<PAGE 1>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 1-3880
NATIONAL FUEL GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 13-1086010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Rockefeller Plaza
New York, New York 10112
(Address of principal executive offices) (Zip Code)
(212) 541-7533
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $1 par value, outstanding at April 30, 1994: 37,131,170 shares.
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Company or Group of Companies for which Report is Filed:
NATIONAL FUEL GAS COMPANY (Company or Registrant)
SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution
Corporation)
National Fuel Gas Supply Corporation (Supply Corporation)
Penn-York Energy Corporation (Penn-York)
Seneca Resources Corporation (Seneca)
Empire Exploration, Inc. (Empire)
Utility Constructors, Inc. (UCI)
Highland Land & Minerals, Inc. (Highland)
Leidy Hub, Inc. (Leidy Hub)
Data-Track Account Services, Inc. (Data-Track)
National Fuel Resources, Inc. (NFR)
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a. Consolidated Statements of Income and Earnings
Reinvested in the Business - Three Months and
Six Months Ended March 31, 1994 and 1993 3 - 4
b. Consolidated Balance Sheet - March 31, 1994 and
September 30, 1993 5 - 6
c. Consolidated Statement of Cash Flows - Six
Months Ended March 31, 1994 and 1993 7
d. Notes to Consolidated Financial Statements 8 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 26
Part II. Other Information
Item 1. Legal Proceedings 27 - 29
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signature 31
* The Company has nothing to report under this item.
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Part I. - Financial Information
Item 1. - Financial Statements
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Three Months Ended
March 31,
1994 1993
(Thousands of Dollars)
INCOME
Operating Revenues $473,722 $391,790
Operating Expenses
Purchased Gas 251,998 188,732
Operation Expense 71,572 64,278
Maintenance 9,646 6,472
Property, Franchise and Other Taxes 37,206 32,079
Depreciation, Depletion and Amortization 18,744 18,051
Income Taxes - Net 29,870 24,983
419,036 334,595
Operating Income 54,686 57,195
Other Income 776 1,176
Income Before Interest Charges 55,462 58,371
Interest Charges
Interest on Long-Term Debt 8,865 9,516
Other Interest 2,758 3,695
11,623 13,211
Net Income Available for Common Stock 43,839 45,160
EARNINGS REINVESTED IN THE BUSINESS
Balance at January 1 353,342 327,554
397,181 372,714
Dividends on Common Stock
(1994 - $.385; 1993 - $.375) 14,230 12,749
Balance at March 31 $382,951 $359,965
Earnings Per Common Share $1.18 $1.33
Weighted Average Common Shares Outstanding 37,049,775 33,988,070
See Notes to Consolidated Financial Statements
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Item 1. - Financial Statements
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Six Months Ended
March 31,
1994 1993
(Thousands of Dollars)
INCOME
Operating Revenues $783,854 $686,010
Operating Expenses
Purchased Gas 396,156 322,745
Operation Expense 135,120 126,268
Maintenance 15,062 12,328
Property, Franchise and Other Taxes 62,489 56,664
Depreciation, Depletion and Amortization 36,629 34,590
Income Taxes - Net 44,967 37,768
690,423 590,363
Operating Income 93,431 95,647
Other Income 1,815 2,686
Income Before Interest Charges 95,246 98,333
Interest Charges
Interest on Long-Term Debt 17,748 19,587
Other Interest 5,859 7,644
23,607 27,231
Income Before Cumulative Effect 71,639 71,102
Cumulative Effect of Change in
Accounting for Income Taxes 3,826 -
Net Income Available for Common Stock 75,465 71,102
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 335,907 314,334
411,372 385,436
Dividends on Common Stock
(1994 - $.77 ; 1993 - $.75) 28,421 25,471
Balance at March 31 $382,951 $359,965
Earnings Per Common Share
Income Before Cumulative Effect $1.95 $2.09
Cumulative Effect of Change in
Accounting for Income Taxes .10 -
Net Income Available for Common Stock $2.05 $2.09
Weighted Average Common Shares Outstanding 36,899,747 33,948,193
See Notes to Consolidated Financial Statements
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Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheet
March 31,
1994 September 30,
(Unaudited) 1993
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,070,661 $2,039,436
Less - Accumulated Depreciation, Depletion
and Amortization 571,864 561,433
1,498,797 1,478,003
Current Assets
Cash and Temporary Cash Investments 19,713 13,595
Receivables - Net 210,869 86,957
Unbilled Utility Revenue 54,180 27,210
Gas Stored Underground 4,301 22,120
Materials and Supplies - at average cost 21,982 20,848
Unrecovered Purchased Gas Costs 2,994 20,772
Prepayments 23,428 17,094
337,467 208,596
Other Assets
Recoverable Future Taxes 104,156 -
Deferred Contract Reformation Costs 14,394 24,862
Unamortized Debt Expense 27,115 28,735
Other Regulatory Assets 37,429 37,788
Deferred Charges 6,005 2,249
Other 23,839 21,307
212,938 114,941
$2,049,202 $1,801,540
See Notes to Consolidated Financial Statements
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Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheet
March 31,
1994 September 30,
(Unaudited) 1993
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 100,000,000 Shares; Issued and
Outstanding - 37,096,941 Shares and 36,661,008
Shares, Respectively $ 37,097 $ 36,661
Paid in Capital 373,937 363,677
Earnings Reinvested in the Business 382,951 335,907
Total Common Stock Equity 793,985 736,245
Long-Term Debt 478,417 478,417
Total Capitalization 1,272,402 1,214,662
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 179,600 196,800
Accounts Payable 70,120 42,893
Amounts Payable to Customers 16,036 40,776
Other Accruals and Current Liabilities 158,958 69,523
424,714 349,992
Deferred Credits
Taxes Refundable to Customers 31,985 -
Unamortized Investment Tax Credit 14,401 14,743
Accumulated Deferred Income Taxes 273,596 188,793
Other Deferred Credits 32,104 33,350
352,086 236,886
Commitments and Contingencies - -
$2,049,202 $1,801,540
See Notes to Consolidated Financial Statements
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Item 1. - Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
March 31,
1994 1993
(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $ 75,465 $ 71,102
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Effect of Noncash Adjustments:
Cumulative Effect of Change in
Accounting for Income Taxes (3,826) -
Depreciation, Depletion and Amortization 36,629 34,590
Deferred Income Taxes 2,031 113
Other 3,082 3,014
113,381 108,819
Change in:
Receivables and Unbilled Utility Revenue (150,882) (140,352)
Gas Stored Underground and Materials and
Supplies 16,685 25,419
Unrecovered Purchased Gas Costs 17,778 13,033
Prepayments (6,334) (8,094)
Accounts Payable 27,227 21,295
Amounts Payable to Customers (24,741) (3,613)
Other Accruals and Current Liabilities 103,903 81,514
Other Assets and Liabilities - Net 3,561 (7,348)
Net Cash Provided by
Operating Activities 100,578 90,673
INVESTING ACTIVITIES
Capital Expenditures (57,197) (56,993)
Other 3,002 7
Net Cash Used in Investing Activities (54,195) (56,986)
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper (17,200) (57,200)
Proceeds from Issuance of Long-Term Debt - 99,000
Reduction of Long-Term Debt - (111,380)
Proceeds from Issuance of Common Stock 5,228 2,502
Dividends Paid on Common Stock (28,293) (25,403)
Net Cash Used in
Financing Activities (40,265) (92,481)
Net Increase (Decrease) in Cash and
Temporary Cash Investments 6,118 (58,794)
Cash and Temporary Cash Investments
at October 1 13,595 76,278
Cash and Temporary Cash Investments at March 31 $ 19,713 $ 17,484
See Notes to Consolidated Financial Statements
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Item 1. Financial Statements (cont.)
National Fuel Gas Company
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Quarterly Earnings. The Company, in its opinion, has included all adjustments
that are necessary for a fair statement of the results of operations for the
periods. The fiscal 1994 consolidated financial statements will be examined by
the Company's independent accountants after the end of the fiscal year. The
consolidated financial statements and notes thereto, included herein, should be
read in conjunction with the financial statements and notes for the years ended
September 30, 1993, 1992 and 1991, that are included in the Company's 1993
Annual Report to the Securities and Exchange Commission (SEC) on Form 10-K.
The earnings for the six months ended March 31, 1994 should not be taken
as a prediction for the fiscal year ending September 30, 1994, as most of the
Company's business is seasonal in nature and is influenced by weather
conditions. Because of the seasonal nature of the Company's heating business,
earnings during the winter months normally represent a substantial part of
earnings for the entire fiscal year. The impact of abnormal weather on
earnings during the heating season is partially reduced by the operation of a
weather normalization clause included in Distribution Corporation's New York
tariff. The weather normalization clause is effective for October through May
billings. In addition, Supply Corporation's straight fixed-variable rate
design, which allows for recovery of substantially all fixed costs in the
demand or reservation charge, reduces the earnings impact of weather.
Rate Refunds. Supply Corporation and Penn-York collect revenues subject to
refund if a final rate case settlement is pending. Estimated rate refunds are
recorded which reflect management's current estimate as to the ultimate outcome
of each rate case.
On October 15, 1993, Supply Corporation filed a Stipulation and Agreement
(the Settlement) with the Federal Energy Regulatory Commission (FERC)
respecting two rate proceedings, which resolved all the issues in these
proceedings. On December 30, 1993, the FERC issued an order approving the
Settlement, with slight modification. Supply Corporation refunded to its
customers $13,600,000, including interest, during the second quarter of fiscal
1994. Distribution Corporation will pass back its portion of this refund to
its customers over a one year period beginning in March 1994 in New York and a
one year period beginning in August 1994 in Pennsylvania.
Consolidated Statement of Cash Flows. For purposes of the Consolidated
Statement of Cash Flows, the Company considers all highly liquid debt
instruments purchased with a maturity of generally three months or less to be
cash equivalents. Cash interest payments during the six months ended March 31,
1994 and 1993, amounted to $24,453,000 and $25,813,000, respectively. Net
income taxes paid during the six months ended March 31, 1994 and 1993 amounted
to $15,616,000 and $9,052,000, respectively.
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Item 1. Financial Statements (cont.)
On December 10, 1993, the Company entered into a non-cash investing
activity whereby it issued 108,396 shares of Company common stock to Empire,
which in turn exchanged those shares for approximately $3,200,000 of natural
gas production assets.
Reclassification. The cost of transporting gas is included on the Consolidated
Statement of Income in "Purchased Gas." Prior period amounts have been
reclassified to conform with current period presentation.
Financial Instruments. Seneca has entered into certain price swap agreements
to effectively manage a portion of the market risk associated with fluctuations
in the price of natural gas. The agreements call for Seneca to make monthly
payments to (or receive payments from) other parties based upon the
differential between a fixed and a variable price as specified by the contract.
The current agreements run through December 1994 and have a remaining notional
amount of 9,900,000 million British Thermal Units of natural gas equivalent at
March 31, 1994.
NFR participates in the gas futures market to lock in natural gas prices
to decrease volatility related to fluctuations in market prices. Gains or
losses resulting from changes in the market value of these transactions are
deferred until the hedged commodity transaction occurs.
Seneca and NFR are exposed to credit risk in the event of nonperformance
by counterparties on natural gas swaps and futures, but Seneca and NFR do not
anticipate nonperformance by any of these counterparties.
Management does not expect the gas futures or swap agreements to have a
material effect on either the results of operations or the financial condition
of the Company.
The Company has SEC authority to enter into interest rate swaps associated
with short-term borrowings up to a notional amount of $200,000,000. Currently,
the Company does not have any interest rate swap agreements outstanding.
NOTE 2 - Regulatory Matters
FERC Order 636 Transition Costs. As a result of the industry-wide
restructuring under FERC Order 636, Distribution Corporation is incurring
transition costs billed by Supply Corporation and other upstream pipeline
companies. Distribution Corporation's current estimate of these transition
costs, including its allocable share of Supply Corporation's transition costs,
is approximately $147,000,000. The majority of these costs relate to gas
supply realignment (GSR) and stranded costs. This estimate was determined from
information provided in the Order 636 compliance filings of Supply Corporation
and the five interstate pipeline companies that directly serve Supply
Corporation, and is exclusive of any potential stranded costs related to
production plant or gathering facilities which pipeline companies, including
Supply Corporation, may file for at a future date and any potential GSR costs
charged by an upstream supplier, which are subject to the outcome of its
bankruptcy proceedings. To date, approximately $26,100,000 of transition costs
have been accepted by the FERC for billing to Distribution Corporation or
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Item 1. Financial Statements (cont.)
Supply Corporation, subject to refund. This is exclusive of $14,687,000 of
Supply Corporation's over-recovered purchased gas costs refunded to
Distribution Corporation on September 30, 1993. Distribution Corporation has
been and will continue to be actively challenging relevant FERC filings made by
the upstream pipeline companies to ensure the eligibility and prudency of all
transition cost claims. This industry-wide issue will potentially involve
years of rate proceedings before the FERC and state commissions.
Currently, Distribution Corporation has estimated that transition costs
allocable to the Pennsylvania jurisdiction are approximately $50,600,000. On
October 15, 1993, the Pennsylvania Public Utility Commission (PaPUC) issued a
policy statement on the recovery of transition costs. The policy statement
permits local distribution companies, such as Distribution Corporation, the
opportunity for full recovery of GSR and stranded costs from customers through
a separate surcharge, and recovery of under-recovered purchased gas costs
(Account 191 costs) and costs related to new facilities from sales customers
through gas cost recovery rates. Effective August 1, 1993, Distribution
Corporation began recovering Account 191 transition costs from its Pennsylvania
sales customers in connection with its annual purchased gas cost filing. On
December 1, 1993, the PaPUC issued an order on certain issues concerning
recovery of GSR and stranded costs by Distribution Corporation in connection
with its March 31, 1993 rate filing with the PaPUC. Under this order,
Distribution Corporation began collecting, effective December 1, 1993,
approximately $4,000,000 of GSR and stranded costs from its customers.
Distribution Corporation is also allowed quarterly updates for transition cost
recovery and has implemented the first two such updates for an additional net
$1,166,000, effective as of February 1 and May 1, 1994.
In its August 27, 1993 rate filing with the State of New York Public
Service Commission (PSC), Distribution Corporation filed for recovery of an
initial annual amount of $24,900,000 of estimated transition costs. Currently,
total estimated transition costs for the New York jurisdiction are
approximately $96,400,000. The PSC has not determined its policy with respect
to the recovery of transition costs. However, on October 28, 1993, the PSC
instituted a state-wide proceeding to review the issues associated with Order
636 restructuring. The PSC staff, in connection with this state-wide
proceeding, has recently recommended that transition costs, exclusive of
Account 191 costs, be allocated between sales and transportation customers.
The PSC currently expects to have this proceeding concluded before the
1994-1995 heating season. Distribution Corporation is actively participating
in this state-wide proceeding.
While the state-wide proceeding is continuing, the PSC staff, in
connection with the above-noted and on-going rate case, has proposed that
transition costs allocable to sales customers be recovered from such customers
through the monthly Gas Adjustment Clause (GAC). Distribution Corporation has
accepted the PSC staff's proposal and, effective February 1, 1994, began
recovering such costs from sales customers through the GAC. As with all costs
included in the GAC mechanism, the ultimate recovery of transition costs is
subject to final approval by the PSC. Since recovery of transition costs from
transportation customers is still being contested in this rate case,
Distribution Corporation will continue to defer amounts relating to those
customers until the PSC reaches a decision on this matter.
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Item 1. Financial Statements (cont.)
In his April 19, 1994 recommended decision in Distribution Corporation's
August 27, 1993 rate filing, the Administrative Law Judge recommended that all
transition costs be collected from sales customers through the monthly GAC.
Distribution Corporation is contesting this methodology and believes that a
portion of transition costs should be recovered from transportation customers.
Management believes that any transition costs resulting from the
implementation of Orders 636, 636-A and 636-B should be fully recoverable from
the respective customers of Supply Corporation and Distribution Corporation to
the extent such costs are prudently incurred.
NOTE 3 - Corporate Realignment
Penn-York/Supply Corporation Merger. On January 19, 1994, the FERC issued an
order approving the merger of Penn-York into Supply Corporation. After the
merger, Supply Corporation will continue to provide all the services Penn-York
currently provides under the same rates, terms and conditions. On March 4,
1994, the SEC approved the merger. The expected date of the Penn-York/Supply
Corporation merger is July 1, 1994.
Empire/Seneca Merger. On April 26, 1994, the Company received SEC approval to
combine its Appalachian, Gulf Coast and West Coast exploration and production
operations under Seneca through the merger of Empire into Seneca. Supply
Corporation's exploration and production activities have already been
transferred to Empire, effective January 1, 1994. The expected date of the
Empire/Seneca merger is July 1, 1994.
These mergers, which will combine all of the Company's natural gas storage
services into Supply Corporation and all of the Company's exploration and
production operations into Seneca, should serve to provide operational
efficiencies.
NOTE 4 - Income Taxes
On October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The adoption of
SFAS 109 changed the Company's method of accounting for income taxes from the
deferred method to an asset and liability approach. Previously, deferred taxes
were provided for the tax effects of timing differences between financial
reporting purposes and tax reporting purposes. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences attributable to temporary differences
between the carrying amounts of assets and liabilities and their tax bases. In
addition, such deferred tax assets and liabilities will be adjusted for the
effects of enacted changes in tax laws and rates.
The cumulative effect of this change increased net income by $3,826,000 as
a result of the reduction in deferred income taxes associated with the
Company's nonregulated operations. A reduction in recorded deferred income
taxes associated with rate-regulated activities of $31,985,000 has been
reclassified to a regulatory liability since such amounts are expected to be
refundable to customers under regulatory procedures.
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Item 1. Financial Statements (cont.)
In addition, under SFAS 109, the Company is required to recognize
additional deferred tax liabilities and assets for timing differences on which
deferred tax treatment was not permitted by regulatory authorities. The
recognition of these deferred tax balances had no effect on earnings due to the
recording of corresponding regulatory assets representing future amounts
collectible from customers in the rate-making process. Upon adoption of SFAS
109, the additional deferred taxes amounted to $104,156,000.
At March 31, 1994, the deferred tax liabilities (assets) were comprised of
the following (in thousands):
Accumulated Deferred
Deferred Income Taxes
Income Taxes Current*
Deferred Tax Liabilities:
Excess of tax over book depreciation $176,839 $ -
Exploration and intangible well
drilling costs 73,188 -
Other 65,404 -
Total Deferred Tax Liabilities 315,431 -
Deferred Tax Assets:
Deferred investment tax credits (8,793) -
Overheads capitalized for tax purposes (8,697) -
Tax credit carryforwards (5,106) -
Provisions for rate contingencies and
refunds - (621)
Unrecovered purchased gas costs - (1,951)
Other (19,239) -
Total Deferred Tax Assets (41,835) (2,572)
Total Net Deferred Income Taxes $273,596 $(2,572)
* Included on the Consolidated Balance Sheet in "Other Accruals and Current
Liabilities."
The components of federal and state income taxes included in the
Consolidated Statement of Income are as follows (in thousands):
Six Months Ended
March 31,
1994 1993
Operating Expenses:
Current Income Taxes -
Federal $37,756 $33,942
State 5,180 3,713
Deferred Income Taxes 2,031 113
44,967 37,768
Other Income
Deferred Investment Tax Credit (343) (350)
Cumulative effect prior to
October 1, 1993 of applying SFAS
No. 109 (3,826) -
Total Income Taxes $40,798 $37,418
<PAGE 13>
Item 1. Financial Statements (cont.)
Total income taxes as reported differ from the amounts that were computed
by applying the federal income tax rate to income before income taxes. The
following is a reconciliation of this difference (in thousands):
Six Months Ended
March 31,
1994 1993
Net income available for common stock $75,465 $71,102
Total income taxes 40,798 37,418
Income before income taxes 116,263 108,520
Income tax expense, computed at
statutory rate of 35% in 1994
and 34% in 1993 40,692 36,897
Increase (reduction) in taxes resulting from:
Current state income taxes 3,366 2,451
Depreciation 1,128 1,342
Production tax credits (751) (1,265)
Miscellaneous 189 (2,007)
Income taxes before cumulative effect 44,624 37,418
Cumulative effect prior to October 1, 1993 of
applying SFAS No. 109 (3,826) -
Total Income Taxes $40,798 $37,418
NOTE 5 - Capitalization
Common Stock. During the six months ended March 31, 1994, the Company issued
123,022 shares of common stock under the Company's Customer Stock Purchase Plan
and 59,600 shares to participants in the Company's section 401(k) plans.
In December 1993, 121,494 shares of restricted stock were awarded under
the 1993 Award and Option Plan. Restrictions on 113,494 shares will lapse
respecting approximately one-sixth of such shares on each January 2, 1996
through 2001. Restrictions on 8,000 shares will lapse respecting approximately
one-fourth of such shares on each January 2, 2001 through 2004.
In December 1993, the Company issued 108,396 shares of common stock to
Empire, which in turn exchanged those shares for approximately $3,200,000 of
natural gas production assets.
The Company has $19,917,000 remaining outstanding principal amount of
9-1/2% debentures due July 1, 2019, which it intends to call on July 1, 1994 in
anticipation of refinancing with lower cost debt.
<PAGE 14>
Item 1. Financial Statements (cont.)
NOTE 6 - Other Post-Retirement Benefits
In addition to providing retirement plan benefits, the Company currently
provides health care and life insurance benefits for substantially all retired
employees under a post-retirement benefit plan (Post-Retirement Plan).
The Company has adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106), effective October 1,
1993. This statement required the Company to change its accounting for these
post-retirement benefits from the "pay-as-you-go" (cash) basis to the accrual
basis.
The Company has established Voluntary Employees' Beneficiary Association
(VEBA) trusts for collectively bargained employees and non-bargaining
employees. The VEBA trusts are similar to the Company's Retirement Plan trust.
Contributions to the VEBA trusts are tax deductible, subject to limitations
contained in the Internal Revenue Code and regulations. Contributions to the
VEBA trusts are made to fund employees' post-retirement health care and life
insurance benefits, as well as benefits as they are paid to current retirees.
The Company has elected to amortize the initial accumulated liability
(transition obligation) to net periodic post-retirement benefit cost on a
straight-line basis over a 20-year period.
The following table sets forth the Post-Retirement Plan's funded status,
as determined by its consulting actuary, as of October 1, 1993:
(in thousands)
Accumulated Post-Retirement Benefit Obligation $179,742
Fair Value of Post-Retirement Plan Assets 7,185
Transition Obligation $172,557
Service Cost $ 3,974
Interest Cost 13,714
Expected Return on Post-Retirement Plan Assets (1,035)
Amortization of Transition Obligation 8,628
Post-Retirement Benefit Cost for Fiscal 1994 $ 25,281
Approximately $16,560,000 of post-retirement benefit cost has been
recorded for the six months ended March 31, 1994. Of this amount, $1,073,000
has been deferred for regulatory purposes and $15,487,000 has been recognized
in the Consolidated Statement of Income.
The weighted-average assumed discount rate used in determining the
accumulated post-retirement benefit obligation was 7.75% at the beginning and
end of the fiscal year. The average assumed annual rate of salary increase for
the applicable life insurance plans was 5%.
The annual rate of increase in the per capita cost of covered medical care
benefits for the active participants and medical plans available to new
retirees was assumed to be 13% for 1994; this rate was assumed to decrease
<PAGE 15>
Item 1. Financial Statements (Concl.)
gradually to 5.5% by the year 2002 and remain at that level thereafter. The
annual rate of increase in the per capita cost of covered medical care benefits
for the medical plans not available to new retirees was assumed to be 8% for
1994, 7% for 1995, 6% for 1996 and 5.5% for each year after 1996. The annual
rate of increase in the per capita cost of covered prescription drug benefits
was assumed to be 14% for 1994. This rate was assumed to decrease gradually to
5.5% by the year 2003 and remain level thereafter.
The health care cost trend rate assumptions used to calculate the per
capita cost of covered medical care benefits have a significant effect on the
amounts reported. If the health care cost trend rates were increased by 1% in
each year, the accumulated post-retirement benefit obligation as of October 1,
1993, would be increased by $26.6 million. This 1% change would also increase
the aggregate of the service and interest cost components of net periodic
post-retirement benefit cost for 1994 by $3.1 million.
Distribution Corporation, Supply Corporation and Penn-York represent
virtually all of the Company's total post-retirement benefit costs. The PSC,
PaPUC and the FERC have each issued a generic policy statement on SFAS 106.
These policy statements essentially allow for the full recovery of
post-retirement benefit costs provided amounts collected are funded.
Distribution Corporation, Supply Corporation and Penn-York are fully recovering
their net periodic post-retirement benefit costs. The Company's current policy
is to invest Post-Retirement Plan assets primarily in equity securities and
municipal bonds.
NOTE 7 - Commitments and Contingencies
In addition to the litigation discussed in Part II, Item 1 of this report,
the Company is involved in litigation arising in the normal course of business.
In addition to the regulatory matters discussed in Note 2, the Company is
involved in other regulatory matters arising in the normal course of business
that involve rate base, cost of service and purchased gas cost issues. While
the resolution of such litigation or other regulatory matters could have a
material effect on earnings and cash flows in the year of resolution, none of
this litigation, and none of these other regulatory matters, is expected to
have a material effect on the financial condition of the Company at this time.
<PAGE 16>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Earnings.
Net income available for common stock for the quarter ended March 31, 1994
was $43.8 million, or $1.18 per common share. This compares with $45.2 million
or $1.33 per common share, for the quarter ended March 31, 1993.
Net income available for common stock for the six months ended March 31,
1994 was $75.5 million, or $2.05 per common share. This includes $3.8 million
of earnings, or $.10 per common share, related to the cumulative effect of a
required change in accounting for income taxes adopted October 1, 1993, in
accordance with the Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Income before the cumulative effect of the change in accounting for
income taxes amounted to $71.6 million, or $1.95 per common share. Net income
available for common stock for the six months ended March 31, 1993 was $71.1
million, or $2.09 per common share.
Per share amounts reflect a greater number of weighted average shares
outstanding in the current periods resulting mainly from the sale of 2.5
million shares of common stock on May 20, 1993.
The decrease in earnings for the quarter ended March 31, 1994, compared
with the same quarter of the prior year, is attributable mainly to lower
earnings of the Company's Pipeline and Storage segment. This resulted
primarily from the Federal Energy Regulatory Commission's (FERC) mandated
change, under Order 636, in Supply Corporation's rate design which reduces the
seasonality of its annual revenues. This was partially offset by an increase
in rates for both Supply Corporation and the Utility Operation in New York and
Pennsylvania. The Company's nonregulated operations showed mixed results for
the quarter. The Exploration and Production segment's earnings were down
despite increased oil and gas production and higher gas prices, as greater
income tax expense resulted partly from a decline in the Section 29 tight sands
tax credit. The earnings of the Other Nonregulated segment increased because
of higher earnings from the Company's gas marketing subsidiary and timber
operations. In addition, the Company's pipeline construction subsidiary
incurred a smaller loss this year compared with last year's second quarter.
The increase in net income, before the cumulative effect of the change in
accounting for income taxes, for the six month's ended March 31, 1994, compared
with the same period of last year, is attributable mainly to increased rates in
the Company's regulated operations, partially offset by the change in rate
design of Supply Corporation, discussed above, and higher earnings of the
Company's nonregulated operations.
A more detailed discussion of current period results can be found in the
business segment information that follows.
<PAGE 17>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Financial Information by Business Segment.
The following tables compare System Throughput, Production Volumes,
Operating Revenues and Operating Income Before Income Taxes by business
segment, with the corresponding prior periods:
SYSTEM THROUGHPUT
(millions of cubic feet-MMcf)
Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 %Change 1994 1993 %Change
Utility Operation
Retail Sales:
Residential 42,627 40,095 6.3 69,624 66,732 4.3
Commercial 13,318 12,060 10.4 21,040 19,867 5.9
Industrial 3,129 2,044 53.1 4,845 4,912 (1.4)
59,074 54,199 9.0 95,509 91,511 4.4
Transportation 16,719 15,573 7.4 28,977 26,738 8.4
75,793 69,772 8.6 124,486 118,249 5.3
Pipeline and Storage
Wholesale Sales* - 58,238(100.0) - 100,158(100.0)
Transportation 109,053 37,789 188.6 188,824 74,387 153.8
109,053 96,027 13.6 188,824 174,545 8.2
Less-Intersegment
Throughput:
Sales - 55,073(100.0) - 94,138(100.0)
Transportation 71,425 10,461 582.8 121,546 18,543 555.5
71,425 65,534 9.0 121,546 112,681 7.9
Total System
Throughput 113,421 100,265 13.1 191,764 180,113 6.5
* Effective August 1, 1993, sales contracts were converted to transportation
and storage arrangements as a result of restructuring under FERC Order 636.
PRODUCTION VOLUMES
Exploration and Production
Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 %Change 1994 1993 %Change
Gas Production - (MMcf)
Gulf Coast 4,439 3,658 21.4 7,516 5,450 37.9
West Coast 174 284 (38.7) 381 582 (34.5)
Appalachia 1,537 1,646 (6.6) 3,123 3,321 (6.0)
6,150 5,588 10.1 11,020 9,353 17.8
Oil Production - (Thousands of Barrels)
Gulf Coast 153 114 34.2 252 167 51.0
West Coast 92 106 (13.2) 194 219 (11.4)
Appalachia 2 2 - 6 7 (14.3)
247 222 11.3 452 393 15.0
<PAGE 18>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
OPERATING REVENUES
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 % Change 1994 1993 %Change
Regulated
Utility Operation
Retail Revenues:
Residential $297,836 $254,936 16.8 $494,496 $439,490 12.5
Commercial 85,117 68,997 23.4 135,478 116,585 16.2
Industrial 15,611 9,964 56.7 24,005 23,148 3.7
398,564 333,897 19.4 653,979 579,223 12.9
Off-System Sales 1,757 - - 1,757 - -
Transportation 13,026 10,926 19.2 21,238 17,661 20.3
Other 1,121 966 16.0 2,192 1,699 29.0
414,468 345,789 19.9 679,166 598,583 13.5
Pipeline and Storage
Wholesale Revenues* - 174,338(100.0) - 332,361(100.0)
Storage Service 15,100 9,671 56.1 29,653 18,623 59.2
Transportation 23,295 10,218 128.0 45,977 19,469 136.2
Other 1,064 578 84.1 1,945 1,370 42.0
39,459 194,805 (79.7) 77,575 371,823 (79.1)
Nonregulated
Exploration and
Production 18,656 15,790 18.2 32,988 27,758 18.8
Other 23,174 10,052 130.5 37,960 19,083 98.9
41,830 25,842 61.9 70,948 46,841 51.5
Less-Intersegment
Revenues 22,035 174,646 (87.4) 43,835 331,237 (86.8)
$473,722 $391,790 20.9 $783,854 $686,010 14.3
* Effective August 1, 1993, sales contracts were converted to transportation
and storage arrangements as a result of restructuring under FERC Order 636.
OPERATING INCOME BEFORE
INCOME TAXES
(in thousands) Three Months Ended Six Months Ended
March 31, March 31,
1994 1993 % Change 1994 1993 %Change
Regulated
Utility Operation $61,289 $56,829 7.8 $ 94,921 $ 92,409 2.7
Pipeline and Storage 16,553 21,588 (23.3) 33,281 35,534 (6.3)
Nonregulated
Exploration and
Production 6,380 5,126 24.5 9,964 8,338 19.5
Other 1,203 (747)261.0 1,838 (1,769)203.9
7,583 4,379 73.2 11,802 6,569 79.7
Corporate (869) (618)(40.6) (1,606) (1,097)(46.4)
$84,556 $82,178 2.9 $138,398 $133,415 3.7
<PAGE 19>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Utility Operation.
Operating income before income taxes for the Utility Operation for the
quarter and six months ended March 31, 1994, increased $4.5 million and $2.5
million, respectively, as compared with the same periods a year ago. Total
throughput for the Utility Operation increased 6 billion cubic feet (Bcf) and
6.2 Bcf for the quarter and six month period, respectively, mainly as a result
of colder weather in the Company's service territory. The increase in
operating revenues for this segment reflects increased gas costs due to higher
throughput and higher average prices of gas as well as general rate increases
effective July 23, 1993 in the New York jurisdiction and December 1, 1993 in
the Pennsylvania jurisdiction. However, the earnings impact of colder weather
experienced by the Utility Operation's New York jurisdiction was tempered by
its weather normalization clause (WNC), which serves to diminish the impact on
earnings of deviations from normal weather. For the quarter and six months
ended March 31, 1994, Distribution Corporation's WNC resulted in a benefit to
its customers of $5.3 million and $6.5 million, respectively. In addition, the
severe cold weather during January and February 1994 caused an unusually high
number of repairs of line leaks thus increasing operation and maintenance
expense for the quarter by approximately $1.7 million.
Degree Days
Three Months Ended March 31:
Percent Colder
Than
Normal 1994 1993 Normal Last Year
Buffalo 3,345 3,622 3,383 8.3 7.1
Erie 3,189 3,554 3,164 11.4 12.3
Six Months Ended March 31:
Buffalo 5,606 5,949 5,667 6.1 5.0
Erie 5,226 5,737 5,188 9.8 10.6
Rate Matters - Utility Operation.
New York Jurisdiction:
In August 1993, Distribution Corporation filed in its New York jurisdiction
a request for an annual rate increase of $55.4 million, or 8.5%, with a return
on equity of 12.16%. Included in the requested rate increase was an initial
amount of $24.9 million for the recovery of transition costs arising from FERC
Order 636. This represented 3.8% out of the total 8.5% requested increase.
The State of New York Public Service Commission (PSC) has not determined
its policy with respect to the recovery of transition costs. However, on
October 28, 1993, the PSC instituted a state-wide proceeding to review the
issues associated with Order 636 restructuring. The PSC staff, in connection
with this state-wide proceeding, has recently recommended that transition
costs, exclusive of under-recovered purchased gas costs, be allocated between
<PAGE 20>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
sales and transportation customers. The PSC currently expects to have this
proceeding concluded before the 1994-1995 heating season. Distribution
Corporation is actively participating in this state-wide proceeding.
While the state-wide proceeding is continuing, the PSC staff, in connection
with the above-noted and on-going rate case, has proposed that transition costs
allocable to sales customers be recovered from such customers through the
monthly Gas Adjustment Clause (GAC). Distribution Corporation has accepted the
PSC staff's proposal and, effective February 1, 1994, began recovering such
costs from sales customers through the GAC. As with all costs included in the
GAC mechanism, the ultimate recovery of transition costs is subject to final
approval by the PSC. Since recovery of transition costs from transportation
customers is still being contested in this rate case, Distribution Corporation
will continue to defer amounts relating to those customers until the PSC
reaches a decision on this matter.
On April 19, 1994, the Administrative Law Judge (ALJ) issued his
recommendation to the PSC in this New York rate case. The recommended decision
was for an annual base rate increase of $9.8 million, or 1.5%, exclusive of
transition costs, with a return on common equity of 10.4%. In addition, the
ALJ recommended that all transition costs be collected from sales customers
through the monthly GAC. Among other issues, Distribution Corporation is
contesting the recommended return on equity and transition cost recovery
methodology and has filed its exceptions to the ALJ's decision. After a final
decision by the PSC, new rates are expected to become effective in late July
1994.
In July 1993, in connection with a previously approved two-year settlement,
Distribution Corporation received PSC approval for the second year of this
settlement. The approval was for a rate increase of $13.3 million, or 2.1%,
for the 12-month period ending July 31, 1994. This rate increase went into
effect on July 23, 1993.
Pennsylvania Jurisdiction:
In March 1993, Distribution Corporation filed with the Pennsylvania Public
Utility Commission (PaPUC) for an annual rate increase in its Pennsylvania
jurisdiction of $33.4 million, or approximately 16.2%, with a return on equity
of 12.4%. Included in the requested rate increase was an initial amount of
$8.2 million for the recovery of transition costs arising from FERC Order 636.
On December 1, 1993, an order was issued by the PaPUC authorizing an annual
rate increase of $11.4 million, or 4.9%, exclusive of transition costs. The
new rates became effective as of December 1, 1993.
The PaPUC's December 1 order also addressed certain issues concerning
recovery of gas supply realignment (GSR) costs and stranded costs resulting
from the implementation of FERC Order 636. Under this order, Distribution
Corporation began collecting, effective December 1, 1993, approximately $4
million of GSR and stranded costs from its customers. Distribution Corporation
is also allowed quarterly updates for transition cost recovery and has
implemented the first two such updates for an additional net $1.2 million,
<PAGE 21>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
effective as of February 1 and May 1, 1994. In addition, in connection with
its annual purchased gas cost filing, effective August 1, 1993, Distribution
Corporation began recovering estimated transition costs from its Pennsylvania
customers related to its upstream pipeline suppliers' balances of
under-recovered purchased gas costs to be billed to Distribution Corporation as
a result of their restructuring under Order 636.
On March 8, 1994, Distribution Corporation filed in its Pennsylvania
jurisdiction a request for an annual rate increase of $16 million, with a
return on common equity of 12.25%. A proposal for a WNC was included in this
filing. New rates are expected to become effective in December 1994.
General rate increases do not reflect the recovery of purchased gas costs.
Such costs are recovered through operation of the purchased gas adjustment
clauses of the regulatory authorities having jurisdiction.
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage segment
for the quarter and six months ended March 31, 1994, decreased $5 million and
$2.3 million, respectively, compared with the same periods a year ago. The
most significant impact on pretax operating income for this segment was the
effect of Supply Corporation's Straight Fixed-Variable (SFV) rate design under
FERC Order 636, which became effective August 1, 1993. Under SFV,
substantially all fixed costs are recovered in the demand or reservation
charge, removing the seasonality in the revenue stream and making
monthly operating income relatively flat. The rate design that Supply
Corporation was under prior to adopting Order 636 allowed for recovery of
approximately 50% of fixed costs in the demand charge and 50% in the commodity
charge. Under this prior rate design, more revenue was recognized in periods
of high throughput (i.e., winter months). Change to the SFV rate design
accounted for an approximate $6.1 million and $8.6 million decrease in revenues
and pretax operating income for the three and six months ended March 31, 1994,
respectively, compared with the same periods of the prior year. While the SFV
rate design negatively impacted the first and second quarters, the impact on
the third and fourth quarters should create a positive variance relative to the
prior year.
This decrease in pretax operating income for the quarter and six months
ended March 31, 1994 was partially offset by a favorable rate settlement
approved by the FERC in October 1993. Revenues for the quarter and six months
ended March 31, 1993 were based upon rates that were in effect, subject to
refund. Management reduced those revenues by recording an estimated refund
provision accrual. Based upon settlement of these rate proceedings in October
1993, it was determined that the estimated refund provision was too high and
revenues were understated for the quarter and six months ended March 31, 1993,
by approximately $1.8 million and $5.5 million, respectively. This revenue was
recognized in the fourth quarter of fiscal 1993.
In addition, for the three and six months ended March 31, 1994, Supply
Corporation recorded the receipt of approximately $.4 million and $1.7 million,
<PAGE 22>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
respectively, from upstream pipeline companies related to prior period joint
storage operations.
Rate Matters - Pipeline and Storage. For a discussion of the Penn-York and
Supply Corporation merger, refer to Note 3 - Corporate Realignment.
On December 30, 1993, the FERC issued an order approving, with slight
modification, an Offer of Settlement (the Settlement), which was filed with the
FERC on October 15, 1993, respecting two Supply Corporation rate proceedings.
As modified, the Settlement provided for rates that produced annual revenues of
approximately $125 million between July 1, 1992 and July 31, 1993. Rates for
the period beginning August 1, 1993 reflect reduced costs after restructuring
plus certain settlement concessions and provide for rates that will produce
revenues of approximately $121 million annually.
Supply Corporation expects to file for new rates in September 1994, for
rates that will become effective in April 1995.
Exploration and Production.
Operating income before income taxes from the Company's Exploration and
Production operations for the quarter and six months ended March 31, 1994,
increased $1.3 million and $1.6 million, respectively, compared with the same
periods a year ago mainly because of increased natural gas production combined
with a higher weighted average price received for gas. System natural gas
production increased 10% and 18%, respectively, for the quarter and six months
ended March 31, 1994. The production increase came from this segment's Gulf
Coast operations and reflects its success both offshore and with its horizontal
drilling program in central Texas. Production increases in the Gulf coast
operations more than offset production declines in the Appalachian and West
Coast operations. System weighted average gas prices increased $.38 per Mcf
and $.18 per Mcf for the quarter and six months ended March 31, 1994,
respectively.
Other Nonregulated.
Operating income before income taxes associated with this segment for the
quarter and six months ended March 31, 1994, increased $2 million and $3.6
million, respectively, compared with the same periods a year ago. The
increases in both periods reflect improved performance by the Company's
pipeline construction subsidiary, its gas marketing operations and its timber
operations. UCI, the Company's pipeline construction subsidiary, incurred a
smaller loss in this year's quarter and six month period. NFR, the Company's
gas marketing subsidiary, improved its performance as a result of an increase
in volumes of gas marketed. Timber operations reflect increased log sales and
higher average prices.
Income Taxes.
Income taxes increased $4.9 million and $7.2 million, respectively, for the
quarter and six months ended March 31, 1994, mainly because of an increase in
pretax income. The increase in income taxes also reflects the increase in the
<PAGE 23>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
federal tax rate from 34% to 35% and lower Section 29 tight sands tax credits.
These credits, which relate to production from qualified gas wells, decreased
approximately $.6 million for the quarter and $.5 million for the six months
ended March 31, 1994, as the production from qualified gas wells declined.
Interest Charges.
Total interest charges decreased $1.6 million and $3.6 million,
respectively, for the quarter and six months ended March 31, 1994. Interest on
long-term debt decreased $.7 million and $1.8 million, respectively, for the
quarter and six month period, mainly because of lower interest rates due to the
refinancing activities that have occurred since November 1992. Other interest
decreased $.9 million and $1.8 million for the quarter and six month period,
respectively, as a result of decreased interest on short-term debt because of
lower interest rates coupled with lower average amounts outstanding. In
addition, both the quarter and six month period ended March 31, 1993, reflected
interest on Supply Corporation's balance of over-recovered purchased gas costs.
In connection with Supply Corporation's restructured under FERC Order 636, the
balance of Supply Corporation's over-recovered purchased gas costs was refunded
to its customers on September 30, 1993, thus the quarter and six months ended
March 31, 1994 reflect no interest charges related to purchased gas costs.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the six month period consisted
of cash provided by operating activities and short-term bank loans and
commercial paper. These sources were supplemented by issuances of common stock
under the Company's Customer Stock Purchase Plan and section 401(K) Plans.
Operating Cash Flow
Internally generated cash from operating activities consists of net income
available for common stock, adjusted for noncash expenses, noncash income and
changes in operating assets and liabilities. Noncash items include
depreciation, depletion and amortization, deferred income taxes and allowance
for funds used during construction. For the six months ended March 31, 1994, a
noncash income item also included the cumulative effect of a required change in
accounting for income taxes in accordance with SFAS 109.
Cash provided by operating activities in the Utility Operation and the
Pipeline and Storage segments may vary substantially from period to period
because of fluctuations in weather, over/under-recovered purchased gas costs,
supplier refunds and the impact of rate cases. The impact of weather in the
Utility Operation's New York rate jurisdiction is tempered by its WNC.
In addition, effective August 1, 1993, under FERC Order 636, Supply
Corporation no longer incurs over/under-recovered purchased gas costs. Also,
Supply Corporation's SFV rate design reduces the impact of weather on its cash
flow.
<PAGE 24>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Because of the seasonal nature of the Company's heating business, revenues
are relatively high during the six months ended March 31, and the Consolidated
Balance Sheet at the end of March usually shows an increase in cash and
temporary cash investments over balances at the end of September. Receivables
and unbilled utility revenue historically increase from September to March
because of winter weather.
The storage gas inventory normally declines during the first and second
quarters of the fiscal year and is replenished during the third and fourth
quarters. Under the last-in, first-out (LIFO) method of accounting, the
current cost of replacing gas withdrawn from storage is recorded in the
Consolidated Statement of Income and a reserve for gas replacement is recorded
in the Consolidated Balance Sheet and is included under the caption "Other
Accruals and Current Liabilities". Such reserve is reduced as the inventory is
replenished.
Net cash provided by operating activities totaled $100.6 million for the
six months ended March 31, 1994, an increase of $9.9 million compared with the
same period of the prior year. This increase mainly reflects the exploration
and production segment's higher operating revenues and lower receivable
balances.
Investing Cash Flow
Capital Expenditures
The Company's capital expenditures totaled $60.4 million during the six
months ended March 31, 1994. This total includes $3.2 million of gas
production assets acquired in exchange for Company common stock. Total
expenditures for the six month period represent 41% of the total current
capital expenditure budget for fiscal 1994 of $147.2 million.
The following table presents capital expenditures for the six months ended
March 31, 1994, by business segment:
(in thousands) Percentage
Regulated
Utility Operation $25,108 41.6 %
Pipeline and Storage 7,787 12.9
Nonregulated
Exploration and Production 25,561 42.3
Other 1,925 3.2
27,486 45.5
$60,381 100.0%
The bulk of the Utility Operation's capital expenditures were made for
replacement of mains and main extensions, as well as for the replacement of
service lines and the installation of new services.
<PAGE 25>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Pipeline and Storage capital expenditures included approximately $2 million
to increase compression at two locations. In addition, capital expenditures
were made for additions, improvements, and replacements to this segment's
transmission and storage systems.
Significant capital expenditures related to Supply Corporation's Laurel
Fields Storage Project are not expected to be incurred until 1996. Filings
with the FERC are expected to be made by early summer to implement this
project. Laurel Fields is a 19 Bcf underground natural gas storage development
project.
Approximately 81% of the Exploration and Production segment's capital
expenditures were made by Seneca for the exploration and development of oil and
gas properties, specifically offshore in the Gulf of Mexico and in the Austin
Chalk formation in the Northeast Clay field in central Texas. In addition,
Empire acquired $3.2 million of natural gas production assets in exchange for
Company common stock. This acquisition added approximately 3 Bcf of gas
reserves.
Other Nonregulated capital expenditures included expenditures by UCI for
the acquisition of equipment.
The Company's capital expenditure program is under continuous review. The
amounts are subject to modification for opportunities in the natural gas
industry such as the acquisition of attractive oil and gas properties or
storage facilities and the expansion of transmission line capacities. The
magnitude of future capital expenditures in the regulated segments depends, to
a large degree, upon market conditions coupled with adequate rate relief.
Other
Cash received on the sale of the Company's investment in property, plant
and equipment is reflected as a cash flow from investing activities.
Approximately $2.3 million of cash was received in the first quarter of fiscal
1994, related to the sale of Seneca's interest in its Alberta, Canada gas
reserves.
Financing Cash Flows
Consolidated short-term debt decreased by $17.2 million during the first
six months of fiscal 1994. The Company considers short-term bank loans and
commercial paper important sources of cash for temporarily financing
construction expenditures, gas in storage inventory, unrecovered purchased gas
costs and other working capital needs.
The Company, through Seneca and NFR, is engaged in the gas futures market
and in certain natural gas price swap agreements as a means of managing a
portion of the market risk associated with fluctuations in the market price of
natural gas. In addition, the Company has SEC authority to enter into interest
rate swaps associated with short-term borrowings. For further discussion, see
disclosure under "Financial Instruments" in Note 1, "Summary of Significant
Accounting Policies."
<PAGE 26>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
The Company has $19.9 million remaining outstanding principal amount of
9-1/2% debentures due July 1, 2019, which it intends to call on July 1, 1994 in
anticipation of refinancing with lower cost debt.
At March 31, 1994, the Company had SEC authority remaining under a shelf
registration filed in March 1993 to issue and sell up to $320 million of
debentures and/or medium-term notes. Depending on market conditions and the
requirements of the Company, the Company may issue and sell approximately $100
million of the debentures and/or medium-term notes within the remainder of
fiscal 1994. The proceeds of such sales would be used to replace outstanding
short-term borrowings, to redeem or discharge higher cost long-term debt, to
finance a portion of the Company's capital expenditures and/or for other
general corporate purposes.
In addition to the litigation discussed in Part II, Item 1, of this report,
the Company is involved in litigation arising in the normal course of business.
In addition to the regulatory matters discussed in Note 2, the Company is
involved in other regulatory matters arising in the normal course of business
that involve rate base, cost of service and purchased gas cost issues, among
other things. While the resolution of such litigation or other regulatory
matters could have a material effect on earnings and cash flows in the year of
resolution, none of this other litigation and none of these other regulatory
matters are expected to change materially the Company's present liquidity
position.
The Company's present liquidity position is believed to be adequate to
satisfy known demands. Under the Company's covenants of its indenture covering
long-term debt, at March 31, 1994, the Company would have been permitted to
issue up to a maximum of $694 million in additional long-term unsecured
indebtedness, subject to maturity and long-term interest rates. In addition,
at March 31, 1994, the Company had regulatory authorizations and unused
short-term credit lines that would have permitted it to borrow an additional
$220.4 million of short-term debt.
<PAGE 27>
Part II. Other Information
Item 1. Legal Proceedings
Paragon/TGX Litigation
A. New York Litigation
On November 30, 1984, Distribution Corporation commenced an action against
Paragon Resources, Inc. (Paragon) and TGX Corp. (collectively Paragon/TGX), in
the United States District Court for the Western District of New York (the
District Court) seeking a declaratory judgment concerning the contract effect
of a December 20, 1983 PSC order (the Disapproval Order) which, among other
things, disapproved a 1974 gas purchase agreement between Distribution
Corporation's predecessor in interest, Iroquois Gas Corporation, and Paragon
(the "Paragon Contract"). Paragon/TGX counterclaimed for (i) a declaration
that the Disapproval Order did not affect the Paragon Contract in any way,
whatsoever, (ii) approximately $4,400,000 in respect of take-or-pay claims, and
(iii) unquantified amounts in respect of other alleged breaches of the Paragon
Contract. Commencing with its payment for production received in September
1984, Distribution Corporation has paid Paragon/TGX for Paragon Contract gas at
prices below those developed by the Paragon Contract's price formula, as the
same have been impacted, from time to time, by the Natural Gas Policy Act of
1978 (NGPA).
On the basis of a Memorandum and Order dated December 10, 1988, the
District Court in January 1991 issued a partial summary judgment which declared
that, whereas the Disapproval Order abrogated only the Paragon Contract's price
term, the legal consequence of such abrogation was to render the Paragon
Contract "void and no longer of any force or effect" as of December 20, 1983.
On December 3, 1991 the U. S. Court of Appeals for the Second Circuit (the
Second Circuit) reversed the District Court's partial summary judgment and
remanded the case to the District Court for further proceedings. The Second
Circuit agreed with the District Court that the Disapproval Order had "voided
the Contract's price term," but did not agree that the Paragon Contract as a
whole was "voided by the cancellation of the price term." Rather, the Second
Circuit found that Paragon/TGX had elected an option available to it under the
Paragon Contract to continue that contract, in the aftermath of the Disapproval
Order, at "a price consistent with" that order.
In a letter dated December 13, 1991, TGX demanded that Distribution
Corporation pay it $21,874,042 (including interest), alleged to represent the
difference between the amount received by Paragon/TGX in respect of Paragon
Contract gas delivered during the period September 1984 through October 1991,
and the amount allegedly due TGX in respect of such gas during such period.
Distribution Corporation rejected TGX's demand.
By Order entered March 23, 1992, the District Court granted Distribution
Corporation permission to amend its reply to Paragon/TGX's counterclaims to
allege, among other things, (i) Distribution Corporation's "termination" of the
Paragon Contract by letter effective February 1, 1988; (ii) Paragon's pre-
September 1984 repudiation of the Paragon Contract; and (iii) the PSC's
"primary jurisdiction" to interpret the Disapproval Order as respects "a price
consistent" therewith. With respect to (iii) above, Distribution Corporation
<PAGE 28>
Item 1. Legal Proceedings - (Cont.)
notes that the New York State Public Service Law provides that no charge for
gas made pursuant to a contract with a New York gas utility shall exceed the
"just and reasonable charge" for such gas. In response to Distribution
Corporation's motion for partial summary judgment in respect of the defense
denominated (ii) above, the District Court, in a Memorandum and Order entered
July 10, 1992, as revised by a Memorandum and Order entered March 1, 1993,
denied Distribution Corporation's summary judgment motion (due to a perceived
question of fact as to the occurrence of a condition precedent to Paragon's
pre-September 1984 contract repudiation), but confirmed Distribution
Corporation's right to assert the repudiation defense upon the trial of the
action.
On January 4, 1993, the District Court entered a non-final order
purportedly responsive to a February 13, 1992 Paragon/TGX motion. The order
purports to declare that, by voiding the Paragon Contract price escalation
mechanism effective December 31, 1983, the PSC's 1983 Disapproval Order
effectively capped the Paragon Contract price, at the lesser, from time to
time, of (i) the 1983 Paragon Contract summer/winter "base prices," or (ii) the
applicable "Natural Gas Ceiling Prices" set forth in 18 CFR paragraph 271.101
Table I. Under date of January 19, 1993 Distribution Corporation sought
rehearing, reargument, reconsideration and clarification of the January 4, 1993
order. On July 12, 1993, the District Court filed a Memorandum and Order
granting in part the January 19, 1993 motion. The July 12, 1993 Order stated
that, while the January 4, 1993 Memorandum and Order did determine that an
obligation on Distribution Corporation's part to pay for gas purchased pursuant
to the gas purchase agreement at the applicable NGPA ceiling price arose out of
the conduct of the parties after the NGPA became effective and that the
Disapproval Order did not relieve Distribution Corporation of such obligation,
it did not determine the just and reasonable price for the gas pursuant to
Public Service Law section 110(4), set a contract price for the duration of the
contract, resolve any defenses presented by Distribution Corporation, determine
whether such obligation continues until the present time, or rule on any
deregulation issues.
Other motions are pending before the District Court regarding the amendment
of the pleadings of the parties and a request by TGX that Distribution
Corporation be required to pay a higher price for Paragon Contract gas.
B. Louisiana Litigation
On February 22, 1990, TGX, the purported assignee of the Paragon Contract,
filed a voluntary petition pursuant to Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Western District
of Louisiana (the Bankruptcy Court). Thereafter TGX commenced a "turnover"
proceeding against Distribution Corporation, premised upon TGX's December 13,
1991 payment demand described above under "New York Litigation." Pursuant to a
partial settlement agreement between TGX and Distribution Corporation, approved
by the Bankruptcy Court in August 1992, TGX has withdrawn the "turnover"
proceeding and Distribution Corporation has paid to TGX $2,940,000 in
consideration of, among other things, TGX's release of Distribution Corporation
from the cause of action asserted in the "turnover" proceeding. TGX is still
<PAGE 29>
Item 1. Legal Proceedings - (Concl.)
free to pursue its breach of contract counterclaims in the New York Litigation.
However, the $2,940,000 paid by Distribution Corporation to TGX will be
credited against the amount, if any, which is ultimately adjudged due TGX
and/or Paragon in the New York Litigation.
C. State Commission Proceedings
By its "Order Instituting Proceeding," issued in Case 93-G-0352, et al.,
and effective April 28, 1993, the PSC granted Distribution Corporation deferral
authority in respect of the New York allocable share ($2,006,000) of the
partial settlement payment described above under "Louisiana Litigation" and
instituted a proceeding designed to address Distribution Corporation's request
for recovery authority in respect of that amount. Distribution Corporation has
received authority to treat the Pennsylvania allocable share ($934,000) of the
partial settlement payment as a gas cost experienced during the twelve (12)
month period ending November 30, 1992.
The PSC proceeding is also expected to address Distribution Corporation's
recovery in New York of gas costs incurred in respect of the Paragon Contract
during the reconciliation period September 1, 1991 through August 30, 1992.
Finally, the PSC proceeding is expected to include the review of the Paragon
Contract in light of the "just and reasonable" standard of the New York Public
Service Law. The parties to the PSC proceeding have submitted testimony and
briefs to the Administrative Law Judge.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of National Fuel Gas Company was held on
February 16, 1994. At that meeting, in addition to electing directors and
appointing independent accountants, the shareholders disapproved a
shareholders' resolution requesting the Board of Directors to take the steps
necessary for the adoption of cumulative voting rights.
<TABLE>
<CAPTION>
The total votes were as follows:
Against Broker
For or Withheld Abstain Non-Votes
<S> <C> <C> <C> <C>
(i) Election of directors to serve
for a three-year term:
- David N. Campbell 29,916,375 451,416 - -
- Eugene T. Mann 29,848,025 519,766 - -
- George H. Schofield 29,957,499 410,292 - -
(ii) Appointment of Price Waterhouse
as independent accountants 29,882,549 244,718 240,523 -
(iii) Shareholders' resolution
requesting the Board of
Directors to take steps
necessary for the adoption
of cumulative voting rights. 4,948,647 19,756,098 997,177 4,665,869
</TABLE>
<PAGE 30>
Item 5. Other Information
Louis R. Reif retired from the Company's Board of Directors effective
February 16, 1994.
Sister M. Lawreace Antoun, a member of the Company's Board of Directors
since 1980, passed away on March 9, 1994.
On March 16, 1994, at a regular meeting of the Board of Directors, Mr.
Philip C. Ackerman was elected a director to serve until the 1995 Annual
Meeting when he is expected to stand for reelection.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended March 31, 1994 and the
fiscal years ended September 30, 1989 through
1993.
(99) National Fuel Gas Company and Subsidiaries
Consolidated Statement of Income for the Twelve
Months Ended March 31, 1994 and 1993.
(b) Reports on Form 8-K
None
<PAGE 31>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
under-signed thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
(Registrant)
/s/Joseph P. Pawlowski
Joseph P. Pawlowski
Treasurer and Principal
Accounting Officer
Date: May 12, 1994
<TABLE>
<CAPTION>
EXHIBIT 12
NATIONAL FUEL GAS COMPANY
COMPUTATION OF ACTUAL RATIO OF
EARNINGS TO FIXED CHARGES
(UNAUDITED)
(Thousands of Dollars)
Twelve
Months
Ended Year Ended September 30
03/31/94 1993 1992 1991 1990 1989
EARNINGS:
<S> <C> <C> <C> <C> <C> <C>
Income Before Interest Charges(1) $122,465 $125,742 $118,222 $110,240 $109,781 $104,065
Allowance for Borrowed Funds
Used in Construction 112 174 1,088 2,278 1,273 775
Federal Income Tax 24,963 21,148 17,680 (3,929) 17,435 18,085
State Income Tax 4,446 2,979 3,426 342 2,419 4,168
Deferred Income Taxes - Net(3) 18,841 16,923 14,130 26,880 7,657 3,624
Investment Tax Credit - Net (691) (698) (711) (746) (798) (890)
Rentals(2) 5,700 5,621 5,857 4,915 4,915 4,915
$175,836 $171,889 $159,692 $139,980 $142,682 $134,742
FIXED CHARGES:
Interest and Amortization
of Premium and Discount
on Funded Debt $ 36,668 $ 38,507 $ 39,949 $ 41,916 $ 37,236 $ 29,949
Interest on Commercial Paper
and Short-Term Notes Payable 6,177 7,465 12,093 11,933 12,521 15,339
Other Interest(1) 3,979 4,727 6,958 9,679 9,298 7,132
Rentals(2) 5,700 5,621 5,857 4,915 4,915 4,915
$ 52,524 $ 56,320 $ 64,857 $ 68,443 $ 63,970 $ 57,335
Ratio of Earnings to
Fixed Charges 3.35 3.05 2.46 2.05 2.23 2.35
Note: (1) For the twelve months ended March 31, 1994, and the fiscal years ended September 30, 1993 and
1992, $1,565,000, $1,374,000, and $1,129,000, representing the amortization of loss on reacquired
debt each period, respectively, has been excluded from "Other Interest" and included as a
componenet of "Income Before Interest Charges."
(2) Rentals shown above represent the portion of all rentals (other than delay rentals) deemed
representative of the interest factor.
(3) For the twelve months ended March 31, 1994, excludes the cumulative effect of change in accounting
for income taxes in the amount of ($3,826,000).
</TABLE>
EXHIBIT 99
NATIONAL FUEL GAS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Twelve Months Ended
March 31,
1994 1993
(Thousands of Dollars)
INCOME
Operating Revenues $1,118,226 $987,764
Operating Expenses
Purchased Gas 482,416 410,814
Operation Expense 267,770 247,998
Maintenance 27,045 23,197
Property, Franchise and Other Taxes 101,218 92,710
Depreciation, Depletion and Amortization 71,465 62,431
Income Taxes - Net 48,245 35,117
998,159 872,267
Operating Income 120,067 115,497
Other Income 3,963 5,159
Income Before Interest Charges 124,030 120,656
Interest Charges
Interest on Long-Term Debt 36,668 39,018
Other Interest 11,608 17,253
48,276 56,271
Income Before Cumulative Effect 75,754 64,385
Cumulative Effect of Change
in Accounting for Income Taxes 3,826 -
Net Income Available for Common Stock $ 79,580 $ 64,385
Earnings Per Common Share
Income Before Cumulative Effect $2.08 $1.98
Cumulative Effect of Change
in Accounting for Income Taxes .11 -
Net Income Available for Common Stock $2.19 $1.98
Weighted Average Common Shares Outstanding 36,410,456 32,594,174
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-END> MAR-31-1994
<CASH> 19,713
<SECURITIES> 0
<RECEIVABLES> 220,240
<ALLOWANCES> 9,371
<INVENTORY> 26,283
<CURRENT-ASSETS> 337,467
<PP&E> 2,070,661
<DEPRECIATION> 571,864
<TOTAL-ASSETS> 2,049,202
<CURRENT-LIABILITIES> 424,714
<BONDS> 478,417
<COMMON> 37,097
0
0
<OTHER-SE> 756,888
<TOTAL-LIABILITY-AND-EQUITY> 2,049,202
<SALES> 783,854
<TOTAL-REVENUES> 785,669
<CGS> 645,456
<TOTAL-COSTS> 645,456
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,607
<INCOME-PRETAX> 116,606
<INCOME-TAX> 44,967
<INCOME-CONTINUING> 71,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,826
<NET-INCOME> 75,465
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.05
</TABLE>
