Date of Application May 1996 May 1995 April 1993 August 1994
Annualized Revenue Increase $3,160,000 $2,227,000 ($218,000) $253,000
(Decrease) Authorized
Rate of Return on 10.10% 11.03% (1) 10.261% 10.73%
Investment Authorized
Rate of Return on 11.50% 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.
6
<PAGE> 9
<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 5 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 May 1996
Adjustment
Date of Application December 1989 November 1994 January 1995 December 1995
Annualized Revenue Increase $639,000 $903,000 $2,700,000 $410,000
(Decrease) Authorized $108,000 (1)
Rate of Return on 11.75% 10.58% 10.638% (2) 10.405%
Investment Authorized
Rate of Return on 13.62% 12.15% 12.00% (2) 11.00%
Equity Authorized
</TABLE>
- --------------------------------------------------------------------------------
(1) The court awarded an additional increase in rates which was effective
October 1992.
(2) Because the 1995 rate case was stipulated, the returns on investment and
equity were not agreed upon. These rates represent the last authorized rates.
7
<PAGE> 10
<TABLE>
<CAPTION>
UTILITY OPERATING STATISTICS
AVERAGE NUMBER OF CUSTOMERS(1) 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Residential ........................................................ 276,892 266,532 259,895
Commercial ......................................................... 35,620 34,435 33,861
Industrial Firm .................................................... 404 395 395
Industrial Interruptible ........................................... 233 251 258
--------- --------- ---------
313,149 301,613 294,409
========= ========= =========
ACTUAL NUMBER OF CUSTOMERS AT YEAR END(1) 319,992 307,856 300,929
========= ========= =========
NATURAL GAS THROUGH - PUT (MCF) (IN THOUSANDS)(2)
Residential ........................................................ 25,458 22,901 21,352
Commercial ......................................................... 16,706 15,165 14,116
Industrial Firm .................................................... 7,083 7,324 8,134
Industrial Interruptible ........................................... 11,124 11,920 11,002
--------- --------- ---------
60,371 57,310 54,604
Transported Volumes ................................................ 17,612 17,184 12,574
--------- --------- ---------
Total Through-Put .................................................. 77,983 74,494 67,178
========= ========= =========
REVENUES (IN THOUSANDS)(1)
Residential ........................................................$ 165,922 $ 127,603 $ 129,519
Commercial ......................................................... 95,683 70,967 73,376
Industrial Firm .................................................... 31,876 27,438 33,772
Industrial Interruptible ........................................... 40,925 33,338 35,297
Other .............................................................. 8,411 4,412 1,813
--------- --------- ---------
342,817 263,758 273,777
Transportation ..................................................... 10,565 8,102 7,207
--------- --------- ---------
$ 353,382 $ 271,860 $ 280,984
========= ========= =========
RESIDENTIAL (AVERAGE PER CUSTOMER)
Annual Usage Mcf ................................................... 92 86 82
Annual Revenue .....................................................$ 599 $ 479 $ 498
Revenue Per Mcf ....................................................$ 6.52 $ 5.57 $ 6.07
COMMERCIAL (AVERAGE PER CUSTOMER)
Annual Usage Mcf ................................................... 469 440 417
Annual Revenue .....................................................$ 2,686 $ 2,061 $ 2,167
Revenue Per Mcf ....................................................$ 5.73 $ 4.68 $ 5.20
</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 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Prior year volumes ................................................. 74,494 67,178 68,543
Changes in volumes:
Residential .................................................... 2,557 1,549 (1,703)
Commercial ..................................................... 1,541 1,049 (319)
Industrial Firm ................................................ (241) (810) 625
Industrial Interruptible ....................................... (796) 918 (659)
Transported volumes ............................................ 428 4,610 691
--------- --------- ---------
77,983 74,494 67,178
========= ========= =========
</TABLE>
8
<PAGE> 11
ACQUISITIONS
On June 28, 1996, Monarch Gas Company (Monarch) was merged into the
company. The merger was accounted for as a pooling of interests in which the
company issued 207,366 shares of the company's common stock in exchange for the
common stock of Monarch. In addition, the company entered into five-year
non-compete agreements with the prior owners of Monarch totaling $400,000. The
merger added approximately 2,900 natural gas customers in the Vandalia, Illinos
area. The company did not restate prior years' 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 Georgia Public Service Commission and the Tennessee
Regulatory Authority 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 1996 and
1995.
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 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Appliance Sales ................... $ 788 $ 1,791 $ 2,537
Jobbing and Service ............... 1,201 1,288 1,256
-------- -------- --------
$ 1,989 $ 3,079 $ 3,793
======== ======== ========
</TABLE>
9
<PAGE> 12
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 $5,524,000,
$7,341,000 and $7,037,000 in 1996, 1995 and 1994, 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>
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 2,119,000 gallons.
The following table contains information, as of December 31, 1996, regarding
the number of customers.
<TABLE>
<CAPTION>
SERVICE AREAS CUSTOMERS
<S> <C>
Jackson, TN .......................................... 1,010
Winchester, TN/Manchester, TN ........................ 2,385
Rock Island, TN ...................................... 1,478
Franklin, TN ......................................... 1,377
Murfreesboro, TN ..................................... 1,936
Hartsville, TN ....................................... 1,842
Maryville, TN ........................................ 3,092
Dandridge, TN ........................................ 3,343
Kingston, TN ......................................... 1,525
New Tazewell, TN ..................................... 314
Johnson City, TN ..................................... 5,271
Mountain City, TN/Boone, NC .......................... 3,481
-------
Total ............................................ 27,054
=======
</TABLE>
Effective February 28, 1997, UCPT purchased substantially all of the
propane assets of Harlan LP Gas, Inc., a retail propane distribution company,
and Propane Sales and Service, Inc., a wholesale propane distribution company,
for approximately $2,040,000. In addition, UCPT entered into ten-year
non-compete agreements with the prior owners for $150,000 to be paid over a
ten-year period. This acquisition added approximately 3,100 propane customers in
the Harlan, Kentucky and New Tazewell, Tennessee areas.
Effective September 1, 1996, UCPT purchased substantially all of the
propane assets of Arrow Propane, Inc. for approximately $610,000. In addition,
UCPT entered into a ten-year non-compete agreement with the prior owners for
$50,000. This acquisition added approximately 700 propane customers in the
Woodbury, Tennessee area.
10
<PAGE> 13
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
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.
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.
In 1996, 1995 and 1994, the Propane Division contributed 87%, 72% and 54%,
respectively, of UCG Energy's total revenues. Of UCG Energy's gross properties
at December 31, 1996, approximately 51% 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 10%, 17%, 17%
of UCG Energy's total revenues in 1996, 1995 and 1994, respectively. Included in
the revenues of the Rental Division are affiliated revenues of $3,588,000,
$5,307,000 and $5,827,000 for the years 1996, 1995 and 1994, respectively,
representing rental charges to Cities for transportation equipment and office
facilities. Of UCG Energy's gross properties at December 31, 1996, approximately
49% 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 3% in
1996, 11% in 1995 and 29% in 1994, of UCG Energy's total revenues. Included in
the Utility Services Division's revenues are affiliated revenues of $112,000 and
$701,000 for 1995 and 1994, respectively. These revenues represent purchases by
Cities of energy-related products from the Utility Services Division. There were
no affiliated revenues during 1996. 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.
11
<PAGE> 14
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 WMLLC. 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, 1996, the company employed 1,211 full time employees,
including 115 who are represented by a union. Of the full time employees, 217
are engaged in the operations of the Illinois/Tennessee/Missouri Division, 225
in the Virginia/East Tennessee Division, 204 in the Georgia/South Carolina
Division, 237 in the Kansas/Iowa/Missouri Division, 185 administrative and
supervisory personnel in the corporate office, and 143 in UCG Energy's operating
locations. At December 31, 1996, there were 465 employees participating in the
employee stock purchase plan and 968 employees participating in the company's
401(k) 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,
operations and human resources for the service locations of each division are
handled at the division levels.
12
<PAGE> 15
(Map of Operating Areas)
13
<PAGE> 16
<TABLE>
Natural Gas ILLINOIS/TENNESSEE/MISSOURI DIVISION
<S> <C> <C>
Illinois Tennessee Missouri
- Virden - Union City -Neelyville
- Vandalia - Franklin +
- Salem - Murfreesboro
- Harrisburg - Columbia
- 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 - Woodbury
- Rock Island - Manchester - Winchester - Piney Flats
- Maryville - Morristown - Johnson City
- Mountain City - Kingston - Jackson
- Sevierville - New Tazewell - Dandridge
NORTH CAROLINA KENTUCKY
- Boone - Baxter
Storage
Facilities: NATURAL GAS STORAGE PROPANE BULK STORAGE
- Columbus, GA (LNG) - Morristown, TN
- Barnsley Storage, KY - Winchester, TN
(underground) - Bristol, TN
- Liberty Storage, KS
(underground)
Pipeline
Suppliers - East Tennessee - Columbia Gulf
Natural Gas Co. Transmission Co.
- Southern Natural - Natural Gas Pipeline Co.
Gas Co. of America
- Williams Natural - Panhandle Eastern
Gas Co. Pipe Line Co.
- Transcontinental Gas - Trunkline Gas Co.
Pipe Line Co. - Mississippi River
- Texas Eastern Transmission Corp.
Transmission Corp. - ANR Pipeline Company
- Texas Gas Transmission - Tennessee Gas
Corp. Pipeline Co.
* Corporate Office-Brentwood, Tennessee
+ Division Office
</TABLE>
14
<PAGE> 17
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>
Gene C. Koonce 64 May 1996 President and Chief Executive Officer
Chairman, President and (October 1978-April 1996)
Chief Executive Officer
Thomas R. Blose, Jr. 47 July 1990
Senior Vice President-
Operations and
Engineering
James B. Ford 54 April 1986
Senior Vice President
and Treasurer
Shirley M. Hawkins 57 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 58 April 1983
Senior Vice President-
Gas Supply and Marketing
</TABLE>
15
<PAGE> 18
ITEM 2. PROPERTIES
Cities' properties are located in operating areas as indicated on page 14,
and consist primarily of approximately 7,523 miles of distribution and
transmission mains and approximately 5,059 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 ...................... 29%
Virginia/East Tennessee .......................... 25%
Georgia/South Carolina ........................... 18%
Kansas/Iowa/Missouri ............................. 28%
---------
100%
=========
</TABLE>
The capital budget for the company for 1997 is approximately $35,900,000
(utility, $33,300,000 and non-utility, $2,600,000). Based on information
currently available, which is subject to change, the company anticipates capital
expenditures of approximately $36,000,000 each year in 1998 and 1999. 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 1996 amounted to approximately
$32,767,000 for system upgrading, relocations, and providing new mains, service
lines and metering equipment. Total utility property at December 31, 1996
amounted to $477,832,000.
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>
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
1996 $32,767 3,943 $28,824
</TABLE>
Non-utility property additions during 1995 amounted to approximately
$6,572,000 (UCG Energy, $6,164,000 and UCG Storage, $408,000). The majority of
UCG Energy's 1996 additions are related to rental 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, 1996 amounted to $76,480,000 (UCG Energy, $56,617,000 and UCG
Storage, $19,863,000).
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 in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Environmental Matters," there is
no material litigation involving the company as of December 31, 1996. There are
certain claims which are adequately covered by liability insurance or reserves.
16
<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of shareholders was held on November 12, 1996, to ratify
and approve an Agreement and Plan of Reorganization dated July 19, 1996 as
amended by Amendment No. 1 to Agreement and Plan of Reorganization dated October
3, 1996, by and between United Cities Gas Company and Atmos Energy Corporation,
a Texas Corporation, and approve the Plan of Merger and the Merger of United
Cities Gas Company with and into Atmos Energy Corporation, with Atmos as the
surviving corporation. The results were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
9,445,280 64,096 76,290
</TABLE>
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, 1996
-----------------
<S> <C>
Common Stock, without par value ............................. 7,848
=================
</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>
1996 1995
--------------------------------- ----------------------------------
Dividends Dividends
High Low per share High Low per share
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $18 1/2 $15 3/4 $.255 $16 1/4 $15 1/4 $.255
2nd Quarter $17 $14 3/4 $.255 $16 1/4 $14 1/2 $.255
3rd Quarter $23 $15 $.255 $16 1/2 $14 3/4 $.255
4th Quarter $23 5/8 $20 $.255 $18 3/4 $15 3/4 $.255
</TABLE>
At its regularly scheduled meeting held on February 1, 1997, the Board of
Directors declared a quarterly dividend of $.255 per share, payable March 15,
1997, to all shareholders of record on February 28, 1997. Dividends have been
paid by Cities for the past 166 consecutive quarters.
The Common Stock is entitled to dividends when, as and if declared by the
Board of Directors, subject to various limitations on the declaration or payment
of dividends imposed by the provisions of Cities' Indenture of Mortgage. Under
these provisions, none of the company's retained earnings at December 31, 1996,
was unavailable to pay dividends on the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Utility Operating Revenues ..........................$ 353,382 $ 271,860 $ 280,984 $ 287,507 $ 265,460
========= ========= ========= ========= =========
Net Income/Common Stock Earnings ....................$ 17,202 $ 9,935 $ 12,093 $ 12,120 $ 10,104
========= ========= ========= ========= =========
Net Income/Common Stock Earnings Per Share ..........$ 1.31 $ 0.84 $ 1.16 $ 1.19 $ 1.07
========= ========= ========= ========= =========
Total Assets ........................................$ 513,649 $ 460,377 $ 421,200 $ 401,520 $ 370,150
========= ========= ========= ========= =========
Long-Term Debt ......................................$ 153,859 $ 163,160 $ 144,344 $ 151,843 $ 157,734
========= ========= ========= ========= =========
Cash Dividends Declared Per Common Share ............$ 1.02 $ 1.02 $ 1.005 $ 0.985 $ 0.965
========= ========= ========= ========= =========
</TABLE>
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
United Cities Gas Company (Cities) and its subsidiaries (collectively, the
company) is primarily a distributor of natural and propane gas serving
approximately 340,000 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.
On July 19, 1996, the company and Atmos Energy Corporation (Atmos) entered
into a definitive agreement whereby the company will be merged with and into
Atmos, with Atmos as the surviving corporation. Under the definitive agreement,
one share of Atmos stock will be exchanged for each share of the company's
stock. The transaction is expected to be accounted for as a pooling of
interests. The transaction was approved by the shareholders of the company and
Atmos on November 12, 1996. Pending approval by appropriate regulatory bodies,
the company expects to close the transaction during the second quarter of 1997.
Atmos is based in Dallas, Texas, and currently provides natural gas service to
approximately 673,000 customers in Texas, Colorado, Kansas, Missouri, Louisiana
and Kentucky.
LIQUIDITY AND CAPITAL RESOURCES
Total cash provided by operations of the company totaled $27,700,000,
$25,300,000 and $27,500,000 in 1996, 1995 and 1994, 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
$39,300,000, $40,100,000 and $35,100,000 in 1996, 1995 and 1994, 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
$33,300,000 for the utility operations and $2,600,000 for the non-utility
operations are budgeted for 1997. Total capital expenditures for 1998 and 1999
are expected to be approximately $36,000,000 each year, based on information
currently available, which is subject to change.
Because 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, 1996, the company had
total short-term lines of credit of $105,000,000 in the form of master and
banker's acceptance notes bearing interest primarily at the lesser of prime or a
negotiated rate during the term of each borrowing. Under these arrangements,
$65,688,000 in short-term debt was outstanding at December 31, 1996.
The financing activities for 1996, 1995 and 1994 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
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
$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 in 1995 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 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 1996, 1995 and 1994,
77,914, 166,609 and 147,148 shares of common stock, respectively, were issued
under the plan resulting in net proceeds to the company of approximately
$1,218,000, $2,457,000 and $2,099,000, respectively.
In June 1996, in connection with the acquisition of Monarch Gas Company
(Monarch), 207,366 shares of the company's common stock were exchanged for the
common stock of Monarch. 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. (WMLLC) by UCG Energy.
UCG Energy and Woodward Marketing, Inc.(WMI), sole shareholders of WMLLC,
act as guarantors of a $12,500,000 credit facility for WMLLC with a certain
bank. UCG Energy's portion of the amount outstanding on this credit facility at
December 31, 1996, was $607,000. UCG Energy and WMI also act as guarantors on
certain purchases of natural gas and transportation services from suppliers by
WMLLC. UCG Energy's portion of these outstanding obligations amounted to
$9,437,000 at December 31, 1996.
In 1997, 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 and short-term borrowings. At December 31, 1996, the company had
bondable property to support a first mortgage bond issuance of approximately
$75,200,000.
In connection with the pending merger of the company and Atmos, the company
has requested certain amendments to the Indenture of Mortgage dated July 15,
1959. The company currently is in negotiations with its bondholders and expects
approval of requested amendments. If any bondholder does not approve the
requested amendments the company could experience an event of default upon the
merger. However, in most cases the company has the option of redeeming, in some
cases at a premium, that portion of outstanding first mortgage bonds.
REGULATORY MATTERS
On November 11, 1996, Cities filed to increase rates on an annual basis by
$1,234,000 in the state of Illinois. Cities expects that any increase granted
will be effective by the fourth quarter of 1997. Effective December 2, 1996,
Cities received an annual rate increase of $3,160,000 in the state of Georgia.
Cities had filed to increase rates by $5,003,000 on an annual basis. Effective
May 17, 1996, Cities received an annual rate increase of $410,000 in the state
of Iowa. Cities had filed to increase rates by $750,000 on an annual basis.
Included in the rate increase in Iowa was the recovery of $1,787,000 over a
ten-year period related to Cities' agreement with 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 pertaining to a manufactured gas plant site in
Keokuk, Iowa.
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.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
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
which is expected by mid-1997.
The Georgia Public Service Commission and the Tennessee Regulatory
Authority (formerly the Tennessee Public Service Commission) 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 a decrease in revenues of $2,612,000 in
1996 and an increase in revenues of $1,030,000 and $2,050,000 in 1995 and 1994,
respectively.
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 recognized by
Cities as a result of the incentive program were limited to a maximum of $25,000
per month in the plan year ended March 31, 1996, and limited to a maximum of
$600,000 per year in the plan year ending March 31, 1997. Cities recognized
gains related to the incentive program in Tennessee of $675,000 and $213,000 for
fiscal 1996 and 1995, respectively. On March 5, 1997, the Tennessee Court of
Appeals (the Court) issued a decision reversing and remanding the Tennessee
Regulatory Authority's order which approved the incentive rate program for the
plan year ending March 31, 1997. The Court found a procedural fault in how the
Tennessee Regulatory Authority arrived at the order. At this time, further
hearings have not been scheduled. An incentive rate program similar to the
Tennessee program has also been approved in Georgia for an experimental two-year
period and is expected to be effective by the second quarter of
1997.
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 residual
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
such operations were being conducted. Under current environmental protection
laws and regulations, Cities may be responsible for response action with respect
to such materials, if response action is necessary.
In June 1995, Cities entered into an agreement to pay $1,787,000 to 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, 1996, Cities had $1,072,000 accrued for
its remaining liability related to the agreement. This amount is to be paid in
equal annual payments over each of the next three years. Cities deferred the
agreement amount of $1,787,000 and was granted recovery over a ten-year period
in the May 1996 Iowa rate increase.
Cities owns former manufactured gas plant sites in Johnson City and
Bristol, Tennessee and Hannibal, Missouri. Cities and the Tennessee Department
of Environment and Conservation entered into a consent order effective January
23, 1997, for the purpose of facilitating the investigation, removal and
remediation of the Johnson City site. Cities began the implementation of the
consent order in the first quarter of 1997. Cities is unaware of any information
which suggests that the Bristol site gives rise to a present health or
environmental risk as a result of the manufactured gas process or that any
response action will be necessary. The Missouri Department of Natural Resources
(MDNR) conducted a site reconnaissance and sampling at the Hannibal site. The
most recent MDNR report received concludes that hazardous substances and
hazardous wastes are present on site, and that a release of hazardous substances
to soils has occurred; however, the risk of human exposure appears to be
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
minimal. Additional site work is likely. As of December 31, 1996, Cities had
incurred and deferred for recovery $309,000, including $258,000 related to an
insurance recoverability study, and accrued and deferred for recovery an
additional $750,000 associated with the preliminary survey and invasive study of
these three sites. The Tennessee Regulatory Authority 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, Cities is
required to upgrade or remove certain underground storage tanks (USTs) situated
in Tennessee. As of December 31, 1996, Cities had identified a small number of
USTs in this category in Tennessee and had incurred and deferred for recovery
$96,000 and, based on available current information, accrued and deferred for
recovery an additional $70,000 for the upgrade or removal of these USTs. The
Tennessee Regulatory Authority 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 certain of the UST sites in Tennessee.
In October 1995, Cities received two Notices of Violation (NOVs) from the
Tennessee Department of Environment and Conservation (TDEC) concerning historic
releases from a UST in Kingsport, Tennessee. This UST was 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 TDEC that Cities is not a
responsible party for any environmental contamination at the site. Cities does
not anticipate incurring any response action costs at this site.
The Kansas Department of Health and Environment (KDHE) identified the need
to investigate gas industry activities which utilize mercury equipment in
Kansas. Cities and the KDHE have signed a Consent Order for the investigation
and possible response action for mercury contamination at any gas pipeline site
which is identified as exceeding the KDHE's established acceptable concentration
levels. As of December 31, 1996, Cities had identified approximately 720 meter
sites where mercury may have been used and had incurred and deferred for
recovery $62,000 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. 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.
Cities addresses other environmental matters from time to time in the
regular and ordinary course of its business. 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.
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
ACQUISITIONS
Effective February 28, 1997, UCPT purchased substantially all of the
propane assets of Harlan LP Gas, Inc., a retail propane distribution company,
and Propane Sales and Service, Inc., a wholesale propane distribution company,
for approximately $2,040,000. In addition, UCPT entered into ten-year
non-compete agreements with the prior owners for $150,000 to be paid over a
ten-year period. This acquisition added approximately 3,100 propane customers in
the Harlan, Kentucky and New Tazewell, Tennessee areas.
Effective September 1, 1996, UCPT purchased substantially all of the
propane assets of Arrow Propane, Inc. for approximately $610,000. In addition,
UCPT entered into a ten-year non-compete agreement with the prior owners for
$50,000. This acquisition added approximately 700 propane customers in the
Woodbury, Tennessee area.
On June 28, 1996, Monarch Gas Company (Monarch) was merged into the
company. The merger was accounted for as a pooling of interests in which the
company issued 207,366 shares of the company's common stock in exchange for the
common stock of Monarch. In addition, the company entered into five-year
non-compete agreements with the prior owners of Monarch totaling $400,000. The
merger added approximately 2,900 natural gas customers in the Vandalia, Illinois
area. The company did not restate prior years' 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.
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.
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.
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has approved a statement of
financial accounting standards effective for the fiscal years ending after
December 15, 1997, which establishes standards for computing and presenting
earnings per share and also establishes standards with respect to disclosure of
information about an entity's capital structure. The company is required to
adopt the provisions of the statement in the first quarter of 1997 and does not
expect the adoption thereof to have a material effect on the company's results
of operations.
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 adopted SFAS 123 effective
January 1, 1996. Because of the limited nature of the company's stock-based
compensation plans, the adoption of SFAS 123 was immaterial.
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 adopted SFAS 121 effective January 1, 1996, and because of the current
regulatory structure in which Cities operates, the adoption did not have a
material effect on the results of operations, financial condition or cash flows
of the company.
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. Settlement of the two
issues was made at the IRS appeals office in July 1996, with no material effect
on the results of operations, financial condition or cash flows of the company.
CONTINGENCIES
The company is involved in certain 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 results of operations, financial condition or cash flows of the
company.
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 the incentive rate program in
Tennessee and prudency and/or administrative reviews by the commissions in the
other seven states.
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
RESULTS OF OPERATIONS
CONSOLIDATED NET INCOME AND DIVIDENDS
The company had net income of $17,202,000 or $1.31 per share in 1996, an
increase of $7,267,000 or $.47 per share from 1995 net income. The increase was
primarily a result of an increase in operating margin, offset slightly by an
increase in operating expenses. Net income of $9,935,000 in 1995 or $.84 per
share represented a decrease of $2,158,000 or $.32 per share from 1994 net
income. The decrease was primarily a result of increased operating expenses,
offset slightly by an increase in operating margin. The company's annual
dividend paid per share was $1.02 in 1996.
UTILITY OPERATING MARGIN
The operating margin of $126,016,000 in 1996 represents an increase of
$13,332,000 over the 1995 margin of $112,684,000. The increase in operating
margin was primarily a result of colder weather during 1996 as compared to 1995,
rate increases granted during 1996 and late-1995 in several states, the
acquisition of Monarch Gas Company, and volumes sold to new residential and
commercial customers. The operating margin increased $4,668,000 from 1994 to
1995 primarily as 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.
UTILITY OPERATING EXPENSES
Operation and maintenance expenses increased $880,000 from $61,826,000 in
1995 to $62,706,000 in 1996. The increase is primarily a result of an increase
in payroll and related benefits, increased distribution expenses and increased
leasing expense on computer related equipment. In 1996, the company began
leasing computer related equipment as opposed to purchasing the equipment as was
done in prior years. The effect of these increases in operation and maintenance
expenses from 1995 to 1996 was somewhat offset by a decrease in certain
administrative expenses primarily attributable to the Virginia/East Tennessee
Division consolidation that occurred in the third quarter of 1995. Five of the
company's local operations in this division were consolidated into two new
operating centers. As a result, costs of approximately $900,000 ($550,000 after
income taxes) related to early retirement and severance programs and employee
relocation expenses were recorded in September 1995. In addition, outside
services expense decreased from 1995 to 1996. Outside services expense for 1995
included incremental expenses related to addressing labor and personnel related
activities, strategic planning and the IRS audit.
Operations and maintenance expenses increased $4,522,000 from $57,304,000
in 1994 to $61,826,000 in 1995. The increase is primarily a result of increased
payroll and related benefits, the Virginia/East Tennessee Division consolidation
in 1995 and increased outside services expense.
Depreciation and amortization expense increased $1,496,000 in 1996 and
$1,185,000 in 1995 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 made in 1995 to true-up current
and deferred income taxes and provide for permanent differences. Other taxes
increased $290,000 from 1995 to 1996 primarily as a result of franchise taxes on
additional revenues. Other taxes increased $1,561,000 from 1994 to 1995
primarily due to property taxes on additional plant in service.
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
OTHER UTILITY INCOME (EXPENSE), NET OF TAX
Other utility income (expense), net of tax decreased $191,000 from income
of $655,000 in 1995 to $464,000 in 1996. 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 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.
UTILITY INTEREST EXPENSE
Interest expense increased from $14,299,000 in 1995 to $14,760,000 in 1996.
Interest on long-term debt increased $739,000 as a result of interest on the
medium-term notes issued in late-1995, slightly offset by the retirement of
other long-term debt. Other interest expense decreased $278,000 as a result of
lower outstanding balances of short-term debt and other miscellaneous
liabilities during 1996. Other interest expense in 1995 was impacted 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 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 the $349,000
reduction to interest expense in 1995 related to the capitalization of the debt
portion of the AFUDC of the twenty-eight mile main in Middle Tennessee.
SUBSIDIARY OPERATIONS
Subsidiary operations contributed 25.6%, 42.2% and 35.4% of the company's
net income in 1996, 1995 and 1994, respectively. The following is a discussion
of the results of operations of the company's subsidiaries, UCG Energy
Corporation and United Cities Gas Storage Company.
UCG ENERGY CORPORATION
Revenues increased from $34,433,000 in 1995 to $43,902,000 in 1996.
Revenues in the Utility Services Division decreased $2,498,000 as a result of
the transfer of certain natural gas contracts to WMLLC. The Propane Division's
revenues increased $13,722,000 due to increased retail and wholesale volumes
sold and increased transport revenues, both due to colder weather in 1996 as
compared to 1995, and the acquisitions of Arrow Propane, Inc. in September 1996,
Duncan Gas Service in January 1996 and Transpro South, Inc. in May 1995. The
Rental Division's revenues decreased $1,755,000 due to the elimination of rental
revenues related to the transfer of certain rental units to Cities.
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 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 in the Propane Division generated by
additional wholesale and retail volumes sold resulting from the acquisitions of
Transpro South, Inc. in May 1995, Harrell Propane, Inc. in January 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.
26
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
Operating expenses increased from $25,625,000 in 1995 to $35,947,000 in
1996. Expenses of the Utility Services Division decreased $2,537,000 as a result
of decreased cost of sales due to decreased gas brokerage activities. Expenses
increased $12,766,000 in the Propane Division due to a combination of the cost
of increased propane volumes sold as well as increased administrative and
general expenses. These increases were the result of colder weather in 1996 as
compared to 1995, and the acquisitions of Arrow Propane, Inc., Duncan Gas
Service and Transpro South, Inc. Expenses increased $93,000 from 1995 to 1996 in
the Rental Division.
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.
Interest expense increased from $1,192,000 in 1995 to $1,366,000 in 1996
due to interest payments associated with both the long-term financing of a 1996
acquisition and short-term borrowings outstanding at the end of 1995 which were
converted to long-term debt in 1996 in the Propane Division. 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.
Depreciation and amortization expense decreased from $4,378,000 in 1995 to
$3,820,000 in 1996. The decrease was due to the elimination of depreciation
expense on certain rental units in the Rental Division which were transferred to
Cities at the end of 1995. This decrease was partially offset by depreciation
expense on additional plant and equipment in the Propane Division. 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.
Other income of UCG Energy increased from $2,330,000 in 1995 to $3,043,000
in 1996. Investment income from WMLLC in the Utility Services Division increased
$643,000 from $1,354,000 in 1995 to $1,997,000 in 1996. Also contributing to the
increase in other income was additional income from investments in oil and
natural gas exploration and production projects in the Utility Services
Division. 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.
Net income for UCG Energy was $3,605,000, $3,450,000 and $3,750,000 in
1996, 1995 and 1994, respectively.
UNITED CITIES GAS STORAGE COMPANY
United Cities Gas Storage Company's net income was $806,000, $740,000 and
$526,000 in 1996, 1995 and 1994, respectively. The increase in net income from
1995 to 1996 was primarily a result of decreased interest expense resulting from
the retirement of long-term debt outstanding. The increase in net income from
1994 to 1995 was primarily a result of increased revenues for storage services
provided primarily to the utility company and a decrease in operating expenses
other than gas cost.
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, 1996, 1995 and 1994 ..................... 30
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ................. 31
Consolidated Balance Sheets as of December 31, 1996 and 1995 ............................................... 32
Consolidated Statements of Capitalization as of December 31, 1996 and 1995 ................................. 33
Consolidated Statements of Retained Earnings, Capital Surplus and Common Stock for the
years ended December 31, 1996, 1995 and 1994 ............................................................. 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 March 31, 1997.
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
<TABLE>
<CAPTION>
(2) Financial Statement Schedules: PAGE
----
<S> <C>
Report of Independent Public Accountants ..................................................... 53
Schedule
Number
---------
I Condensed Financial Information of Registrant ................................... 54
II Valuation and Qualifying Accounts ............................................... 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 (filed
with the Registrant's. Annual Report on
Form 10-K for the year ended December 31,
1995, and incorporated herein by
reference).
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, (filed with
the Registrant's Annual Report on Form
10-K for the year ended December 31,
1995, and incorporated herein by
reference).
(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, 1996:
1. Form 8-K, Item 5 dated November 7, 1996.
2. Form 8-K, Item 5 dated November 18, 1996.
3. Form 8-K, Item 5 dated December 10, 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
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
(In Thousands, except per share data)
<S> <C> <C> <C>
UTILITY OPERATING REVENUES ............................ $ 353,382 $ 271,860 $ 280,984
Natural gas cost ................................. 227,366 159,176 172,968
- ----------------------------------------------------------------------------------------------
UTILITY OPERATING MARGIN .............................. 126,016 112,684 108,016
- ----------------------------------------------------------------------------------------------
OTHER UTILITY OPERATING EXPENSES:
Operations ....................................... 56,073 55,426 51,299
Maintenance ...................................... 6,633 6,400 6,005
Depreciation and amortization .................... 16,615 15,119 13,934
Federal and state income taxes ................... 7,018 4,050 3,873
Other taxes ...................................... 12,590 12,300 10,739
- ----------------------------------------------------------------------------------------------
Total other utility operating expenses ...... 98,929 93,295 85,850
- ----------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME .............................. 27,087 19,389 22,166
OTHER UTILITY INCOME (EXPENSE), NET OF TAX ............ 464 655 (262)
- ----------------------------------------------------------------------------------------------
27,551 20,044 21,904
- ----------------------------------------------------------------------------------------------
UTILITY INTEREST EXPENSE:
Interest on long-term debt ....................... 12,772 12,033 12,350
Other interest expense ........................... 1,988 2,266 1,737
- ----------------------------------------------------------------------------------------------
Total utility interest expense .............. 14,760 14,299 14,087
- ----------------------------------------------------------------------------------------------
UTILITY INCOME ........................................ 12,791 5,745 7,817
- ----------------------------------------------------------------------------------------------
OTHER INCOME:
Operations of UCG Energy Corporation--
Revenues .................................... 43,902 34,433 38,383
Operating expenses .......................... (35,947) (25,625) (28,713)
Interest expense ............................ (1,366) (1,192) (773)
Depreciation and amortization ............... (3,820) (4,378) (3,580)
Other income ................................ 3,043 2,330 727
Federal and state income taxes .............. (2,207) (2,118) (2,294)
- ----------------------------------------------------------------------------------------------
3,605 3,450 3,750
- ----------------------------------------------------------------------------------------------
Operations of UCG Storage Company--
Revenues .................................... 5,664 7,443 7,128
Operating expenses .......................... (3,114) (4,905) (4,952)
Interest expense ............................ (841) (965) (948)
Depreciation and amortization ............... (394) (368) (366)
Federal and state income taxes .............. (509) (465) (336)
- ----------------------------------------------------------------------------------------------
806 740 526
- ----------------------------------------------------------------------------------------------
NET INCOME ............................................ $ 17,202 $ 9,935 $ 12,093
==============================================================================================
NET INCOME PER SHARE .................................. $ 1.31 $ .84 $ 1.16
==============================================================================================
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ........... 13,086 11,792 10,409
==============================================================================================
COMMON STOCK DIVIDENDS PER SHARE ...................... $ 1.02 $ 1.02 $ 1.005
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ................................................................ $ 17,202 $ 9,935 $ 12,093
- ----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................ 20,829 19,865 17,880
Deferred taxes ....................................................... 1,578 1,780 1,301
Investment tax credits, net .......................................... (362) (364) (370)
Investment income from Woodward Marketing, L.L.C ..................... (1,997) (1,354) --
Changes in current assets and current liabilities:
Receivables ..................................................... (14,416) (11,187) 7,032
Materials and supplies .......................................... (508) 266 193
Gas in storage .................................................. (12,055) 9,808 (468)
Gas costs to be billed in the future ............................ 2,592 244 (7,911)
Prepayments and other ........................................... (1,359) 18 1,007
Accounts payable ................................................ 16,038 144 (8,437)
Customer deposits and advance payments .......................... (1,201) (2,095) 2,190
Accrued interest ................................................ (133) 267 (1,112)
Supplier refunds due customers .................................. (5,653) 1,013 1,227
Accrued taxes ................................................... 6,524 (1,955) 2,489
Other, net ...................................................... 652 (1,095) 409
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments .......................................... 10,529 15,355 15,430
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............. 27,731 25,290 27,523
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property--utility ............................................ (32,767) (35,160) (30,888)
Additions to property--non-utility ........................................ (6,572) (4,926) (4,228)
Proceeds from (investment in) Woodward Marketing, L.L.C ................... 795 (832) --
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................. (38,544) (40,918) (35,116)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net ................................................ 33,375 (13,875) 23,325
Proceeds from issuance of long-term debt .................................. -- 27,000 --
Proceeds from issuance of common stock .................................... 2,640 23,314 3,262
Long-term debt retirements ................................................ (13,734) (6,347) (7,833)
Dividends paid ............................................................ (11,062) (10,206) (9,215)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............. 11,219 19,886 9,539
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY INVESTMENTS ................................. 406 4,258 1,946
CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF YEAR ............................ 7,002 2,744 798
- ----------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY INVESTMENTS AT END OF YEAR .................................. $ 7,408 $ 7,002 $ 2,744
======================================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest, net of amounts capitalized ...................................... $ 17,061 $ 16,164 $ 16,946
======================================================================================================================
Income taxes .............................................................. $ 7,883 $ 8,623 $ 3,720
======================================================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Dividends reinvested ...................................................... $ 2,181 $ 1,799 $ 1,254
======================================================================================================================
Debt incurred to acquire assets of Harrell Propane, Inc. .................. $ -- $ 1,250 $ --
======================================================================================================================
Debt incurred to acquire assets of Duncan Gas Service ..................... $ 2,957 $ -- $ --
======================================================================================================================
Common stock issued for investment in Woodward Marketing, L.L.C ........... $ -- $ 5,000 $ --
======================================================================================================================
Increase in common stock equity due to acquisition of Monarch Gas Co. ..... $ 2,433 $ -- $ --
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
31
<PAGE> 34
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
As of December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
ASSETS
UTILITY PLANT:
<S> <C> <C>
Plant in service, at cost ...................................................... $ 477,832 $ 445,058
Less--accumulated depreciation ............................................ 175,156 157,968
- ---------------------------------------------------------------------------------------------------------------
302,676 287,090
- ----------------------------------------------------------------------------------------------------------------
NON-UTILITY PROPERTY:
Property, plant and equipment .................................................. 76,480 67,423
Less--accumulated depreciation ............................................ 21,536 19,501
- ----------------------------------------------------------------------------------------------------------------
54,944 47,922
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and temporary investments ................................................. 7,408 7,002
Receivables, less allowances for uncollectible accounts of $1,746 in 1996
and $1,352 in 1995 ........................................................ 68,933 54,517
Materials and supplies ......................................................... 5,422 4,914
Gas in storage ................................................................. 28,698 16,643
Gas costs to be billed in the future ........................................... 13,121 15,713
Prepayments and other .......................................................... 3,387 2,028
- ----------------------------------------------------------------------------------------------------------------
126,969 100,817
- ----------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES:
Unamortized debt discount and expense, net ..................................... 2,775 2,896
Non-compete agreements, net .................................................... 3,183 3,259
Investment in Woodward Marketing, L.L.C., net .................................. 8,062 7,012
Other deferred charges ......................................................... 15,040 11,381
- ----------------------------------------------------------------------------------------------------------------
29,060 24,548
- ----------------------------------------------------------------------------------------------------------------
$ 513,649 $ 460,377
===============================================================================================================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock equity ............................................................ $ 157,284 $ 146,071
Long-term debt ................................................................. 153,859 163,160
- ----------------------------------------------------------------------------------------------------------------
311,143 309,231
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term obligations ....................................... 7,679 9,155
Notes payable .................................................................. 65,688 32,313
Accounts payable for gas costs ................................................. 39,486 24,433
Other accounts payable ......................................................... 5,869 4,884
Accrued taxes .................................................................. 10,944 4,420
Customer deposits and advance payments ......................................... 10,877 12,078
Accrued interest ............................................................... 3,479 3,612
Supplier refunds due customers ................................................. 801 6,454
Other .......................................................................... 11,514 8,580
- ----------------------------------------------------------------------------------------------------------------
156,337 105,929
- ----------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS:
Accumulated deferred income tax ................................................ 33,017 31,599
Deferred investment tax credits ................................................ 3,936 4,281
Income taxes due customers ..................................................... 4,943 5,190
Other .......................................................................... 4,273 4,147
- ----------------------------------------------------------------------------------------------------------------
46,169 45,217
- ----------------------------------------------------------------------------------------------------------------
$ 513,649 $ 460,377
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
32
<PAGE> 35
CONSOLIDATED STATEMENTS OF CAPITALIZATION
- -------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
As of December 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands, except share amounts)
<S> <C> <C> <C> <C>
COMMON STOCK EQUITY:
Common Stock without par value, authorized
40,000,000 shares, outstanding 13,220,538 in 1996
and 12,727,280 in 1995 ..................................... $ 108,056 $ 101,735
Capital surplus ................................................. 22,462 22,462
Retained earnings ............................................... 26,766 21,874
- ---------------------------------------------------------------------------------------------------------------------------
Total common stock equity .................................. 157,284 50.6% 146,071 47.2%
- ---------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT:
First mortgage bonds--
Series N, 8.69%, due 2000 .................................. 7,000 10,000
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
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 ............................ 115,000 125,000
Medium term notes, 6.20% through 6.67%,
due 2000 through 2025 ........................................... 22,000 22,000
Senior secured storage term notes, 7.45%,
due in installments through 2007 ................................ 9,353 9,926
Rental property adjustable rate term notes
due in installments through 1999 ................................ 4,497 5,691
Rental property fixed rate term note,
7.9%, due in installments through 2013 .......................... 2,161 2,292
Propane term note, 6.99%, due in installments
through 2002 .................................................... 4,500 5,000
Other long-term obligations due in installments
through 2004 .................................................... 4,027 2,406
- ---------------------------------------------------------------------------------------------------------------------------
161,538 172,315
Less--current requirements ....................................... 7,679 9,155
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt, excluding amounts due
within one year ....................................... 153,859 49.4% 163,160 52.8%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION ................................................. $ 311,143 100.0% $ 309,231 100.0%
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
33
<PAGE> 36
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, CAPITAL SURPLUS AND COMMON STOCK
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
RETAINED CAPITAL COMMON
(In Thousands, except share amounts) EARNINGS SURPLUS STOCK
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1993 ............................................................ $ 22,320 $ 22,462 $ 67,106
Add-net income .................................................................. 12,093 - -
Common stock activity:
Sold under employee stock purchase, dividend reinvestment,
long-term stock and customer stock purchase 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-net income .................................................................. 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
ADJUSTMENTS FOR POOLING OF INTERESTS (207,366 SHARES) ................................ 933 - 1,500
- -----------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995, AS RESTATED ............................................... 22,807 22,462 103,235
Add-net income .................................................................. 17,202 - -
Common stock activity:
Sold under employee stock purchase, dividend reinvestment,
long-term stock, non-employee director and customer stock
purchase plans (285,892 shares) ....................................... - - 4,821
- -----------------------------------------------------------------------------------------------------------------------
40,009 22,462 108,056
Deduct-common stock dividends ................................................... 13,243 - -
- -----------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 ............................................................ $ 26,766 $ 22,462 $108,056
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
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
$9,112,000, $12,760,000 and $13,565,000 for the years 1996, 1995 and 1994,
respectively.
The affiliated revenues of UCG Energy represent rental charges to Cities
for transportation equipment and office facilities, and in 1995 and 1994, the
affiliated revenues also included 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 do 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>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt portion of the cost of funds ................... 5.4% 6.5% 5.7%
Equity portion of the cost of funds ................. 4.7% 4.3% 3.5%
- --------------------------------------------------------------------------------
Total ............................................... 10.1% 10.8% 9.2%
================================================================================
</TABLE>
The debt portion of the cost of funds is reflected as a credit to "Other
interest expense" in the amounts of $258,000, $489,000 and $183,000 in 1996,
1995 and 1994, respectively. The equity portion of the cost of funds is
reflected in "Other utility income (expense), net of tax" in the amounts of
$186,000, $256,000 and $111,000 in 1996, 1995 and 1994, respectively.
DEPRECIATION AND MAINTENANCE-
Depreciation is provided in the accounts based on straight-line composite
rates of 3.5%, 3.6% and 3.4% of the cost of depreciable utility plant in service
in 1996, 1995 and 1994, 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.
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
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 49 operating areas in the states of Tennessee, Kansas, Georgia,
Virginia, Illinois, Missouri, Iowa, South Carolina, North Carolina and Kentucky.
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 Public Service Commission and the Tennessee Regulatory
Authority (formerly the Tennessee Public Service Commission) 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 a decrease in revenues of
$2,612,000 in 1996 and an increase in revenues of $1,030,000 and $2,050,000 in
1995 and 1994, 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 were limited to a maximum of $25,000
per month in the plan year ended March 31, 1996, and limited to a maximum of
$600,000 per year in the plan year ending March 31, 1997. Cities recognized
gains related to the incentive program in Tennessee of $675,000 and $213,000 for
fiscal 1996 and 1995, respectively. An incentive rate program similar to the
Tennessee program has also been approved in Georgia for an experimental two-year
period and is expected to be effective by the second quarter of 1997.
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, 1996 and
1995, $5,004,000 and $3,799,000, respectively, of the total gas in storage was
valued on the LIFO basis. In accordance with Cities' PGA clauses, the
liquidation of a LIFO layer would be reflected in subsequent gas adjustments in
customer rates and does not affect the results of operations.
The categories of current gas in storage are as follows:
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------
Natural gas stored underground ..............................$ 7,674 $ 4,784
Liquefied natural gas ....................................... 1,550 835
Propane ..................................................... 1,539 830
Natural gas stored by pipeline suppliers .................... 17,935 10,194
- --------------------------------------------------------------------------------
Total gas in storage ........................................$ 28,698 $ 16,643
================================================================================
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.
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
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 $18,200,000 and
$29,100,000 at December 31, 1996 and 1995, 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.
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 adopted SFAS 121
effective January 1, 1996, and because of the current regulatory structure in
which Cities operates, the adoption did not have a material effect on the
results of operations, financial condition or cash flows of the company.
RECLASSIFICATIONS-
Certain reclassifications were made conforming prior years' financial
statements with 1996 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 by mid-1997.
EMPLOYEE BENEFIT PLANS
PENSION-
The company has a trusteed noncontributory defined benefit pension plan
which covers substantially all 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>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average discount rate ................... 7.50% 7.50% 8.00%
Rate of increase in future compensation levels ... 5.50% 5.50% 5.50%
Expected long-term rate of return ................ 9.00% 9.00% 9.00%
- --------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
Net periodic pension expense for the plans in fiscal 1996, 1995 and 1994
consists of the following components:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Service cost ............................... $ 3,268 $ 3,451 $ 3,129
Interest cost .............................. 4,890 4,296 3,857
Actual return on plan assets ............... (7,937) (10,365) (1,067)
Net amortization and other ................. 2,441 5,772 (3,591)
- --------------------------------------------------------------------------------
Net periodic pension expense ............... $ 2,662 $ 3,154 $ 2,328
================================================================================
</TABLE>
A reconciliation of the funded status of the plans to the amounts
recognized in the company's consolidated financial statements at December 31,
1996 and 1995, is presented below:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Vested benefit obligation ............................................ $ 46,974 $ 49,048
Nonvested benefit obligation ......................................... 8,719 5,857
- ---------------------------------------------------------------------------------------------
Accumulated benefit obligation ....................................... 55,693 54,905
Projected salary increases ........................................... 15,866 11,596
- ---------------------------------------------------------------------------------------------
Projected benefit obligation ......................................... 71,559 66,501
Plan assets at fair value ............................................ 71,978 63,732
- ---------------------------------------------------------------------------------------------
Funded status ........................................................ (419) 2,769
Unrecognized net obligation being recognized over participants'
average remaining service period ................................ (1,616) (1,800)
Unrecognized net transition liability ................................ (191) (250)
Unrecognized net gain (loss) ......................................... 1,939 (231)
Adjustment to recognize minimum liability ............................ 9 461
- ---------------------------------------------------------------------------------------------
Accrued (prepaid) pension expense .................................... $ (278) $ 949
=============================================================================================
</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.
POSTRETIREMENT BENEFITS AND OTHER-
The company provides postretirement health care 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. Net periodic postretirement benefit expense for the company's plan in
1996, 1995 and 1994 consists of the following components:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost ................................... $ 153 $ 120 $ 196
Interest cost .................................. 1,037 1,051 894
Actual return on plan assets ................... (212) (107) 13
Amortization of transition costs ............... 445 445 445
Other .......................................... 233 182 101
- --------------------------------------------------------------------------------
Net periodic postretirement benefit expense .... $ 1,656 $ 1,691 $ 1,649
================================================================================
</TABLE>
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
A reconciliation of the funded status of the plan to the amounts
recognized in the company's consolidated financial statements at December 31,
1996 and 1995 is presented below:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ........................................................ $ 12,834 $ 10,903
Fully eligible active plan participants ......................... 1,015 2,302
Other active plan participants .................................. 2,033 988
- ---------------------------------------------------------------------------------------------
15,882 14,193
Plan assets at fair value, primarily listed stocks and bonds ......... 3,715 2,703
- ---------------------------------------------------------------------------------------------
Accumulated obligation in excess of plan assets ...................... 12,167 11,490
Unrecognized net transition obligation ............................... (7,115) (7,559)
Unrecognized net loss ................................................ (5,278) (4,019)
- ---------------------------------------------------------------------------------------------
Prepaid postretirement benefit expense ............................... $ (226) $ (88)
=============================================================================================
</TABLE>
Actuarial assumptions used for the plan are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average discount rate ............................. 7.50% 7.50% 8.50%
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% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996 and 1995, and a 12%
annual rate of increase was assumed for 1994. In 1996, the rate was assumed to
decrease gradually to 5.5% over eight 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, 1996, by $1,099,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year then ended by $79,000.
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 1996, 1995 and 1994,
the company contributed $826,000, $478,000 and $750,000, respectively, to the
401(k) plan.
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
INCOME TAXES
A detail of the federal and state income tax provision is set forth below:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Charged to operating expenses--
Federal income taxes--
Current ........................................$ 4,927 $ 2,244 $ 2,481
Deferred, net .................................. 1,228 1,542 1,052
Investment tax credits, net ...................... (362) (364) (370)
State income taxes--
Current ........................................ 991 450 496
Deferred, net .................................. 234 178 214
- --------------------------------------------------------------------------------
7,018 4,050 3,873
- --------------------------------------------------------------------------------
Charged to other income, net--
Federal income taxes--
Current ........................................ 2,447 2,450 2,039
Deferred, net .................................. 99 52 30
State income taxes--
Current ........................................ 425 410 421
Deferred, net .................................. 17 8 5
- --------------------------------------------------------------------------------
2,988 2,920 2,495
- --------------------------------------------------------------------------------
Total federal and state income tax provision .....$10,006 $ 6,970 $ 6,368
================================================================================
</TABLE>
Income taxes differ from amounts computed by applying the statutory rates
to pre-tax income as follows:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income .......................................$17,202 $ 9,935 $12,093
Income tax provision ............................. 10,006 6,970 6,368
- -------------------------------------------------------------------------------
Pre-tax income ...................................$27,208 $16,905 $18,461
===============================================================================
Federal income tax at statutory rate of 34% ......$ 9,251 $ 5,748 $ 6,277
State income tax, net ............................ 1,100 690 750
Additional federal income tax provision .......... 210 875 --
Amortization of investment tax credits ........... (362) (364) (370)
Amortization of excess deferred income tax ....... (183) 26 (288)
Other, net ....................................... (10) (5) (1)
- -------------------------------------------------------------------------------
Total federal and state income tax provision .....$10,006 $ 6,970 $ 6,368
===============================================================================
</TABLE>
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
The temporary differences which gave rise to the net deferred tax liability
at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets--
Unamortized investment tax credit ............................... $ 1,346 $ 1,410
Other ........................................................... 4,517 4,095
- --------------------------------------------------------------------------------------------
5,863 5,505
- --------------------------------------------------------------------------------------------
Deferred tax liabilities--
Accelerated depreciation and other plant-related differences .... 36,153 34,785
AFUDC-equity .................................................... 690 721
Regulatory tax assets ........................................... 105 354
Additional deferred federal income tax liability accrued ........ -- 425
Deductible legal fees ........................................... 640 --
Miscellaneous deferred charges .................................. 478 191
Pension funding ................................................. 805 628
Other ........................................................... 9 --
- --------------------------------------------------------------------------------------------
38,880 37,104
- --------------------------------------------------------------------------------------------
Net accumulated deferred income tax liability ........................ $ 33,017 $ 31,599
============================================================================================
</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. Settlement of the two
issues was made at the IRS appeals office in July 1996, with no material effect
on the results of operations, financial condition or cash flows of the company.
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 residual
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
such operations were being conducted. Under current environmental protection
laws and regulations, Cities may be responsible for response action with respect
to such materials, if response action is necessary.
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, 1996, Cities had
$1,072,000 accrued for its remaining liability related to the agreement. This
amount is to be paid in equal annual payments over each of the next three years.
Cities deferred the agreement amount of $1,787,000 and was granted recovery over
a ten-year period in the May 1996 Iowa rate increase.
Cities owns former manufactured gas plant sites in Johnson City and
Bristol, Tennessee and Hannibal, Missouri. Cities and the Tennessee Department
of Environment and Conservation entered into a consent order effective January
23, 1997, for the purpose of facilitating the investigation, removal and
remediation of the Johnson City site. Cities began the implementation of the
consent order in the first quarter of 1997. Cities is unaware of any information
which suggests that the Bristol site gives rise to a present health or
environmental risk as a result of the manufactured gas process or that any
response action will be necessary. The Missouri Department of Natural Resources
(MDNR) conducted a site reconnaissance and sampling at the Hannibal site. The
most recent MDNR report received concludes that hazardous substances and
hazardous wastes are present on site, and that a release of hazardous substances
to soils has occurred; however, the risk of human exposure appears to be
minimal. Additional site work is likely. As of December 31, 1996, Cities had
incurred and deferred for recovery $309,000, including $258,000 related to an
insurance recoverability study, and accrued and deferred for recovery an
additional $750,000 associated with the preliminary survey and invasive study of
these three sites. The Tennessee Regulatory Authority granted Cities permission
to defer, until its next rate case, all costs incurred in Tennessee in
connection with state and federally
41
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
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, Cities is
required to upgrade or remove certain underground storage tanks (USTs) situated
in Tennessee. As of December 31, 1996, Cities had identified a small number of
USTs in this category in Tennessee and had incurred and deferred for recovery
$96,000 and, based on available current information, accrued and deferred for
recovery an additional $70,000 for the upgrade or removal of these USTs. The
Tennessee Regulatory Authority 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.
In October 1995, Cities received two Notices of Violation (NOVs) from the
Tennessee Department of Environment and Conservation (TDEC) concerning historic
releases from a UST in Kingsport, Tennessee. This UST was 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 TDEC that Cities is not a
responsible party for any environmental contamination at the site. Cities does
not anticipate incurring any response action costs at this site.
The Kansas Department of Health and Environment (KDHE) identified the need
to investigate gas industry activities which utilize mercury equipment in
Kansas. Cities and the KDHE have signed a Consent Order for the investigation
and possible response action for mercury contamination at any gas pipeline site
which is identified as exceeding the KDHE's established acceptable concentration
levels. As of December 31, 1996, Cities had identified approximately 720 meter
sites where mercury may have been used and had incurred and deferred for
recovery $62,000 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. 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.
Cities addresses other environmental matters from time to time in the
regular and ordinary course of its business. 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
COMMON STOCK--
As of December 31, 1996, the company had 2,200,878 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, the company's non-employee director stock 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, 1996, are as follows:
42
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
Options Exercise Price SARs Exercise Price
=========================================================================================================
<S> <C> <C> <C> <C>
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
Granted ........................... 39,000 15.50 -- --
Exercised ......................... (16,900) 12.50-16.00 (4,130) 12.50-15.125
Forfeited ......................... -- -- -- --
- ---------------------------------------------------------------------------------------------------------
OUTSTANDING DECEMBER 31, 1996 .......... 140,600 $ 12.50-16.00 8,820 $12.50-15.125
=========================================================================================================
</TABLE>
As of December 31, 1996 and 1995, there were 45,200 and 39,400 options,
respectively, and 8,820 and 10,710 SARs, respectively, which were exercisable.
As of December 31, 1996, 170,100 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 adopted SFAS 123 effective
January 1, 1996. Because of the limited nature of the company's stock-based
compensation plans, the adoption of SFAS 123 was immaterial.
ACQUISITIONS
Effective September 1, 1996, United Cities Propane Gas of Tennessee, Inc.
(UCPT), a wholly-owned subsidiary of UCG Energy, purchased substantially all of
the propane assets of Arrow Propane, Inc. for approximately $610,000. In
addition, UCPT entered into a ten-year non-compete agreement with the prior
owners for $50,000. This acquisition added approximately 700 propane customers
in the Woodbury, Tennessee area.
On June 28, 1996, Monarch Gas Company (Monarch) was merged into the
company. The merger was accounted for as a pooling of interests in which the
company issued 207,366 shares of the company's common stock in exchange for the
common stock of Monarch. In addition, the company entered into five-year
non-compete agreements with the prior owners of Monarch totaling $400,000. The
merger added approximately 2,900 natural gas customers in the Vandalia, Illinois
area. The company did not restate prior years' 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.
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.
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.
43
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
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.
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 1996. The company's medium-term notes, issued in 1995, are
unsecured and at December 31, 1996, bore a weighted-average interest rate of
6.60%. 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 6.81% at December
31, 1996. Annual maturities and sinking fund requirements of the company's First
Mortgage Bonds and other long-term debt for the years 1997 through 2001 are
$7,679,000, $8,354,000, $8,473,000, $8,482,000 and $6,021,000, respectively.
INTERIM FINANCING
The company has arrangements with several banks which provide, through
mid-1997, a total line of credit of $105,000,000 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, 1996 and 1995, the company had short-term debt
outstanding of $65,688,000 and $32,313,000, respectively, with a
weighted-average interest rate of 6.39% and 6.41%, respectively.
UCG Energy and WMI, sole shareholders of WMLLC, act as guarantors of a
$12,500,000 credit facility for WMLLC with a certain bank. UCG Energy's portion
of the amount outstanding on this credit facility at December 31, 1996, was
$607,000. UCG Energy and WMI also act as guarantors on certain purchases of
natural gas and transportation services from suppliers by WMLLC. UCG Energy's
portion of these outstanding obligations amounted to $9,437,000 at December 31,
1996.
OTHER
In the third quarter of 1995, the company announced a consolidation plan
under which five of the company's local operations in its Virginia/East
Tennessee Division were consolidated into two new operating centers. As a result
of the plan implementation, costs of approximately $900,000 ($550,000 after
income taxes) related to early retirement and severance programs and employee
relocation expenses were recorded in September 1995.
COMMITMENTS AND CONTINGENCIES
The company is involved in certain 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 results of operations, financial condition or cash flows of the
company.
ATMOS MERGER
On July 19, 1996, the company and Atmos Energy Corporation (Atmos) entered
into a definitive agreement whereby the company will be merged with and into
Atmos, with Atmos as the surviving corporation. Under the definitive agreement,
one share of Atmos stock will be exchanged for each share of the company's
stock. The transaction is expected to be accounted for as a pooling of
interests. The transaction was approved by the shareholders of the company and
Atmos on November 12, 1996. Pending approval by appropriate regulatory bodies,
the company expects to close the transaction during the second quarter of 1997.
Atmos is based in Dallas, Texas, and currently provides natural gas service to
approximately 673,000 customers in Texas, Colorado, Kansas, Missouri, Louisiana
and Kentucky.
44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
SUBSEQUENT EVENTS (UNAUDITED)
Effective February 28, 1997, UCPT purchased substantially all of the
propane assets of Harlan LP Gas, Inc., a retail propane distribution company,
and Propane Sales and Service, Inc., a wholesale propane distribution company,
for approximately $2,040,000. In addition, UCPT entered into ten-year
non-compete agreements with the prior owners for $150,000 to be paid over a
ten-year period. This acquisition added approximately 3,100 propane customers in
the Harlan, Kentucky and New Tazewell, Tennessee areas.
On March 5, 1997, the Tennessee Court of Appeals (the Court) issued a
decision reversing and remanding the Tennessee Regulatory Authority's order
which approved the incentive rate program for the plan year ending March 31,
1997. The Court found a procedural fault in how the Tennessee Regulatory
Authority arrived at the order. At this time, further hearings have not been
scheduled.
45
<PAGE> 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Nashville, Tennessee Arthur Andersen LLP
February 14, 1997
46
<PAGE> 49
CONSOLIDATED FINANCIAL AND OPERATING DATA
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(In Thousands, except per share data)
<TABLE>
<CAPTION>
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utility Operating Revenues .................. $144,709 $ 60,698 $ 39,953 $108,022
Utility Operating Income (Loss) ............. $ 18,263 $ 521 $ (3,055) $ 11,358
Net Income (Loss)(a) ........................ $ 17,523 $ (3,112) $ (6,472) $ 9,263
Net Income (Loss) Per Share(b) .............. $ 1.35 $ (.24) $ (.49) $ .70
<CAPTION>
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
Net Income (Loss)(a) ........................ $ 13,327 $ (3,962) $ (6,916) $ 7,486
Net Income (Loss) Per Share(b) .............. $ 1.25 $ (.35) $ (.55) $ .59
</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 1996 and 1995.
<TABLE>
<CAPTION>
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High ........................................ $ 18.50 $ 17.00 $ 23.00 $ 23.63
Low ......................................... $ 15.75 $ 14.75 $ 15.00 $ 20.00
Dividends per share ......................... $ .255 $ .255 $ .255 $ .255
<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
</TABLE>
47
<PAGE> 50
CONSOLIDATED FINANCIAL AND OPERATING DATA
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------
UTILITY OPERATING REVENUES:*
<S> <C> <C> <C>
Residential ................................. $165,922 $127,603 $129,519
Commercial .................................. 95,683 70,967 73,376
Industrial--
Firm ..................................... 31,876 27,438 33,772
Interruptible ............................ 40,925 33,338 35,297
Other ....................................... 8,411 4,412 1,813
- -------------------------------------------------------------------------------------
342,817 263,758 273,777
Transportation .............................. 10,565 8,102 7,207
- -------------------------------------------------------------------------------------
Total ................................... $353,382 $271,860 $280,984
=====================================================================================
OPERATING MARGIN* ................................ $126,016 $112,684 $108,016
=====================================================================================
NATURAL GAS THROUGH-PUT (MCF):*
Residential ................................. 25,458 22,901 21,352
Commercial .................................. 16,706 15,165 14,116
Industrial--
Firm ..................................... 7,083 7,324 8,134
Interruptible ............................ 11,124 11,920 11,002
- -------------------------------------------------------------------------------------
60,371 57,310 54,604
Transportation .............................. 17,612 17,184 12,574
- -------------------------------------------------------------------------------------
Total ................................... 77,983 74,494 67,178
======================================================================================
CUSTOMERS (AVERAGE FOR YEAR):
Residential ................................. 276,892 266,532 259,895
Commercial .................................. 35,620 34,435 33,861
Industrial--
Firm ..................................... 404 395 395
Interruptible ............................ 233 251 258
- -------------------------------------------------------------------------------------
Natural gas ................................. 313,149 301,613 294,409
Propane ..................................... 26,108 23,359 21,693
- -------------------------------------------------------------------------------------
Total customers ......................... 339,257 324,972 316,102
=====================================================================================
ACTUAL CUSTOMERS AT DECEMBER 31, ................. 347,046 331,958 322,851
=====================================================================================
PROPANE:*
Sales ....................................... $ 34,730 $ 22,124 $ 18,510
Cost of sales ............................... 23,832 13,038 10,126
- -------------------------------------------------------------------------------------
Gross margin ................................ $ 10,898 $ 9,086 $ 8,384
=====================================================================================
Gross margin % of sales ..................... 31.4% 41.1% 45.3%
=====================================================================================
Gallons ..................................... 40,723 28,854 23,175
=====================================================================================
</TABLE>
* In thousands
48
<PAGE> 51
CONSOLIDATED FINANCIAL AND OPERATING DATA
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING REVENUES:*
<S> <C> <C> <C> <C> <C> <C> <C>
Residential ................................. $134,856 $119,245 $109,081 $ 95,916 $ 79,245 $ 75,659 $ 68,668
Commercial .................................. 74,361 69,447 62,052 55,576 50,502 46,341 41,327
Industrial--
Firm ..................................... 31,252 32,805 33,392 33,924 33,430 33,865 35,195
Interruptible ............................ 36,703 29,607 25,182 26,028 26,406 25,077 26,250
Other ....................................... 3,411 6,530 2,692 6,797 3,957 1,777 2,812
- ---------------------------------------------------------------------------------------------------------------------------------
280,583 257,634 232,399 218,241 193,540 182,719 174,252
Transportation .............................. 6,924 7,826 6,756 6,352 4,385 4,690 3,897
- ---------------------------------------------------------------------------------------------------------------------------------
Total .................................. $287,507 $265,460 $239,155 $224,593 $197,925 $187,409 $178,149
=================================================================================================================================
OPERATING MARGIN* ................................ $106,499 $ 99,300 $ 87,779 $ 80,231 $ 71,536 $ 63,748 $ 57,480
=================================================================================================================================
NATURAL GAS THROUGH-PUT (MCF):*
Residential ................................. 23,055 20,481 19,679 17,765 14,135 13,675 12,162
Commercial .................................. 14,435 13,324 12,573 11,697 10,577 9,671 8,542
Industrial--
Firm ..................................... 7,509 7,690 8,323 8,407 8,059 7,930 8,011
Interruptible ............................ 11,661 10,101 9,050 8,432 8,088 7,701 8,092
- ---------------------------------------------------------------------------------------------------------------------------------
56,660 51,596 49,625 46,301 40,859 38,977 36,807
Transportation .............................. 11,883 11,117 9,484 8,977 4,462 4,614 3,363
- ---------------------------------------------------------------------------------------------------------------------------------
Total .................................. 68,543 62,713 59,109 55,278 45,321 43,591 40,170
=================================================================================================================================
CUSTOMERS (AVERAGE FOR YEAR):
Residential ................................. 250,051 242,990 236,215 228,678 166,859 157,022 151,304
Commercial .................................. 31,849 31,124 30,493 29,592 24,680 21,614 19,212
Industrial--
Firm ................................... 395 397 376 466 443 413 362
Interruptible .......................... 245 231 223 208 171 159 168
- ---------------------------------------------------------------------------------------------------------------------------------
Natural gas ................................. 282,540 274,742 267,307 258,944 192,153 179,208 171,046
Propane ..................................... 20,498 21,120 24,480 31,300 28,184 24,996 19,522
- ---------------------------------------------------------------------------------------------------------------------------------
Total customers ........................ 303,038 295,862 291,787 290,244 220,337 204,204 190,568
=================================================================================================================================
ACTUAL CUSTOMERS AT DECEMBER 31, ................. 313,788 302,781 295,729 297,855 289,639 211,716 200,786
=================================================================================================================================
PROPANE:*
Sales ....................................... $ 16,506 $ 15,194 $ 14,727 $ 16,781 $ 13,334 $ 12,394 $ 9,882
Cost of sales ............................... 8,920 8,053 7,539 9,773 5,538 5,239 4,429
- ---------------------------------------------------------------------------------------------------------------------------------
Gross margin ................................ $ 7,586 $ 7,141 $ 7,188 $ 7,008 $ 7,796 $ 7,155 $ 5,453
=================================================================================================================================
Gross margin % of sales ..................... 46.0% 47.0% 48.8% 41.8% 58.5% 57.7% 55.2%
=================================================================================================================================
Gallons ..................................... 20,180 19,063 16,066 17,931 17,499 16,535 13,363
=================================================================================================================================
</TABLE>
49
<PAGE> 52
CONSOLIDATED FINANCIAL AND OPERATING DATA
- --------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------
COMMON STOCK INFORMATION:
<S> <C> <C> <C>
Net income/common stock earnings:*
Utility ................................ $ 12,791 $ 5,745 $ 7,817
UCG Energy ............................. 3,605 3,450 3,750
UCG Storage ............................ 806 740 526
- ----------------------------------------------------------------------------------
Total ............................. $ 17,202 $ 9,935 $ 12,093
==================================================================================
Net income/earnings per share ............... $ 1.31 $ .84 $ 1.16
==================================================================================
Average number of shares* ................... 13,086 11,792 10,409
==================================================================================
Shares outstanding* ......................... 13,221 12,727 10,613
==================================================================================
Dividends per share ......................... $ 1.02 $ 1.02 $ 1.005
==================================================================================
Dividend pay-out ............................ 77.9% 121.4% 86.6%
==================================================================================
Dividend yield .............................. 4.5% 5.4% 6.4%
==================================================================================
Market value per share:
High ................................... $ 23.63 $ 18.75 $ 18.75
Low .................................... $ 14.75 $ 14.50 $ 15.44
Close .................................. $ 22.50 $ 18.75 $ 15.75
==================================================================================
Price/Earnings ratio ........................ 17.2x 22.3x 13.6x
==================================================================================
RETURN ON AVERAGE EQUITY ......................... 11.3% 7.5% 10.5%
==================================================================================
WEATHER DATA--COLDER (WARMER) THAN NORMAL ........ 6.1% (2.3%) (10.2%)
==================================================================================
CAPITALIZATION:
Capitalization:*
Long-term debt ......................... $ 153,859 $ 163,160 $ 144,344
Preferred and preference stock ......... -- -- --
Common stock equity .................... 157,284 146,071 118,028
- ----------------------------------------------------------------------------------
Total .................................. $ 311,143 $ 309,231 $ 262,372
==================================================================================
Capitalization (percent):
Long-term debt ......................... 49.4% 52.8% 55.0%
Preferred and preference stock ......... -- -- --
Common stock equity .................... 50.6% 47.2% 45.0%
- ----------------------------------------------------------------------------------
Total ............................. 100.0% 100.0% 100.0%
==================================================================================
TOTAL ASSETS* .................................... $ 513,649 $ 460,377 $ 421,200
==================================================================================
</TABLE>
*In thousands
50
<PAGE> 53
CONSOLIDATED FINANCIAL AND OPERATING DATA
- -------------------------------------------------------------------------------
UNITED CITIES GAS COMPANY & SUBSIDIARIES
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 7,877 $ 5,865 $ 4,777 $ 1,490 $ 7,140 $ 4,684 $ 3,731
3,775 3,681 2,570 1,375 2,790 2,262 1,504
468 558 394 346 78 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
$ 12,120 $ 10,104 $ 7,741 $ 3,211 $ 10,008 $ 6,946 $ 5,235
===================================================================================================================================
$ 1.19 $ 1.07 $ .97 .44 $ 1.52 $ 1.24 $ 1.00
===================================================================================================================================
10,197 9,459 8,000 7,238 6,572 5,621 5,251
===================================================================================================================================
10,314 10,052 8,517 7,292 7,197 5,677 5,300
===================================================================================================================================
$ .985 $ .965 $ .93 $ .92 $ .88 $ .84 $ .80
===================================================================================================================================
82.8% 90.2% 95.9% 209.1% 57.9% 67.7% 80.0%
===================================================================================================================================
5.3% 5.8% 5.7% 6.8% 5.9% 6.8% 6.7%
===================================================================================================================================
$ 20.50 $ 16.50 16.25 $ 15.63 $ 15.50 $ 13.13 $ 15.13
$ 16.00 $ 12.75 12.00 $ 13.00 $ 12.25 $ 11.75 $ 11.75
$ 18.50 $ 16.50 16.25 $ 13.50 $ 14.88 $ 12.38 $ 12.00
===================================================================================================================================
15.5x 15.4x 16.8x 30.7x 9.8x 10.0x 12.0x
===================================================================================================================================
11.1% 10.5% 9.9% 4.4% 15.9% 14.0% 11.4%
===================================================================================================================================
2.8% (7.8%) (12.8%) (20.4%) .9% 3.5% (4.0%)
===================================================================================================================================
$151,843 $157,734 $127,430 $ 96,521 $ 78,230 $ 69,138 $ 73,325
-- -- 1,352 1,483 2,203 4,871 5,156
111,888 106,206 85,953 71,118 73,204 52,279 46,964
- -----------------------------------------------------------------------------------------------------------------------------------
$263,731 $263,940 $214,735 $169,122 $153,637 $126,288 $125,445
===================================================================================================================================
57.6% 59.8% 59.4% 57.1% 50.9% 54.7% 58.5%
-- -- 0.6% 0.9% 1.4% 3.9% 4.1%
42.4% 40.2% 40.0% 42.0% 47.7% 41.4% 37.4%
===================================================================================================================================
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===================================================================================================================================
$401,520 $370,150 $368,283 $338,167 $307,160 $212,629 $197,946
===================================================================================================================================
</TABLE>
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
Chairman, President and
Chief Executive Officer
Dated: March 20, 1997
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
registrants and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE Title Date
- --------- ----- ----
<S> <C> <C>
/s/ GENE C. KOONCE Chairman, President and
- ----------------------------- Chief Executive Officer
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
- ----------------------------- Director
Jerry H. Ballengee
/s/ DWIGHT C. BAUM Director
- -----------------------------
Dwight C. Baum
/s/ THOMAS J. GARLAND Director March 20, 1997
- -----------------------------
Thomas J. Garland
/s/ DALE A. KEASLING Director
- -----------------------------
Dale A. Keasling
/s/ VINCENT J. LEWIS Director
- -----------------------------
Vincent J. Lewis
- ----------------------------- 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.
</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
14, 1997. 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 14, 1997
53
<PAGE> 56
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
DIVIDENDS FROM SUBSIDIARIES.
Cash dividends declared to Cities from the registrant's wholly-owned
subsidiaries were $100,000 in 1996, $6,100,000 in 1995 and $1,350,000 in 1994.
54
<PAGE> 57
UNITED CITIES GAS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 1996 -
Deducted in the balance sheet from the
asset to which it applies:
Allowance for uncollectible accounts ......... $ 1,352 1,620 1,226 (a) - $ 1,746
============ ============ ============ =========== ============
Included in the deferred credits section of
the balance sheet:
Injuries and damages reserve ................. $ 1,134 60 66 - $ 1,128
============ ============ ============ =========== ============
Included in the current liabilities section
of the balance sheet:
Injuries and damages reserve ................. $ 105 87 - - $ 192
============ ============ ============ =========== ============
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
============ ============ ============ =========== ============
</TABLE>
(a) Represents write-off of accounts considered to be uncollectible, less
collection of accounts previously written off.
55
<PAGE> 58
LIST OF EXHIBITS
3.01 Amended Articles of Incorporation of Company, as amended May 3, 1996,
(filed with the Registrant's Form 10-Q dated June 30, 1996 and
incorporated herein by reference).
3.02 Amended By-Laws of Company, as amended August 22, 1996, (filed with the
Registrant's Form 10-Q dated September 30, 1996, and incorporated
herein by reference).
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,
(filed with the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by reference).
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,
(filed with the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by reference).
12.01 Computation of Ratio of Consolidated Earnings to Fixed Charges. (Page
57)
21. Subsidiaries of United Cities Gas Company. (Page 58)
23. Consent of Independent Public Accountants. (Page 59)
27. Financial Data Schedule (for SEC use only).
56
<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,
(In thousands, except ratio amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Charges, as defined:
Interest on long-term debt ......................... $ 14,681 $ 13,697 $ 14,026 $ 14,553 $ 12,965
Amortization of debt discount ...................... 285 227 227 220 181
---------- ---------- ---------- ---------- ----------
Total ........................................... $ 14,966 $ 13,924 $ 14,253 $ 14,773 $ 13,146
========== ========== ========== ========== ==========
Earnings, as defined:
Net income ......................................... $ 17,202 $ 9,935 $ 12,093 $ 12,150 $ 10,218
Taxes on income .................................... 10,006 6,970 6,503 5,681 5,171
Fixed charges, as above ............................ 14,966 13,924 14,253 14,773 13,146
---------- ---------- ---------- ---------- ----------
Total ........................................... $ 42,174 $ 30,829 $ 32,849 $ 32,604 $ 28,535
========== ========== ========== ========== ==========
Ratio of Consolidated Earnings to Fixed Charges ....... 2.82 2.21 2.30 2.21 2.17
========== ========== ========== ========== ==========
</TABLE>
57
<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>
58
<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, 1996 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 20, 1997
59
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME, CASH,
FLOWS AND CAPITALIZATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 302,676
<OTHER-PROPERTY-AND-INVEST> 54,944
<TOTAL-CURRENT-ASSETS> 126,969
<TOTAL-DEFERRED-CHARGES> 29,060
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 513,649
<COMMON> 108,056
<CAPITAL-SURPLUS-PAID-IN> 22,462
<RETAINED-EARNINGS> 26,766
<TOTAL-COMMON-STOCKHOLDERS-EQ> 157,284
0
0
<LONG-TERM-DEBT-NET> 153,859
<SHORT-TERM-NOTES> 65,688
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 7,679
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 129,139
<TOT-CAPITALIZATION-AND-LIAB> 513,649
<GROSS-OPERATING-REVENUE> 353,382
<INCOME-TAX-EXPENSE> 7,018
<OTHER-OPERATING-EXPENSES> 319,277
<TOTAL-OPERATING-EXPENSES> 326,295
<OPERATING-INCOME-LOSS> 27,087
<OTHER-INCOME-NET> 4,875
<INCOME-BEFORE-INTEREST-EXPEN> 31,962
<TOTAL-INTEREST-EXPENSE> 14,760
<NET-INCOME> 17,202
0
<EARNINGS-AVAILABLE-FOR-COMM> 17,202
<COMMON-STOCK-DIVIDENDS> 13,243
<TOTAL-INTEREST-ON-BONDS> 11,354
<CASH-FLOW-OPERATIONS> 27,731
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
</TABLE>
