-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ESQTv43ClqZwIDwOBNoSEV598wWpOtK5YULRoeBpSd6XI4TPLyBeYhQYHXMBotGN n2BrHFGuzSOetODvuyR4EQ== 0000950144-96-001135.txt : 19960325 0000950144-96-001135.hdr.sgml : 19960325 ACCESSION NUMBER: 0000950144-96-001135 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED CITIES GAS CO CENTRAL INDEX KEY: 0000101105 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 361801540 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-01284 FILM NUMBER: 96537691 BUSINESS ADDRESS: STREET 1: 5300 MARYLAND WAY CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6153735310 MAIL ADDRESS: STREET 1: 5300 MARYLAND WAY CITY: BRENTWOOD STATE: TN ZIP: 37027 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHEASTERN ILLINOIS GAS CO DATE OF NAME CHANGE: 19670829 10-K 1 UNITED CITIES GAS CO. FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-K (Mark One) /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 Commission file number 0-1284 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to UNITED CITIES GAS COMPANY (Exact name of registrant as specified in its charter) ------------------ ILLINOIS & VIRGINIA 36-1801540 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ------------------ 5300 MARYLAND WAY, BRENTWOOD, TN 37027 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code: (615) 373-5310 Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------ None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / State the aggregate market value of the voting stock held by nonaffiliates of the registrant. (The aggregate market value shall be computed by reference to the price at which the stock was sold or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing) $202,266,708. (As of February 29, 1996). Excludes shares owned by Directors and Officers (306,628) who might be deemed affiliates. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (applicable only to corporate registrants). Common Stock 12,753,810 shares (As of February 29, 1996) ------------------- DOCUMENTS INCORPORATED BY REFERENCE: LIST THE FOLLOWING DOCUMENTS IF INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE DOCUMENT IS INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS; (2) ANY PROXY OR INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED PURSUANT TO RULE 424(b) OR (c) UNDER THE SECURITIES ACT OF 1933. (THE LISTED DOCUMENTS SHOULD BE CLEARLY DESCRIBED FOR INDENTIFICATION PURPOSES.) PART III, PROXY STATEMENT (EXCEPT FOR THE REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS AND THE PERFORMANCE GRAPH). A LIST OF EXHIBITS APPEARS ON PAGE 56 HEREOF. ================================================================================ 2 TABLE OF CONTENTS
ITEM NO. CAPTION PAGE - -------- ------- ----- PART I 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 17 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 18 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . 28 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 PART III 10. Directors and Executive Officers of the Company. . . . . . . . . . . . . 28 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 28 12. Security Ownership of Certain Beneficial Owners and Management . . . . . 28 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 28 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . 28 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 List of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 56
i 3 PART I ITEM 1. BUSINESS GENERAL United Cities Gas Company (Cities) was incorporated under the laws of the State of Illinois on September 21, 1929. Cities' predominant business is the distribution of natural gas. As of December 31, 1995, Cities supplied natural gas service to approximately 308,000 customers. In addition to its business of natural gas distribution, Cities sells and installs gas appliances and performs certain appliance service work. Since 1985, Cities has significantly increased its customer base by adding approximately 180,000 new customers to its natural gas distribution system. The table below reflects the areas of growth through acquisitions and internal marketing efforts, including population growth within Cities' service areas.
AREAS OF GROWTH CUSTOMERS ADDED Acquisition of Tennessee-Virginia Energy Corporation (December, 1986).................... 17,000 Acquisition of Great River Gas Company (May, 1989)....................................... 17,000 Acquisition of Union Gas System, Inc. (December, 1989)................................... 65,000 Other acquisitions....................................................................... 6,000 Internal growth.......................................................................... 75,000 --------- 180,000 =========
Cities has two wholly-owned subsidiaries. One subsidiary, United Cities Gas Storage Company (UCG Storage), was formed as a Delaware corporation in December 1989 to provide natural gas storage services. In 1989, a natural gas storage field was purchased in Kentucky to supplement natural gas used by Cities' customers in Tennessee and Illinois. In addition, natural gas storage fields located in Kansas and included in Cities' 1989 acquisition of Union Gas System, Inc. were sold to UCG Storage. These fields are used to supplement natural gas used by Cities' Kansas customers. The other subsidiary, UCG Energy Corporation (UCG Energy), incorporated under the laws of Delaware in 1965, leases appliances, real estate and equipment, and vehicles to Cities and others, and is engaged in exploration and production activites. UCG Energy also owns a 45% interest in Woodward Marketing, L.L.C. (WMLLC) which provides natural gas marketing services to industrial customers, municipalities and local distribution companies, including Cities. WMLLC was formed in 1995. UCG Energy has two wholly-owned subsidiaries, United Cities Propane Gas of Tennessee, Inc. and UCG Leasing, Inc. United Cities Propane Gas of Tennessee, Inc., incorporated under the laws of Tennessee in 1976, is engaged in the retail distribution of propane (LP) gas. As of December 31, 1995, the propane operation served approximately 24,000 customers in Tennessee, Virginia and North Carolina. UCG Leasing, Inc. was incorporated under the laws of Georgia in 1987 and leases vehicles, equipment and real estate to Cities. Cities and its subsidiaries, UCG Storage and UCG Energy and its subsidiaries, are hereinafter referred to collectively as the "company". 1 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,
1995 1994 1993 ------------------- ------------------- ------------------ REVENUES (IN THOUSANDS) Utility............................................. $271,860 87% $280,984 86% $287,507 86% -------- ----- --------- ----- -------- ----- Subsidiaries: UCG Energy Corporation - Propane Division................................ 24,651 8% 20,788 6% 18,203 5% Rental Division................................. 5,959 2% 6,449 2% 6,633 2% Utility Services Division....................... 3,823 1% 11,146 4% 14,073 4% -------- ----- --------- ----- -------- ----- Total UCG Energy Corporation.................. 34,433 11% 38,383 12% 38,909 11% United Cities Gas Storage Company................. 7,443 2% 7,128 2% 8,837 3% -------- ----- --------- ----- -------- ----- Total Subsidiaries............................ 41,876 13% 45,511 14% 47,746 14% -------- ----- --------- ----- -------- ----- Total Revenues (1).................................. $313,736 100% $326,495 100% $335,253 100% ======== ===== ========= ===== ======== ===== COMMON STOCK EARNINGS Utility............................................. $5,745 58% $7,817 65% $7,877 65% -------- ----- --------- ----- -------- ----- Subsidiaries: UCG Energy Corporation - Propane Division................................ 1,123 11% 1,122 9% 1,010 8% Rental Division................................. 1,693 17% 2,024 17% 2,170 18% Utility Services Division....................... 634 6% 604 5% 595 5% -------- ----- --------- ----- -------- ----- Total UCG Energy Corporation.................. 3,450 34% 3,750 31% 3,775 31% United Cities Gas Storage Company................. 740 8% 526 4% 468 4% -------- ----- --------- ----- -------- ----- Total Subsidiaries............................ 4,190 42% 4,276 35% 4,243 35% -------- ----- --------- ----- -------- ----- Total Common Stock Earnings......................... $9,935 100% $12,093 100% $12,120 100% ======== ===== ========= ===== ======== ===== IDENTIFIABLE ASSETS Utility............................................. $389,278 85% $358,364 85% $336,480 84% -------- ----- --------- ----- -------- ----- Subsidiaries: UCG Energy Corporation............................ 47,098 10% 39,402 9% 41,950 10% United Cities Gas Storage Company................. 24,001 5% 23,434 6% 23,090 6% -------- ----- --------- ----- -------- ----- Total Subsidiaries............................ 71,099 15% 62,836 15% 65,040 16% -------- ----- --------- ----- -------- ----- Total Identifiable Assets........................... $460,377 100% $421,200 100% $401,520 100% ======== ===== ========= ===== ======== =====
- ------------- (1) Sales to affiliated companies described under "Subsidiary Operations". For additional information, see the "Consolidated Statements of Income" for the years ended December 31, 1995, 1994 and 1993 under Item 8. Financial Statements and Supplementary Data. 2 5 UTILITY OPERATIONS GENERAL Cities distributes natural gas under regulated rates to approximately 308,000 customers in the states of Tennessee, Kansas, Georgia, Illinois, Virginia, Missouri, Iowa and South Carolina. Total operating revenues for the year ended December 31, 1995 were $271,860,000, of which approximately 47% was derived from residential customers, 25% from industrial customers, 26% from commercial customers and 2% from other sources. The ten largest customers of Cities accounted for 6.3% of operating revenues in 1995 and the largest of these customers accounted for 1.9%. Cities serves a diverse industrial load with customers engaged in the manufacture of asphalt, cars, car parts, chemicals, electronics, food products, metal fabrication, textiles and wire, among others. Cities also serves several colleges and a major army base. Cities is currently structured into four operating divisions. The percent of revenues contributed by each division for the three years ended December 31 is as follows:
DIVISIONS 1995 1994 1993 ---------------- ---------------- ----------------- Virginia/East Tennessee...................... 31% 32% 31% Georgia/South Carolina....................... 21% 22% 21% Illinois/Tennessee/Missouri.................. 22% 21% 22% Kansas/Iowa/Missouri......................... 26% 25% 26% ---------------- ---------------- ----------------- 100% 100% 100% ================ ================ =================
NATURAL GAS SUPPLY To encourage more competition among natural gas suppliers, the Federal Energy Regulatory Commission (FERC) issued Orders 636, 636-A and 636-B (collectively, Order 636) in 1992. Order 636 required interstate pipelines to unbundle or separate gas sales, transportation and storage services by the 1993-1994 winter heating season. The pipelines' sales services were previously combined and sold as a single service. With the implementation of Order 636, the pipelines discontinued their traditional merchant function. Each distribution company is now responsible for obtaining all of its gas supply in the open market. The unbundling of these services allows Cities more flexibility in selecting and managing the type of services required to provide its customers with the lowest possible priced gas while maintaining a reliable gas supply. However, this also places an additional responsibility on Cities to obtain its natural gas supply in the open market on a timely basis to fulfill its commitments during peak demand periods. Management believes that, to date, Cities has been successful in managing its portfolio of spot and term supplies that it purchases from producers and marketers in the open market on the thirteen interstate pipelines on which it operates, resulting in reliable supplies at a competitive price. Another aspect of Order 636 allowed the pipelines to set rates to recover a higher portion of their fixed costs through monthly demand charges. As a result, Cities is charged a higher fixed amount each month, regardless of through-put. Since Cities must contract for pipeline capacity to meet peak demand, this has the effect of increasing Cities' fixed cost of gas. Many elements such as company owned gas storage facilities, peak shaving plants and the liquefied natural gas (LNG) plant and, in some instances, storage contracts with Cities' suppliers are being utilized to reduce these higher pipeline demand charges. Order 636 also required pipelines to set up capacity release mechanisms on their systems to allow holders of firm capacity and firm storage to release these services when they are not needed. Cities is active in releasing capacity during off peak periods and the majority of revenues generated by this activity is used to offset pipeline demand charges. In addition, three projects have recently been completed and various other projects are in the preliminary stages to add additional pipeline suppliers in several of Cities' operating areas. These projects will not only promote competition among the pipelines, but will also provide increased reliability of gas supply. Adding alternatives will provide bargaining power which should, over time, decrease Cities' pipeline capacity costs. Purchased Gas Adjustment (PGA) clauses in effect in the states in which Cities operates allow Cities to pass through to its customers, subject to prudency and/or administrative reviews, any increase or decrease in rates charged to Cities related to the purchase and transportation of natural gas. Effective April 1, 1995, and for an experimental two year 3 6 period, the PGA clause in Tennessee was modified by an incentive rate program which compares Cities' purchased gas prices to market prices. The gains or losses to be recognized by Cities as a result of the incentive program are limited to a maximum of $25,000 per month. Considerable planning is required to project demand for the winter period. In order to provide natural gas at the lowest possible price and to meet peak demand, Cities must have a sufficient volume of natural gas in underground storage with its pipeline suppliers, natural gas in UCG Storage's underground storage facilities, and propane and LNG in its own facilities. Cities normally injects gas into pipeline storage systems and UCG Storage's storage system during the summer months and withdraws it in the winter months. At the present time, the underground storage facilities of UCG Storage have a maximum daily output capability of approximately 45,000 Mcf. Other storage facilities owned by Cities are used to provide short-term supplies to meet peak demand. Cities has nine propane peak shaving plants with a total capacity of approximately 1,050,000 gallons that can produce an equivalent of 19,459 Mcf daily and a LNG storage facility with a capacity of 500,000 Mcf which can inject a daily volume of 30,000 Mcf in the system. Cities has the ability to serve approximately 60% of its peak day load through the use of company owned storage facilities, storage contracts with Cities' suppliers and peaking facilities throughout the system. This ability provides the operational flexibility and security of supply required to meet the needs of the highly weather sensitive firm market. REGULATION In each state in which Cities operates, its rates, services and operations as a natural gas distribution company are subject to general regulation by the state public service commission. Cities' pipeline suppliers, but not Cities, are subject to regulation by the FERC (see "Utility Operations-Natural Gas Supply"). Cities' rates, which vary in its different regulatory jurisdictions, are determined by the cost of purchased gas to Cities, rate of return, type of service and volume of use by the customer. In addition, the issuance of securities by Cities is subject to approval by the state commissions, except in South Carolina and Iowa. Missouri only regulates the issuance of secured debt. Cities operates in each community where necessary under a franchise granted by the municipality for a fixed term of years. To date, Cities has been able to renew franchises and expects to continue to do so in the future. Cities considers the franchises held valid and adequate for the conduct of its business. In each of the service areas where it operates, Cities considers that its rights to maintain gas lines through unincorporated communities over private rights-of-way are, as a group or system, satisfactory for the adequate conduct of the business of Cities. Cities also has all required certificates of convenience and necessity for the operation of its properties and the conduct of its business from the appropriate state public utility regulatory agencies. The Tennessee and Georgia Public Service Commissions approved the implementation of Weather Normalization Adjustments (WNAs) effective in late 1991 and 1990, respectively. The WNAs, effective October through May each year in Georgia and November through April each year in Tennessee, allow Cities to increase the base rate portion of bills when weather is warmer than normal and decrease the base rate when weather is colder than normal. On December 8, 1995, Cities filed to increase rates on an annual basis by $750,000 in the state of Iowa. Cities expects that any increase granted will be effective by the fourth quarter of 1996. Effective November 15, 1995, Cities received an annual rate increase of $2,227,000 in the state of Tennessee. Cities had filed to increase rates by $3,951,000 on an annual basis. Effective October 14, 1995, Cities received an annual rate increase of $903,000 in the state of Missouri. Cities had filed to increase rates by $1,100,000 on an annual basis. Effective September 1, 1995, Cities received an annual rate increase of $2,700,000 in the state of Kansas. Cities had filed to increase rates by $4,230,000 on an annual basis. Effective February 7, 1995, Cities received an annual rate increase of $253,000 in the state of South Carolina. Cities had filed to increase rates by $341,000 on an annual basis. 4 7 In April 1995, Cities filed to increase rates on an annual basis by $810,000 in the state of Virginia. Cities was granted permission by the Virginia State Corporation Commission to implement the proposed rate increase effective September 29, 1995. The increase is subject to refund pending a final order by the commission which is expected in the fourth quarter of 1996. In an order issued in November 1994, the Virginia State Corporation Commission reduced Cities authorized rate of return in Virginia from 11.26% to 10.26%, resulting in a reduction in annual revenues of $218,000. This reduction was effective April 1, 1993. Excess revenues of approximately $370,000, plus interest, collected under interim rates through December 31, 1994, were refunded to Cities' Virginia customers in 1995. In addition, the commission determined that Cities had overcollected gross receipts tax from its customers from 1988 through mid-1993 and ordered the refund of $301,000, plus interest. This amount was also refunded to Cities' Virginia customers in 1995. As a part of a settlement agreement in the 1992 rate proceeding in Tennessee, Cities agreed to a management audit. The management audit report was issued in 1994. Management agreed with a majority of the recommendations made by the auditors and a number of recommendations have been or are currently in the process of being implemented. As a part of the settlement agreement in the 1995 rate proceeding in Tennessee, Cities resolved all outstanding issues related to the management audit. The implementation of the recommendations and final resolution of these matters did not have a material effect on the results of operations, financial condition or cash flows of the company. The FERC has permitted pipelines to recover from their customers, including Cities, the prudently incurred costs of implementing Order 636, referred to as transition costs. Based on current information from the pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred $2,862,000 and $6,739,000, respectively, as its estimated share of the remaining liability related to these transition costs. The 1995 estimate may differ from the final amount of future transition costs recovered from Cities. Cities has been granted permission through approved PGA filings or specific orders in all the states in which it operates to recover these transition costs from its customers. Cities' pipeline suppliers have liabilities to producers for payments under purchase contracts for quantities of gas for which deliveries have not been taken. Pipeline suppliers received permission from the FERC to recover from their customers, including Cities, a portion of their take-or-pay liabilities. Cities has been granted permission in all the states in which it operates to recover from its customers any take-or-pay costs. Based on current information from the pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred $1,172,000 and $2,086,000, respectively, as its estimated share of the remaining liability related to these take-or-pay costs. The 1995 estimate may differ from the final amount of future take-or-pay costs recovered from Cities. Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires Cities to record the expected costs of postretirement health and life insurance benefits during the years the employees render service. Prior to January 1, 1993, the effective date of Cities' adoption of SFAS 106, Cities recognized these costs on a cash basis. Costs related to these benefits calculated in accordance with SFAS 106 amounted to $1,691,000, $1,649,000 and $1,331,000 in 1995, 1994 and 1993, respectively. In fiscal 1993, the amount of expense recognized on a cash basis would have been $663,000. The accumulated benefit obligation of $8,894,000 existing at January 1, 1993, is being amortized over a twenty year period as allowed by SFAS 106. Cities has received approval to recover SFAS 106 costs in South Carolina, Kansas, Iowa, Illinois, Missouri and Tennessee. Effective January 1, 1993, the Tennessee commission allowed Cities to defer the difference between cash payments and SFAS 106 expense. In the 1995 rate proceeding in Tennessee, Cities received permission to recover the deferred amount of $553,000, plus interest, over a five year period. Cities discontinued deferring the difference in November 1995. The Virginia commission has approved the recovery of SFAS 106 costs in rates. However, the accumulated benefit obligation will be recovered over forty years as opposed to the twenty year amortization period allowed by SFAS 106. The difference 5 8 in the amortization period allowed by the Virginia commission does not have a material effect on the results of operations, financial condition, or cash flows of the company. The Georgia commission did not render a decision on SFAS 106 in Cities' most recent rate proceeding in that state. As required by some commissions, Cities has established a trust fund to accumulate the difference between the cash payments for postretirement benefits and SFAS 106 expense. 6 9 This Page Intentionally Left Blank 7 10 Set forth below is a table containing information relating to the state regulatory bodies which have jurisdiction over Cities and its rates. Amounts realized from rate increases may differ significantly from amounts authorized depending on volumes of gas sold and customer mix.
REGULATORY JURISDICTION ------------------------------------------------------------------------------------------ GEORGIA TENNESSEE VIRGINIA SOUTH CAROLINA ------------------- ------------------- ------------------- ------------------- Purchased Gas Adjustment Allowed upon filing Allowed upon filing Allowed upon filing Allowed upon filing Weather Normalization Effective November Effective November - - Adjustment 1990 1991 Regulatory Commission 5 commissioners 3 commissioners 3 commissioners 7 commissioners Make Up elected at large elected at large (2) elected by General elected by legislature Assembly on approval of merit selection panel Statutory Time Limit 6 months from date 6 months from date 150 days from date 6 months from date on Rate Orders of filing of filing of filing of filing Empowered to Grant Yes Yes Yes No Interim Rate Relief Latest General Rate November 1992 November 1995 November 1994 February 1995 Adjustment Date of Application May 1992 May 1995 April 1993 August 1994 Annualized Revenue Increase $1,900,000 $2,227,000 ($218,000) $253,000 (Decrease) Authorized Rate of Return on 10.78% 11.03% (1) 10.261% 10.73% Investment Authorized Rate of Return on 12.00% 12.60% (1) 11.20% 11.75% Equity Authorized
- ------------------------------------------------------------------------------- (1) Because the 1995 rate case was stipulated, the returns on investment and equity were not agreed upon. These rates represent the last authorized rates. (2) Commissioners will become appointed in 1996 and will take office July 1, 1996. 8 11
REGULATORY JURISDICTION ------------------------------------------------------------------------------------------ ILLINOIS MISSOURI KANSAS IOWA ------------------- ------------------- ------------------- ------------------- Purchased Gas Adjustment Allowed upon filing Allowed upon filing Allowed upon filing Allowed upon filing Weather Normalization - - - - Adjustment Regulatory Commission 7 commissioners 5 commissioners 3 commissioners 3 commissioners Make Up appointed by appointed by appointed by appointed by governor governor governor governor with Senate approval and minority party representation Statutory Time Limit 11 months from 11 months from 240 days from 10 months from on Rate Orders date of filing date of filing date of filing date of filing Empowered to Grant Yes Yes Yes Yes Interim Rate Relief Latest General Rate November 1990 October 1995 September 1995 December 1991 Adjustment Date of Application December 1989 November 1994 January 1995 November 1991 Annualized Revenue Increase $639,000 $903,000 $2,700,000 ($55,000) (Decrease) Authorized $108,000 (1) Rate of Return on 11.75% 10.58% 10.638% (2) 11.31% Investment Authorized Rate of Return on 13.62% 12.15% 12.00% (2) 12.45% Equity Authorized
- -------------------------------------------------------------------------------- (1) The court awarded an additional increase in rates which was effective October 1992. (2) Because the 1995 rate case was stipulated, the returns on investment and equity were not agreed upon. These rates represent the last authorized rates. 9 12
UTILITY OPERATING STATISTICS AVERAGE NUMBER OF CUSTOMERS(1) 1995 1994 1993 -------------- -------------- -------------- Residential............................................ 266,532 259,895 250,051 Commercial............................................. 34,435 33,861 31,849 Industrial Firm........................................ 395 395 395 Industrial Interruptible............................... 251 258 245 -------------- -------------- -------------- 301,613 294,409 282,540 ============== ============== ============== ACTUAL NUMBER OF CUSTOMERS AT YEAR END(1) 307,856 300,929 292,329 ============== ============== ============== NATURAL GAS THROUGH - PUT (MCF) (IN THOUSANDS)(2) Residential............................................ 22,901 21,352 23,055 Commercial............................................. 15,165 14,116 14,435 Industrial Firm........................................ 7,324 8,134 7,509 Industrial Interruptible............................... 11,920 11,002 11,661 -------------- -------------- -------------- 57,310 54,604 56,660 Transported Volumes.................................... 17,184 12,574 11,883 -------------- -------------- -------------- Total Through-Put...................................... 74,494 67,178 68,543 ============== ============== ============== REVENUES (IN THOUSANDS)(1) Residential............................................ $127,603 $129,519 $134,856 Commercial............................................. 70,967 73,376 74,361 Industrial Firm........................................ 27,438 33,772 31,252 Industrial Interruptible............................... 33,338 35,297 36,703 Other.................................................. 4,412 1,813 3,411 -------------- -------------- -------------- 263,758 273,777 280,583 Transportation......................................... 8,102 7,207 6,924 -------------- -------------- -------------- $271,860 $280,984 $287,507 ============== ============== ============== RESIDENTIAL (AVERAGE PER CUSTOMER) Annual Usage Mcf....................................... 86 82 92 Annual Revenue......................................... $479 $498 $539 Revenue Per Mcf........................................ $5.57 $6.07 $5.85 COMMERCIAL (AVERAGE PER CUSTOMER) Annual Usage Mcf....................................... 440 417 453 Annual Revenue......................................... $2,061 $2,167 $2,335 Revenue Per Mcf........................................ $4.68 $5.20 $5.15
- --------- (1) Residential, industrial firm and certain commercial customers are entitled to receive gas service on a continuous, uninterrupted basis subject to the application of their priority classification in the event of gas shortages. Industrial interruptible and certain commercial customers receive a low cost, load balancing service, which permits Cities to interrupt service and which is limited to users with alternative fuel sources for use when service is interrupted. Interruptible rates are generally lower than firm rates. (2) The following table classifies the effect of changes in volumes (Mcfs) of natural gas delivered during 1995, 1994 and 1993.
1995 1994 1993 -------------- -------------- -------------- (IN THOUSANDS) Prior year volumes........................ 67,178 68,543 62,713 Changes in volumes: Residential................................. 1,549 (1,703) 2,574 Commercial................................ 1,049 (319) 1,111 Industrial Firm.............................. (810) 625 (181) Industrial Interruptible.................... 918 (659) 1,560 Transported volumes.......................... 4,610 691 766 -------------- -------------- -------------- 74,494 67,178 68,543 ============== ============== ==============
10 13 ACQUISITIONS Effective March 1, 1994, the company purchased the natural gas system in Palmyra, Missouri from Western Resources, Inc. for approximately $665,000. The company also obtained a ten year non-compete agreement. Consideration for the agreement is contingent upon volumes sold to a certain industrial customer with payments made over a three year period, not to exceed $720,000. The system serves approximately 1,400 natural gas customers. On April 6, 1995, the company signed a letter of intent to acquire all the outstanding common stock of Monarch Gas Company (Monarch). The acquisition will be accounted for as a pooling of interests whereby the number of shares of the company's common stock issued will be calculated based on the book value of Monarch versus the book value of the company at December 31, 1994. In addition, the company will enter into a $250,000, five year non-compete agreement with the owners of Monarch. Monarch serves approximately 3,000 customers in small communities adjacent to Cities' Vandalia, Illinois operation. Pending regulatory approval, the company expects this acquisition to be final by the second quarter of 1996 and will not restate prior years' consolidated financial statements due to immateriality. SEASONAL NATURE OF BUSINESS Cities' business is highly seasonal in nature and heavily dependent upon weather due to Cities' substantial heating load. In order to moderate the impact of weather on the financial results of the utility operation, Cities sought and received approval from the Tennessee and Georgia commissions to implement Weather Normalization Adjustments (WNAs). See "Utility Operations-Regulation" for additional information concerning WNAs. Cities' business will still be seasonal in nature resulting in greater earnings during the winter months and will continue to be dependent upon weather, especially in those states where a WNA has not been implemented. However, Cities seeks to minimize the quarterly variations in sales volumes and earnings by sales to industrial customers and the diversified activities of its unregulated subsidiaries. See chart of quarterly earnings on page 47 for the years 1995 and 1994. OTHER UTILITY OPERATIONS In addition to its sales of natural gas, Cities engages in direct merchandising and repair of gas appliances. The following table summarizes revenues from these sources for 1995, 1994 and 1993.
1995 1994 1993 -------------- -------------- -------------- (IN THOUSANDS) Appliance Sales.............................. $1,791 $2,537 $3,276 Jobbing and Service.......................... 1,288 1,256 1,148 -------------- -------------- -------------- $3,079 $3,793 $4,424 ============== ============== ==============
11 14 SUBSIDIARY OPERATIONS UNITED CITIES GAS STORAGE COMPANY UCG Storage is engaged in maintaining and operating gas wells for natural gas storage. UCG Storage owns and operates storage fields in Kansas and Kentucky. The storage fields provide a mechanism to purchase and store gas for distribution during the winter and other times when feasible. In addition to providing peak shaving gas, the storage facilities can also be used to balance gas supplies, allowing extra gas to be diverted into the field when contract demand is not needed and withdrawn when gas usage exceeds contract demand. Included in the revenues of UCG Storage are affiliated revenues of $7,341,000, $7,037,000 and $8,749,000 in 1995, 1994 and 1993, respectively, for storage services and natural gas provided to Cities' customers in Tennessee, Kansas and Illinois. The following table provides information about the storage fields.
DAILY FIELD CAPACITY CUSHION GAS DELIVERABILITY - ----- -------------- -------------- -------------- (Mcf) Kansas storage fields............................. 7,037,000 1,879,000 15,000 Kentucky storage field............................ 3,300,000 1,600,000 30,000 -------------- -------------- -------------- 10,337,000 3,479,000 45,000 ============== ============== ==============
UCG ENERGY CORPORATION AND SUBSIDIARIES The activities of UCG Energy and its subsidiaries are described below. PROPANE DIVISION The Propane Division currently operates through United Cities Propane Gas of Tennessee, Inc. (UCPT), a wholly-owned subsidiary of UCG Energy. The Propane Division engages in the retail distribution of propane (LP) gas, the wholesale supply and transportation of LP gas, the transportation of certain products for other companies and the direct merchandising and repair of propane gas appliances. Each town operation has its own storage facility with a total Propane Division storage capacity of 1,830,000 gallons. The following table contains information, as of December 31, 1995, regarding the number of customers.
SERVICE AREAS CUSTOMERS Jackson, TN..................................................... 1,025 Manchester, TN.................................................. 1,139 Winchester, TN.................................................. 1,239 Rock Island, TN................................................. 929 Franklin, TN.................................................... 1,335 Murfreesboro, TN................................................ 1,983 Hartsville, TN.................................................. 1,906 Maryville, TN................................................... 3,049 Sevierville, TN................................................. 1,791 Kingston, TN.................................................... 1,514 Morristown, TN.................................................. 1,431 Tazewell, TN.................................................... 166 Johnson City, TN................................................ 3,212 Mountain City, TN............................................... 1,467 Boone, NC....................................................... 1,916 --------------- Total....................................................... 24,102 ===============
Effective January 1, 1996, UCPT purchased substantially all the assets of Duncan Gas Service for approximately $4,310,000. In addition, UCPT entered into a ten year non-compete agreement with the prior owners for $250,000, to be paid over a ten year period. This acquisition added approximately 2,000 customers in the Johnson City, Tennessee area. 12 15 Effective May 22, 1995, UCPT purchased all of the propane transportation assets of Transpro South, Inc., a common carrier corporation, for approximately $218,000. In addition, UCPT entered into a ten year non-compete agreement with the prior owner for $6,000. Effective January 1, 1995, UCPT purchased substantially all of the assets of Harrell Propane, Inc. for approximately $1,383,000. In addition, UCPT entered into ten year non-compete agreements with the prior owners for $250,000, to be paid over an eight year period. This acquisition added approximately 1,300 propane customers in the Murfreesboro, Tennessee area. Effective April 14, 1994, UCPT purchased all of the assets of Hurley's Propane Gas for approximately $938,000. In addition, UCPT entered into ten year non-compete agreements with the prior owners for $100,000, to be paid over a five year period. This acquisition added approximately 700 propane customers in the Morristown, Tennessee area. Effective August 1, 1993, UCPT purchased the issued and outstanding shares of common stock of High Country Propane, Inc. for $1,600,000, less liabilities assumed of $820,000. In addition, UCPT obtained ten year non-compete agreements for $100,000, to be paid over a five year period. This acquisition added approximately 1,400 propane customers in the Boone, North Carolina area. In 1995, 1994 and 1993, the Propane Division contributed 72%, 54% and 47%, respectively, of UCG Energy's total revenues. Of UCG Energy's gross properties at December 31, 1995, approximately 47% was related to the Propane Division. RENTAL DIVISION UCG Energy's Rental Division, which includes UCG Leasing, Inc., leases real estate and vehicles to Cities and real estate and appliances to non-affiliated third parties. The Rental Division's revenues were approximately 17% of UCG Energy's total revenues in 1995, 1994 and 1993. Included in the revenues of the Rental Division are affiliated revenues of $5,307,000, $5,827,000 and $6,042,000 for the years 1995, 1994 and 1993, respectively, representing rental charges to Cities for transportation equipment and office facilities. Of UCG Energy's gross properties at December 31, 1995, approximately 53% was related to the Rental Division. UTILITY SERVICES DIVISION UCG Energy's Utility Services Division is engaged in exploration and production activities. The revenues from this division were approximately 11% in 1995, 29% in 1994 and 36% in 1993, of UCG Energy's total revenues. Included in the Utility Services Division's revenues are affiliated revenues of $112,000, $701,000 and $1,139,000 for the years 1995, 1994 and 1993, respectively. These revenues represent purchases by Cities of energy-related products from the Utility Services Division. A decision to discontinue the distribution of energy-related products by the Utility Services Division was made by management in June 1994. The discontinuance of this activity, which was completed mid-1995, had no material effect on the results of operations, financial condition or cash flows of the company. During the first quarter of 1995, UCG Energy purchased a 45% interest in certain contracts related to the gas marketing business of Woodward Marketing, Inc. (WMI), a Texas corporation. In exchange for the acquired interest, the shareholders of WMI received $5,000,000 in the company's common stock (320,512 shares) and $832,000 in cash in May 1995, and may, if certain earnings targets are met, receive up to $1,000,000 in cash to be paid over a five year period. In exchange for its own gas marketing contracts and the acquired 45% interest in the WMI gas marketing contracts, UCG Energy received a 45% interest in a newly formed limited liability company, Woodward Marketing, L.L.C., (WMLLC). WMI received a 55% interest in WMLLC in exchange for its remaining 55% interest in the WMI gas marketing contracts. WMLLC provides gas marketing services to industrial customers, municipalities and local distribution companies, including Cities. UCG Energy utilized equity accounting, effective January 1, 1995, for this acquisition. The excess of the purchase price over the value of the net tangible assets, amounting to approximately $5,400,000, was allocated to intangible assets consisting of customer contracts and goodwill, which are being amortized over ten and twenty years, respectively. 13 16 COMPETITION Cities distributes natural gas primarily to residential, commercial and high-priority industrial users and intends to aggressively seek additional numbers of such customers. Competition exists between natural gas and other forms of energy available to customers. Cities is experiencing competition for each class of customer; electricity is the primary competition for residential and commercial customers, and #2 and #6 fuel oil is the primary competition for industrial customers. In addition, certain customers, primarily industrial, may have the ability to by-pass Cities' distribution system by connecting directly with a pipeline. Cities has received approval from all the public service commissions in the states in which it operates, except Iowa, to place into effect a negotiated tariff rate which allows Cities to maintain industrial loads at lower margin rates. Iowa has rules which allow for flexible rates. These rates are competitive with the price of alternative fuels. In addition, certain industrial customers have changed from firm to interruptible rate schedules in order to obtain natural gas at a lower cost. Additionally, Cities has received approval from all state commissions to provide transportation service of customer-owned gas (see Item 1. Business - "Utility Operations-Natural Gas Supply"). UCG Energy's propane subsidiary is in competition with other suppliers of propane, natural gas and electricity. Competition exists in the areas of price and service. The wholesale cost of propane is subject to fluctuations primarily based on demand, availability of supply and product transportation costs. Propane storage facilities can be utilized to store purchased gas when the cost is more economical, thus enabling UCG Energy to more competitively price its product. However, during periods of colder than normal weather, when demand is high, UCG Energy may have to replace its supply of gas at higher costs, which may require UCG Energy to sell at reduced margins to match its competition. The Utility Services Division of UCG Energy, through its 45% interest in WMLLC, competes with other natural gas brokers in obtaining natural gas supplies for customers. The Rental Division competes with other rental companies. UCG Storage charges rates to Cities that are subject to review by the various commissions in the states within which the storage service is provided to Cities. Therefore, UCG Storage's rates must be competitive with other storage facilities. UCG Storage also stores natural gas for unrelated third parties. As a result, UCG Storage is in competition with other companies that store natural gas as to rates charged and deliverability of natural gas. Storage agreements between UCG Storage and Cities give Cities first priority to any storage services. PERSONNEL At December 31, 1995, the company employed 1,298 full time employees, including 99 who are represented by a union. The agreement between the company and the union that represents 88 employees in Kansas expires October 31, 1996, and the company expects to renegotiate the terms of the agreement prior to the expiration date. In addition, an election is scheduled for March 29, 1996, in Hannibal, Missouri for 20 employees to determine if they will be represented by a union. On March 6, 1996, the International Union of Operating Engineers filed a petition to represent approximately 97 employees in Columbus, Georgia, and an election is scheduled for April 19, 1996. Of the full time employees, 235 are engaged in the operations of the Illinois/Tennessee/Missouri Division, 243 in the Virginia/East Tennessee Division, 237 in the Georgia/South Carolina Division, 274 in the Kansas/Iowa/Missouri Division, 179 administrative and supervisory personnel in the corporate office, and 130 in UCG Energy's operating locations. At December 31, 1995, there were 559 employees participating in the employee stock purchase plan and 1,004 employees participating in the company's 401k savings plan. All corporate general and administrative functions, as well as the overseeing of engineering, marketing, accounting, finance, operations and human resources are handled at the company's corporate offices in Brentwood and Franklin, Tennessee. Direct functions dealing with engineering, marketing, accounting, operations and human resources for the service locations of each division are handled at the division levels. 14 17 OPERATING AREAS [MAP]
NATURAL GAS ILLINOIS/TENNESSEE/MISSOURI DIVISION Illinois Tennessee Missouri - - Virden - Union city - Neelyville - - Vandalia - Franklin + - - Salem - Murfreesboro - - Harrisburg - Colubmia - - Metropolis - Shelbyville KANSAS/IOWA/MISSOURI DIVISION Kansas Iowa Missouri - - Wyandotte Cty - Keokuk - Canton - - Johnson Cty + - Hannibal - - Yates Center - Palmyra - - Independence - - Coffeyville VIRGINIA/EAST TENNESSEE DIVISION Virginia Tennessee - - Abingdon - Maryville - - Marion - Morristown - - Wytheville - Greeneville - - Pulaski - Johnson City + - - Radford - Kingsport - - Blacksburg - Bristol GEORGIA/SOUTH CAROLINA DIVISION Georgia South Carolina - - Gainesville - Gaffney - - Columbus + PROPANE Tennessee - - Franklin + - Hartsville - Murfreesboro - - Rock Island - Manchester - Winchester - - Maryville - Morristown - Johnson City - - Mountain City - Kingston - Jackson - - Sevierville - New Tazewell NORTH CAROLINA - - Boone STORAGE FACILITIES Natural Gas Storage Propane Bulk Storage - - Columbus, GA (LNG) - Morristown, TN - - Barnsley Storage, KY - Winchester, TN (underground) - - Liberty Storage, KS (underground) PIPELINE SUPPLIERS - - East Tennessee - Columbia Gulf Transmission Co. Natural Gas Co. - Natural Gas Pipeline Co. of America - - Southern Natural - Panhandle Eastern Pipe Line Co. Gas Co. - Trunkline Gas Co. - - Williams Natural - Mississippi River Transmission Corp. Gas Co. - ANR Pipeline Company - - Transcontinental Gas - Tennessee Gas Pipeline Co. Pipe Line Corp. - - Texas Eastern Transmission Corp. - - Texas Gas Transmission Corp.
* Corporate Office - Brentwood, Tennessee + Division Office 15 18 EXECUTIVE OFFICERS OF THE COMPANY
HELD PRESENT OTHER POSITIONS HELD NAME AND POSITION AGE OFFICE SINCE DURING PAST FIVE YEARS ----------------- --- ------------ ---------------------- Dwight C. Baum 83 October 1979 Chairman of the Board Gene C. Koonce 63 October 1978 President and Chief Executive Officer Thomas R. Blose, Jr. 46 July 1990 Senior Vice President- Operations and Engineering James B. Ford 53 April 1986 Senior Vice President and Treasurer Shirley M. Hawkins 56 August 1993 Senior Vice President-Administration Senior Vice President (April 1993-July 1993) and Secretary Vice President-Human Resources (April 1987-March 1993) Glenn B. Rogers 57 April 1983 Senior Vice President- Gas Supply and Marketing
16 19 ITEM 2. PROPERTIES Cities' properties are located in operating areas as indicated on page 15, and consist primarily of approximately 7,262 miles of distribution and transmission mains and approximately 5,519 miles of service lines connecting the mains to customers' premises. The company also owns and operates nine peak shaving plants and a LNG plant, as well as underground storage fields which are used to supplement the supply of natural gas in periods of peak demand (see Item 1. Business -- "Utility Operations-Natural Gas Supply"). Substantially all of Cities' property is subject to the lien of the Indenture of Mortgage securing Cities' first mortgage bonds. The following table sets forth the percentages of property located in the various operating divisions.
DIVISION PERCENT --------- ------- Illinois/Tennessee/Missouri................................ 28% Virginia/East Tennessee.................................... 25% Georgia/South Carolina..................................... 19% Kansas/Iowa/Missouri....................................... 28% ----------------- 100% =================
The capital budget for the company for 1996 is approximately $36,800,000 (utility, $29,000,000 and non-utility, $7,800,000). Based on information currently available, which is subject to change, the company anticipates capital expenditures of approximately $31,800,000 in 1997 and $32,100,000 in 1998. These reflect the normal growth in Cities' service areas along with the increased demands expected for natural gas and propane (LP) service. Cities follows a regular program of improvements and additions to its properties. Utility plant additions during 1995 amounted to approximately $35,160,000 for system upgrading, relocations, and providing new mains, service lines and metering equipment. During 1995, Cities completed construction of a twenty-eight mile main which connects two of its fastest growing distribution systems located in Middle Tennessee and is designed to provide Cities' current customers with the lowest possible priced gas through increased gas supply flexibility. Included in the 1995 capital expenditures is $5,700,000 related to this project. Total utility property at December 31, 1995 amounted to $445,058,000. The following table sets forth information with respect to utility property additions, excluding acquisitions, made by Cities during each of the five years ended December 31.
GROSS NET PERIOD ADDITIONS RETIREMENTS ADDITIONS ------ ---------- ----------- --------- (IN THOUSANDS) 1991 $27,950 3,512 $24,438 1992 $23,484 2,531 $20,953 1993 $27,030 2,826 $24,204 1994 $30,888 2,199 $28,689 1995 $35,160 2,535 $32,625
Non-utility property additions during 1995 amounted to approximately $4,926,000 (UCG Energy, $4,879,000 and UCG Storage, $47,000). The majority of UCG Energy's 1995 additions are related to transportation equipment, rental equipment and facilities and propane related equipment. The upgrading of underground storage facilities accounts for the majority of property additions for UCG Storage. Gross non-utility property as of December 31, 1995 amounted to $67,423,000 (UCG Energy, $47,968,000 and UCG Storage, $19,455,000). The company believes its facilities are suitable and adequate for the purpose of serving the needs of its customers. ITEM 3. LEGAL PROCEEDINGS. Except as set forth below and in Item 1. Business - "Utility Operations-Regulation," and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Environmental Matters," "Internal Revenue Service Audit" and "Contingencies," there is no material litigation involving the company as of December 31, 1995. There are certain claims which are adequately covered by liability insurance or reserves. In February 1996, Cities received a letter from the Georgia Environmental Protection Division asking Cities to submit a compliance status report for an Americus, Georgia former manufactured gas plant site. Cities is discussing this matter further with other parties already performing work at the site. Management expects that expenditures, if any, related to response action at this site will be recovered through rates or insurance, or shared among other potentially responsible parties. Therefore, the costs of responding to this site are not expected to materially affect the results of operations, financial condition or cash flows of the company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 17 20 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. APPROXIMATE NUMBER OF STOCKHOLDERS
NUMBER OF STOCKHOLDERS OF RECORD AS OF TITLE OF CLASS DECEMBER 31, 1995 ----------------- Common Stock, without par value................................ 8,157 =========
The Common Stock of the company is traded over-the-counter on the NASDAQ National Market System under the symbol UCIT. The high and low closing sales prices, compiled from quotations supplied by the NASDAQ Monthly Statistical Report, and the dividends paid per share, were as follows:
1995 1994 ------------------------------------- ------------------------------------------- DIVIDENDS DIVIDENDS HIGH LOW PER SHARE HIGH LOW PER SHARE ---- ---- ---------- ---- ---- --------- 1st Quarter............ 16 1/4 15 1/4 $.255 18 3/4 16 $.25 2nd Quarter............ 16 1/4 14 1/2 $.255 17 1/4 15 1/2 $.25 3rd Quarter............ 16 1/2 14 3/4 $.255 17 3/4 15 1/2 $.25 4th Quarter............ 18 3/4 15 3/4 $.255 17 1/4 15 7/16 $.255
At its regularly scheduled meeting held on February 3, 1996, the Board of Directors declared a quarterly dividend of $.255 per share, payable March 15, 1996, to all shareholders of record on February 29, 1996. Dividends have been paid by Cities for the past 162 consecutive quarters. The Common Stock is entitled to dividends when, as and if declared by the Board of Directors, subject to various limitations on the declaration or payment of dividends imposed by the provisions of Cities' Indenture of Mortgage. Under these provisions, none of the company's retained earnings at December 31, 1995, was unavailable to pay dividends on the Common Stock. ITEM 6. SELECTED FINANCIAL DATA.
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE DATA) Utility Operating Revenues........................ $271,860 $280,984 $287,507 $265,460 $239,155 =============== ============= ============= ============= ============= Common Stock Earnings............................. $9,935 $12,093 $12,120 $10,104 $7,741 =============== ============= ============= ============= ============= Common Stock Earnings Per Share................... $0.84 $1.16 $1.19 $1.07 $0.97 =============== ============= ============= ============= ============= Total Assets...................................... $460,377 $421,200 $401,520 $370,150 $368,283 =============== ============= ============= ============= ============= Long-Term Debt.................................... $163,160 $144,344 $151,843 $157,734 $127,430 =============== ============= ============= ============= ============= Redeemable Preferred and Preference Stock......... - - - - $1,352 =============== ============= ============= ============= ============= Cash Dividends Declared Per Common Share.......... $1.02 $1.005 $0.985 $0.965 $0.93 =============== ============= ============= ============= =============
18 21 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- United Cities Gas Company (Cities) and its subsidiaries (collectively, the company) is primarily a distributor of natural and propane gas serving approximately 335,000 customers in parts of ten states. The financial condition and results of operations of the company are significantly affected by the weather and the regulatory environment in the eight states in which it distributes natural gas. The following discussion focuses on the financial condition and results of operations for the company for the past three years and its capital expenditure plans for the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995, the company's capitalization ratios consisted of 47% common stock equity and 53% long-term debt. The company's goal is to maintain a common stock equity ratio of approximately 50% through increased retained earnings and the issuance of stock through the employee stock purchase, customer stock purchase, dividend reinvestment and long-term stock plans. This should enable the company to maintain its current credit integrity and continue to allow access to relatively low cost financing. Total cash provided by operations of the company totaled $25,290,000, $27,523,000 and $11,791,000 in 1995, 1994 and 1993, respectively. Changes in accounts receivable, gas in storage and accounts payable were primarily a result of the weather sensitive nature of the company's business. Changes in gas costs to be billed in the future and supplier refunds due customers were primarily a result of the timing of the recoveries from, or refunds to, customers of these costs through the Purchased Gas Adjustment (PGA) mechanism. A substantial portion of the company's cash requirements is to fund its ongoing construction program in order to provide natural gas services to a growing customer base. Investing activities of the company include capital expenditures for the company's utility and non-utility operations totaling $40,l00,000, $35,100,000 and $31,000,000 in 1995, 1994 and 1993, respectively. During 1995, Cities completed construction of a twenty-eight mile main which connects two of its fastest growing distribution systems located in Middle Tennessee and is designed to provide Cities' current customers with the lowest possible priced gas through increased gas supply flexibility. Included in the 1995 and 1994 utility capital expenditures stated above is $5,700,000 and $3,700,000, respectively, related to this project. Capital expenditures totaling $29,000,000 for the utility operations and $7,800,000 for the non-utility operations are budgeted for 1996. Total capital expenditures for 1997 and 1998 are expected to be approximately $31,800,000 and $32,100,000, respectively, based on information currently available, which is subject to change. Because the nature of the company's business is highly seasonal and weather sensitive, the company uses short-term debt during the non-heating season as a means of funding its ongoing construction program and working capital requirements. The short-term debt is retired with cash from operations or long-term securities, whichever management deems appropriate. At December 31, 1995, the company had total short-term lines of credit of $84,000,000 in the form of master and banker's acceptance notes bearing interest primarily at the lesser of the prime rate or a negotiated rate during the term of each borrowing. Under these arrangements, $32,313,000 in short-term debt was outstanding at December 31, 1995. The financing activities for 1995, 1994 and 1993 reflect the retirement of long-term debt, dividend payments, the issuance of stock through the company's various stock purchase plans and the net activity of short-term borrowings. The financing activities of 1995 also included common stock and long-term debt securities issued under the company's shelf registration statement which became effective in 1995. The shelf registration statement gives the company the flexibility to issue from time to time in one or more public offerings up to $200,000,000 of its securities which may include common stock, unsecured notes and/or first mortgage bonds. In June 1995, the company issued 1,380,000 shares of common stock under the shelf registration statement in an underwritten public offering with net proceeds from the sale amounting to approximately $18,900,000. In addition, $22,000,000 of medium-term notes were issued under the shelf registration statement in the last quarter of 1995. The proceeds of long-term debt also included a $5,000,000 term note in United Cities Propane Gas of Tennessee, Inc. (UCPT), a wholly-owned subsidiary of UCG Energy Corporation (UCG Energy). The proceeds of these activities were used to repay short-term borrowings, retire United Cities Gas Company & Subsidiaries 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- long-term debt, finance the company's construction program and for other corporate purposes. In 1994, the company implemented a customer stock purchase plan whereby residents in the company's service territory can make a one-time purchase of common stock at a 5% discount below the average market value. A participant can invest any amount ranging from $250 to $10,000. During 1995 and 1994, 166,609 and 147,148 shares of common stock, respectively, were issued under the plan resulting in net proceeds to the company of approximately $2,457,000 and $2,099,000, respectively. In May 1995, 320,512 shares of common stock valued at $5,000,000 were issued in connection with the purchase of a 45% interest in Woodward Marketing, L.L.C. by UCG Energy. In 1996, funds for capital expenditures, long-term debt maturities, sinking fund requirements and dividend payments are expected to be provided by internally generated cash, issuance of stock through the company's various stock purchase plans, short-term borrowings and issuances of securities under the shelf registration statement. Although the company does not currently plan to issue first mortgage bonds in 1996 under the shelf registration statement, at December 31, 1995, the company had bondable property to support the issuance of approximately $60,500,000 of first mortgage bonds. REGULATORY MATTERS On December 8, 1995, Cities filed to increase rates on an annual basis by $750,000 in the state of Iowa. Cities expects that any increase granted will be effective by the fourth quarter of 1996. Effective November 15, 1995, Cities received an annual rate increase of $2,227,000 in the state of Tennessee. Cities had filed to increase rates by $3,951,000 on an annual basis. Effective October 14, 1995, Cities received an annual rate increase of $903,000 in the state of Missouri. Cities had filed to increase rates by $1,100,000 on an annual basis. Effective September 1, 1995, Cities received an annual rate increase of $2,700,000 in the state of Kansas. Cities had filed to increase rates by $4,230,000 on an annual basis. Effective February 7, 1995, Cities received an annual rate increase of $253,000 in the state of South Carolina. Cities had filed to increase rates by $341,000 on an annual basis. In April 1995, Cities filed to increase rates on an annual basis by $810,000 in the state of Virginia. Cities was granted permission by the Virginia State Corporation Commission to implement the proposed rate increase effective September 29, 1995. The increase is subject to refund pending a final order by the commission which is expected in the fourth quarter of 1996. In an order issued in November 1994, the Virginia State Corporation Commission reduced Cities' authorized rate of return in Virginia from 11.26% to 10.26%, resulting in a reduction in annual revenues of $218,000. This reduction was effective April 1, 1993. Excess revenues of approximately $370,000, plus interest, collected under interim rates through December 31, 1994, were refunded to Cities' Virginia customers in 1995. In addition, the commission determined that Cities had overcollected gross receipts tax from its customers from 1988 through mid-1993 and ordered the refund of $301,000, plus interest. This amount was also refunded to Cities' Virginia customers in 1995. As a part of a settlement agreement in the 1992 rate proceeding in Tennessee, Cities agreed to a management audit. The management audit report was issued in 1994. Management agreed with a majority of the recommendations made by the auditors and a number of recommendations have been or are currently in the process of being implemented. As a part of the settlement agreement in the 1995 rate proceeding in Tennessee, Cities resolved all outstanding issues related to the management audit. The implementation of the recommendations and final resolution of these matters did not have a material effect on the results of operations, financial condition or cash flows of the company. The Georgia and Tennessee Public Service Commissions have approved Weather Normalization Adjustments (WNAs). The WNAs, effective October through May each year in Georgia and November through April each year in Tennessee, allow Cities to increase the base rate portion of customers' bills when weather is warmer than normal and decrease the base rate when weather is colder than normal. The net effect of the WNAs was an increase in revenues of $1,030,000, $2,050,000 and $324,000 in 1995, 1994 and 1993, respectively. United Cities Gas Company & Subsidiaries 20 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- ENVIRONMENTAL MATTERS Cities is the owner or previous owner of manufactured gas plant sites which were used to supply gas prior to the availability of natural gas. Manufactured gas was an inexpensive source of fuel for lighting and heating nationwide. As a result of the gas manufacturing process, certain by-products and waste materials, including coal-tar, were produced and may have been accumulated at the plant sites. This was an acceptable and satisfactory process at the time of operations. Under current environmental protection laws and regulations, Cities may be responsible for response action with respect to such materials, if response action is necessary. Cities identified a site in Columbus, Georgia, and along with other responsible parties, has performed response action. Cities' share of response action costs at this site totaled approximately $1,324,000. Of this amount, $1,275,000 was requested and approved to be recovered over a three year period in rates which were effective November 1992. Cities recovered all but approximately $23,000 of the approved amount through October 1995. Cities will request and expects approval to recover the remaining costs of $72,000 as an extension of the rider or through the PGA process. In June 1995, Cities entered into an agreement to pay $1,787,000 to Union Electric Company (Union Electric) whereby Union Electric agreed to assume responsibility for Cities' continuing investigation and environmental response action obligations as outlined in the feasibility study related to a former manufactured gas plant site in Keokuk, Iowa. At December 31, 1995, Cities had $1,430,000 accrued for its remaining liability related to the agreement. This amount is to be paid in equal annual payments over each of the next four years beginning in 1996. Cities has deferred the accrued amount and expects approval for recovery in its current rate proceeding in Iowa. Cities owns former manufactured gas plant sites in Johnson City and Bristol, Tennessee and Hannibal, Missouri. Cities is unaware of any information which suggests that these sites give rise to a present health or environmental risk as a result of the manufactured gas process or that any response action will be necessary. However, as of December 31, 1995, Cities had incurred and deferred for recovery $16,000 and accrued and deferred for recovery an additional $750,000 associated with the preliminary survey and invasive study of these sites. The Tennessee Public Service Commission granted Cities permission to defer, until its next rate case, all costs incurred in Tennessee in connection with state and federally mandated environmental control requirements. In addition, based on a decision by the Missouri Public Service Commission concerning the recovery of environmental response action costs incurred by another company, Cities expects recovery of the costs involved in the investigation and response action, if any, associated with the manufactured gas plant site in Missouri. Pursuant to the Tennessee Petroleum Underground Storage Tank Act (the Act), Cities is required to upgrade or remove certain underground storage tanks (USTs) situated in Tennessee. As of December 31, 1995, Cities had identified a small number of USTs in this category in Tennessee and had incurred and deferred for recovery $34,000 and, based on available current information, accrued and deferred for recovery an additional $70,000 for the upgrade or removal of these USTs. Cities has estimated that it may incur, if corrective action is necessary, additional costs of up to $160,000 to bring the sites into compliance with the Act. The Tennessee Public Service Commission granted Cities permission to defer, until its next rate case, all costs incurred in connection with state and federally mandated environmental control requirements. In addition, Cities may be able to recover a portion of any corrective action costs from the Tennessee Underground Storage Tank Fund for the UST sites in Tennessee. Cities identified three USTs in Virginia and, as of December 31, 1995, incurred approximately $20,000 for the closure of these sites. Under current regulation, these sites are officially closed and Cities does not anticipate incurring any additional amounts related to these sites. In October 1995, Cities received two Notices of Violation (NOVs) from the Tennessee Department of Environment and Conservation (DEC) concerning historic releases from USTs in Kingsport, Tennessee. These USTs were formerly owned by Holston Oil Co., Inc. (Holston), which at one time was a wholly-owned subsidiary of Tennessee-Virginia Energy Corporation (TVEC). Prior to TVEC's merger with the company in 1986, TVEC sold the common stock of Holston to an unrelated party. Cities has responded to the NOVs advising the DEC that Cities is not a responsible party United Cities Gas Company & Subsidiaries 21 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- for any environmental contamination at the sites. Cities has been advised by the DEC that the DEC will respond in several months. Cities does not anticipate incurring any response action costs at these sites. Cities has reviewed and commented on a proposed Consent Order from the Kansas Department of Health and Environment (KDHE) regarding mercury contamination at gas pipeline sites. The KDHE has identified the need to investigate gas industry activities which utilize mercury equipment in Kansas. Cities is cooperating with the KDHE in preparing a Consent Order and a Work Plan for responding to mercury contamination at any site which is identified as exceeding the KDHE's established acceptable concentration levels. As of December 31, 1995, Cities had identified approximately 720 meter sites where mercury may have been used and had incurred and deferred for recovery $28,000 and, based on available current information, accrued and deferred for recovery an additional $280,000 for the investigation of these sites. Cities has estimated that it may incur an additional amount of up to $4,100,000 over the next seven years in responding to a future administrative order for those sites, if any, that exceed the KDHE's established acceptable concentration levels. Cities has received an order from the Kansas Corporation Commission (KCC) allowing Cities to defer and seek recovery in future rate proceedings the reasonable and prudent costs and expenses associated with the Consent Order and Work Plan. In the order, the commission approved a Stipulation and Agreement which provides a cap of $1,500,000 on amounts deferred with the ability to exceed this cap if reasonable costs of response action are incurred. Based on a decision by the KCC concerning the recovery of environmental response action costs incurred by another company, Cities expects recovery of the costs involved in the investigation and response action associated with the mercury meter sites in Kansas. Management expects that future expenditures related to response action at any site will be recovered through rates or insurance, or shared among other potentially responsible parties. Therefore, the costs of responding to these sites are not expected to materially affect the results of operations, financial condition or cash flows of the company. GAS SUPPLY In 1992, the Federal Energy Regulatory Commission (FERC) issued Orders 636, 636-A and 636-B. These orders required interstate pipelines to unbundle or separate gas sales, transportation and storage services by the 1993-1994 winter season. The pipelines' sales services were previously combined and sold as a single service. The unbundling of these services has allowed Cities more flexibility in selecting and managing the type of services required to provide its customers with the lowest possible priced gas while maintaining reliable gas supply. The FERC has permitted pipelines to recover from their customers, including Cities, the prudently incurred costs of implementing these orders, referred to as transition costs. Based on current information from the pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred $2,862,000 and $6,739,000, respectively, as its estimated share of the remaining liability related to these transition costs. The 1995 estimate may differ from the final amount of future transition costs recovered from Cities. Cities has been granted permission through approved PGA filings or specific orders in all the states in which it operates to recover these transition costs from its customers. Cities' pipeline suppliers have liabilities to producers for payments under purchase contracts for quantities of gas for which deliveries have not been taken. Pipeline suppliers received permission from the FERC to recover from their customers, including Cities, a portion of their take-or-pay liabilities. Cities has been granted permission in all the states in which it operates to recover from its customers any take-or-pay costs. Based on current information from the pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred $1,172,000 and $2,086,000, respectively, as its estimated share of the remaining liability related to these take-or-pay costs. The 1995 estimate may differ from the final amount of future take-or-pay costs recovered from Cities. ACQUISITIONS Effective January 1, 1996, UCPT purchased substantially all of the assets of Duncan Gas Service for approximately $4,310,000. In addition, UCPT entered into a ten year non-compete agreement with the prior owners for $250,000, United Cities Gas Company & Subsidiaries 22 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- to be paid over a ten year period. This acquisition added approximately 2,000 propane customers in the Johnson City, Tennessee area. Effective May 22, 1995, UCPT purchased all of the propane transportation assets of Transpro South, Inc., a common carrier corporation, for approximately $218,000. In addition, UCPT entered into a ten year non-compete agreement with the prior owner for $6,000. On April 6, 1995, the company signed a letter of intent to acquire all the outstanding common stock of Monarch Gas Company (Monarch). The acquisition will be accounted for as a pooling of interests whereby the number of shares of the company's common stock issued will be calculated based on the book value of Monarch versus the book value of the company at December 31, 1994. In addition, the company will enter into a $250,000, five year non-compete agreement with the owners of Monarch. Monarch serves approximately 3,000 customers in small communities adjacent to Cities' Vandalia, Illinois operation. Pending regulatory approval, the company expects this acquisition to be final by the second quarter of 1996 and will not restate prior years' consolidated financial statements due to immateriality. During the first quarter of 1995, UCG Energy purchased a 45% interest in certain contracts related to the gas marketing business of Woodward Marketing, Inc. (WMI), a Texas corporation. In exchange for the acquired interest, the shareholders of WMI received $5,000,000 in the company's common stock (320,512 shares) and $832,000 in cash in May 1995, and may, if certain earnings targets are met, receive up to $1,000,000 in cash to be paid over a five year period. In exchange for its own gas marketing contracts and the acquired 45% in the WMI gas marketing contracts, UCG Energy received a 45% interest in a newly formed limited liability company, Woodward Marketing, L.L.C. (WMLLC). WMI received a 55% interest in WMLLC in exchange for its remaining 55% interest in the WMI gas marketing contracts. WMLLC provides gas marketing services to industrial customers, municipalities and local distribution companies, including Cities. UCG Energy utilized equity accounting, effective January 1, 1995, for the acquisition. The excess of the purchase price over the value of the net tangible assets, amounting to approximately $5,400,000, was allocated to intangible assets consisting of customer contracts and goodwill, which are being amortized over ten and twenty years, respectively. Effective January 1, 1995, UCPT purchased substantially all of the assets of Harrell Propane, Inc. for approximately $1,383,000. In addition, UCPT entered into ten year non-compete agreements with the prior owners for $250,000, to be paid over an eight year period. This acquisition added approximately 1,300 propane customers in the Murfreesboro, Tennessee area. Effective April 14, 1994, UCPT purchased all of the assets of Hurley's Propane Gas for approximately $938,000. In addition, UCPT entered into ten year non-compete agreements with the prior owners for $100,000, to be paid over a five year period. This acquisition added approximately 700 propane customers in the Morristown, Tennessee area. Effective March 1, 1994, the company purchased the natural gas system in Palmyra, Missouri from Western Resources, Inc. for approximately $665,000. The company also obtained a ten year non-compete agreement. Consideration for the agreement is contingent upon volumes sold to a certain industrial customer with payments made over a three year period, not to exceed $720,000. The system serves approximately 1,400 natural gas customers. Effective August 1, 1993, UCPT purchased the issued and outstanding shares of common stock of High Country Propane, Inc. for $1,600,000, less liabilities assumed of $820,000. Additionally, UCPT obtained ten year non-compete agreements for $100,000, to be paid over a five year period. This acquisition added approximately 1,400 propane customers in the Boone, North Carolina area. ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." This statement requires new disclosures in the notes to the financial statements about stock-based compensation plans based on the fair value of equity instruments granted. Companies also may base the recognition of compensation cost for instruments issued under stock-based compensation plans on United Cities Gas Company & Subsidiaries 23 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- these fair values. The company anticipates adopting SFAS 123 effective January 1, 1996, but currently does not plan to change the method of accounting for these plans. In March 1995, the FASB issued Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This statement imposes stricter criteria for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. The company anticipates adopting SFAS 121 effective January 1, 1996, and does not expect that adoption will have a material impact on the results of operations, financial condition or cash flows of the company based on the current regulatory structure in which Cities operates. This conclusion may change in the future as a result of changes in regulation. The company adopted Statement of Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. This statement requires the company to accrue any obligations which may exist to provide benefits to former or inactive employees after employment but before retirement. Due to the limited nature of the postemployment benefits provided by the company, most of which were already being accrued, the implementation of SFAS 112 did not have a material effect on the results of operations, financial condition or cash flows of the company. Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes," was adopted by the company in 1993 and prior periods were not restated. Implementation of SFAS 109 required conversion to the liability method of accounting for deferred income taxes. Lower income tax rates resulting from the Tax Reform Act of 1986 resulted in excess accumulated deferred income taxes (ADIT) which are being amortized to reduce tax expense for accounting and ratemaking purposes. Tax law requires that excess ADIT related to accelerated depreciation be used to reduce tax expense over the lives of the related assets. There is no such normalization requirement for nonregulated excess ADIT and the related deferred tax liability was reversed in accordance with the new statement. The cumulative increase in net income resulting from the change in the accounting method for income taxes was approximately $443,000, and was included in UCG Energy's net income in 1993. Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires the company to record the expected costs of postretirement health and life insurance benefits during the years the employees render service. Prior to January 1, 1993, the effective date of the company's adoption of SFAS 106, the company recognized these costs on a cash basis. Costs related to these benefits calculated in accordance with SFAS 106 amounted to $1,691,000, $1,649,000 and $1,331,000 in 1995, 1994 and 1993, respectively. In 1993, the amount of expense recognized on a cash basis would have been $663,000. The accumulated benefit obligation of $8,894,000 existing at January 1, 1993, is being amortized over a twenty year period as allowed by SFAS 106. Cities has received approval to recover SFAS 106 costs in South Carolina, Kansas, Iowa, Illinois, Missouri and Tennessee. Effective January 1, 1993, the Tennessee commission allowed Cities to defer the difference between cash payments and SFAS 106 expense. In the 1995 rate proceeding in Tennessee, Cities received permission to recover the deferred amount of $553,000, plus interest, over a five year period. Cities discontinued deferring the difference in November 1995. The Virginia commission has approved the recovery of SFAS 106 costs in rates. However, the accumulated benefit obligation will be recovered over forty years as opposed to the twenty year amortization period allowed by SFAS 106. The difference in the amortization period allowed by the Virginia commission does not have a material effect on the results of operations, financial condition or cash flows of the company. The Georgia commission did not render a decision on SFAS 106 in Cities' most recent rate proceeding in that state. As required by some commissions, Cities has established a trust fund to accumulate the difference between the cash payments for postretirement benefits and SFAS 106 expense. United Cities Gas Company & Subsidiaries 24 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- INTERNAL REVENUE SERVICE AUDITS The Internal Revenue Service (IRS) has reviewed the consolidated federal income tax returns of the company for the years 1991 through 1993. In September 1995, the revenue agent issued a report proposing certain adjustments to the company's taxable income. In December 1995, the company filed a formal protest and disagreement with the IRS on two proposed adjustments and requested a conference with the IRS appeals office. The adjustments proposed by the agent would increase prior years' taxes by $595,000. Management does not agree with the IRS agent's assertions on these two issues and intends to vigorously protest them. However, the final outcome of this matter cannot presently be determined. In 1993, the IRS completed its review of the consolidated federal income tax returns of the company for the years 1986 through 1990. The company was assessed additional taxes of $3,100,000 and interest of $1,400,000 for the periods reviewed. A substantial amount of the tax assessments were related to items which were timing differences which had no effect on the results of operations of the company. In 1993, the company expensed the interest related to the tax assessments. CONTINGENCIES During 1994, Cities discovered defects in the polyethylene piping installed in certain of its service areas. An independent laboratory is conducting a study of the matter at the request of the gas industry and the manufacturers. Cities also continues to closely monitor the laboratory studies. Cities believes this problem to be manageable under normal operating maintenance and anticipates recovering the cost from the manufacturers or through the ratemaking process. The company is involved in other legal or administrative proceedings before various courts and agencies with respect to rates and other matters. Although unable to predict the outcome of these matters, it is management's opinion that final disposition of these proceedings will not have a material effect on the company's results of operations, financial condition or cash flows. IMPACT OF INFLATION The company experiences the effect of inflation primarily through the cost of materials, labor and related employee benefits, and services. Since Cities can only adjust its rates to recover these additional costs through the regulatory process, increased costs may have a significant impact on its results of operations. Management continually assesses the need to file for rate increases in each of the states in which Cities operates. Cities has PGA clauses in the states in which it operates which permit any fluctuations in gas costs to be passed through to its customers, subject to prudency and/or administrative reviews by the commissions in the states. Effective April 1, 1995, and for an experimental two year period, the PGA clause in Tennessee was modified by an incentive rate program which compares Cities' purchased gas prices to market prices. The gains or losses to be recognized by Cities as a result of the incentive program are limited to a maximum of $25,000 per month. RESULTS OF OPERATIONS CONSOLIDATED COMMON STOCK EARNINGS AND DIVIDENDS The company had consolidated common stock earnings of $9,935,000 or $.84 per share in 1995, a decrease of $2,158,000 or $.32 per share from 1994 earnings. The decrease was primarily a result of increased operating expenses, offset slightly by an increase in operating margin. The decrease in earnings per share also reflects a 1,383,000 increase in the average number of shares outstanding which is primarily a result of a public stock offering in June 1995. Earnings of $12,093,000 or $1.16 per share in 1994 represented a decrease of $27,000 or $.03 per share from 1993. The company's annual dividend paid per share was $1.02 in 1995. UTILITY OPERATING MARGIN The operating margin of $112,684,000 in 1995 represents an increase of $4,668,000 over the 1994 margin of $108,016,000. The increase in operating margin was primarily a result of slightly colder weather during 1995 as compared to 1994, volumes sold to new residential and commercial customers, and rate increases granted during 1995 in several states. The operating margin increased $1,517,000 from 1993 to 1994 as a result of volumes sold to new residential and commercial customers; the additional revenues from certain interruptible customers who did not go off Cities' system when curtailed during the first quarter of 1994; the rate increase effective July 1993 in Missouri; and the United Cities Gas Company & Subsidiaries 25 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- Palmyra acquisition in March 1994. The effect of these increases was partially offset by warmer weather during 1994. UTILITY OPERATING EXPENSES Operations and maintenance expenses increased $4,522,000 from $57,304,000 in 1994 to $61,826,000 in 1995. In the third quarter of 1995, the company announced a consolidation plan under which five of Cities' local operations in its Virginia/East Tennessee Division were consolidated into two new operating centers. As a result of the plan implementation, costs of approximately $900,000 ($550,000 after income taxes) related to early retirement and severance programs and employee relocation expenses were recorded in September 1995. The company expects a reduction in annual expenses of approximately $1,000,000 before income taxes as a result of this consolidation. The increase in operations and maintenance expenses can also be attributed to increased payroll and related benefits and increased outside services expense. The increase in outside services expense is primarily a result of incremental expenses related to addressing labor and personnel related activities, strategic planning and the IRS audit. Operations and maintenance expenses increased $382,000 from $56,922,000 in 1993 to $57,304,000 in 1994. Depreciation and amortization expense increased $1,185,000 in 1995 and $830,000 in 1994 from the prior year periods primarily due to additional plant in service. Federal and state income taxes varied in all periods in relation to changes in income. In addition, federal and state income taxes increased from 1994 to 1995 as a result of additional accruals to true-up current and deferred income taxes and provide for permanent differences. Other taxes increased $1,561,000 in 1995 and $454,000 in 1994 from the prior year periods primarily due to property taxes on additional plant in service. OTHER UTILITY INCOME (EXPENSE), NET OF TAX Other utility income (expense), net of tax increased $917,000 from an expense of $262,000 in 1994 to income of $655,000 in 1995. The increase was a result of revenues from the incentive rate program in Tennessee and, as allowed by certain regulatory commissions in the states in which Cities operates, there was an increased amount of revenues recognized by Cities related to the release of its excess firm capacity on the pipelines which serve Cities. In addition, the increase in other utility income (expense), net of tax was a result of a $171,000 credit for the capitalization of the equity portion of the allowance for funds used during construction (AFUDC) of the twenty-eight mile main in Middle Tennessee and increased interest income on deferred gas costs that are to be billed in the future. Other utility income (expense), net of tax decreased $504,000 from income of $242,000 in 1993 to an expense of $262,000 in 1994. This decrease was primarily a result of a 1993 adjustment to record interest income on take-or-pay amounts in Kansas that were paid and deferred but not yet collected from the Kansas customers. Cities received permission in 1993 from the Kansas Corporation Commission to recover these amounts. UTILITY INTEREST EXPENSE Interest expense increased from $14,087,000 in 1994 to $14,299,000 in 1995. Interest on long-term debt decreased $317,000 due to the retirement of long-term debt. Other interest expense increased $529,000 primarily as a result of interest on additional short-term debt and other miscellaneous liabilities outstanding during 1995. This increase was somewhat offset by a $349,000 reduction to interest expense related to the capitalization of the debt portion of the AFUDC of the twenty-eight mile main in Middle Tennessee. Interest expense decreased from $15,048,000 in 1993 to $14,087,000 in 1994. Interest on long-term debt decreased $405,000 due to the retirement of long-term debt. Other interest expense decreased $556,000 primarily because of the 1993 assessment of interest related to the settlement of the IRS audit for the years 1986 through 1990, partially offset by increased interest on short-term debt during 1994. SUBSIDIARY OPERATIONS Subsidiary operations contributed 42.2%, 35.4% and 35.0% of the company's common stock earnings in 1995, 1994 and 1993, respectively. The following is a discussion of the results of operations of Cities' subsidiaries, UCG Energy Corporation and United Cities Gas Storage Company. UCG ENERGY CORPORATION Revenues decreased from $38,383,000 in 1994 to $34,433,000 in 1995 principally because of decreased gas brokerage sales to municipalities, industrial and other customers. This decrease was primarily due to the transfer of certain United Cities Gas Company & Subsidiaries 26 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------[LOGO]-------------------------------------- gas brokerage contracts in the Utility Services Division to WMLLC. Also contributing to the decrease was the discontinuance of the distribution of energy-related products in the Utility Services Division. This decrease was partially offset by an increase in revenues by the Propane Division generated by additional wholesale and retail volumes sold resulting from the acquisitions of Harrell Propane, Inc. in January 1995, Transpro South, Inc. in May 1995 and Hurley's Propane Gas in April 1994. The Rental Division experienced a decrease in revenues due to lower rental rates on particular rental units in service as well as the elimination of certain revenues due to the transfer of certain rental units to Cities in 1995. Revenues decreased from $38,909,000 in 1993 to $38,383,000 in 1994 primarily due to a decrease in gas brokerage sales to municipalities, industrial and other customers, and a decrease in the sale of energy-related products in the Utility Services Division. This decrease was partially offset by an increase in revenues in the Propane Division generated by additional wholesale volumes sold as well as additional volumes sold resulting from the acquisitions of Hurley's Propane Gas in April 1994, and High Country Propane, Inc. in August 1993. The Rental Division had a moderate decrease in revenues due to lower rental rates on certain rental units in service. Operating expenses decreased from $28,713,000 in 1994 to $25,625,000 in 1995. The decrease of $3,088,000 is related to the decrease in the cost of sales resulting from reduced sales in the Utility Services Division. This decrease was partially offset by an increase in the cost of sales in the Propane Division on additional volumes sold as well as an increase in general and administrative expenses, all principally due to the propane acquisitions during 1995 and 1994. Operating expenses decreased from $29,387,000 in 1993 to $28,713,000 in 1994. This $674,000 decrease can largely be attributed to the decrease in the cost of sales as a result of reduced sales in the Utility Services Division. This decrease was partially offset by an increase in cost of sales in the Propane Division on additional wholesale volumes sold, as well as additional volumes sold due to the acquisitions of Hurley's Propane Gas and High Country Propane, Inc. Interest expense increased from $773,000 in 1994 to $1,192,000 in 1995 primarily due to interest payments on short-term financing resulting from the WMLLC acquisition. Contributing to this increase was interest expense on additional short-term borrowings in the Propane Division. Interest expense decreased from $1,049,000 in 1993 to $773,000 in 1994. This decrease was primarily the result of the 1993 assessment of interest related to the settlement of the IRS audit for the years 1986 through 1990. In addition, long-term interest expense decreased in all divisions due to the retirement of certain long-term debt. Depreciation and amortization expense increased from $3,580,000 in 1994 to $4,378,000 in 1995. This increase was due primarily to the amortization of the intangible assets related to the investment in WMLLC of approximately $374,000 in the Utility Services Division. Also contributing to the increase was increased amortization on exploration projects and depreciation on additional plant and equipment. Depreciation and amortization expense decreased to $3,580,000 in 1994 from $3,664,000 in 1993. The decrease was primarily due to a 1993 adjustment which increased the amortization of certain exploration projects, somewhat offset by depreciation expense on additional plant and equipment. Other income of UCG Energy increased from $727,000 in 1994 to $2,330,000 in 1995 primarily as a result of investment income from WMLLC in the amount of $1,354,000 in the Utility Services Division. Other income of UCG Energy decreased from $801,000 in 1993 to $727,000 in 1994 due to reduced interest income on notes receivable in the Rental Division. Net income for UCG Energy was $3,450,000, $3,750,000 and $3,775,000 in 1995, 1994, and 1993, respectively. UNITED CITIES GAS STORAGE COMPANY United Cities Gas Storage Company's net income was $740,000, $526,000 and $468,000 in 1995, 1994 and 1993, respectively. The increase in net income from 1994 to 1995 was primarily a result of increased revenues for storage services provided primarily to Cities and a decrease in operating expenses other than gas cost. The increase in net income from 1993 to 1994 was primarily a result of increased revenues for storage services, partially offset by increased operating expenses other than gas cost. United Cities Gas Company & Subsidiaries 27 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE ------ Financial Statements: Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993............................... 30 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993........................... 31 Consolidated Balance Sheets as of December 31, 1995 and 1994......................................................... 32 Consolidated Statements of Capitalization as of December 31, 1995 and 1994........................................... 33 Consolidated Statements of Retained Earnings, Capital Surplus and Common Stock for the years ended December 31, 1995, 1994 and 1993................................................................................ 34 Notes to Consolidated Financial Statements........................................................................... 35 Report of Independent Public Accountants............................................................................. 46 Consolidated Financial and Operating Data............................................................................ 47 Quarterly Financial Data............................................................................................. 47 Market Information................................................................................................... 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10, 11, 12, AND 13, constituting Part III of the Form 10-K, have been omitted from this annual report pursuant to the provisions of Instruction G to Form 10-K, since a definitive proxy statement, which is incorporated herein by reference, except for the report of the compensation committee of the board of directors and the performance graph, will be filed on or about April 1, 1996. Information required for executive officers is included in Part I, Item 1. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Financial Statements: See Part II, Item 8 (2) Financial Statement Schedules:
PAGE ---- Report of Independent Public Accountants.................................................. 53
Schedule Number -------- II Reserves........................................................................ 54 III Condensed Financial Information of Registrant................................... 55
All other schedules are not submitted because they are not applicable or because the required information is included in the financial statements or notes thereto. Individual financial statements of United Cities Gas Company are omitted as Cities is primarily an operating company and the subsidiaries (UCG Energy Corporation, United Cities Propane Gas of Tennessee, Inc., UCG Leasing, Inc.,and United Cities Gas Storage Company) included in the consolidated financial statements are wholly-owned. 28 31 (3) Exhibits filed: A complete listing of exhibits required is given in the Exhibit Index (page 56) which precedes the exhibits filed with this report. A list of the compensation plans is set forth below. 10.01 Annual Incentive Compensation Plan effective January 1, 1989, as revised, (filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.02 Supplemental Executive Retirement Compensation Agreement, as revised. (Page 78) 10.03 Long-Term Stock Plan of 1989, (filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). 10.04 Directors' Deferred Compensation Plan effective February 1, 1992, (filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). 10.05 Non-Employee Director Stock Plan effective February 28, 1995, (filed with the Registrant's Form 10-Q dated June 30, 1995 and incorporated herein by reference). 10.06 Key Management Deferred Compensation Plan effective January 1, 1995. (Page 96) (b) Reports filed on Form 8-K: The following Form 8-Ks have been filed subsequent to the filing of the Form 10-Q dated September 30, 1995: 1. Form 8-K, Item 5 dated December 8, 1995. 2. Form 8-K, Item 5 dated December 20, 1995. 3. Form 8-K, Item 5 dated February 16, 1996. (c) Exhibits filed: A complete listing of exhibits required is given in the Exhibit Index (page 56) which precedes the exhibits filed with this report. (d) Financial Statements Omitted from Annual Report to Security Holders: None. 29 32 CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------[LOGO]--------------------------------------
For the Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------- (In Thousands, except per share data) Utility Operating Revenues................ $271,860 $280,984 $287,507 Natural gas cost....................... 159,176 172,968 181,008 - ------------------------------------------------------------------------- Utility Operating Margin ................. 112,684 108,016 106,499 - ------------------------------------------------------------------------- Other Utility Operating Expenses: Operations............................. 55,426 51,299 50,852 Maintenance............................ 6,400 6,005 6,070 Depreciation and amortization.......... 15,119 13,934 13,104 Federal and state income taxes......... 4,050 3,873 3,475 Other taxes............................ 12,300 10,739 10,285 - ------------------------------------------------------------------------- Total other utility operating expenses.......................... 93,295 85,850 83,786 - ------------------------------------------------------------------------- Utility Operating Income.................. 19,389 22,166 22,713 Other Utility Income (Expense), net of tax 655 (262) 242 - ------------------------------------------------------------------------- 20,044 21,904 22,955 - ------------------------------------------------------------------------- Utility Interest Expense: Interest on long-term debt............. 12,033 12,350 12,755 Other interest expense................. 2,266 1,737 2,293 - ------------------------------------------------------------------------- Total utility interest expense...... 14,299 14,087 15,048 - ------------------------------------------------------------------------- Utility Income............................ 5,745 7,817 7,907 - ------------------------------------------------------------------------- Other Income: Operations of UCG Energy Corporation-- Revenues............................ 34,433 38,383 38,909 Operating expenses.................. (25,625) (28,713) (29,387) Interest expense.................... (1,192) (773) (1,049) Depreciation and amortization....... (4,378) (3,580) (3,664) Other income........................ 2,330 727 801 Federal and state income taxes...... (2,118) (2,294) (1,835) - ------------------------------------------------------------------------- 3,450 3,750 3,775 - ------------------------------------------------------------------------- Operations of UCG Storage Company-- Revenues............................ 7,443 7,128 8,837 Operating expenses.................. (4,905) (4,952) (6,649) Interest expense.................... (965) (948) (987) Depreciation and amortization....... (368) (366) (362) Federal and state income taxes...... (465) (336) (371) - ------------------------------------------------------------------------- 740 526 468 - ------------------------------------------------------------------------- Net Income 9,935 12,093 12,150 - ------------------------------------------------------------------------- Preference Stock Dividends -- -- 30 - ------------------------------------------------------------------------- Common Stock Earnings $ 9,935 $ 12,093 $ 12,120 ========================================================================= Common Stock Earnings Per Share $ .84 $ 1.16 $ 1.19 ========================================================================= Average Number of Common Shares Outstanding 11,792 10,409 10,197 ========================================================================= Common Stock Dividends Per Share $ 1.02 $ 1.005 $ .985 =========================================================================
The accompanying notes are an integral part of these consolidated statements. United Cities Gas Company & Subsidiaries 30 33 CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------[LOGO]--------------------------------------
For the Years Ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- (In Thousands) Cash Flows from Operating Activities: Net income ........................................................... $ 9,935 $ 12,093 $ 12,150 - ----------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ...................................... 19,865 17,880 17,130 Deferred taxes ..................................................... 1,780 1,301 611 Investment tax credits, net ........................................ (364) (370) (374) Investment income from Woodward Marketing, L.L.C. .................. (1,354) -- -- Changes in current assets and current liabilities: Receivables ...................................................... (11,187) 7,032 (448) Materials and supplies ........................................... 266 193 757 Gas in storage ................................................... 9,808 (468) (18,641) Gas costs to be billed in the future ............................. 244 (7,911) (2,171) Prepayments and other ............................................ 18 1,007 (544) Accounts payable ................................................. 144 (8,437) 9,906 Customer deposits and advance payments ........................... (2,095) 2,190 1,540 Accrued interest ................................................. 267 (1,112) 934 Supplier refunds due customers ................................... 1,013 1,227 (4,159) Accrued taxes .................................................... (1,955) 2,489 (7,421) Other, net ....................................................... (1,095) 409 2,521 - ----------------------------------------------------------------------------------------------------- Total adjustments .............................................. 15,355 15,430 (359) - ----------------------------------------------------------------------------------------------------- Net cash provided by operating activities ................... 25,290 27,523 11,791 - ----------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Additions to property--utility ...................................... (35,160) (30,888) (27,030) Additions to property--non-utility .................................. (4,926) (4,228) (3,937) Investment in Woodward Marketing, L.L.C. ............................ (832) -- -- - ----------------------------------------------------------------------------------------------------- Net cash used in investing activities ....................... (40,918) (35,116) (30,967) - ----------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Short-term borrowings, net .......................................... (13,875) 23,325 22,863 Proceeds from issuance of long-term debt ............................ 27,000 -- 150 Proceeds from issuance of common stock .............................. 23,314 3,262 1,949 Long-term debt retirements .......................................... (6,347) (7,833) (4,578) Dividends paid ...................................................... (10,206) (9,215) (8,947) Redemption of preferred stock ....................................... -- -- (106) - ----------------------------------------------------------------------------------------------------- Net cash provided by financing activities ................... 19,886 9,539 11,331 - ----------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Temporary Investments ............. 4,258 1,946 (7,845) Cash and Temporary Investments at Beginning of Year ................... 2,744 798 8,643 - ----------------------------------------------------------------------------------------------------- Cash and Temporary Investments at End of Year ......................... $ 7,002 $ 2,744 $ 798 ===================================================================================================== Cash Paid During the Period for: Interest, net of amounts capitalized ................................. $ 16,164 $ 16,946 $ 16,127 ===================================================================================================== Income taxes ......................................................... $ 8,623 $ 3,720 $ 11,958 ===================================================================================================== Non-Cash Investing and Financing Activities: Dividends reinvested ................................................. $ 1,799 $ 1,254 $ 1,130 ===================================================================================================== Debt incurred to acquire assets of Harrell Propane, Inc. ............. $ 1,250 $ -- $ -- ===================================================================================================== Common stock issued for investment in Woodward Marketing, L.L.C....... $ 5,000 $ -- $ -- =====================================================================================================
The accompanying notes are an integral part of these consolidated statements. United Cities Gas Company & Subsidiaries 31 34 CONSOLIDATED BALANCE SHEETS - ------------------------------------[LOGO]--------------------------------------
As of December 31, 1995 1994 - ---------------------------------------------------------------------------------------------- (In Thousands) ASSETS Utility Plant: Plant in service, at cost ............................................... $445,058 $403,121 Less--accumulated depreciation ........................................ 157,968 139,715 - ---------------------------------------------------------------------------------------------- 287,090 263,406 - ---------------------------------------------------------------------------------------------- Non-Utility Property: Property, plant and equipment ........................................... 67,423 71,222 Less--accumulated depreciation ........................................ 19,501 22,272 - ---------------------------------------------------------------------------------------------- 47,922 48,950 - ---------------------------------------------------------------------------------------------- Current Assets: Cash and temporary investments .......................................... 7,002 2,744 Receivables, less allowances for uncollectible accounts of $1,352 in 1995 and $1,017 in 1994 ................................................... 54,517 43,330 Materials and supplies .................................................. 4,914 5,180 Gas in storage .......................................................... 16,643 26,451 Gas costs to be billed in the future .................................... 15,713 15,957 Prepayments and other ................................................... 2,028 2,046 - ---------------------------------------------------------------------------------------------- 100,817 95,708 - ---------------------------------------------------------------------------------------------- Deferred Charges: Unamortized debt discount and expense, net .............................. 2,896 2,694 Non-compete agreements, net ............................................. 3,259 3,697 Deferred system improvement costs, net .................................. 814 1,425 Investment in Woodward Marketing, L.L.C., net ........................... 7,012 -- Other deferred charges .................................................. 10,567 5,320 - ---------------------------------------------------------------------------------------------- 24,548 13,136 - ---------------------------------------------------------------------------------------------- $460,377 $421,200 ============================================================================================== CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity ..................................................... $146,071 $118,028 Long-term debt .......................................................... 163,160 144,344 - ---------------------------------------------------------------------------------------------- 309,231 262,372 - ---------------------------------------------------------------------------------------------- Current Liabilities: Current portion of long-term obligations ................................ 9,155 6,068 Notes payable ........................................................... 32,313 46,188 Accounts payable for gas costs .......................................... 24,433 26,185 Other accounts payable .................................................. 4,884 2,988 Accrued taxes ........................................................... 4,420 6,375 Customer deposits and advance payments .................................. 12,078 14,173 Accrued interest ........................................................ 3,612 3,345 Supplier refunds due customers .......................................... 6,454 5,441 Other ................................................................... 8,580 8,993 - ---------------------------------------------------------------------------------------------- 105,929 119,756 - ---------------------------------------------------------------------------------------------- Deferred Credits: Accumulated deferred income tax ......................................... 31,599 24,572 Deferred investment tax credits ......................................... 4,281 4,645 Income taxes due customers .............................................. 5,190 6,329 Other ................................................................... 4,147 3,526 - ---------------------------------------------------------------------------------------------- 45,217 39,072 - ---------------------------------------------------------------------------------------------- $460,377 $421,200 ==============================================================================================
The accompanying notes are an integral part of these consolidated balance sheets. United Cities Gas Company & Subsidiaries 32 35 CONSOLIDATED STATEMENTS OF CAPITALIZATION - ------------------------------------[LOGO]--------------------------------------
As of December 31, 1995 1994 - --------------------------------------------------------------------------------------- (In Thousands, except share amounts) Common Stock Equity: Common Stock without par value, authorized 40,000,000 shares, outstanding 12,727,280 in 1995 and 10,613,441 in 1994.................. $101,735 $ 71,622 Capital surplus................................. 22,462 22,462 Retained earnings............................... 21,874 23,944 - --------------------------------------------------------------------------------------- Total common stock equity................ 146,071 47.2% 118,028 45.0% - --------------------------------------------------------------------------------------- Long-Term Debt: First mortgage bonds-- Series N, 8.69%, due 2000.................... 10,000 14,000 Series P, 10.43%, due 2017................... 25,000 25,000 Series Q, 9.75%, due 2020.................... 20,000 20,000 Series R, 11.32%, due 2004................... 15,000 15,000 Series S, 8.71%, due 1997.................... 7,000 7,000 Series T, 9.32%, due 2021.................... 18,000 18,000 Series U, 8.77%, due 2022.................... 20,000 20,000 Series V, 7.50%, due 2007.................... 10,000 10,000 - --------------------------------------------------------------------------------------- Total first mortgage bonds............... 125,000 129,000 Medium term notes, 6.20% through 6.67%, due 2000 through 2025........................ 22,000 -- Senior secured storage term notes, 7.45%, due in installments through 2007............. 9,926 10,436 Rental property adjustable rate term notes due in installments through 1999............. 5,691 6,839 Rental property fixed rate term note, 7.9%, due in installments through 2013....... 2,292 2,423 Propane term note, 6.99%, due in installments through 2002................................. 5,000 -- Other long-term obligations due in installments through 2004................................. 2,406 1,714 - --------------------------------------------------------------------------------------- 172,315 150,412 Less--current requirements................... 9,155 6,068 - --------------------------------------------------------------------------------------- Total long-term debt, excluding amounts due within one year.................... 163,160 52.8% 144,344 55.0% - --------------------------------------------------------------------------------------- Total Capitalization............................. $309,231 100.0% $262,372 100.0% =======================================================================================
The accompanying notes are an integral part of these consolidated statements. United Cities Gas Company & Subsidiaries 33 36 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, CAPITAL SURPLUS AND COMMON STOCK - ------------------------------------[LOGO]--------------------------------------
Retained Capital Common (In Thousands, except share amounts) Earnings Surplus Stock - ------------------------------------------------------------------------------------------------------------------- Balance December 31, 1992 ............................................... $20,247 $22,462 $ 63,497 Add--common stock earnings ............................................ 12,120 -- -- Common stock activity: Sold under employee stock purchase, dividend reinvestment and long-term stock plans (186,293 shares) ........................... -- -- 3,079 Conversion of preference stock (75,777 shares) ...................... -- -- 530 - ------------------------------------------------------------------------------------------------------------------- 32,367 22,462 67,106 Deduct--common stock dividends ......................................... 10,047 -- -- - ------------------------------------------------------------------------------------------------------------------- Balance December 31, 1993 ............................................... 22,320 22,462 67,106 Add--common stock earnings ............................................ 12,093 -- -- Common stock activity: Sold under employee stock purchase, dividend reinvestment and long-term stock plans (299,415 shares) ........................... -- -- 4,516 - ------------------------------------------------------------------------------------------------------------------- 34,413 22,462 71,622 Deduct--common stock dividends ......................................... 10,469 -- -- - ------------------------------------------------------------------------------------------------------------------- Balance December 31, 1994 ............................................... 23,944 22,462 71,622 Add--common stock earnings ............................................ 9,935 -- -- Common stock activity: Sold under employee stock purchase, dividend reinvestment, long-term stock, 401(k) and customer stock purchase plans (413,327 shares) ................................................ -- -- 6,213 Issued in acquisition of Woodward Marketing, L.L.C. (320,512 shares) -- -- 5,000 Issuance of 1,380,000 shares of common stock ....................... -- -- 18,900 - ------------------------------------------------------------------------------------------------------------------- 33,879 22,462 101,735 Deduct--common stock dividends ........................................ 12,005 -- -- - ------------------------------------------------------------------------------------------------------------------- Balance December 31, 1995 ............................................... $21,874 $22,462 $101,735 ===================================================================================================================
The accompanying notes are an integral part of these consolidated statements. United Cities Gas Company & Subsidiaries 34 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION- The consolidated financial statements include the accounts of United Cities Gas Company (Cities) and its subsidiaries (collectively, the company). The operations of UCG Energy Corporation (UCG Energy) and United Cities Gas Storage Company (UCG Storage), wholly-owned subsidiaries of Cities, shown in the accompanying Consolidated Statements of Income, include affiliated revenues of $12,760,000, $13,565,000 and $15,930,000 for the years 1995, 1994 and 1993, respectively. The affiliated revenues of UCG Energy represent rental charges to Cities for transportation equipment and office facilities and the sale of gas-related equipment to Cities. The affiliated revenues of UCG Storage consist of charges for natural gas storage services and natural gas sales to Cities. In management's opinion, such intercompany charges compare favorably with terms which Cities could obtain from other sources under comparable conditions. SYSTEM OF ACCOUNTS- Cities is a public utility which distributes natural gas in Tennessee, Kansas, Georgia, Virginia, Illinois, Missouri, Iowa and South Carolina. Cities is subject to regulation with respect to rates, service, maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which it operates. The consolidated financial statements are based on generally accepted accounting principles (GAAP) which for Cities give appropriate recognition to the ratemaking and accounting practices and policies of the various regulatory commissions. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. BASIS OF ACCOUNTING- The consolidated financial statements reflect actions by the regulatory authorities in the states in which Cities operates that result in the recognition of revenues and expenses in different time periods than those of companies that are not regulated. As a result of the ratemaking process, regulatory assets and liabilities are deferred in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." UTILITY PLANT- Utility plant is stated at the historical cost of construction. Such costs include direct construction costs, payroll related costs (taxes, pensions and other fringe benefits), administrative and general costs, and the estimated cost of allowance for funds used during construction. The estimated cost of allowance for funds is as follows:
1995 1994 1993 - -------------------------------------------------------------------- Debt portion of the cost of funds .... 6.5% 5.7% 5.9% Equity portion of the cost of funds .. 4.3% 3.5% 2.0% - -------------------------------------------------------------------- Total ................................ 10.8% 9.2% 7.9% ====================================================================
The debt portion of the cost of funds is reflected as a credit to "Other interest expense" in the amounts of $489,000, $183,000 and $246,000 in 1995, 1994 and 1993, respectively. The equity portion of the cost of funds is reflected in "Other income (expense), net of tax" in the amounts of $256,000, $111,000 and $81,000 in 1995, 1994 and 1993, respectively. DEPRECIATION AND MAINTENANCE- Depreciation is provided in the accounts based on straight-line composite rates of 3.6%, 3.4% and 3.6% of the cost of depreciable utility plant in service in 1995, 1994 and 1993, respectively. Cities follows the practice of charging to maintenance the cost of normal repairs of property and the replacements and renewals of items considered to be less than units of property. Replacements and renewals of items considered to be units of property are charged to utility plant accounts. Units of property replaced or retired are credited to the utility plant accounts and charged to accumulated depreciation. United Cities Gas Company & Subsidiaries 35 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- CUSTOMER RECEIVABLES AND OPERATING REVENUES- The company is primarily engaged in the distribution and sales of natural and propane gas to a diverse base of residential, commercial and industrial customers in 45 operating areas in the states of Tennessee, Kansas, Georgia, Virginia, Illinois, Missouri, Iowa, South Carolina and North Carolina. Cities' operating revenues are based on rates approved by the regulatory commissions in the states in which it operates. Cities follows the practice of accruing for services rendered but unbilled at the end of the accounting period. The Georgia and Tennessee Public Service Commissions have approved the implementation of Weather Normalization Adjustments (WNAs). The WNAs, effective October through May each year in Georgia and November through April each year in Tennessee, allow Cities to increase the base rate portion of customers' bills when weather is warmer than normal and decrease the base rate when weather is colder than normal. The net effect of the WNAs was an increase in revenues of $1,030,000, $2,050,000 and $324,000 in 1995, 1994 and 1993, respectively. REFUNDABLE OR RECOVERABLE GAS COSTS- Cities' refunds from pipeline suppliers and changes in cost of gas delivered to customers, which are different from the amounts recovered through rates, are deferred and are being refunded or recovered in accordance with procedures approved by the state commissions. Effective April 1, 1995, and for an experimental two year period, the Purchased Gas Adjustment (PGA) clause in Tennessee was modified by an incentive rate program which compares Cities' purchased gas prices to market prices. The gains or losses to be recognized by Cities as a result of the incentive program are limited to a maximum of $25,000 per month. INVENTORIES- Inventories consist primarily of materials and supplies and gas in storage. Materials and supplies include merchandise and appliances and are valued at average cost. Cities' liquefied natural gas and propane inventories and gas stored underground are valued on a first-in, first-out basis. Propane owned by UCG Energy is priced at average cost. Gas stored underground and owned by UCG Storage is valued on a last-in, first-out (LIFO) basis. At December 31, 1995 and 1994, $3,799,000 and $4,941,000, respectively, of the total gas in storage was valued on the LIFO basis. In accordance with Cities' PGA clauses, the liquidation of a LIFO layer would be reflected in subsequent gas adjustments in customer rates and does not affect the results of operations. The categories of current gas in storage are as follows:
(In Thousands) 1995 1994 - ------------------------------------------------------------- Natural gas stored underground ............ $ 4,784 $ 7,293 Liquefied natural gas ..................... 835 1,369 Propane ................................... 830 1,130 Natural gas stored by pipeline suppliers .. 10,194 16,659 - ------------------------------------------------------------- Total gas in storage ...................... $16,643 $26,451 =============================================================
EARNINGS PER SHARE- Primary earnings per share have been computed on the basis of the weighted average number of shares of common stock outstanding during the year. Fully diluted earnings per share for 1993 give effect to conversion of the 11 1/2% Cumulative Redeemable Convertible Preference Stock. Fully diluted earnings per share are not materially different from primary earnings per share. FAIR VALUE OF FINANCIAL INSTRUMENTS- The carrying amounts of cash and temporary investments, short-term debt and accrued interest approximate fair value because of the short-term nature of these items. Based on the current market rates offered for similar debt of the same maturities, the fair value of the company's long-term debt, including the current portion, exceeded the carrying amount by approximately $29,100,000 and $5,300,000 at December 31, 1995 and 1994, respectively. Management believes that the prepayment provisions of the company's first mortgage bonds do not make it economically feasible to refinance the long-term debt at this time. United Cities Gas Company & Subsidiaries 36 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- STATEMENTS OF CASH FLOWS- For the purpose of the statements of cash flows, the company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. ACCOUNTING PRONOUNCEMENTS- In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This statement imposes stricter criteria for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. The company anticipates adopting SFAS 121 effective January 1, 1996, and does not expect that adoption will have a material impact on the results of operations, financial condition or cash flows of the company based on the current regulatory structure in which Cities operates. This conclusion may change in the future as a result of changes in regulation. RECLASSIFICATIONS- Certain reclassifications were made conforming prior years' financial statements with 1995 financial statement presentation. REGULATORY MATTERS In April 1995, Cities filed to increase rates on an annual basis by $810,000 in the state of Virginia. Cities was granted permission by the Virginia State Corporation Commission to implement the proposed rate increase effective September 29, 1995. The increase is subject to refund pending the final order by the commission which is expected in the fourth quarter of 1996. In an order issued in November 1994, the Virginia State Corporation Commission reduced Cities' authorized rate of return in Virginia from 11.26% to 10.26%, resulting in a reduction in annual revenues of $218,000. This reduction was effective April 1, 1993. Excess revenues of approximately $370,000, plus interest, collected under interim rates through December 31, 1994, were refunded to Cities' Virginia customers in 1995. In addition, the commission determined that Cities had overcollected gross receipts tax from its customers from 1988 through mid-1993 and ordered the refund of $301,000, plus interest. This amount was also refunded to Cities' Virginia customers in 1995. As a part of a settlement agreement in the 1992 rate proceeding in Tennessee, Cities agreed to a management audit. The management audit report was issued in 1994. Management agreed with a majority of the recommendations made by the auditors and a number of recommendations have been or are currently in the process of being implemented. As a part of the settlement agreement in the 1995 rate proceeding in Tennessee, Cities resolved all outstanding issues related to the management audit. The implementation of the recommendations and final resolution of these matters did not have a material effect on the results of operations, financial condition or cash flows of the company. In 1992, the Federal Energy Regulatory Commission (FERC) issued Orders 636, 636-A and 636-B. These orders required interstate pipelines to unbundle or separate gas sales, transportation and storage services by the 1993-1994 winter season. The pipelines' sales services were previously combined and sold as a single service. The FERC has permitted pipelines to recover from their customers, including Cities, the prudently incurred costs of implementing these orders, referred to as transition costs. Based on current information from the pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred $2,862,000 and $6,739,000, respectively, as its estimated share of the remaining liability related to these transition costs. The 1995 estimate may differ from the final amount of future transition costs recovered from Cities. These estimated amounts are included as a liability in "Accounts payable for gas costs" and as a regulatory asset in "Gas costs to be billed in the future." Cities has been granted permission through approved PGA filings or specific orders in all the states in which it operates to recover these transition costs from its customers. Cities' pipeline suppliers have liabilities to producers for payments under purchase contracts for quantities of gas for which deliveries have not been taken. Pipeline suppliers received permission from the FERC to recover from their customers, including Cities, a portion of their take-or-pay liabilities. Cities has been granted permission in all the states in which it operates to recover from its customers any take-or-pay costs. Based on current information from the pipelines, as of December 31, 1995 and 1994, Cities had accrued and deferred $1,172,000 and $2,086,000, respectively, as its estimated share of the remaining liability related to these take-or-pay costs. The United Cities Gas Company & Subsidiaries 37 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- 1995 estimate may differ from the final amount of future take-or-pay costs recovered from Cities. These estimated amounts are included as a liability in "Accounts payable for gas costs" and as a regulatory asset in "Gas costs to be billed in the future." EMPLOYEE BENEFIT PLANS PENSION- The company has a trusteed noncontributory defined benefit pension plan which covers substantially all full-time employees. The plan provides benefits based on years of credited service and final average salary. The plan assets consist principally of marketable equity securities, corporate and government debt securities, and deposits with insurance companies. The company's policy is to fund the plan in accordance with the requirements of the Employee Retirement Income Security Act. The company also has an excess benefit pension plan that is unfunded and may provide supplemental benefits to officers of the company after retirement. Actuarial assumptions used for the plans are as follows:
1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Weighted average discount rate .................. 7.50% 8.00% 7.00% Rate of increase in future compensation levels .. 5.50% 5.50% 5.50% Expected long-term rate of return ............... 9.00% 9.00% 9.50% - -----------------------------------------------------------------------------------------------------------------------
Net periodic pension expense for the plans in fiscal 1995, 1994 and 1993 consists of the following components:
(In Thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Service cost .................................... $ 3,451 $ 3,129 $ 2,879 Interest cost ................................... 4,296 3,857 3,697 Actual return on plan assets .................... (10,365) (1,067) (4,969) Net amortization and other ...................... 5,772 (3,591) 801 - ----------------------------------------------------------------------------------------------------------------------- Net periodic pension expense .................... $ 3,154 $ 2,328 $ 2,408 =======================================================================================================================
A reconciliation of the funded status of the plans to the amounts recognized in the company's consolidated financial statements at December 31, 1995 and 1994, is presented below:
(In Thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Vested benefit obligation ..................................... $49,048 $39,190 Nonvested benefit obligation .................................. 5,857 5,812 - ------------------------------------------------------------------------------------------------------------------------ Accumulated benefit obligation ................................ 54,905 45,002 Projected salary increases. ................................... 11,596 9,661 - ------------------------------------------------------------------------------------------------------------------------ Projected benefit obligation .................................. 66,501 54,663 Plan assets at fair value ..................................... 63,732 52,966 - ------------------------------------------------------------------------------------------------------------------------ Projected obligation in excess of plan assets ................. 2,769 1,697 Unrecognized net obligation being recognized over participants' average remaining service period .............................. (1,800) (576) Unrecognized net transition liability ......................... (250) (309) Unrecognized net loss ......................................... (231) (540) Adjustment to recognize minimum liability ..................... 461 34 - ------------------------------------------------------------------------------------------------------------------------ Accrued pension expense ....................................... $ 949 $ 306 ========================================================================================================================
Included in the 1995 accumulated benefit obligation and net periodic pension expense is $576,000 of costs related to the company's consolidation activities in its Virginia/East Tennessee Division. United Cities Gas Company & Subsidiaries 38 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- POSTRETIREMENT BENEFITS- The company provides postretirement health care benefits and life insurance benefits for retired employees. Substantially all of the company's employees will become eligible for those benefits if they reach the normal retirement age while working for the company. Effective January 1, 1993, the company made certain revisions to its postretirement benefits plan which limit the company's contributions to the plan for employees retiring after December 31, 1997. Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires the company to record the expected costs of postretirement health and life insurance benefits during the years the employees render service. Prior to January 1, 1993, the effective date of the company's adoption of SFAS 106, the company recognized these costs on a cash basis. In 1993, the amount of expense recognized on a cash basis would have been $663,000. Net periodic postretirement benefit expense for the company's plan in 1995, 1994 and 1993 consists of the following components:
(In Thousands) 1995 1994 1993 - ---------------------------------------------------------------------- Service cost ................................. $ 120 $ 196 $ 137 Interest cost ................................ 1,051 894 749 Actual return on plan assets ................. (107) 13 (9) Amortization of transition costs ............. 445 445 445 Other ........................................ 182 101 9 - ---------------------------------------------------------------------- Net periodic postretirement benefit expense .. $1,691 $1,649 $1,331 ======================================================================
A reconciliation of the funded status of the plan to the amounts recognized in the company's consolidated financial statements at December 31, 1995 and 1994 is presented below:
(In Thousands) 1995 1994 - ----------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees ..................................................... $10,903 $7,995 Fully eligible active plan participants ...................... 2,302 549 Other active plan participants ............................... 988 3,523 - ------------------------------------------------------------------------------------------ 14,193 12,067 Plan assets at fair value, primarily listed stocks and bonds.... 2,703 697 - ------------------------------------------------------------------------------------------ Accumulated obligation in excess of plan assets................. 11,490 11,370 Unrecognized net transition obligation.......................... (7,559) (8,004) Unrecognized net loss........................................... (4,019) (2,446) - ------------------------------------------------------------------------------------------ Accrued (prepaid) postretirement benefit expense................ $ (88) $ 920 ==========================================================================================
Actuarila assumptions used for the plan are as follows:
1995 1994 1993 - --------------------------------------------------------------------------------------- Weighted-average discount rate ............................... 7.50% 8.50% 7.50% Rate of increase in future compensation levels. .............. 5.50% 5.50% 5.50% Expected long-term rate of return after estimated taxes ...... 4.25% 4.25% 4.25% - ---------------------------------------------------------------------------------------
For measurement purposes, a 10%, 12% and 15% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995, 1994 and 1993, respectively. In 1995, the rate was assumed to decrease gradually to 5.5% over nine years and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, by $1,121,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $82,000. United Cities Gas Company & Subsidiaries 39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- Cities has received approval to recover SFAS 106 costs in South Carolina, Kansas, Iowa, Illinois, Missouri and Tennessee. Effective January 1, 1993, the Tennessee commission allowed Cities to defer the difference between cash payments and SFAS 106 expense. In the 1995 rate proceeding in Tennessee, Cities received permission to recover the deferred amount of $553,000, plus interest, over a five year period. Cities discontinued deferring the difference in November 1995. The Virginia commission has approved the recovery of SFAS 106 costs in rates. However, the accumulated benefit obligation will be recovered over forty years as opposed to the twenty year amortization period allowed by SFAS 106. The difference in the amortization period allowed by the Virginia commission does not have a material effect on the results of operations, financial condition or cash flows of the company. The Georgia commission did not render a decision on SFAS 106 in Cities' most recent rate proceeding in that state. As required by some commissions, Cities has established a trust fund to accumulate the difference between the cash payments for postretirement benefits and SFAS 106 expense. POSTEMPLOYMENT BENEFITS AND OTHER- The company adopted Statement of Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. This statement requires the company to accrue any obligations which may exist to provide benefits to former or inactive employees after employment but before retirement. Due to the limited nature of the postemployment benefits provided by the company, most of which were already being accrued, the implementation of SFAS 112 did not have a material effect on the results of operations, financial condition or cash flows of the company. The company's 401(k) savings plan allows participants to make contributions toward retirement savings. Each participant may contribute up to 15% of qualified compensation. For employee contributions up to 6% of the participant's qualified compensation, the company will contribute 30% of the employee's contribution. The company may also contribute up to an additional 20% of the employee's contribution based on certain criteria specified in the plan. Effective January 1, 1995, any additional contribution made by the company will be through the issuance of the company's common stock. For 1995, 1994 and 1993, the company contributed $478,000, $750,000 and $495,000, respectively, to the 401(k) plan. INCOME TAXES A detail of the federal and state income tax provision is set forth below:
(In Thousands) 1995 1994 1993 - ------------------------------------------------------------------------ Charged to operating expenses-- Federal income taxes-- Current ...................................... $2,244 $2,481 $1,978 Deferred, net ................................ 1,542 1,052 754 Investment tax credits, net ................... (364) (370) (374) State income taxes-- Current ...................................... 450 496 1,250 Deferred, net ................................ 178 214 (133) - ------------------------------------------------------------------------ 4,050 3,873 3,475 - ------------------------------------------------------------------------ Charged to other income, net-- Federal income taxes-- Current ...................................... 2,450 2,039 1,892 Deferred, net ................................ 52 30 (8) State income taxes-- Current ...................................... 410 421 449 Deferred, net ................................ 8 5 (2) - ------------------------------------------------------------------------ 2,920 2,495 2,331 - ------------------------------------------------------------------------ Total federal and state income tax provision .. $6,970 $6,368 $5,806 ========================================================================
United Cities Gas Company & Subsidiaries 40 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- Income taxes differ from amounts computed by applying the statutory rates to pre-tax income as follows:
(In Thousands) 1995 1994 1993 - ---------------------------------------------------------------------------------- Net income ........................................... $ 9,935 $12,093 $12,150 Income tax provision ................................. 6,970 6,368 5,806 - ---------------------------------------------------------------------------------- Pre-tax income ....................................... $16,905 $18,461 $17,956 - ---------------------------------------------------------------------------------- Federal income tax at statutory rate of 34% .......... $ 5,748 $ 6,277 $ 6,105 State income tax, net ................................ 690 750 725 Additional federal income tax provision .............. 875 -- -- Additional state income tax provision ................ -- -- 465 Amortization of investment tax credits ............... (364) (370) (374) Amortization of excess deferred income tax ........... 26 (288) (311) Utilization of previously unrecognized tax benefits .. -- -- (287) Cumulative effect of accounting change ............... -- -- (443) Other, net ........................................... (5) (1) (74) - ---------------------------------------------------------------------------------- Total federal and state income tax provision ......... $ 6,970 $ 6,368 $ 5,806 ==================================================================================
The temporary differences which gave rise to the net deferred tax liability at December 31, 1995 and 1994, were as follows:
(In Thousands) 1995 1994 - ---------------------------------------------------------------------------------- Deferred tax assets-- Unamortized investment tax credit ............................. $ 1,410 $2,406 Other ......................................................... 3,771 3,506 - ---------------------------------------------------------------------------------- 5,181 5,912 - ---------------------------------------------------------------------------------- Deferred tax liabilities-- Accelerated depreciation and other plant-related differences .. 34,785 28,893 AFUDC-equity .................................................. 721 747 Regulatory tax assets ......................................... 354 514 Additional deferred federal income tax liability accrued....... 425 -- Other ......................................................... 495 330 - ---------------------------------------------------------------------------------- 36,780 30,484 - ---------------------------------------------------------------------------------- Net accumulated deferred income tax liability .................. $31,599 $24,572 ==================================================================================
The Internal Revenue Service (IRS) has reviewed the consolidated federal income tax returns of the company for the years 1991 through 1993. In September 1995, the revenue agent issued a report proposing certain adjustments to the company's taxable income. In December 1995, the company filed a formal protest and disagreement with the IRS on two proposed adjustments and requested a conference with the IRS appeals office. The adjustments proposed by the agent would increase prior years' taxes by $595,000. Management does not agree with the IRS agent's assertions on these two issues and intends to vigorously protest them. However, the final outcome of this matter cannot presently be determined. In 1993, the IRS completed its review of the consolidated federal income tax returns of the company for the years 1986 through 1990. The company was assessed additional taxes of $3,100,000 and interest of $1,400,000 for the periods reviewed. A substantial amount of the tax assessments were related to items which were timing differences which had no effect on the results of operations of the company. In 1993, the company expensed the interest related to the tax assessments. 41 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes," was adopted by the company in 1993 and prior periods were not restated. Implementation of SFAS 109 required conversion to the liability method of accounting for deferred income taxes. Lower income tax rates resulting from the Tax Reform Act of 1986 resulted in excess accumulated deferred income taxes (ADIT) which are being amortized to reduce tax expense for accounting and ratemaking purposes. Tax law requires that excess ADIT related to accelerated depreciation be used to reduce tax expense over the lives of the related assets. There is no such normalization requirement for nonregulated excess ADIT and the related deferred tax liability was reversed in accordance with the new statement. The cumulative increase in net income resulting from the change in the accounting method for income taxes was approximately $443,000, and was included in UCG Energy's net income in 1993. ENVIRONMENTAL ISSUES Cities is the owner or previous owner of manufactured gas plant sites which were used to supply gas prior to the availability of natural gas. Manufactured gas was an inexpensive source of fuel for lighting and heating nationwide. As a result of the gas manufacturing process, certain by-products and waste materials, including coal-tar, were produced and may have been accumulated at the plant sites. This was an acceptable and satisfactory process at the time of operations. Under current environmental protection laws and regulations, Cities may be responsible for response action with respect to such materials, if response action is necessary. Cities identified a site in Columbus, Georgia, and along with other responsible parties, has performed response action. Cities' share of response action costs at this site totaled approximately $1,324,000. Of this amount, $1,275,000 was requested and approved to be recovered over a three year period in rates which were effective November 1992. Cities recovered all but approximately $23,000 of the approved amount through October 1995. Cities will request and expects approval to recover the remaining costs of $72,000 as an extension of the rider or through the PGA process. In June 1995, Cities entered into an agreement to pay $1,787,000 to Union Electric Company (Union Electric) whereby Union Electric agreed to assume responsibility for Cities' continuing investigation and environmental response action obligations as outlined in the feasibility study related to a former manufactured gas plant site in Keokuk, Iowa. At December 31, 1995, Cities had $1,430,000 accrued for its remaining liability related to the agreement. This amount is to be paid in equal annual payments over each of the next four years beginning in 1996. Cities has deferred the accrued amount and expects approval for recovery in its current rate proceeding in Iowa. Cities owns former manufactured gas plant sites in Johnson City and Bristol, Tennessee and Hannibal, Missouri. Cities is unaware of any information which suggests that these sites give rise to a present health or environmental risk as a result of the manufactured gas process or that any response action will be necessary. However, as of December 31, 1995, Cities had incurred and deferred for recovery $16,000 and accrued and deferred for recovery an additional $750,000 associated with the preliminary survey and invasive study of these sites. The Tennessee Public Service Commission granted Cities permission to defer, until its next rate case, all costs incurred in Tennessee in connection with state and federally mandated environmental control requirements. In addition, based on a decision by the Missouri Public Service Commission concerning the recovery of environmental response action costs incurred by another company, Cities expects recovery of the costs involved in the investigation and response action, if any, associated with the manufactured gas plant site in Missouri. Pursuant to the Tennessee Petroleum Underground Storage Tank Act (the Act), Cities is required to upgrade or remove certain underground storage tanks (USTs) situated in Tennessee. As of December 31, 1995, Cities had identified a small number of USTs in this category in Tennessee and had incurred and deferred for recovery $34,000 and, based on available current information, accrued and deferred for recovery an additional $70,000 for the upgrade or removal of these USTs. Cities has estimated that it may incur, if corrective action is necessary, additional costs of up to $160,000 to bring the sites into compliance with the Act. The Tennessee Public Service Commission granted Cities permission to defer, until its next rate case, all costs incurred in connection with state and federally mandated environmental control requirements. In addition, Cities may be able to recover a portion of any corrective action costs from the Tennessee Underground Storage Tank Fund for the UST sites in Tennessee. Cities identified three USTs in Virginia and, as of December 31, 1995, incurred approximately $20,000 for the closure of these sites. Under current regulation, these sites are officially closed and Cities does not anticipate incurring any additional amounts related to these sites. United Cities Gas Company & Subsidiaries 42 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- In October 1995, Cities received two Notices of Violation (NOVs) from the Tennessee Department of Environment and Conservation (DEC) concerning historic releases from USTs in Kingsport, Tennessee. These USTs were formerly owned by Holston Oil Co., Inc. (Holston), which at one time was a wholly-owned subsidiary of Tennessee-Virginia Energy Corporation (TVEC). Prior to TVEC's merger with the company in 1986, TVEC sold the common stock of Holston to an unrelated party. Cities has responded to the NOVs advising the DEC that the company is not a responsible party for any environmental contamination at the sites. Cities has been advised by the DEC that the DEC will respond in several months. Cities does not anticipate incurring any response action costs at these sites. Cities has reviewed and commented on a proposed Consent Order from the Kansas Department of Health and Environment (KDHE) regarding mercury contamination at gas pipeline sites. The KDHE has identified the need to investigate gas industry activities which utilize mercury equipment in Kansas. Cities is cooperating with the KDHE in preparing a Consent Order and a Work Plan for responding to mercury contamination at any site which is identified as exceeding the KDHE's established acceptable concentration levels. As of December 31, 1995, Cities had identified approximately 720 meter sites where mercury may have been used and had incurred and deferred for recovery $28,000 and, based on available current information, accrued and deferred for recovery an additional $280,000 for the investigation of these sites. Cities has estimated that it may incur an additional amount of up to $4,100,000 over the next seven years in responding to a future administrative order for those sites, if any, that exceed the KDHE's established acceptable concentration levels. Cities has received an order from the Kansas Corporation Commission (KCC) allowing Cities to defer and seek recovery in future rate proceedings the reasonable and prudent costs and expenses associated with the Consent Order and Work Plan. In the order, the commission approved a Stipulation and Agreement which provides a cap of $1,500,000 on amounts deferred with the ability to exceed this cap if reasonable costs of response action are incurred. Based on a decision by the KCC concerning the recovery of environmental response action costs incurred by another company, Cities expects recovery of the costs involved in the investigation and response action associated with the mercury meter sites in Kansas. Management expects that future expenditures related to response action at any site will be recovered through rates or insurance, or shared among other potentially responsible parties. Therefore, the costs of responding to these sites are not expected to materially affect the results of operations, financial condition or cash flows of the company. CAPITAL STOCK 11 1/2% CUMULATIVE REDEEMABLE CONVERTIBLE PREFERENCE STOCK- The Preference Stock was convertible to common stock at the option of the holder at $7.00 per common share and contained a redemption feature. During 1993, 5,307 shares of the Preference Stock were converted into 75,777 shares of common stock. Of the 6,364 shares of Preference Stock outstanding at December 31, 1992, the remaining 1,057 shares that were not converted into common stock were redeemed at $100 per share in mid-1993. COMMON STOCK- As of December 31, 1995, the company had 1,386,770 shares of common stock reserved for issuance under the company's employee and customer stock purchase plans, the company's dividend reinvestment and stock purchase plan, the company's 401(k) savings plan, and the company's long-term stock plan of 1989. Under the company's long-term stock plan implemented in 1989, incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock or any combination thereof may be granted to officers and key employees of the company. The option price per share must be at least equal to the fair market value of one share of common stock on the date of the grant. The options granted become exercisable at a rate of 20% per year and expire ten years after the date of grant. The long-term stock plan has a Stock Appreciation Right (SAR) feature which provides optionees the right to receive appreciation in the shares of common stock subject to such option in common stock or cash, or a combination thereof, equal in value to the difference between the fair market value of such shares on the date of exercise and the option exercise price. Option and SAR transactions during the three years ended December 31, 1995, are as follows: United Cities Gas Company & Subsidiaries 43 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]--------------------------------------
Options Exercise Price SARs Exercise Price - -------------------------------------------------------------------------------------- Outstanding December 31, 1992 .. 102,000 $12.50-15.125 35,700 $12.50-15.125 Granted ....................... -- -- -- -- Exercised ..................... (51,000) 12.50-15.125 (17,850) 12.50-15.125 Forfeited ..................... (4,800) 12.50-15.125 (1,680) 12.50-15.125 - -------------------------------------------------------------------------------------- Outstanding December 31, 1993 .. 46,200 $12.50-15.125 16,170 $12.50-15.125 Granted ....................... 46,000 16.00 -- -- Exercised ..................... (3,000) 12.50-15.125 (1,050) 12.50-15.125 Forfeited ..................... -- -- -- -- - -------------------------------------------------------------------------------------- Outstanding December 31, 1994 .. 89,200 $ 12.50-16.00 15,120 $12.50-15.125 Granted ....................... 39,000 15.75 -- -- Exercised ..................... (6,000) 12.50-16.00 (1,960) 12.50-15.125 Forfeited ..................... (3,700) 12.50-15.125 (210) 12.50-15.125 - -------------------------------------------------------------------------------------- Outstanding December 31, 1995 .. 118,500 $ 12.50-16.00 12,950 $12.50-15.125 ======================================================================================
As of December 31, 1995 and 1994, there were 39,400 and 22,200 options, respectively, and 10,710 and 7,770 SARs, respectively, which were exercisable. As of December 31, 1995, 187,000 shares of common stock were reserved under the company's long-term stock plan. In October 1995, the FASB issued Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." This statement requires new disclosures in the notes to the financial statements about stock-based compensation plans based on the fair value of equity instruments granted. Companies also may base the recognition of compensation cost for instruments issued under stock-based compensation plans on these fair values. The company anticipates adopting SFAS 123 effective January 1, 1996, but currently does not plan to change the method of accounting for these plans. ACQUISITIONS Effective May 22, 1995, United Cities Propane Gas of Tennessee, Inc. (UCPT), a wholly-owned subsidiary of UCG Energy, purchased all of the propane transportation assets of Transpro South, Inc., a common carrier corporation, for approximately $218,000. In addition, UCPT entered into a ten year non-compete agreement with the prior owner for $6,000. During the first quarter of 1995, UCG Energy purchased a 45% interest in certain contracts related to the gas marketing business of Woodward Marketing, Inc. (WMI), a Texas corporation. In exchange for the acquired interest, the shareholders of WMI received $5,000,000 in the company's common stock (320,512 shares) and $832,000 in cash in May 1995, and may, if certain earnings targets are met, receive up to $1,000,000 in cash to be paid over a five year period. In exchange for its own gas marketing contracts and the acquired 45% interest in the WMI gas marketing contracts, UCG Energy received a 45% interest in a newly formed limited liability company, Woodward Marketing, L.L.C. (WMLLC). WMI received a 55% interest in WMLLC in exchange for its remaining 55% interest in the WMI gas marketing contracts. WMLLC provides gas marketing services to industrial customers, municipalities and local distribution companies, including Cities. UCG Energy utilized equity accounting, effective January 1, 1995, for the acquisition. The excess of the purchase price over the value of the net tangible assets, amounting to approximately $5,400,000, was allocated to intangible assets consisting of customer contracts and goodwill, which are being amortized over ten and twenty years, respectively. Effective January 1, 1995, UCPT purchased substantially all of the assets of Harrell Propane, Inc. for approximately $1,383,000. In addition, UCPT entered into ten year non-compete agreements with the prior owners for $250,000, to be paid over an eight year period. This acquisition added approximately 1,300 propane customers in the Murfreesboro, Tennessee area. Effective April 14, 1994, UCPT purchased all of the assets of Hurley's Propane Gas for approximately $938,000. In addition, UCPT entered into ten year non-compete agreements with the prior owners for $100,000, to be paid over a five year period. This acquisition added approximately 700 propane customers in the Morristown, Tennessee area. Effective March 1, 1994, the company purchased the natural gas system in Palmyra, Missouri from Western Resources, Inc. for approximately $665,000. The company also obtained a ten year non-compete agreement. Consideration for the agreement is contingent upon volumes sold to a certain industrial customer with payments made over a three year period, not to exceed $720,000. The system serves approximately 1,400 natural gas customers. United Cities Gas Company & Subsidiaries 44 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------[LOGO]-------------------------------------- Effective August 1, 1993, UCPT purchased the issued and outstanding shares of common stock of High Country Propane, Inc. for $1,600,000, less liabilities assumed of $820,000. Additionally, UCPT obtained ten year non-compete agreements for $100,000, to be paid over a five year period. This acquisition added approximately 1,400 propane customers in the Boone, North Carolina area. LONG-TERM DEBT The company's mortgage dated as of July 15, 1959, as amended and supplemented, securing the first mortgage bonds issued by the company constitutes a direct first lien on substantially all of Cities' fixed property and franchises. The company was in compliance with the requirements of its indentures during 1995. The company's medium-term notes, issued in 1995, are unsecured and at December 31, 1995, bore a weighted-average interest rate of 6.45%. The company's senior secured storage term notes bear interest at a rate of 7.45% and are secured by storage plant assets. The weighted-average interest rate of the company's other long-term debt was approximately 6.75% at December 31, 1995. Annual maturities and sinking fund requirements of the company's first mortgage bonds and other long-term debt for the years 1996 through 2000 are $9,155,000, $10,661,000, $7,656,000, $7,776,000 and $8,156,000, respectively. INTERIM FINANCING The company has arrangements with several banks which provide, through mid-1996, a total line of credit of $84,000,000 in the form of master and banker's acceptance notes bearing interest primarily at the lesser of the prime rate or a negotiated rate during the term of each borrowing. Under these arrangements, at December 31, 1995 and 1994, the company had short-term debt outstanding of $32,313,000 and $46,188,000, respectively, with a weighted-average interest rate of 6.41% and 6.60%, respectively. OTHER In the third quarter of 1995, the company announced a consolidation plan under which five of Cities' local operations in its Virginia/East Tennessee Division were consolidated into two new operating centers. As a result of the plan implementation, costs of approximately $900,000 ($550,000 after income taxes) related to early retirement and severance programs and employee relocation expenses were recorded in September 1995. COMMITMENTS AND CONTINGENCIES During 1994, Cities discovered defects in the polyethylene piping installed in certain of its service areas. An independent laboratory is conducting a study of the matter at the request of the gas industry and the manufacturers. Cities also continues to closely monitor the laboratory studies. Cities believes this problem to be manageable under normal operating maintenance and anticipates recovering the cost from the manufacturers or through the ratemaking process. The company is involved in other legal or administrative proceedings before various courts and agencies with respect to rates and other matters. Although unable to predict the outcome of these matters, it is management's opinion that final disposition of these proceedings will not have a material effect on the company's results of operations, financial condition or cash flows. SUBSEQUENT EVENTS AND OTHER (UNAUDITED) On April 6, 1995, the company signed a letter of intent to acquire all the outstanding common stock of Monarch Gas Company (Monarch). The acquisition will be accounted for as a pooling of interests whereby the number of shares of the company's common stock issued will be calculated based on the book value of Monarch versus the book value of the company at December 31, 1994. In addition, the company will enter into a $250,000, five year non-compete agreement with the owners of Monarch. Monarch serves approximately 3,000 customers in small communities adjacent to Cities' Vandalia, Illinois operation. Pending regulatory approval, the company expects this acquisition to be final by the second quarter of 1996 and will not restate prior years' consolidated financial statements due to immateriality. Effective January 1, 1996, UCPT purchased substantially all of the assets of Duncan Gas Service for approximately $4,310,000. In addition, UCPT entered into a ten year non-compete agreement with the prior owners for $250,000, to be paid over a ten year period. This acquisition added approximately 2,000 propane customers in the Johnson City, Tennessee area. United Cities Gas Company & Subsidiaries 45 48 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ------------------------------------[LOGO]-------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of United Cities Gas Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of United Cities Gas Company (an Illinois corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, retained earnings, capital surplus and common stock and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Cities Gas Company and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, effective January 1, 1993, the Company changed its methods of accounting for postretirement benefits other than pensions and income taxes. Nashville, Tennessee Arthur Andersen LLP February 16, 1996 United Cities Gas Company & Subsidiaries 46 49 CONSOLIDATED FINANCIAL AND OPERATING DATA - ----------------------------------[LOGO]--------------------------------------- QUARTERLY FINANCIAL DATA
(In Thousands, except per share data) 1995 March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------- Utility Operating Revenues ............. $106,006 $42,246 $32,248 $91,360 Utility Operating Income (Loss)......... $ 14,883 $ (557) $(4,084) $ 9,147 Common Stock Earnings (Loss)(a)......... $ 13,327 $(3,962) $(6,916) $ 7,486 Primary Earnings (Loss) Per Share(b).... $ 1.25 $ (.35) $ (.55) $ .59 1994 March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------- Utility Operating Revenues.............. $124,191 $48,352 $34,143 $74,298 Utility Operating Income (Loss)......... $ 15,572 $ (106) $(2,141) $ 8,841 Common Stock Earnings (Loss)(a)......... $ 14,236 $(3,320) $(5,210) $ 6,387 Primary Earnings (Loss) Per Share(b).... $ 1.38 $ (.32) $ (.50) $ .61
(a) The pattern of quarterly earnings (loss)is the result of the highly seasonal nature of the business as variations in weather conditions generally result in greater earnings during the winter months. (b) May not add to year-end results due to changes in average number of outstanding common shares between periods. MARKET INFORMATION The common stock of the company is traded over-the-counter on the NASDAQ National Market System under the symbol UCIT. The following table reflects the quarterly high and low closing sales prices of the common stock, as compiled from quotations supplied by the NASDAQ Monthly Statistical Report, and the quarterly dividends paid per share, for the years 1995 and 1994.
1995 March 31 June 30 September 30 December 31 - -------------------------------------------------------------------- High ................. $16.25 $16.25 $16.50 $18.75 Low .................. $15.25 $14.50 $14.75 $15.75 Dividends per share .. $ .255 $ .255 $ .255 $ .255 1994 March 31 June 30 September 30 December 31 - -------------------------------------------------------------------- High ................. $18.75 $17.25 $17.75 $17.25 Low .................. $16.00 $15.50 $15.50 $15.44 Dividends per share .. $ .250 $ .250 $ .250 $ .255
United Cities Gas Company & Subsidiaries 47 50 CONSOLIDATED FINANCIAL AND OPERATING DATA
1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- UTILITY OPERATING REVENUES:* Residential . . . . . . . . . . . . . . . . . . . . . . . . . . $127,603 $129,519 $134,856 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . 70,967 73,376 74,361 Industrial-- Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,438 33,772 31,252 Interruptible . . . . . . . . . . . . . . . . . . . . . . . . 33,338 35,297 36,703 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,412 1,813 3,411 - ----------------------------------------------------------------------------------------------------------------------------- 263,758 273,777 280,583 Transportation . . . . . . . . . . . . . . . . . . . . . . . . 8,102 7,207 6,924 - ----------------------------------------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $271,860 $280,984 $287,507 ============================================================================================================================= OPERATING MARGIN* . . . . . . . . . . . . . . . . . . . . . . . . $112,684 $108,016 $106,499 ============================================================================================================================= NATURAL GAS THROUGH-PUT (MCF):* Residential . . . . . . . . . . . . . . . . . . . . . . . . . . 22,901 21,352 23,055 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . 15,165 14,116 14,435 Industrial-- Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,324 8,134 7,509 Interruptible . . . . . . . . . . . . . . . . . . . . . . . . 11,920 11,002 11,661 - ----------------------------------------------------------------------------------------------------------------------------- 57,310 54,604 56,660 Transportation . . . . . . . . . . . . . . . . . . . . . . . . 17,184 12,574 11,883 - ----------------------------------------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 74,494 67,178 68,543 ============================================================================================================================= Customers (average for year): Residential . . . . . . . . . . . . . . . . . . . . . . . . . . 266,532 259,895 250,051 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . 34,435 33,861 31,849 Industrial Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 395 395 Interruptible . . . . . . . . . . . . . . . . . . . . . . . . 251 258 245 - ----------------------------------------------------------------------------------------------------------------------------- Natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . 301,613 294,409 282,540 Propane . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,359 21,693 20,498 - ----------------------------------------------------------------------------------------------------------------------------- Total customers . . . . . . . . . . . . . . . . . . . . 324,972 316,102 303,038 ============================================================================================================================= Actual Customers at December 31, . . . . . . . . . . . . . . . . 331,958 322,851 313,788 ============================================================================================================================= Propane:* Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,124 $ 18,510 $ 16,506 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 13,038 10,126 8,920 - ----------------------------------------------------------------------------------------------------------------------------- Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,086 $ 8,384 $ 7,586 ============================================================================================================================= Gross margin % of sales . . . . . . . . . . . . . . . . . . . . 41.1% 45.3% 46.0% ============================================================================================================================= Gallons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,854 23,175 20,180 =============================================================================================================================
*In thousands United Cities Gas Company & Subsidiaries 48 51 CONSOLIDATED FINANCIAL AND OPERATING DATA
1992 1991 1990 1989 1988 1987 1986 - --------------------------------------------------------------------------------------------------------------------------- $119,245 $109,081 $ 95,916 $ 79,245 $ 75,659 $ 68,668 $ 70,285 69,447 62,052 55,576 50,502 46,341 41,327 40,975 32,805 33,392 33,924 33,430 33,865 35,195 40,088 29,607 25,182 26,028 26,406 25,077 26,250 30,119 6,530 2,692 6,797 3,957 1,777 2,812 1,618 - --------------------------------------------------------------------------------------------------------------------------- 257,634 232,399 218,241 193,540 182,719 174,252 183,085 7,826 6,756 6,352 4,385 4,690 3,897 2,171 - --------------------------------------------------------------------------------------------------------------------------- $265,460 $239,155 $224,593 $197,925 $187,409 $178,149 $185,256 =========================================================================================================================== $ 99,300 $ 87,779 $ 80,231 $ 71,536 $ 63,748 $ 57,480 $ 50,181 =========================================================================================================================== 20,481 19,679 17,765 14,135 13,675 12,162 11,669 13,324 12,573 11,697 10,577 9,671 8,542 7,913 7,690 8,323 8,407 8,059 7,930 8,011 8,343 10,101 9,050 8,432 8,088 7,701 8,092 7,881 - --------------------------------------------------------------------------------------------------------------------------- 51,596 49,625 46,301 40,859 38,977 36,807 35,806 11,117 9,484 8,977 4,462 4,614 3,363 2,293 - --------------------------------------------------------------------------------------------------------------------------- 62,713 59,109 55,278 45,321 43,591 40,170 38,099 =========================================================================================================================== 242,990 236,215 228,678 166,859 157,022 151,304 141,956 31,124 30,493 29,592 24,680 21,614 19,212 18,943 397 376 466 443 413 362 404 231 223 208 171 159 168 167 - --------------------------------------------------------------------------------------------------------------------------- 274,742 267,307 258,944 192,153 179,208 171,046 161,470 21,120 24,480 31,300 28,184 24,996 19,522 11,820 - --------------------------------------------------------------------------------------------------------------------------- 295,862 291,787 290,244 220,337 204,204 190,568 173,290 =========================================================================================================================== 302,781 295,729 297,855 289,639 211,716 200,786 183,354 =========================================================================================================================== $ 15,194 $ 14,727 $ 16,781 $ 13,334 $ 12,394 $ 9,882 $ 6,713 8,053 7,539 9,773 5,538 5,239 4,429 3,381 - --------------------------------------------------------------------------------------------------------------------------- $ 7,141 $ 7,188 $ 7,008 $ 7,796 $ 7,155 $ 5,453 $ 3,332 =========================================================================================================================== 47.0% 48.8% 41.8% 58.5% 57.7% 55.2% 49.6% =========================================================================================================================== 19,063 16,066 17,931 17,499 16,535 13,363 8,161 ===========================================================================================================================
United Cities Gas Company & Subsidiaries 49 52 CONSOLIDATED FINANCIAL AND OPERATING DATA
1995 1994 1993 - --------------------------------------------------------------------------------------------------- Common stock information: Common stock earnings:* Utility . . . . . . . . . . . . . . . . . . $ 5,745 $ 7,817 $ 7,877 UCG Energy . . . . . . . . . . . . . . . . 3,450 3,750 3,775 UCG Storage . . . . . . . . . . . . . . . . 740 526 468 - -------------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . $ 9,935 $ 12,093 $ 12,120 ================================================================================================== Earnings per share . . . . . . . . . . . . . . $ .84 $ 1.16 $ 1.19 ================================================================================================== Average number of shares* . . . . . . . . . . . 11,792 10,409 10,197 ================================================================================================== Shares outstanding* . . . . . . . . . . . . . . 12,727 10,613 10,314 ================================================================================================== Dividends per share . . . . . . . . . . . . . . $ 1.02 $ 1.005 $ .985 ================================================================================================== Dividend pay-out . . . . . . . . . . . . . . . 121.4% 86.6% 82.8% ================================================================================================== Dividend yield . . . . . . . . . . . . . . . . 5.4% 6.4% 5.3% ================================================================================================== Market value per share: High . . . . . . . . . . . . . . . . . . . $ 18.75 $ 18.75 $ 20.50 Low . . . . . . . . . . . . . . . . . . . . $ 14.50 $ 15.44 $ 16.00 Close . . . . . . . . . . . . . . . . . . . $ 18.75 $ 15.75 $ 18.50 ================================================================================================== Price/Earnings ratio . . . . . . . . . . . . . 22.3x 13.6x 15.5x ================================================================================================== Return on average equity . . . . . . . . . . . . . 7.5% 10.5% 11.1% ================================================================================================== Weather data-colder (warmer) than normal. . . . . . (2.4%) (10.2%) 2.8% ================================================================================================== Capitalization: Capitalization:* Long-term debt . . . . . . . . . . . . . . $163,160 $ 144,344 $151,843 Preferred and preference stock . . . . . . Common stock equity . . . . . . . . . . . . 146,071 118,028 111,888 - -------------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . $309,231 $ 262,372 $263,731 ================================================================================================== Capitalization (percent): Long-term debt . . . . . . . . . . . . . . 52.8% 55.0% 57.6% Preferred and preference stock . . . . . . Common stock equity . . . . . . . . . . . . 47.2% 45.0% 42.4% - -------------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% ================================================================================================== Total assets* . . . . . . . . . . . . . . . . . . . $460,377 $ 421,200 $401,520 ==================================================================================================
*In thousands United Cities Gas Company & Subsidiaries 50 53 CONSOLIDATED FINANCIAL AND OPERATING DATA
1992 1991 1990 1989 1988 1987 1986 - --------------------------------------------------------------------------------------------------------------------------- $ 5,865 $ 4,777 $ 1,490 $ 7,140 $ 4,684 $ 3,731 $ 3,498 3,681 2,570 1,375 2,790 2,262 1,504 1,113 558 394 346 78 -- -- -- - --------------------------------------------------------------------------------------------------------------------------- $ 10,104 $ 7,741 $ 3,211 $ 10,008 $ 6,946 $ 5,235 $ 4,611 =========================================================================================================================== $ 1.07 $ $.97 $ .44 $ 1.52 $ 1.24 $ 1.00 $ .97 =========================================================================================================================== 9,459 8,000 7,238 6,572 5,621 5,251 4,768 =========================================================================================================================== 10,052 8,517 7,292 7,197 5,677 5,300 5,225 =========================================================================================================================== $ .965 $ .93 $ .92 $ .88 $ .84 $ .80 $ .79 =========================================================================================================================== 90.2% 95.9% 209.1% 57.9% 67.7% 80.0% 81.4% =========================================================================================================================== 5.8% 5.7% 6.8% 5.9% 6.8% 6.7% 6.6% =========================================================================================================================== $ 16.50 $ 16.25 $ 15.63 $ 15.50 $ 13.13 $ 15.13 $ 16.50 $ 12.75 $ 12.00 $ 13.00 $ 12.25 $ 11.75 $ 11.75 $ 12.00 $ 16.50 $ 16.25 $ 13.50 $ 14.88 $ 12.38 $ 12.00 $ 12.00 =========================================================================================================================== 15.4x 16.8x 30.7x 9.8x 10.0x 12.0x 12.4x =========================================================================================================================== 10.5% 9.9% 4.4% 15.9% 14.0% 11.4% 12.4% =========================================================================================================================== (7.8%) (12.8%) (20.4%) .9% 3.5% (4.0%) (8.0%) =========================================================================================================================== $157,734 $127,430 $ 96,521 $ 78,230 $ 69,138 $ 73,325 $ 32,274 1,352 1,483 2,203 4,871 5,156 5,483 106,206 85,953 71,118 73,204 52,279 46,964 44,790 - --------------------------------------------------------------------------------------------------------------------------- $263,940 $214,735 $169,122 $153,637 $126,288 $125,445 $ 82,547 =========================================================================================================================== 59.8% 59.4% 57.1% 50.9% 54.7% 58.5% 39.1% -- 0.6% 0.9% 1.4% 3.9% 4.1% 6.6% 40.2% 40.0% 42.0% 47.7% 41.4% 37.4% 54.3% - --------------------------------------------------------------------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% =========================================================================================================================== $370,150 $368,283 $338,167 $307,160 $212,629 $197,946 $166,186 ===========================================================================================================================
United Cities Gas Company & Subsidiaries 51 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. UNITED CITIES GAS COMPANY (Registrant) By: /s/ GENE C. KOONCE -------------------------- Gene C. Koonce President Dated: March 20, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ DWIGHT C. BAUM Chairman of the Board - -------------------------------------- Dwight C. Baum /s/ GENE C. KOONCE President, Principal Executive - -------------------------------------- Officer and Director Gene C. Koonce /s/ JAMES B. FORD Senior Vice President and - -------------------------------------- Treasurer and Principal James B. Ford Financial Officer /s/ ADRIENNE H. BRANDON Vice President and Controller - -------------------------------------- Adrienne H. Brandon /s/ THOMAS J. GARLAND Director March 20, 1996 - -------------------------------------- Thomas J. Garland /s/ DALE A. KEASLING Director - -------------------------------------- Dale A. Keasling /s/ VINCENT J. LEWIS Director - -------------------------------------- Vincent J. Lewis /s/ DENNIS L. NEWBERRY, II Director - -------------------------------------- Dennis L. Newberry, II /s/ STIRTON OMAN, JR. Director - -------------------------------------- Stirton Oman, Jr. /s/ TIMOTHY W. TRIPLETT Director - -------------------------------------- Timothy W. Triplett /s/ GEORGE C. WOODRUFF, JR. Director - -------------------------------------- George C. Woodruff, Jr. /s/ JERRY H. BALLENGEE Director - -------------------------------------- Jerry H. Ballengee
52 55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To United Cities Gas Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of United Cities Gas Company and subsidiaries included in this Form 10-K, and have issued our report thereon dated February 16, 1996. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Nashville, Tennessee, February 16, 1996 53 56 UNITED CITIES GAS COMPANY AND SUBSIDIARIES SCHEDULE II-RESERVES FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
OTHER BALANCE AT ADDITIONS CHANGES BALANCE AT BEGINNING CHARGED TO INCREASE END OF DESCRIPTION OF PERIOD INCOME DEDUCTIONS (DECREASE) PERIOD ----------- ------------ ------------ ------------ ------------- ----------- (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1995 - Deducted in the balance sheet from the asset to which it applies: Allowance for uncollectible accounts.................. $1,017 1,331 996 (a) - $1,352 ============ ========== =========== ========= =========== Included in the deferred credits section of the balance sheet: Injuries and damages reserve.......................... $774 360 - - $1,134 ============ ========== =========== ========= =========== Included in the current liabilities section of the balance sheet: Injuries and damages reserve.......................... $313 96 304 - $105 ============ ========== =========== ========= =========== YEAR ENDED DECEMBER 31, 1994 - Deducted in the balance sheet from the asset to which it applies: Allowance for uncollectible accounts.................. $1,150 1,021 1,154 (a) - $1,017 ============ ========== =========== ========= =========== Included in the deferred credits section of the balance sheet: Injuries and damages reserve.......................... $1,064 60 350 - $774 ============ ========== =========== ========= =========== Included in the current liabilities section of the balance sheet: Injuries and damages reserve.......................... $277 36 - - $313 ============ ========== =========== ========= =========== YEAR ENDED DECEMBER 31, 1993 - Deducted in the balance sheet from the asset to which it applies: Allowance for uncollectible accounts.................. $705 1,345 900 (a) - $1,150 ============ ========== =========== ========= =========== Included in the deferred credits section of the balance sheet: Injuries and damages reserve.......................... $959 107 2 - $1,064 ============ ========== =========== ========= =========== Included in the current liabilities section of the balance sheet: Injuries and damages reserve.......................... $174 156 53 - $277 ============ ========== =========== ========= ===========
- ---------- (a) Represents write-off of accounts considered to be uncollectible, less collection of accounts previously written off. 54 57 UNITED CITIES GAS COMPANY AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 DIVIDENDS FROM SUBSIDIARIES. Cash dividends declared to Cities from the registrant's wholly-owned subsidiaries were $6,100,000 in 1995, $1,350,000 in 1994 and $1,100,000 in 1993. 55 58 LIST OF EXHIBITS 3.01 Amended Articles of Incorporation of Company, as amended April 28, 1995, (filed with the Registrant's Form 10-Q dated June 30, 1995 and incorporated herein by reference). 3.02 Amended By-Laws of Company, as amended February 3, 1996. 4.01 Indenture of Mortgage, dated as of July 15, 1959, from the Company to First Trust of Illinois, National Association, and M. J. Kruger, as Trustees, as amended and supplemented through December 1, 1992, (the Indenture of Mortgage through the 20th Supplemental Indenture, filed with the Registrant's Registration Statement on Form S-3 (File No. 33-56983) and incorporated herein by reference). 4.02 Form of Indenture between the Company and First Trust of Illinois, National Association, as trustee (filed with the Registrant's Registration Statement on Form S-3 (File No. 33-56983) and incorporated herein by reference). 10.01 Annual Incentive Compensation Plan effective January 1, 1989, as revised, (filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.02 Supplemental Executive Retirement Compensation Agreement, as revised. 10.03 Long-Term Stock Plan of 1989, (filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). 10.04 Directors' Deferred Compensation Plan effective February 1, 1992, (filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). 10.05 Non-Employee Director Stock Plan effective February 28, 1995 (filed with the Registrant's Form 10-Q dated June 30, 1995 and incorporated herein by reference). 10.06 Key Management Deferred Compensation Plan effective January 1, 1995. 11.01 Computation of Common Stock Earnings Per Share. 12.01 Computation of Ratio of Consolidated Earnings to Fixed Charges. 21. Subsidiaries of United Cities Gas Company. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule (SEC use only). 56 EX-3.02 2 BY-LAWS 1 EXHIBIT 3.02 AS RESTATED FEBRUARY 3, 1996 BY-LAWS OF UNITED CITIES GAS COMPANY OFFICES 1. The principal office shall be in the City of Brentwood, County of Williamson, State of Tennessee. 2. The corporation may also have offices at such other places as the board of directors may from time to time appoint or the business of the corporation may require. SEAL 3. The corporation seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Illinois." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 4. Except as otherwise provided herein, meetings of the shareholders may be held at such place, either within or without the State of Illinois, as may be designated by the board of directors and stated in the notice of the meeting. 5. The Annual Meeting of Shareholders shall be held as near as possible to the last Friday of April in each year, if not a legal holiday, and, if a legal holiday, then on the next secular day following, at ten-thirty o'clock a.m., when the shareholders shall elect, by a plurality vote, by ballot, a board of directors, and transact such other business as may properly be brought before the meeting. 6. The holders of a majority of the shares issued and outstanding, and entitled to vote thereat, present in person, or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by law, by the Articles of Incorporation by these by-laws. If, however, such majority shall not be present or represented at any meeting of the shareholders, a majority of the 2 shareholders entitled to vote thereat, present in person or by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of voting shares shall be present. At such adjourned meeting at which the requisite amount of voting shares shall be represented any business may be transacted which might have been transacted at the meeting as originally notified. 7. At each meeting of the shareholders every shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by an instrument in writing subscribed by such shareholder. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. In all elections for directors every shareholder shall have the right to vote in person or by proxy for the number of shares owned by him for as many persons as there are directors to be elected, or to cumulate said shares and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal, or to distribute them on the same principle among as many candidates as he shall think fit. Except where the books maintained by the Transfer Agent for the transfer of shares of the corporation shall have been closed or a date shall have been fixed as a record date for the determination of its shareholders entitled to vote, no shares shall be voted at any election for directors which shall have been transferred on the books maintained by said Transfer Agent within twenty days next preceding such election of directors. 8. Written notice of the annual meeting shall be mailed at least ten, or in case a merger or consolidation is to be acted upon at least twenty, but not more than forty days prior to the date thereof to each shareholder entitled to vote thereat at such address as appears on the books maintained by the Transfer Agent for the transfer of shares of the corporation. 9. The Transfer Agent of the corporation shall make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the registered office of 2 3 the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. 10. Special meetings of the shareholders may be called only by the chairman, by the president, by the secretary, by the board of directors, or in the manner hereafter prescribed by the holders of not less than one-fifth of all the outstanding shares entitled to vote on the matter for which the meeting is called. At any time, upon written request of shareholders holding in the aggregate one-fifth of all the outstanding shares entitled to vote on the matter for which a meeting is called, it shall be the duty of the secretary to call a special meeting of shareholders to be held at the registered office at such time as the secretary may fix, not less than ten nor more than forty days after the receipt of said request, and if the secretary shall neglect or refuse to issue such call, shareholders making the request may do so upon no less than forty days' written notice. Such request shall state the purpose or purposes of the proposed meeting. 11. Persons authorized to call shareholders' meetings shall cause written notice of the time, place and purpose of the meeting to be given all shareholders entitled to vote at such meeting, at least ten, or in case a merger or consolidation is to be acted upon at the meeting, at least twenty but not more than forty days prior to the day named for the meeting, provided that written notice given by shareholders calling a meeting in accordance with paragraph 10 above shall be given forty days prior to the date named for the meeting. If such written notice is placed in the United States mail, postage prepaid, and addressed to a shareholder at his last known post office address, notice shall be deemed to have been given him. Notice of any shareholders' meeting may be waived by any shareholder at any time. 12. Business transacted at all special meetings shall be confined to the object stated in the call. 3 4 DIRECTORS 13. The property and business of the corporation shall be managed by its board of directors, which shall be ten (10) in number and divided into three classes, which shall be as nearly equal in number as possible, as provided in the Articles of Incorporation. The number of directors may be increased or decreased by amendment to these by-laws, provided the number of directors shall not be less than three. In case of any increase in the number of directors, the additional directors may be elected by the shareholders at any meeting, annual or special, duly called for that purpose, or by the board of directors. Except as otherwise herein provided, the directors shall be elected at the annual meeting of shareholders. Each director shall be elected to serve until his successors shall be elected and shall qualify; provided, however, that in no event shall any director who is first elected on or after February 16, 1976, be permitted to serve on or after his date of retirement, which retirement date shall be deemed to be the date of the Annual Meeting of Shareholders of the Company next following the date on which a director has attained age 70. Nominations for the election of directors may be made by the board of directors or by any shareholder entitled to vote for the election of directors. Nominations by the board of directors may be made at any time. Nominations by shareholders shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the secretary of the corporation not less than 30 days nor more than 40 days prior to any meeting of the shareholders called for the election of directors; provided, however, that if less than 30 days' notice of the meeting is given to shareholders, such written notice shall be delivered or mailed, as prescribed, to the secretary of the corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to shareholders. Each notice of nomination by a shareholder shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee and (iii) the number of share of stock of the corporation which are beneficially owned by each nominee. The chairman of the meeting may, if the facts warrant, determine and declare to 4 5 the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 14. The directors may hold their meetings and have one or more offices, and keep the books of the corporation in the City of Brentwood, Tennessee, or at such other places as they may from time to time determine. 15. The entire board of directors or any individual director may, at any special meeting of the shareholders called for that purpose in the manner provided by Paragraph 10 and 11 hereof, be removed from office by a vote of shareholders holding a majority of the outstanding shares entitled to a vote at an election of directors. In case the board or any one or more directors be so removed, new directors may be elected at the same meeting. Unless the entire board be removed, no individual director shall be removed in case the votes of a sufficient number of shares are cast against the resolution for his removal, which, if cumulatively voted at an election of the whole board, would be sufficient to elect one or more directors. 16. If the office of a any director or directors becomes vacant by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, such vacancy or vacancies may be filled by the affirmative vote of a majority of the remaining directors. A director thus elected to fill any vacancy shall hold office until the next annual election and until a successor or successors have been duly elected, unless sooner displaced. 17. In addition to the powers and authorities by these by-laws expressly conferred upon it, the board of directors may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these by-laws directed or required to be exercised or done by the shareholders. 5 6 EXECUTIVE COMMITTEE 18. The board of directors shall by resolution or upon recommendation of the Chairman and approval of the majority of the entire Board, establish an Audit Committee and a Compensation Committee and may by resolution or resolutions, passed by a majority of the whole Board, designate one or more additional committees, each committee to consist of two or more directors, who shall serve at the pleasure of the Board. Such committees shall have any may exercise such powers permitted by law as may be directed or delegated by the board of directors from time to time. Vacancies in the membership of the committees shall be filed by the board of directors at a regular or a special meeting called for that purpose. COMPENSATION OF DIRECTORS 19. Directors who are not employees of the Company shall be paid a stated salary for their service plus a fixed sum and expenses of attendance at each regular and special meeting of the board; PROVIDED, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor or preclude the Chairman of the Board from receiving any stated salary for his services as such. Members of special or standing committees will be allowed like compensation for attending committee meetings. The board of directors shall have the authority to fix the compensation of directors unless otherwise provided by the Articles of Incorporation. MEETINGS OF THE BOARD 20. Each newly elected board shall hold its annual meeting immediately following the annual meeting of shareholders at the place where such annual meeting of shareholders was held, and no notice of such annual meeting to the new elected directors shall be necessary in order legally to constitute the annual meeting, provided a quorum shall be present. 6 7 21. Regular meetings of the board of directors may be held at such place as a majority of the directors may from time to time appoint. Notice of such regular meeting shall be given at least five days before the meeting by mail or telegram by the chairman of the board or in his absence, by the president. Such notice need not specify the business to be transacted at such regular meeting, but shall state that the meeting to be held is a regular meeting of the board. 22. Special meetings of the board may be called by the chairman of the board, or in his absence, by the president on five (5) days' notice to each director, by mail or telegram, or notice may be waived by the directors. Special meetings shall be called by the chairman of the board or by the president or the secretary in like manner and on like notice on the written request of two directors. 23. At all meetings of the board a majority of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation or by these By-laws. 24. No business shall be transacted at any special meeting of the board which shall not have been stated in the notice thereof, except upon written approval of all the directors of the corporation. OFFICERS 25. The officers of the corporation shall be elected by the directors and shall be a chairman of the board, a president, one or more vice presidents, a secretary and a treasurer. The board of directors may also appoint one or more assistant secretaries and assistant treasurers. Any two of the offices of the corporation may be held by one person except the offices of president and secretary. The board of directors may appoint one or more assistant secretaries and assistant treasurers to perform their respective duties and to have such powers of the secretary and treasurer as shall from time to time be assigned to them by the board of directors. 7 8 26. The chairman of the board and the president shall be a member of the board of directors. No other officers of the corporation need be a member of the board. No vice president who is not a director may succeed to or fill the office of the president. 27. The board may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. 28. The salaries of all elected officers of the corporation shall be fixed by the board of directors. 29. The officers of the corporation shall hold office until their successors are chosen and qualify in their stead. Any officer, manager or agent elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the whole board of directors, whenever in their judgment the best interest of the corporation will be served thereby, such removal, however, to be without prejudice to the contract rights of the person so removed. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the affirmative vote of a majority of the whole board of directors. 30. The chairman of the board shall preside at all meetings of the shareholders and the board of directors. PRESIDENT 31. The president shall be the chief executive officer of the corporation and shall have active supervision and general charge of the property, business and employees of the corporation, subject, however, to the control of the board of directors; he shall see that all resolutions and orders of the board of directors are carried into effect; he shall exercise such other powers and perform such other duties as shall be incident to the office of president or as may be required by the board of directors. In the absence or inability to act of the chairman of the board of directors, the president shall preside at all meetings of the shareholders and the board of directors and shall during such absence exercise all the powers of the chairman of the board. 8 9 32. He shall execute bonds, mortgages, and other contracts requiring the seal, under the seal of the corporation, but the authority to execute such instruments may also be vested in others as provided in Paragraph 41 of these by-laws. 33. He shall be EX OFFICIO a member of all standing committees, and shall have the general powers and duties of supervision and management usually vested in the office of president of a corporation. VICE PRESIDENTS 34. Each vice president shall have such powers and perform such duties as the board of directors may from time to time prescribe or as the chairman of the board or the president may from time to time delegate to him. At the request of the president, any vice president may, in the case of the absence or inability to act of the president, temporarily act in his place. In the case of the death of the president or in the case of his absence or inability to act where no vice president has been designated to act temporarily in his place, the board of directors shall designate one or more vice presidents to perform the duties of the president. THE SECRETARY AND ASSISTANT SECRETARIES 35. The secretary shall attend all sessions of the board and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall keep in safe custody the seal of the corporation, and when authorized by the board, affix the same to any instrument requiring it, and when so affixed, it shall be attested by his signature or by the signature of the assistant secretary or an assistant secretary. 9 10 36. The assistant secretary, or assistant secretaries in the order of their seniority, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary, and shall perform such other duties as the board of directors shall prescribe. THE TREASURER AND ASSISTANT TREASURERS 37. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts or receipts and disbursements in books belonging to the corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the corporation in such depositaries as may be designated by the board of directors. 38. He shall disburse the funds of the corporation as may be ordered by the board, taking proper vouchers for such disbursements, and shall render to the president and directors, at the regular meetings of the board, or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the corporation. 39. If required by the board of directors, he shall give the corporation a bond in such sum, and with such surety or sureties as shall be satisfactory to the board, for the faithful performance of the duties of his office, and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. 40. The assistant treasurer, or assistant treasurers in the order of their seniority, shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer, and shall perform such other duties as the board of directors shall prescribe. DUTIES OF OFFICERS MAY BE DELEGATED 41. The board of directors, except as otherwise provided in these by-laws, may authorize any officer or officers, or agent or agents, to enter into any bond, mortgage or contract or execute and deliver any instrument in the name and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the board of directors or 10 11 by the provisions of these by-laws, no officer, agent or employee other than the chairman of the board of directors and the president shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or to any allowance. 42. In case of the absence of any officer of the corporation or for any other reason that the board may deem sufficient, the board may delegate, for the time being, the powers or duties or any of them, of such officer to any other officer, or to any director. CONSIDERATION FOR SHARES 43. Without the consent of any holder of any share of the capital stock of this corporation, the shares of stock of this corporation may be issued by it from time to time in such number or amount of shares of said stock, and for such consideration, not less than the par value thereof, in labor or services actually performed, money or property, as from time to time may be fixed and determined by the board of directors of this corporation at any annual meeting or any special meeting called for said purpose, and the right, power and authority of said board of directors from time to time so to authorize and order the issuance by this corporation of the said shares of said stock, in such number or amount of share, and for such consideration in labor, services actually performed, money or property, as from time to time said board may fix and determine, is hereby absolutely reserved to said board of directors. Payment or delivery to, or receipt by this corporation of such consideration as may be so fixed and determined by its board of directors for the issuance of any share or shares of its said stock, as hereinbefore in this Paragraph 43 provided, shall operate and be construed, deemed and held: (i) to discharge, release and satisfy fully and absolutely, all liability to this corporation and/or to its creditors now or at any time hereafter existing, of any subscriber for, and/or holder or any such share or shares so authorized to be issued in any way on account of, founded upon, or 11 12 arising out of any subscription for, and/or purchase of, and/or issuance of a certificate or certificates representing such share or shares, and (ii) to constitute such share or shares as full paid and non-assessable. CERTIFICATES REPRESENTING SHARES 44. Certificates evidencing the ownership of shares of the corporation shall bear such serial designation (which may be a combination of letters and numbers) as shall be prescribed by the board of directors and the ownership thereof shall be recorded in books maintained by the Transfer Agent for recording the transfer of shares of the corporation as they are issued. They shall state that the corporation is organized under the laws of the State of Illinois, the name of the person of whom issued, the number and class of shares, and the designation of the series, if any, which such certificate represents, the par value of each share represented by such certificate, and such authorization number as may be prescribed by an Order or Orders of the Illinois Commerce Commission. They shall be signed by the president or a vice president, and the secretary or an assistant secretary, and sealed with the seal or a facsimile seal of the corporation. In case the seal of the corporation is changed after the certificate is sealed with the seal or a facsimile of the seal of the corporation, but before it is issued, the certificate may be issued by the corporation with the same effect as if the seal had not been changed. Where such certificate is countersigned by a transfer agent other than the corporation itself or an employee of the corporation, or by a transfer clerk and registered by a registrar, the signatures of the president or vice president and the secretary or assistant secretary upon such certificate may be facsimiles, engraved or printed. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if such officer had not ceased to be such at the date of its issue. 12 13 Every certificate representing shares issued by the corporation shall set forth upon the face or back of the certificate a full or summary statement of all the designations, preferences, qualifications, limitations, restrictions, and special or relative rights of the shares of each class authorized to be issued, and if the corporation is authorized to issue any preferred or special class in series, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series; provided that such statement may be omitted from the certificate if it shall be set forth upon the face or back of the certificate that such statement, in full, will be furnished by the corporation to any shareholder upon request without charge. TRANSFER OF SHARES 45. Transfers of shares shall be made on the books maintained by the Transfer Agent for the transfer of shares of the corporation only upon surrender of the certificate therefor, endorsed by the person named in the certificate or by attorney lawfully constituted in writing. CLOSING OF TRANSFER BOOKS 46. The board of directors shall have power to close the stock transfer books of the corporation for a period not exceeding forty days preceding the date of any meeting of shareholders or the date for payment of any dividend or distribution, or the date for the allotment of rights, or, subject to contract rights with respect thereto, the date when any change or conversion or exchange of shares will be made or go into effect; provided, however, if the share transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 days, or in the case of a merger or consolidation at least 20 days, immediately preceding such meeting; and provided, further, that in lieu of closing the stock transfer books as aforesaid, the board of directors may fix in advance a date at least 10, or in the case of a merger or consolidation at least 20, but not more 13 14 than 40 days preceding the date of any meeting of shareholders or the date for payment of any dividend or distribution, or the date for the allotment of rights, or, subject to contract rights with respect thereto, the date when any change or conversion of exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of shares of capital stock, and in such case only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, or to receive payment of such dividend, or to receive such allotment or rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. REGISTERED SHAREHOLDERS 47. The corporation shall be entitled to treat the holder of record of any share or shares of the corporation as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Illinois. LOST CERTIFICATES 48. Any person claiming a certificate of stock to be lost or destroyed, shall make an affidavit or affirmation of that fact and advertise the same in such manner as the board of directors may require. The owner of a lost or destroyed certificate(s), or his legal representative will give the corporation a bond, sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss of any such certificate. A new certificate of the same tenor and for the same number of shares as the one alleged to be lost or destroyed, may be issued without requiring any bond, when, in the judgment of the directors it is proper so to do. 14 15 INSPECTION OF BOOKS 49. The directors shall determine from time to time whether and, if allowed, when and under what conditions and regulations the accounts and books for the corporation (except as may by statute be specifically open to inspection) or any of them shall be open to the inspection of the shareholders, and the shareholders' rights in this respect are and shall be restricted and limited accordingly. CHECKS 50. All checks or demands for money and notes of the corporation shall be signed by such officer or officers as the board of directors may from time to time designate. FISCAL YEAR 51. The fiscal year shall begin the first day of January in each year. DIVIDENDS 52. Dividends upon shares of the corporation, subject to the provisions of the Articles of Incorporation, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the corporation, and shall be paid only out of the surplus of the aggregate of the assets of the corporation over the aggregate of its liabilities, including in the latter the amount of its capital shares. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conductive to the interests of the corporation. 15 16 DIRECTORS' ANNUAL STATEMENT 53. The board of directors shall present at each annual meeting and when called for by vote of the shareholders at any special meeting of the shareholders, a full and clear statement of the business and condition of the corporation. NOTICES 54. Whenever under the provisions of these by-laws notice is required to be given to any director, officer or shareholder, it shall not be construed to mean any requirement for personal notice, but such notice may be given in writing, by mail, by depositing the same in the post office or letter box, in a postpaid, sealed wrapper, addressed to such shareholder, officer or director at such address as appears on the books of the corporation, or, in default of other address, to such director, officer or shareholder at the General Post Office in the City of Chicago, Illinois, and such notice shall be deemed to be given at the time when same shall be thus mailed. 55. The notice provided for in these by-laws of any general or special meeting of the shareholders, or general or special meeting of the directors, may be waived in writing by the shareholders or directors, respectively. INDEMNIFICATION OF DIRECTORS AND OFFICERS 56. Each director or officer of the corporation, each former director or officer, and any person who serves or has served at the request of the corporation as a director or officer of another corporation in which the corporation owned shares of the capital stock or of which it was a creditor, shall be indemnified by the corporation against any costs and expenses which may be imposed upon or actually and necessarily incurred by him (and for which he is not otherwise reimbursed), including the amount of any judgments or fines, in connection with the defense of any action, suit or proceeding, whether criminal or civil, in which he may be named as a party by reason of his being or having been such director or officer, or by reason of any action alleged to have been taken or omitted by him in either such capacity; provided, however, that the 16 17 corporation shall not indemnify any such person against any costs or expenses imposed upon or incurred by him in relation to matters as to which he shall be finally adjudged to be liable for negligence or misconduct in the performance of duty. In the event of a settlement of any such action, suit or proceeding prior to final adjudication, or in the event of a settlement or any claim made against any such person by reason of his being or having been such director or officer, such person shall be indemnified against any costs and expenses actually incurred by him, including any amount paid to effect such settlement, if the corporation is advised by independent counsel selected or approved by its board of directors that he acted without negligence or misconduct in the performance of duty and that such costs and expenses are not unreasonable. In the event of a criminal action, suit or proceeding, a conviction or judgment (whether based on a plea of guilty or nolo contendere or its equivalent, or after trial) shall not be deemed an adjudication that such person is liable for negligence or misconduct in the performance of duty if he acted in good faith in what he considered to be the best interests of the corporation or such other corporation or such other corporation and with no reasonable cause to believe that the action was illegal. The right of indemnification in this Paragraph 56 provided shall insure to each person referred to in the first paragraph of this Paragraph 56 whether or not he is such director or officer at the time such costs or expenses are imposed or incurred, and whether or not the claim asserted against him is based on matters which antedate the adoption of these by-laws; and in the event of his death or incapacity shall extend to his legal representatives. Each person who shall act as a director or officer of the corporation, or if any such other corporation at the request of the corporation, shall be deemed to be doing so in reliance upon such right of indemnification; and such right shall not be exclusive of any other right which he may have. None of the provisions of this Paragraph 56 shall be construed as a limitation upon the right of the corporation to exercise its general power to enter into a contract or undertaking of indemnity with a director or officer in any proper case not provided for herein. The provisions of Paragraph 56 shall be subject to any limitations contained in applicable statutory laws. 17 18 VOTING SHARE IN OTHER CORPORATIONS 57. Unless otherwise ordered by the shareholders, the chairman of the board, the president or a vice president shall have full power and authority in behalf of the corporation to attend, and to act and to vote, at any meeting of shareholders of any corporation in which this corporation may hold shares, and in connection with such meeting shall possess and may exercise in behalf of the corporation any and all rights and powers incident to the ownership of such shares, including the power to appoint proxies therefor and to execute any and all instruments for that purpose. The directors may, from time to time by resolution, direct the manner in which shares may be voted or confer these powers upon any other person or persons. AMENDMENTS 58. These by-laws may be altered or amended only in the manner prescribed by the Articles of Incorporation. * * * * * * * * * * * * * * * * * * 18 EX-10.02 3 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.02 UNITED CITIES GAS COMPANY AND SUBSIDIARIES MASTER AGREEMENT FOR THE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP") (AS OF JANUARY 1, 1995) 2 The Plan hereby established under this Master Agreement shall be designated as the United Cities Gas Company and Subsidiaries Supplemental Executive Retirement Plan. The purpose of the Plan is to advance the interest of the Sponsor and the Adopting Employers by enabling the Sponsor and the Adopting Employers (if any) to provide benefits in excess of the benefits payable under a retirement plan qualified for tax-favorable treatment under Sections 401(a) of the Code. Such excess benefits may be payable under this Plan to certain officers who have been designated as eligible for this Plan by their Employer in the event of Early or Normal Retirement, Disability Retirement or death as provided herein. This Plan is available only to a select group of management or highly compensated Employees and is not qualified under the Code. It is intended to be an unfunded and unsecured "top hat" plan under the provisions of ERISA, and thereby exempt from many of ERISA's reporting and disclosure, participation and vesting, and funding and fiduciary requirements of ERISA under ERISA Sections 201(2), 301(a)(3) and 401(a)(1), respectively. Also because benefits under the Plan are unfunded and unsecured, any benefits under the Plan are excluded from the definition of "property" described in Code Regulation Section 1.83-3(e). The Plan will be subject to FICA (and FUTA) taxes at the latter of (1) the date on which the services are performed for which such credits are given or (2) the date there is no substantial risk of forfeiture with respect to the benefits which have accrued. The Plan is not maintained solely, nor is any part of it maintained separately, to provide benefits limited by Section 415 of the Code. The restriction on the compensation that can be taken into consideration for determining benefits under a qualified plan imposed by Section 401(a)(17) of the Code ($150,000 for a plan year beginning in 1994) is the principal limitation on benefits that may be payable under this Plan as "excess" benefits as that term is used above. The Plan shall be associated with a "Rabbi" trust. The provisions of the Plan shall apply only to persons who become eligible for participation in the Plan on or after the Effective Date of the Plan and during its continuation. The Plan replaces any prior Plan, or contract or agreement, providing for nonqualified benefits by and between the Employer and any Participant of this Plan other than the United Cities Gas Company and Subsidiaries Executive Deferred Compensation Plan. However, this Plan does not otherwise limit, offset, restrict or decrease benefits to which Participants under this Plan may otherwise be entitled as employees of the Employer. 3 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 MEMBERSHIP IN THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Membership Following Re-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE 3 FINANCING THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Establishing and Maintaining the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Contributions by Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.3 Annual Contributions by the Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.4 Creation of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 4 BENEFIT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.2 Retirement Benefits (including Early Retirement and Disability Retirement) . . . . . . . . . . . . 7 4.3 Death After Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.4 Death Before Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.5 Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 5 AMENDMENT AND TERMINATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.1 Amendment of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.2 Termination of the Plan by the Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.3 Termination of Plan With Respect to an Adopting Employer . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 6 PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.1 Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.2 Powers and Duties of the Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.3 Administrator Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.4 Claims Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 7 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.1 Alienation or Assignment of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.2 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.3 Construction of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.4 Correction of Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.5 Legally Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.6 Right of Employer to Discharge Eligible Executives and Participants . . . . . . . . . . . . . . . . 12 7.7 Limitation on Liability; Legal Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.8 Indemnification by Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.9 Application of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.10 Severability of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4 7.11 Deferred Compensation not to be Taken Into Consideration by Other Plans . . . . . . . . . . . . . . 13 7.12 Benefits Payable Only From General Corporate Assets; Unsecured General Creditor Status of Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.13 No Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.14 Parties Bear Own Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.15 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5 ARTICLE 1 DEFINITIONS The following terms when used herein, unless the context clearly indicates otherwise, shall have the meanings set forth below: 1.1 "ACCRUED BENEFIT" shall mean with respect to a Participant eligible (or deemed to be eligible hereunder) to receive a Retirement Benefit under this Plan, a monthly benefit equal to the percentage of the monthly Base Salary of the Participant described below according to the age attained by, and the Years of Service credited to, the Participant on the date of Retirement, payable monthly as of the first day of each calendar month for the life of the Participant as a straight (i.e., single) life annuity.
PARTICIPANT'S ATTAINED PERCENTAGE MINIMUM REQUIRED AGE AT RETIREMENT OF BASE SALARY YEARS OF SERVICE ---------------------- -------------- ---------------- 65 or greater 70% 10 64 65% 10 63 60% 10 62 55% 10 61 or less Zero% 10
Further notwithstanding the foregoing, all Retirement Benefits and the Survivor Benefit (i.e., the actuarial value thereof) shall be reduced and offset by the actuarial value of the following other benefits payable to, or with respect to, the Participant, (to the extent such other benefits have not previously reduced or offset Retirement Benefits under this Plan): (a) Benefits (including the death and disability benefits) attributable to Employer contributions (other than salary deferrals made by the Employer at the direction of Employees) from the Retirement Plan for Employees of United Gas Company (or any successor plan thereto) as qualified for tax-favorable treatment under Section 401(a) of the Code; (b) Retirement benefits (including the death benefit) from the Federal Social Security Administration; (c) Disability benefits from the Federal Social Security Administration. 1.2 "ACTIVE PARTICIPANT" shall mean, with respect to a Plan Year, an individual who has not ceased to be a Participant of the Plan as described at Section 2.2 hereof. 1.3 "ADMINISTRATIVE COMMITTEE" shall mean the committee described at Section 6.1 which is appointed by the Board of Directors of the Sponsor to administer the Plan. -1- 6 1.4 "ADOPTING EMPLOYER" shall mean any business organization or corporation affiliated with the Sponsor through ownership by the Sponsor which is authorized by the Board of Directors of the Sponsor to adopt the Plan, and which subsequently adopts the Plan in writing. 1.5 "BASE SALARY" shall mean the base salary paid to the Participant in the calendar month immediately before the Participant actually takes Retirement, or in the event of the Participant's death before actually taking Retirement, the base salary paid to the Participant in the calendar month immediately before the Participant's death occurred. 1.6 "BENEFICIARY" shall mean the payee of the Survivor Benefit designated by a Participant in his or her last Joinder Agreement according to the records of the Employer. If for any reason no Beneficiary designation was made in the Joinder Agreement, or the designation is defective, incomplete or unintelligible, or both the primary and alternate Beneficiary predecease the Participant, the Survivor Benefit shall be paid to the Participant's then living current legal spouse as Beneficiary, or if the Participant is not survived by such a legal spouse, then the Survivor Benefit shall be paid to the then living children of the Participant, if any, each as Beneficiary in equal shares (per stirpes if a child shall survive the Participant, but die before the payment of the death benefit hereunder) and if no living children, the Survivor Benefit shall be paid in a single lump sum to the estate of the Participant as Beneficiary. 1.7 "CHANGE IN CONTROL" shall mean the following: (a) with respect to the Employer then employing the Participant, (i) the sale of all or substantially all of the assets of the Employer to one or more of the same persons or entities which, immediately prior to the sale, did not own, directly or indirectly, collectively more than fifty percent (50%) of the Employer or (ii) the merger or consolidation of the Sponsor into another business organization or corporation after which more than fifty percent (50%) of the ownership of the merged or consolidated successor organization or corporation is not held by one or more of the same persons or entities which owned more than fifty percent (50%) of the Employer immediately prior to the merger or consolidation, or (b) if at any time after an Eligible Executive becomes a Participant in this Plan, a change in the identity of the President of the Sponsor or the cessation of the President's actuary, in fact, as the chief executive officer of the Sponsor. 1.8 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.9 "COMMITTEE" shall mean the Administrative Committee. -2- 7 1.10 "DISCOUNT FACTOR" shall mean, in order to determine the single lump sum present value of a series of future benefit payments hereunder, the annual interest rate on thirty (30) year Treasury bonds reported by the Wall Street Journal to be in effect on the first day of the month immediately preceding the month with respect to which the calculation is made. 1.11 "DISABILITY" shall mean a "Disability" as that term is defined in the Retirement Plan for Employees of United Cities Gas Company qualified for tax-favorable treatment under Code Section 401(a) which is maintained by the Employer. If there ever is any uncertainty as to the definition to use for "Disability" hereunder, it shall be resolved by the Committee, whose decision shall be final. 1.12 "DISABILITY RETIREMENT" shall mean the termination of the employment of a Participant with the Employer described at Section 1.27(a) herein. 1.13 "DISABLED" shall mean a Participant who suffers a Disability. 1.14 "EFFECTIVE DATE" shall mean January 1, 1995, the date as of which the Plan is established; provided, however, that the term shall mean for an Eligible Executive the effective date of adoption of the Plan by his Adopting Employer if such date is later than January 1, 1995. 1.15 "EARLY RETIREMENT" shall mean the termination of the employment of a Participant with the Employer described at Section 1.27(b) herein. 1.16 "ELIGIBLE EXECUTIVE" shall mean an employee of an Employer (i) who holds the title of President, Senior Vice President or Corporate Vice President, as bestowed on him by the Board of Directors for the Employer for which he or she works; (ii) who holds such title as of the date of his or her Retirement, or if earlier, his or her death; and (iii) who has attained the age of thirty five (35) on such date. 1.17 "EMPLOYEE" shall mean a person who is receiving remuneration for services rendered to the Employer as a common-law employee or pursuant to a written employment contract (or who would be receiving remuneration except for leave of absence authorized in advance). 1.18 "EMPLOYER" shall mean the Sponsor and/or an Adopting Employer, as required by the context. 1.19 "ERISA" shall mean Public Law 93-406, popularly known as the "Employee Retirement Income Security Act of 1974," as amended from time to time. 1.20 "JOINDER AGREEMENT" shall mean the agreement executed by an Eligible Executive by which he or she becomes a Participant of the Plan and accepts all the terms, provisions and conditions of this Master Agreement. The Joinder Agreement, itself, is an integral part of the Master Agreement and Plan and is incorporated herein by reference as if fully set forth herein. -3- 8 1.21 "JOINT ANNUITANT" shall mean that person designated by a Participant to receive the survivor annuity on the Participant's death in the event the Participant has made an effective election to receive his or her Retirement Benefit in the form of a fifty percent (50%) joint and survivor annuity and the person so designated survives the Participant. The identity of the Joint Annuitant cannot be changed once the payment of Retirement Benefits is begun. 1.22 "MASTER AGREEMENT" shall mean this document which establishes the Plan and which together with a Participant's Joinder Agreement and the Trust reflects the Agreement between the Participant and the Employer. 1.23 "PARTICIPANT" shall mean an Eligible Employee who begins to participate in the Plan as described in Section 2.2 hereof. 1.24 "NORMAL RETIREMENT" shall mean the termination of the employment of a Participant with the Employer described at Section 1.27(c) herein. 1.25 "PLAN" shall mean this Plan, the United Cities Gas and Subsidiaries Supplemental Executive Retirement Plan, as established by this Master Agreement effective as of January 1, 1995, and as it may be amended from time to time. Each Joinder Agreement and the Trust shall be an integral part of this Plan and are incorporated herein by reference as if fully set forth herein. 1.26 "PLAN YEAR" shall mean the twelve (12) consecutive month period which is the fiscal year of the Plan. The Plan Year shall be January 1 through December 31. 1.27 "RETIREMENT" shall mean the first occurring of the following: (a) the termination of the Participant's employment with the Employer on or after the Participant attains age 35 on account of Disability upon the determination by the Committee that a Participant is Disabled for purposes of this Plan (also known as "Disability Retirement"); (b) the termination of the Participant's employment with the Employer on or after the Participant attains age 62, but prior to his or her attaining age 65, upon the election in writing in advance by a Participant to take Early Retirement (also known as "Early Retirement"); or (c) the termination of the Participant's employment with the Employer on or after the Participant attains age 65, upon the election in writing in advance by a Participant to take Normal Retirement (also known as "Normal Retirement"). The term "Retirement" shall comprehensively mean Disability Retirement, Early Retirement and Normal Retirement. -4- 9 1.28 "RETIREMENT BENEFIT" shall mean the Participant's Accrued Benefit determined at the date of actual termination of employment with the Employer under certain circumstances in which the Participant is eligible for Retirement. 1.29 "SERP" shall be another name for this Plan and stands for "Supplemental Executive Retirement Plan." 1.30 "SPONSOR" shall mean United Cities Gas Company and any business organization or corporation with which it may be merged, consolidated, or succeeded, provided such successor adopts the Plan in writing. 1.31 "SURVIVOR BENEFIT" shall mean the Survivor Benefit which will be payable after the death of the Participant if the Participant dies while still in the employ of the Employer prior to his or her actually taking Early, Normal, or Disability Retirement. 1.32 "TRUST " OR "TRUST FUND" shall mean the irrevocable grantor trust established by the Employer in conjunction with this Plan to hold Plan assets on a pooled and unsegregated basis to pay benefits hereunder. The Trust is an integral part of the Master Agreement and Plan and is incorporated herein by reference as if fully set forth herein. 1.33 "TRUSTEE" shall mean the party or parties who accept the duties of trustee by executing the Trust. 1.33 "YEARS OF SERVICE" shall mean a twelve (12) consecutive month period of continuous employment by the Employee with the Employer as a "full-time" Employee (as that term is uniformly defined by the Employer with respect to all Employees for any period in question), and shall include such employment prior to the Effective Date of this Plan. ARTICLE 2 MEMBERSHIP IN THE PLAN 2.1 ELIGIBILITY. Each Employee who has met the requirement to be considered an Eligible Executive on the Effective Date shall immediately be considered to be an Eligible Executive for this Plan, and each Employee who meets the eligibility requirement after the Effective Date shall be eligible to become a Participant on the first day of the month coincident with or next following the date he or she becomes an Eligible Executive. Upon its determination that an Employee has met the requirement to become an Eligible Executive, the Administration Committee shall forward to each Eligible Executive a copy of this Master Agreement and Plan and a Joinder Agreement to be executed by the Eligible Executive. 2.2 PARTICIPATION. An Employee shall become a Participant on the first day he or she is an Eligible Executive and has filed his properly completed Joinder Agreement with the Committee. -5- 10 In the event that a person ceases to be an Eligible Executive or the Participant's employment with the Employer terminates for any reason, he or she shall thereupon immediately cease to be a Participant, and benefits payable with respect to the person, if any, shall be governed by the provisions of this Plan. 2.3 MEMBERSHIP FOLLOWING RE-EMPLOYMENT. Any former Eligible Executive or Participant who, subsequent to the Effective Date, ceased to be an Employee of any Employer but is rehired by an Employer after a period of time during which the former Eligible Executive or Participant was not an Employee of any Employer (i.e., the termination from one Employer and rehire by the next Employer was not just a transfer between Employers which have adopted this Plan), and thereafter such rehired Employee would again be considered to be an Eligible Executive shall be eligible to be a Participant in the Plan again only upon specific authorization by the Board of Directors of the rehiring Employer. ARTICLE 3 FINANCING THE PLAN 3.1 ESTABLISHING AND MAINTAINING THE PLAN AND THE PAYMENT OF BENEFITS THEREUNDER. The Sponsor and the Adopting Employers shall bear the administrative cost of establishing and operating the Plan and its associated Trust. The administrative costs of the Plan shall be borne by each Employer on a per capita basis each Plan Year: that is, each Employer shall bear that fraction of the total administrative costs for each Plan Year obtained by dividing the number of Participants in the Plan who are Employees of that Employer at any time during the Plan Year by the number of Employees of all such Employees of the Employers that Plan Year. The cost of providing benefits under this Plan shall be the expense each Employer recognizes each year in accordance with Section 3.3 hereof. 3.2 CONTRIBUTIONS BY PARTICIPANTS. No contributions by Participants shall be required for participation in the Plan nor shall contributions by Participants be permitted hereunder. 3.3 ANNUAL CONTRIBUTIONS BY THE EMPLOYER. Retirement and Survivor Benefits payable under this Plan shall be completely paid for by the Employer. The earliest date a Participant could take Retirement under this Plan is age 62 (although if the Participant remains an Active Participant of this Plan thereafter he or she may continue to accrue a greater Accrued Benefit each Plan Year until age 65). In order to assist it to set aside a sufficient sum by the time the Participants attain age 62 to pay the anticipated stream of Retirement Benefits that the Participants may become entitled to at age 62 (and thereafter if they continue to accrue a further Accrued Benefit) the Employer shall set aside in the Trust Fund each Plan Year an amount at least equal to the expense the Employer recognizes under Financial Accounting Standard Number 87 ("FAS 87") for that year. Such contribution shall be made at the time the expense is determined. Separate accounts shall be established on the books of the Plan for each Participant which shall be credited each year with that portion of the FAS 87 expense attributable to the Participant. -6- 11 Notwithstanding the foregoing, however, the Employer's contribution each year shall also be at least sufficient to provide the Survivor Benefit each Participant would be eligible for under the Plan if he or she were to die in that Plan Year. All benefits including the Survivor Benefit, may be provided for through the purchase by the Plan of insurance on the life of the Participant. Any such policy of life insurance shall be owned by the Trust (and payable thereto). If life insurance is purchased, the Survivor Benefit may be paid from the proceeds of such policy if not paid directly from the Trust Fund. 3.4 CREATION OF TRUST. In conjunction with this Plan, the Employer shall establish an irrevocable grantor trust. Contributions set aside to pay benefits under this Plan shall be contributed to the Trust as provided herein. These contributions shall be the assets which compose the Trust Fund and though held in the Trust irrevocably (except as provided in the Trust), the Trust Fund assets remain the property of the Employer making any contribution thereto, and subject to the claims of the Employer's general creditors. ARTICLE 4 BENEFIT PROVISIONS 4.1 GENERAL PROVISIONS. (a) Written Application. The Committee may require written application, in such form and manner as it may establish, before benefits are paid hereunder. (b) Payment of Benefits. When the payment of a benefit is referenced herein, what is meant is the payment from the Trust Fund (or life insurance owned by the Trust) of the benefit described herein (or if not paid from the Trust Fund, then paid from the general assets of the Employer). 4.2 RETIREMENT BENEFITS (INCLUDING EARLY RETIREMENT AND DISABILITY RETIREMENT). Upon Early Retirement, Normal Retirement, or Disability Retirement, the retired former Participant shall become entitled to a Retirement Benefit equal to his or her Accrued Benefit. The normal form of a Retirement Benefit shall be a straight (i.e., single) life annuity. However, before payment of Retirement Benefits are to begin, the Participant may elect, in a manner and within a time period acceptable to the Administrative Committee, to receive the actuarial equivalent of his or her Accrued Benefit, instead of in the normal form of payment, in the form of a fifty percent (50%) joint and survivor annuity, with the Participant's designated Joint Annuitant, if he or she should survive the Participant, to receive fifty percent (50%) of the adjusted monthly annuity benefit paid to the Participant, and benefits to cease on the last to die of the Participant and the Participant's designated Joint Annuitant. Furthermore, before payment of Retirement Benefits are to begin, the Participant may elect in a manner and within a time period acceptable to the Administrative Committee to have the actuarial equivalent of the Participant's Accrued Benefit payable instead in an optional form, or partly in a lump sum and the remainder in another optional form, permitted under the Retirement Plan for Employees of United Cities Gas Company, or any successor plan thereto (the "Qualified Retirement Plan"). In such election, any spousal consent or waiver required under that Qualified Retirement Plan in order for the Participant to elect an optional form of payment -7- 12 shall not be required in order to elect such optional form of payment of the actuarially equivalent value of the Benefit under this Plan; however, just as in the Qualified Retirement Plan, no lump sum payment of all or any portion of an Accrued Benefit with an actuarial equivalent of more than $10,000 shall be permitted. The optional form of benefit payment elected under this Plan may, or may not, as determined by the Participant, be the same optional form actually elected by the Participant under the Qualified Retirement Plan. If the Retirement Benefit is to be paid monthly, then the Retirement Benefit shall commence on the first day of the month following the month in which Retirement occurs. If the Retirement Benefit is to be paid in a lump sum, then the Retirement Benefit shall be paid on the first day of the month following the month in which Retirement occurs. 4.3 DEATH AFTER RETIREMENT. If a retired Participant dies after taking Early or Normal Retirement, or after Disability Retirement, no further benefit will be paid with respect to the deceased Participant unless prior to death, the Participant was receiving, or elected to receive, a benefit form which would continue payments after his or her death. 4.4 DEATH BEFORE RETIREMENT. If a Participant dies before Retirement while still employed by the Employer, a Survivor Benefit shall be paid with respect to the deceased Participant. This Survivor Benefit shall be equal to the single lump sum present value (determined by using the Discount Factor) of the Accrued Benefit the Participant would have received if instead of dying, the Participant is deemed to have become entitled to a Normal Retirement Benefit on his or her date of death (crediting the deceased Participant with ten (10) Years of Service if he or she did not have such on death, and further treating the deceased Participant as having attained age 65, regardless of the Participant's actual age at death, but not projecting the deceased Participant's expected increases in Base Salary until age 65), or if greater, an amount equal to one hundred (100) monthly payments in the aggregate of such monthly Normal Retirement Benefit. The value of this Survivor Benefit shall be paid as directed by the Participant in the Participant's last Joinder Agreement of record, either in a lump sum or in as equal as possible monthly payments for ten (10) years (or instead of ten (10) years, if the Beneficiary is a person under age 21, then until the Beneficiary attains age 21, if such would be longer than ten (10) years). This Survivor Benefit shall commence (if payable monthly), or be paid (if payable in a single lump sum) to the deceased Participant's Beneficiary as soon as administratively practicable after the date of death. 4.5 CHANGE IN CONTROL. This Section shall apply if a Change in Control occurs while a Participant is employed by the Employer prior to a Participant's actual Retirement or death. If the Participant would not actually be eligible for Normal Retirement on the date of the Change in Control because the Participant's then current age is too young or the Participant has not been credited with ten (10) years of service, then notwithstanding the Participant's age or Year of Service the eventual benefit the Participant shall receive under this Plan shall not be less than that benefit he or she would receive if, as of the date of the Change in Control, the Participant were deemed to have just attained age 65, been credited with ten (10) Years of -8- 13 Service, and therefore were eligible for and took Normal Retirement providing an Accrued Benefit of seventy percent (70%) of Base Salary. (Salary increases shall not be projected in this case, however.) The payment of the Participant's benefit under this Section will not commence until the Participant's employment with the Employer actually terminates, but shall commence or be paid at that time if the Participant is not otherwise eligible for a greater benefit from this Plan on termination of employment with the Employer (including a death benefit to his or her survivor as a Survivor Benefit pursuant to Section 4.3 hereof). ARTICLE 5 AMENDMENT AND TERMINATION OF THE PLAN 5.1 AMENDMENT OF PLAN. The Board of Directors of the Sponsor shall have the right at any time, and from time to time, to modify, alter or amend the Plan in whole or in part by instrument in writing duly executed; provided, however, that no benefit may be modified, altered or eliminated with respect to which any Participant, former or deceased, or Beneficiary is then entitled to payment at that time because of Retirement, death or Change in Control (unless the Participant or Beneficiary agrees in writing thereto). An executed copy of any amendment to the Plan shall be furnished to Participants and Beneficiaries in-pay status as soon as practicable after the date of adoption thereof. 5.2 TERMINATION OF THE PLAN BY THE SPONSOR. In the event the Sponsor concludes that it is impossible or inadvisable to continue the Plan, the Board of Directors of the Sponsor shall have the right to terminate the Plan by an appropriate resolution, resolutions or actions which shall specify the date of termination; provided, however, that no benefit may be modified, altered or eliminated with respect to which any Participant, former or deceased, or Beneficiary is then entitled to payment at that time because of Retirement, death or Change in Control (unless the Participant or Beneficiary agrees in writing thereto). A certified copy of such resolution, resolutions or action shall be delivered to Participants and Beneficiaries in-pay status as soon as possible thereafter. 5.3 TERMINATION OF PLAN WITH RESPECT TO AN ADOPTING EMPLOYER. Each Adopting Employer reserves the right to terminate the Plan at any time with respect to Eligible Executives of the Adopting Employer by resolution or action of its proprietor, partners or board of directors as the executive policy-making body may be in that Adopting Employer. However, no benefit may be modified, altered or eliminated with respect to which any Participant, former or deceased, or Beneficiary is then entitled to payment at that time because of Retirement, death or Change on Control (unless the Participant or Beneficiary agrees in writing thereto). ARTICLE 6 PLAN ADMINISTRATION 6.1 PLAN ADMINISTRATION. This Plan shall be administered by the Administrative Committee appointed by the Board of Directors of the Sponsor, which shall be composed of individuals who accept this responsibility. -9- 14 Members of the Committee shall serve without compensation, but the reasonable expenses of the Committee in discharging its responsibilities shall be borne by the Sponsor. 6.2 POWERS AND DUTIES OF THE COMMITTEE. The Committee shall administer and supervise the operation of the Plan in accordance with the terms and provisions of the Plan. The Committee shall have all powers necessary for the performance of its duties, which duties shall be as follows: (a) to interpret and construe the provisions of the Plan, supplying any omissions and resolving any inconsistencies therein, and to determine issues of fact and the application of the law with respect to the Plan, its Participants and Beneficiaries. (b) to determine the eligibility of Eligible Executives for membership in the Plan, and to notify such Eligible Executives of their eligibility and the requirements for such participation; (c) to determine and certify eligibility for benefits under the Plan, and to determine the amount, manner and time of the payment of such benefits; (d) to prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan; (e) to require a Eligible Executive to complete and file with the Committee a Joinder Agreement in order to become a Participant in the Plan; (f) to adopt such rules as it deems necessary, desirable or appropriate for the administration of the Plan, provided such rules are consistent with the terms and provisions of the Plan; all rules and decisions of the Committee shall be uniformly and nondiscriminatorily applied to all Participants, former Participants and Beneficiaries in similar circumstances unless expressly provided otherwise herein; and (g) to appoint such agents as it may need in the performance of its duties. 6.3 ADMINISTRATOR PROCEDURES. The Committee shall elect one of its members as chairman and shall appoint a secretary, who may or may not be a Committee member. The secretary shall forward all necessary communication to the Participants. The Committee may adopt such bylaws and regulations as it deems desirable for the conduct of its affairs. All decisions of the Committee shall be made by majority vote of a those present. 6.4 CLAIMS PROCEDURE. If, upon application for benefits made by a Participant, former Participant or Beneficiary pursuant to Section 4.1(a), the Committee shall determine that benefits applied for shall be denied either in whole or in part, the following provisions shall govern: -10- 15 (a) Notice of Denial. The Committee shall, upon its denial of a claim for benefits under the Plan, provide the applicant with written notice of such denial setting forth (i) the specific reason or reasons for the denial, (ii) specific reference to pertinent Plan provisions upon which the denial is based, (iii) a description of any additional material or information necessary for the claimant to perfect the claim, and (iv) an explanation of the claimant's rights with respect to the claims review procedure as provided in subsection (b) of this Section. (b) Claims Review. Every claimant with respect to whom a claim is denied shall, upon written notice of such denial, have the right to (i) request a review of the denial of benefits by written notice delivered to the Committee, (ii) review pertinent documents, and (iii) submit issues and comments in writing. (c) Decision on Review. The Committee shall, upon receipt of a request for review submitted by the claimant in accordance with subsection (b), appoint a special committee for the purpose of conducting such review, and provide the claimant with written notice of the decision reached by the said committee setting forth the specific reasons for the decision and specific references to the provisions of the Plan upon which the decision is based. Such notice shall be delivered to the claimant not later than 60 days following the receipt of the claimant's request, or, in the event that the committee shall determine that a hearing is needed, no later than 120 days following the receipt of such request. (d) Arbitration. If the Participant or Beneficiary is still not satisfied with the decision after review, such claim shall be reviewed by an arbitrator whose decision thereon shall be final and binding on all parties. The arbitrator shall be selected by, and be subject to the appropriate rules of, the American Arbitration Association. The arbitration shall be held in Nashville, Tennessee. The costs and expenses of the arbitration shall be borne entirely by the Employer, which upon the claim of a Participant or Beneficiary being made to it in writing hereunder, shall be under an affirmative duty to arrange for and institute such arbitration within thirty (30) days. ARTICLE 7 MISCELLANEOUS PROVISIONS 7.1 ALIENATION OR ASSIGNMENT OF BENEFITS. All of the benefits and amounts payable hereunder are expressly declared to be unassignable and nontransferable. The right of any Participant, former Participant or Beneficiary in any benefit or amount hereunder, prior to actual payment hereof, may not be anticipated, conveyed, assigned, mortgaged or encumbered by any Participant, former Participant or Beneficiary either by voluntary or involuntary action or by operation of law or in the event of bankruptcy, insolvency or death of the Participant, former Participant or Beneficiary; nor shall any such right or interest be in any manner subject to levy, attachment, execution, garnishment or any other seizure under legal, equitable or other process, by a creditor of, or other entity claiming payment from or through, any Participant, former Participant or Beneficiary. -11- 16 7.2 HEADINGS. The headings and sub-headings of Articles and Sections are included solely for convenience of reference, and if there be any conflict between such headings and the text of the Plan, the text shall control. 7.3 CONSTRUCTION OF THE PLAN. All legal questions pertaining to the Plan shall be determined in accordance with the laws of the State of Tennessee, to the extent that federal law is not controlling, and all contributions hereunder shall be deemed to have been made in that State. In the construction of the Plan, the masculine gender shall include the feminine, and the singular shall include the plural, unless the context clearly indicates otherwise. 7.4 CORRECTION OF ERRORS. If any error or change in records results in any Participant or former Participant receiving from the Plan more or less than he or she would have been entitled to receive had the records been correct or had the error not been made, the Committee, upon discovery of such error, shall correct the error by adjusting, as far as practicable, the payments in such a manner that the benefits to which such person was correctly entitled shall be paid. 7.5 LEGALLY INCOMPETENT. If any Participant or former Participant is in the judgment of the Retirement Committee legally incapable of personally receiving and giving a valid receipt for any payment due him hereunder, the Committee may, unless and until claim shall have been made by a guardian or conservator of such person duly appointed by a court of competent jurisdiction, direct that such payment, or any part thereof, be made to such person or to such person's spouse, child, parent, brother or sister, or other person deemed by the Committee to be a proper person to receive such payment. Any payment so made shall be, to the extent of the payment, a complete discharge to the Employer (and each of them) of any liabilities under the Plan. 7.6 RIGHT OF EMPLOYER TO DISCHARGE ELIGIBLE EXECUTIVES AND PARTICIPANTS. The adoption and maintenance of the Plan shall not be deemed to constitute an employment contract between the Employer and any Eligible Executive or member, or to be a consideration for, or an inducement or condition of, the employment of any person, or to add or modify any previous employment agreement between the Employer and Eligible Executive or Participant. 7.7 LIMITATION ON LIABILITY; LEGAL ACTIONS. It is expressly understood and agreed by each Eligible Executive, for himself and his heirs, assigns and beneficiaries as a condition of eligibility under the Plan that except for its or their willful neglect or fraud, the Employer shall be in no way subject to any suit or litigation, or to any legal liability, for any cause or reason or thing whatsoever in connection with the Plan or its operation, and each such Eligible Executive hereby shall be deemed to have released the Employer, the Committee and all their officers and agents from any and all liability or obligation. -12- 17 7.8 INDEMNIFICATION BY SPONSOR. The right of indemnification granted to each director, officer or employee of the Sponsor under the by-laws of the Sponsor, as from time to time amended, shall apply to any action taken by the Committee or by any individual member of the Committee in connection with the Plan. 7.9 APPLICATION OF PLAN PROVISIONS. The provisions of the Plan shall apply only to Participants who terminate employment with the Employer on or after the Effective Date and during its continuation. 7.10 SEVERABILITY OF PLAN PROVISIONS. All provisions of this Agreement are severable, and should any part or provision be ruled illegal or void, all other parts and provisions shall remain in full force and effect. 7.11 DEFERRED COMPENSATION NOT TO BE TAKEN INTO CONSIDERATION BY OTHER PLANS. Any deferred compensation payable hereunder shall not be deemed salary or other compensation to the Participant for purposes of computing benefits to which the Participant may be entitled under any other employee benefit plan sponsored and maintained by the Employer for the benefit of its Employees. 7.12 BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED GENERAL CREDITOR STATUS OF PARTICIPANT. (a) The payments to the Participant or the Participant's Beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Employer (even if in the Trust); no person or entity shall have nor acquire any interest in any such assets by virtue of the provisions of this Plan. The Employer's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that the Participant or any person or entity acquires a right to receive payments from the Employer under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Employer; no such person or entity shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Employer. (b) In the event that, in its discretion, the Employer purchases an insurance policy or policies insuring the life of the Participant (or any other property) to allow the Employer to recover the cost of providing the benefits, in whole, or in part, hereunder, neither the Participant, the Participant's Beneficiary, any other beneficiary or any other person or entity shall have nor acquire any rights whatsoever therein or in the proceeds therefrom. The Employer shall be the sole owner and beneficiary of any such policy or policies and, as such, shall possess and, may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for the Participant or any other person or entity nor as collateral security for any obligation of the Employer hereunder. -13- 18 7.13 NO REPRESENTATION. The Employer makes no representation, guarantee, warranty, or other assurance of any kind to the Participant or any other person regarding the federal, state or local tax consequences of this Agreement or any payments hereunder. 7.14 PARTIES BEAR OWN EXPENSES. The Employer and the Participant shall bear its and his, respective, own legal, accounting, actuarial, and all other expenses, if any, incurred in connection with the negotiation, drafting, preparation, review, execution, interpretation, and construction of this Agreement, including any costs connected with securing any administrative or judicial rulings (including any Internal Revenue Service private letter rulings), decisions, or orders construing the prospective, current, or past effect of this Plan at any time. 7.15 ENTIRE AGREEMENT. This instrument contains the entire agreement between the parties. It may not be amended or modified orally, but only by agreement in writing signed by each of the parties. *************** IN WITNESS WHEREOF, the Sponsor has caused this Plan to be executed by its duly authorized representative as of the 2nd day of January, 1995. UNITED CITIES GAS COMPANY By: /s/ Shirley M. Hawkins ---------------------------------------- Title: Sr. V.P./Secretary ------------------------------------- -14- EX-10.06 4 EMPLOYEE DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.06 UNITED CITIES GAS COMPANY AND SUBSIDIARIES MASTER AGREEMENT FOR THE SELECT KEY AND/OR MANAGEMENT EMPLOYEE DEFERRED COMPENSATION PLAN ("DCP") (AS OF JANUARY 1, 1995) 2 The Plan hereby established under this Master Agreement shall be designated as the United Cities Gas Company and Subsidiaries Key Management Deferred Compensation Plan. The purpose of the Plan is to advance the interest of the Sponsor and the Adopting Employer by encouraging and enabling the Sponsor and the Adopting Employer to attract, motivate and retain select key executives and/or management Employees who are eligible for Incentive Compensation and who, in recognition of their contributions to the success of the Employer, have been designated as eligible under this Plan by the President and CEO of the Employer to defer up to 100 percent of such Incentive Compensation in order to provide a later deferred compensation benefit in the event of termination of service (to the extent the Eligible Participant is vested in a benefit), or in the event of death or Disability. The Plan also permits Eligible Participants to defer up to $30,000 of their Base Salary from current taxation in order to provide such benefits. This Plan is available only to a select group of management or highly compensated Employees and is not qualified under the Code. It is intended to be an unfunded and unsecured "top hat" plan under the provisions of ERISA, and thereby exempt from many of ERISA's reporting and disclosure, participation and vesting, and funding and fiduciary requirements of ERISA under ERISA Sections 201(2), 301(a)(3) and 401(a)(1), respectively. Also because benefits under the Plan are unfunded and unsecured, any benefits under the Plan are excluded from the definition of "property" described in Code Regulation Section 1.83-3(e). The Plan will be subject to FICA (and FUTA) at the later of (1) the date on which the services are performed, or (2) the date on when there is no substantial risk of forfeiture with respect to the benefits which have accrued. The Plan is not maintained solely, nor is any part of it maintained separately, to provide benefits limited by Section 415 of the Code. The Plan may be associated with a "Rabbi" trust. The provisions of the Plan shall apply only to persons who become eligible for participation in the Plan on or after the Effective Date of the Plan and during its continuation. The Plan replaces any prior Plan, or contract or agreement, providing for nonqualified benefits by and between the Employer and any Participant of this Plan other than the United Cities Gas Company and Subsidiaries Supplemental Executive Retirement Plan. However, this Plan does not otherwise limit, offset, restrict or decrease benefits to which Participants under this Plan may otherwise be entitled as employees of the Employer. 3 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 PARTICIPATION IN THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.3 Participation Following Re-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 3 FINANCING THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.1 Establishing and Maintaining the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.2 Salary Deferrals by Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.3 Annual Earnings Contributions by the Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.4 Creation of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE 4 BENEFIT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.2 Termination of Employment Before Disability or Death . . . . . . . . . . . . . . . . . . . . . . . 6 4.3 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.4 Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.5 Discretionary Payment in the Event of Financial Need . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 5 AMENDMENT AND TERMINATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.1 Amendment of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.2 Termination of the Plan by the Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.3 Termination of Plan With Respect to an Adopting Employer . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 6 PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.1 Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.2 Powers and Duties of the Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.3 Administrator Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.4 Claims Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 7 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.1 Alienation or Assignment of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.2 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.3 Construction of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.4 Correction of Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.5 Legally Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.6 Right of Employer to Discharge Eligible Employees and Participants . . . . . . . . . . . . . . . . 11 7.7 Limitation on Liability; Legal Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.8 Indemnification by Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.9 Application of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.10 Severability of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4 7.11 Deferred Compensation not to be Taken Into Consideration by Other Plans . . . . . . . . . . . . . . 11 7.12 Benefits Payable Only From General Corporate Assets; Unsecured General Creditor Status of Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.13 No Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.14 Parties Bear Own Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.15 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5 ARTICLE 1 DEFINITIONS The following terms when used herein, unless the context clearly indicates otherwise, shall have the meanings set forth below: 1.1 "ACCOUNTS" shall mean both the Employee Contribution Account and the Employer Contribution Account. 1.2 "ADMINISTRATIVE COMMITTEE" shall mean the committee described at Section 6.1 which is appointed by the Board of Directors of the Sponsor to administer the Plan. 1.3 "ADOPTING EMPLOYER" shall mean any business organization or corporation affiliated with the Sponsor through ownership by the Sponsor which is authorized by the Board of Directors of the Sponsor to adopt the Plan, and which subsequently adopts the Plan in writing. 1.4 "BASE SALARY" shall mean, with respect to all Employers an Employee may work for as a Participant for a Plan Year, the regular salary budgeted for the Participant for the Plan Year (adding back in, for purposes of determining the amount to defer pursuant to his or her Joinder Agreement, the Salary Deferrals the Participant elects to make under this Plan) which is paid to the Participant, or which would be paid to the Participant but for his or her election under this Plan to defer such payment as a Salary Deferral. Base Salary shall not include amounts paid as severance pay (even though such severance pay takes the form of regular salary payments), the characterization of such pay as severance pay to be conclusively evidenced by the fact that the Employee performs no usual services of a material nature for the Employer at the explicit request of the Employer. 1.5 "BENEFICIARY" shall mean the payee of the death benefit designated by a Participant in his or her last Joinder Agreement according to the records of the Employer. If for any reason no Beneficiary designation was made in the Joinder Agreement, or the designation is defective, incomplete or unintelligible, or both the primary and alternate Beneficiary predecease the Participant, the Death Benefit yet unpaid shall be paid to the Participant's then living legal spouse as Beneficiary, or if the Participant is not survived by a legal spouse, then the Death Benefit shall be paid to the then living children of the Participant, if any, each as Beneficiary in equal shares (per stirpes if a child shall survive the Participant, but die before the payment of the death benefit hereunder) and if no living children, the Death Benefit shall be paid in a single lump sum to the estate of the Participant as Beneficiary. 1.6 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.7 "COMMITTEE" shall mean the Administrative Committee. 1.8 "DISABILITY" shall mean any physical or mental impairment which, in the opinion of the Committee, is expected to result in total or permanent disability. -1- 6 1.9 "EARNINGS FACTOR" shall mean the rate of earnings that is to be credited to the balance of each Employer Contribution Account for a Plan Year pursuant to Section 3.3 hereof. 1.10 "EFFECTIVE DATE" shall mean January 1, 1995, the date the Plan is established; provided, however, that the term shall mean for an Eligible Participant the effective date of adoption of the Plan by his Adopting Employer if such date is later than January 1, 1995. 1.11 "EMPLOYEE CONTRIBUTION ACCOUNT" shall mean the bookkeeping account established pursuant to Section 3.1(b) hereof to which shall be credited Salary Deferrals of a Participant pursuant to Section 3.2. 1.12 "ELIGIBLE SELECT KEY AND/OR MANAGEMENT EMPLOYEE" shall mean an Employee who has been designated as eligible for the Plan by the President and CEO of the Sponsor. 1.13 "EMPLOYEE" shall mean a person who is receiving remuneration for services rendered to the Employer as a common-law employee or pursuant to a written employment contract (or who would be receiving remuneration except for leave of absence authorized in advance). 1.14 "EMPLOYER" shall mean the Sponsor and/or an Adopting Employer, as required by the context. 1.15 "EMPLOYER CONTRIBUTION ACCOUNT" shall mean the bookkeeping account established pursuant to Section 3.1(b) hereof to which shall be credited earnings (or losses) pursuant to Section 3.3 1.16 "ERISA" shall mean Public Law 93-406, popularly known as the "Employee Retirement Income Security Act of 1974," as amended from time to time. 1.17 "INCENTIVE COMPENSATION" shall mean a bonus which is paid in excess of Base Salary to the Participant, or which would be paid to the Participant but for his or her election under this Plan to defer such payment for the performance of services to the Employer which resulted in the attainment of goals established by the Employer either for the Participant or for the business of the Employer itself. 1.18 "JOINDER AGREEMENT" shall mean the agreement executed by a select Key and/or Management Employee by which he or she becomes a Participant of the Plan by electing to defer Base Salary and/or Incentive Compensation under the Plan and accepting all the terms, provisions and conditions of this Master Agreement. The Joinder Agreement is an integral part of the Master Agreement and Plan and is incorporated herein by reference as if fully set forth herein. 1.19 "MASTER AGREEMENT" shall mean this document which establishes the Plan and which together with a Participant's Joinder Agreement reflects the agreement between the Participant and the Employer. -2- 7 1.20 "PARTICIPANT" shall mean a Select Key and/or Management Employee who has become a Participant in this Plan as provided. 1.21 "PLAN" shall mean this Plan, the United Cities Gas Company and Subsidiaries Key Management Deferred Compensation Plan, as established by this Master Agreement effective January 1, 1995, and as it may be amended from time to time. 1.22 "PLAN YEAR" shall mean the twelve (12) consecutive month period which is the fiscal year of the Plan. The Plan Year shall be January 1 through December 31. 1.23 "SALARY DEFERRALS" shall mean those contributions credited to the Employee Contribution Account by the Employer at the election of a Participant rather than receiving such credited amounts as Base Salary or Incentive Compensation. The election of a Participant to make a Salary Deferral must be made prior to the performance of the services for which the deferred Base Salary would have been paid or the year in which the incentive bonus would have been earned but for the election to defer. 1.24 "SPONSOR" shall mean United Cities Gas Company and any business organization or corporation with which it may be merged, consolidated or succeeded, provided such successor adopts this Plan in writing. 1.25 "TRUST" OR "TRUST FUND" shall mean the irrevocable grantor trust established by the Employer in conjunction with this Plan to hold Plan assets on a pooled and unsegregated basis to pay benefits hereunder. The Trust is an integral part of the Master Agreement and Plan and is incorporated herein by reference as if fully set forth herein. 1.26 "TRUSTEE" shall mean the party or parties who accept the duties of trustee by executing the Trust. ARTICLE 2 PARTICIPATION IN THE PLAN 2.1 ELIGIBILITY. Each Employee who has met the requirement to be considered an Eligible Select Key and/or Management Employee on the Effective Date shall immediately be considered to be an Eligible Select Key and/or Management Employee for this Plan, and each Employee who meets the eligibility requirement to be an Eligible Select Key and/or Management Employee after the Effective Date shall be eligible to become an Eligible Select Key and/or Management Employee on the first day of the month coincident with or next following the date he becomes an Eligible Select Key and/or Management Employee. Upon its determination that an Employee has met the requirement to become a Select Key and/or Management Employee, the Administration Committee shall forward to each Eligible Select Key and/or Management Employee a copy of this Master Agreement and Plan and a Joinder Agreement to be executed by the Eligible Select Key and/or Management Employee. -3- 8 2.2 PARTICIPATION. An Eligible Select Key and/or Management Employee shall become a Participant on the first day on which he or she is an Eligible Select Key and/or Management Employee and has filed his or her Joinder Agreement with the Committee electing to defer Base Salary and/or Incentive Compensation under the Plan. In the event that a person ceases to be an Eligible Select Key and/or Management Employee, he or she shall thereupon immediately cease to be a Participant, but balances credited to the Accounts of that person on such date shall not be affected. 2.3 PARTICIPATION FOLLOWING RE-EMPLOYMENT. Any former Eligible Select Key and/or Management Employee or Participant who had satisfied, subsequent to the Effective Date, the requirements for participation and who is re-employed following termination of employment with the Employer, shall be eligible for continued membership in the Plan only upon specific authorization by the Committee. ARTICLE 3 FINANCING THE PLAN 3.1 ESTABLISHING AND MAINTAINING THE PLAN. (a) Administrative Expenses. The Sponsor and the Adopting Employers shall bear the administrative cost of establishing and operating the Plan. The administrative costs of the Plan shall be borne by each Employer on a per capita basis each Plan Year: that is, each Employer shall bear that fraction of the total administrative costs for each Plan Year obtained by dividing the number of Accounts maintained by that Employer at any time during the Plan Year as described in subsection (c) below by the number of such Accounts in the aggregate maintained by all Employers that Plan Year. (b) Establishment of Accounts. The Employer shall establish, for each Participant it employs, two accounts in its books, the first to be entitled the "Employee Contribution Account" and the second to be entitled the "Employer Contribution Account". The Employee Contribution Account shall be credited with the Participant's Salary Deferrals as described in Section 3.2 and the Employer Contribution Account shall be credited with earnings (and debited for losses) as described in Section 3.3, and debited for payment of benefits based on credited balances in the Accounts as described in Article 4. (c) Universal Payment and Forfeitures of Benefits Among Employers. Each separate Account established under subsection (b) above by an Employer for whom an Employee works while a Participant in this Plan shall be maintained by each Employer and credited with earnings (or losses) pursuant to Section 3.3 hereof each Plan Year until such time as a final payment of benefits is to be made, or a Forfeiture occurs, with respect to the Participant. When any benefits are to be paid, or Forfeiture occur, the terms of the Plan shall be applied as if the Participant then were employed by all the Employers for which he or she had worked at any time while a Participant, and benefits will be paid from, or Forfeitures occur in, all the Accounts maintained with respect to the Participant. -4- 9 3.2 SALARY DEFERRALS BY PARTICIPANTS. In advance of each calendar month in a Plan Year, a Participant may elect to defer his or her Base Salary as Salary Deferrals (in one percent (1%) increments), up to an amount in the aggregate in the Plan Year not to exceed $30,000. At the end of each calendar month, instead of paying the Participant an amount equal to the Salary Deferral elected by the Participant, the Employer shall credit the bookkeeping account entitled the "Employee Contribution Account" in the name of each Participant who makes such Salary Deferral with an amount equal to the Salary Deferral elected for the month. Deferrals may be commenced, increased, reduced or stopped at any time prior to the beginning of a month on a prospective basis. In advance of any period for which Incentive Compensation may be earned, the Participant may also elect to defer an amount (also in one percent (1%) increments) up to one hundred percent (100%) of his or her Incentive Compensation which he or she may earn. Instead of paying to the Participant the Incentive Compensation the Participant elected to defer, the Employer shall credit the Participant's Employee Contributions Account with such Compensation Deferral. Once elected, the Compensation Deferrals which may be made by the Participant for the Incentive Compensation period may not be changed in any way. The election to permit or not to permit Salary Deferrals of Base Salary or Incentive Compensation shall remain in effect until changed. The election to permit Salary Deferrals of Base Salary is not contingent upon an election to permit Salary Deferrals of Incentive Compensation, and vice versa. All Salary Deferrals by Participants shall be deposited in the Trust as soon as possible after made. Earnings on balances credited to the Employee Contribution Accounts of Participants shall be credited to the Employer Contribution Accounts of Participants as described in Section 3.3 hereof. 3.3 ANNUAL EARNINGS CONTRIBUTIONS BY THE EMPLOYER. The Employer shall credit the Employer Contribution Accounts of Participants with imputed earnings (and debit such Accounts for losses) using an Earnings Factor as described herein. As of the end of each calendar month the Plan is in existence until both of the Participant's Accounts are completely paid out, the Committee shall credit (or debit) the Employer Contribution Account of each Participant, former Participant or Beneficiary with an amount of imputed earnings using an "Earnings Factor." The Earnings Factor shall be the Trustee's prime rate most recently published in the Wall Street Journal as of the last business day of the month. This Earnings Factor for the Employer Contribution Accounts shall be multiplied by the balance credited to each Participant's, former Participant's or Beneficiary's Employer Contribution Account as of the first day of the month for which the determination is being made. The resulting amount determined pursuant to this section with respect to each Participant, former Participant or Beneficiary, if earnings are positive, shall be deposited in the Trust by the Employer as soon as practicable and shall be credited to his or her Employer Contribution Account as soon as administratively possible after its determination. If earnings -5- 10 are negative, the Employer Contribution Account shall be debited, but no Trust assets shall be removed from the Trust. Instead, future deposits to the Trust called for above shall be offset by these amounts. 3.4 CREATION OF TRUST. In conjunction with this Plan, the Employer shall establish an irrevocable grantor trust. Contributions set aside to pay benefits under this Plan shall be contributed to the Trust as provided herein. These contributions shall be the assets which compose the Trust Fund and though held in the Trust irrevocably (except as provided in the Trust), the Trust Fund assets remain the property of the Employer making any contribution thereto, and subject to the claims of the Employer's general creditors. ARTICLE 4 BENEFIT PROVISIONS 4.1 GENERAL PROVISIONS. (a) Written Application. The Committee may require written application, in such form and manner as it may establish, before benefits are paid hereunder. (b) Payment of the Accounts. When the payment of the Accounts is referenced herein, what is meant is the payment from the Trust (or if not the Trust, from the general assets of the Sponsor or the Adopting Employer) of the book value of the Accounts as reflected in the records of the Plan. 4.2 TERMINATION OF EMPLOYMENT BEFORE DISABILITY OR DEATH. (a) In General. A Participant whose employment with the Employer terminated for a reason other than his or her Disability or death will receive a payment in cash as described in this Section equal to the aggregate balance of his or her Employee Contribution Account and his or her Employer Contribution Account. (b) Payment Terms. The benefit hereunder shall be payable within 30 days of the date in which the Participant's employment with the Employer terminated. Payment shall be made in the form of a single lump sum in cash. Alternatively, at the discretion of the Committee, provided one year's advance notice in writing is given by the Participant, an amount in cash equal to the aggregate balance of the Participant's Accounts either shall be paid in monthly installments in as equal amounts as possible (installments being subject to change at any time to effect this purpose) over a period of sixty (60) months or shall be paid as follows: an amount equal to twenty-five percent (25%) of the balance of the Accounts in the aggregate to be paid in a single, lump sum as soon as administratively feasible and the remainder of the balance of the Accounts over sixty (60) monthly installments in as equal installments as possible until the balance of the Accounts in the aggregate is zero (0). -6- 11 4.3 DISABILITY. (a) In General. A Participant who suffers a Disability before his or her death or other termination of employment with the Employer shall receive a Disability benefit. The Disability benefit shall be the payment of an amount in cash equal to the aggregate balance of the Employer and Employee Accounts of the Participant on his or her date of Disability. (b) Payment Terms. The Disability benefit shall be payable in a single, lump sum as soon as administratively feasible but no later than 30 days after the determination is made that the Participant is disabled. 4.4 DEATH. (a) In General. A Participant who dies while employed by the Employer shall receive a death benefit. The death benefit shall be the payment, as set forth in this Section, of an amount in cash equal to the aggregate balance of the Employer and Employee Accounts of the deceased Participant on his or her date of death. (b) Payment Terms. The death benefit shall be payable in a single lump sum as soon as administratively feasible but no later than 30 days after the Participant's death. Payment of the death benefit shall be made to the Beneficiary designated by the Participant in his or her last Joinder Agreement according to the records of the Employer. 4.5 DISCRETIONARY PAYMENT IN THE EVENT OF FINANCIAL NEED. A payment of an amount in cash equal to all or part of a Participant's Accounts in the aggregate while he or she is employed by the Employer may be permitted. Such a payment, however, shall be at the sole discretion of the Committee. The Committee shall determine what, if any, standard to set for such a payment, or may set no fixed standard, and decide each request on a case by case basis, with any previous payment serving as no precedent or authority for a later request for payment. Each such payment shall result in a debit to the Participant's Accounts in an amount equal to the payment when made. To the extent possible, this debit first shall be applied against the Participant's Employer Contribution Account. If a Participant subsequently incurs another financial need, the Committee may, or may not, in its sole discretion, permit another payment to be made in the case of this later event of financial need, but in no event may the Committee permit a payment of an amount in cash in excess of the remaining balance of the Participant's Accounts in the aggregate. ARTICLE 5 AMENDMENT AND TERMINATION OF THE PLAN 5.1 AMENDMENT OF PLAN. The Board of Directors of the Sponsor shall have the right at any time, and from time to time, to modify, alter or amend the Plan in whole or in part by instrument in writing duly executed; provided, however, that in no event shall the Board of Directors have the right to change, in any way, either the form or the amount of the payment of any benefits hereunder to a Participant or former Participant, and all benefits to a former -7- 12 Participant in - pay status shall continue as provided hereunder without regard to the amendment of the Plan by the Sponsor. An executed copy of any amendment to the Plan shall be furnished to Participants and former Participants with credited Account balances as soon as practicable after the date of adoption thereof. 5.2 TERMINATION OF THE PLAN BY THE SPONSOR. In the event the Sponsor concludes that it is impossible or inadvisable to continue the Plan, the Board of Directors of the Sponsor shall have the right to terminate the Plan by an appropriate resolution, resolutions or actions which shall specify the date of termination; provided, however, that in no event shall the Board of Directors have the right to change, in any way, either the form or the amount of the payment of any benefits hereunder to a Participant or former Participant, and all such benefits to a former Participant shall continue as provided hereunder without regard to the termination of the Plan by the Sponsor. A certified copy of such resolution, resolutions or action shall be delivered to Participants and former Participants with credited Account balances, and as soon as possible thereafter. 5.3 TERMINATION OF PLAN WITH RESPECT TO AN ADOPTING EMPLOYER. Each Adopting Employer reserves the right to terminate the Plan at any time with respect to Eligible Employees of the Adopting Employer by resolution or action of its proprietor, partners or board of directors as the executive policy-making body may be in that Adopting Employer. However, in no event shall an Adopting Employer have the right to change, in any way, either the form or the amount of the payment of any benefits hereunder to a Participant or former Participant, and all such benefits to a Participant or former Participant shall continue as provided hereunder without regard to the termination of the Plan by the Adopting Employer. ARTICLE 6 PLAN ADMINISTRATION 6.1 PLAN ADMINISTRATION. This Plan shall be administered by the Administrative Committee appointed by the Board of Directors of the Sponsor who accept this responsibility. Participants of the Committee shall serve without compensation, but the reasonable expenses of the Committee in discharging its responsibilities shall be borne by the Sponsor. 6.2 POWERS AND DUTIES OF THE COMMITTEE. The Committee shall administer and supervise the operation of the Plan in accordance with the terms and provisions of the Plan. The Committee shall have all powers necessary for the performance of its duties, which duties shall be as follows: -8- 13 (a) to interpret and construe the provisions of the Plan, supplying any omissions and resolving any inconsistencies therein, and to determine issues of fact and the application of the law with respect to the Plan, its Participants and Beneficiaries. (b) to determine the eligibility of Employees for participation in the Plan, and to notify such Eligible Employees of their eligibility and the requirements for such participation; (c) to determine and certify eligibility for benefits under the Plan, and to determine the amount, manner and time of the payment of such benefits; (d) to prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan; (e) to require an Eligible Employee to complete and file with the Committee a Joinder Agreement in order to become a Participant in the Plan; (f) to adopt such rules as it deems necessary, desirable or appropriate for the administration of the Plan, provided such rules are consistent with the terms and provisions of the Plan; all rules and decisions of the Committee shall be uniformly and nondiscriminatorily applied to all Participants, former Participants and Beneficiaries in similar circumstances unless expressly provided otherwise herein; and (g) to appoint such agents as it may need in the performance of its duties. 6.3 ADMINISTRATOR PROCEDURES. The Committee shall elect one of its members as chairman and shall appoint a secretary, who may or may not be a Committee member. The secretary shall forward all necessary communication to the Participants. The Committee may adopt such bylaws and regulations as it deems desirable for the conduct of its affairs. All decisions of the Committee shall be made by majority vote of the Committee present. 6.4 CLAIMS PROCEDURE. If, upon application for benefits made by a Participant, former Participant or Beneficiary pursuant to Section 4.1(a), the Committee shall determine that benefits applied for shall be denied either in whole or in part, the following provisions shall govern: (a) Notice of Denial. The Committee shall, upon its denial of a claim for benefits under the Plan, provide the applicant with written notice of such denial setting forth (i) the specific reason or reasons for the denial, (ii) specific reference to pertinent Plan provisions upon which the denial is based, (iii) a description of any additional material or information necessary for the claimant to perfect the claim, and (iv) an explanation of the claimant's rights with respect to the claims review procedure as provided in subsection (b) of this Section. (b) Claims Review. Every claimant with respect to whom a claim is denied shall, upon written notice of such denial, have the right to (i) request a review of the -9- 14 denial of benefits by written notice delivered to the Committee, (ii) review pertinent documents, and (iii) submit issues and comments in writing. (c) Decision on Review. The Committee shall, upon receipt of a request for review submitted by the claimant in accordance with subsection (b), appoint a special committee for the purpose of conducting such review, and provide the claimant with written notice of the decision reached by the said committee setting forth the specific reasons for the decision and specific references to the provisions of the Plan upon which the decision is based. Such notice shall be delivered to the claimant not later than 60 days following the receipt of the claimant's request, or, in the event that the committee shall determine that a hearing is needed, no later than 120 days following the receipt of such request. ARTICLE 7 MISCELLANEOUS PROVISIONS 7.1 ALIENATION OR ASSIGNMENT OF BENEFITS. All of the benefits and amounts payable hereunder are expressly declared to be unassignable and nontransferable The right of any Participant, former Participant or Beneficiary in any benefit or amount hereunder, prior to actual payment hereof, may not be anticipated, conveyed, assigned, mortgaged or encumbered by any Participant, former Participant or Beneficiary either by voluntary or involuntary action or by operation of law or in the event of bankruptcy, insolvency or death of the Participant, former Participant or Beneficiary; nor shall any such right or interest be in any manner subject to levy, attachment, execution, garnishment or any other seizure under legal, equitable or other process, by a creditor of, or other entity claiming payment from or through, any Participant, former Participant or Beneficiary. 7.2 HEADINGS. The headings and sub-headings of Articles and Sections are included solely for convenience of reference, and if there be any conflict between such headings and the text of the Plan, the text shall control. 7.3 CONSTRUCTION OF THE PLAN. All legal questions pertaining to the Plan shall be determined in accordance with the laws of the State of Tennessee, to the extent that federal law is not controlling, and all contributions hereunder shall be deemed to have been made in that State. In the construction of the Plan, the masculine gender shall include the feminine, and the singular shall include the plural, unless the context clearly indicates otherwise. 7.4 CORRECTION OF ERRORS. If any error or change in records results in any Participant or former Participant receiving from the Plan more or less than he would have been entitled to receive had the records been correct or had the error not been made, the Committee, upon discovery of such error, shall correct the error by adjusting, as far as practicable, the payments in such a manner that the benefits to which such person was correctly entitled shall be paid. -10- 15 7.5 LEGALLY INCOMPETENT. If any Participant or former Participant is in the judgment of the Administrative Committee legally incapable of personally receiving and giving a valid receipt for any payment due him hereunder, the Committee may, unless and until claim shall have been made by a guardian or conservator of such person duly appointed by a court of competent jurisdiction, direct that such payment, or any part thereof, be made to such person or to such person's spouse, child, parent, brother or sister, or other person deemed by the Committee to be a proper person to receive such payment. Any payment so made shall be, to the extent of the payment, a complete discharge to the Employer (and each of them) of any liabilities under the Plan. 7.6 RIGHT OF EMPLOYER TO DISCHARGE ELIGIBLE EMPLOYEES AND PARTICIPANTS. The adoption and maintenance of the Plan shall not be deemed to constitute an employment contract between the Employer and any Eligible Employee or Participant, or to be a consideration for, or an inducement or condition of, the employment of any person, or to add or modify any previous employment agreement between the Employer and Eligible Employee or Participant. The Plan also shall not be construed to indicate any amount of Incentive Compensation will be earned with respect to a Participant as a matter of right, or that the Participant even has a right to earn Incentive Compensation merely because this Plan provides for the deferral of Incentive Compensation if it is earned. 7.7 LIMITATION ON LIABILITY; LEGAL ACTIONS. It is expressly understood and agreed by each Eligible Employee, for himself and his heirs, assigns and beneficiaries as a condition of eligibility under the Plan that except for its or their willful neglect or fraud, the Employer shall be in no way subject to any suit or litigation, or to any legal liability, for any cause or reason or thing whatsoever in connection with the Plan or its operation, and each such Eligible Employee hereby shall be deemed to have released the Employer, the Committee and all their officers and agents from any and all liability or obligation. 7.8 INDEMNIFICATION BY SPONSOR. The right of indemnification granted to each director, officer or employee of the Sponsor under the by-laws of the Sponsor, as from time to time amended, shall apply to any action taken by the Committee or by any individual member of the Committee in connection with the Plan. 7.9 APPLICATION OF PLAN PROVISIONS. The provisions of the Plan shall apply only to Participants who terminate employment with the Employer on or after the Effective Date and during its continuation. 7.10 SEVERABILITY OF PLAN PROVISIONS. All provisions of this Agreement are severable, and should any part or provision be ruled illegal or void, all other parts and provisions shall remain in full force and effect. 7.11 DEFERRED COMPENSATION NOT TO BE TAKEN INTO CONSIDERATION BY OTHER PLANS. Any deferred compensation payable hereunder shall not be deemed salary or other compensation to the Participant for purposes of computing benefits to which the Participant may be entitled under any other employee benefit plan sponsored and maintained by the Employer for the benefit of its Employees. -11- 16 7.12 BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED GENERAL CREDITOR STATUS OF PARTICIPANT. (a) The payments to the Participant or the Participant's Beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Employer; no person or entity shall have nor acquire any interest in any such assets by virtue of the provisions of this Plan. The Employer's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that the Participant or any person or entity acquires a right to receive payments from the Employer under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Employer; no such person or entity shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Employer. (b) In the event that, in its discretion, the Employer purchases an insurance policy or policies insuring the life of the Participant (or any other property) to allow the Employer to recover the cost of providing the benefits, in whole, or in part, hereunder, neither the Participant, the Participant's Beneficiary, any other beneficiary or any other person or entity shall have nor acquire any rights whatsoever therein or in the proceeds therefrom. The Employer shall be the sole owner and beneficiary of any such policy or policies and, as such, shall possess and, may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for the Participant or any other person or entity nor as collateral security for any obligation of the Employer hereunder. 7.13 NO REPRESENTATION. The Employer makes no representation, guarantee, warranty, or other assurance of any kind to the Participant or any other person regarding the federal, state or local tax consequences of this Agreement or any payments hereunder. 7.14 PARTIES BEAR OWN EXPENSES. The Employer and the Participant shall bear its and his, respective, own legal, accounting, actuarial, and all other expenses, if any, incurred in connection with the negotiation, drafting, preparation, review, execution, interpretation, and construction of this Agreement, including any costs connected with securing any administrative or judicial rulings (including any Internal Revenue Service private letter rulings), decisions, or orders construing the prospective, current, or past effect of this Plan at any time. 7.15 ENTIRE AGREEMENT. This instrument contains the entire agreement between the parties. It may not be amended or modified orally, but only by agreement in writing signed by each of the parties. ****************** -12- 17 IN WITNESS WHEREOF, the Sponsor has caused this Plan to be executed by its duly authorized representative as of the 2nd day of January, 1995. UNITED CITIES GAS COMPANY By: /s/ Shirley M. Hawkins ---------------------------------------- Title: Sr. V.P./Secretary ------------------------------------- -13- EX-11.01 5 COMPUTATION OF COMMON STOCK EARNINGS PER SHARE 1 EXHIBIT 11.01 UNITED CITIES GAS COMPANY AND SUBSIDIARIES COMPUTATION OF COMMON STOCK EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993 ---- ---- ---- Common Stock Earnings.............................. $9,935,000 $12,093,000 $12,120,000 Add-Preference Stock Dividends..................... - - 30,000 ------------- -------------- -------------- Common Stock Earnings after Conversions............ $9,935,000 $12,093,000 $12,150,000 ============= ============== ============== Average Number of Common Shares Outstanding During the Period................................ 11,791,556 10,409,040 10,197,400 Add-Conversion of 11 1/2% Preference Stock......... - - - ------------- -------------- -------------- Average Number of Common Shares Outstanding After Conversions................................ 11,791,556 10,409,040 10,197,400 ============= ============== ============== Common Stock Earnings - Primary........................................ $0.84 $1.16 $1.19 ============= ============== ============== Fully Diluted.................................. $0.84 $1.16 $1.19 ============= ============== ==============
EX-12.01 6 COMP. OF RATION OF CONS. EARNINGS TO FIXED CHARGES 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) 1995 1994 1993 1992 1991 ------------ ------------ ------------- -------------- -------------- Fixed Charges, as defined: Interest on long-term debt.................... $13,697 $14,026 $14,553 $12,965 $11,111 Amortization of debt discount................. 227 227 220 181 233 ----------- ------------ ------------- -------------- -------------- Total...................................... $13,924 $14,253 $14,773 $13,146 $11,344 =========== ============ ============= ============== ============== Earnings, as defined: Net income.................................... $9,935 $12,093 $12,150 $10,218 $7,875 Taxes on income............................... 6,970 6,503 5,681 5,171 2,564 Fixed charges, as above....................... 13,924 14,253 14,773 13,146 11,344 ----------- ------------ ------------- -------------- -------------- Total............................................ $30,829 $32,849 $32,604 $28,535 $21,783 =========== ============ ============= ============== ============== Ratio of Consolidated Earnings to Fixed Charges.. 2.21 2.30 2.21 2.17 1.92 =========== ============ ============= ============== ==============
EX-21 7 SUBSIDIARIES OF UNITED CITIES GAS COMPANY 1 EXHIBIT 21 SUBSIDIARIES OF UNITED CITIES GAS COMPANY
STATE OF NAME INCORPORATION PERCENT OF STOCK ---- ------------- ---------------- 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%
EX-23 8 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Annual Report on Form 10-K for the year ended December 31, 1995 into the Company's previously filed Registration Statements on Form S-8 for the Company's Employee Stock Purchase Plan (File No. 33-54759), on Form S-3 for the Company's Dividend Reinvestment and Stock Purchase Plan (File No. 333-01221), on Form S-3 for the Company's shelf registration (File No. 33-56983) and on Form S-3 for the Company's Customer Stock Purchase Plan (File No. 33-56799). ARTHUR ANDERSEN LLP Nashville, Tennessee, March 15, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the consolidated balance sheets and the consolidated statements of income, cash flows, capitalization and retained earnings, capital surplus and common stock, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 PER-BOOK 287,090 47,922 100,817 24,548 0 460,377 101,735 22,462 21,874 146,071 0 0 163,160 32,313 0 0 9,155 0 0 0 109,678 460,377 271,860 4,050 248,421 252,471 19,389 4,845 24,234 14,299 9,935 0 9,935 12,005 11,978 25,290 .84 .84
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