<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 June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 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 July 31, 1994: 37,226,068 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)
National Fuel Resources, Inc. (NFR)
Highland Land & Minerals, Inc. (Highland)
Leidy Hub, Inc. (Leidy Hub)
Data-Track Account Services, Inc. (Data-Track)
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a. Consolidated Statements of Income and Earnings
Reinvested in the Business - Three Months and
Nine Months Ended June 30, 1994 and 1993 3 - 4
b. Consolidated Balance Sheet - June 30, 1994 and
September 30, 1993 5 - 6
c. Consolidated Statement of Cash Flows - Nine
Months Ended June 30, 1994 and 1993 7
d. Notes to Consolidated Financial Statements 8 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 28
Part II. Other Information
Item 1. Legal Proceedings 29 - 31
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
* 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
June 30,
1994 1993
(Thousands of Dollars)
INCOME
Operating Revenues $216,281 $185,525
Operating Expenses
Purchased Gas 76,342 61,236
Operation Expense 63,769 61,118
Maintenance 8,687 5,903
Property, Franchise and Other Taxes 23,383 21,882
Depreciation, Depletion and Amortization 19,220 18,853
Income Taxes - Net 5,098 1,540
196,499 170,532
Operating Income 19,782 14,993
Other Income 1,033 1,178
Income Before Interest Charges 20,815 16,171
Interest Charges
Interest on Long-Term Debt 8,865 10,130
Other Interest 2,117 2,813
10,982 12,943
Net Income Available for Common Stock 9,833 3,228
EARNINGS REINVESTED IN THE BUSINESS
Balance at April 1 382,951 359,965
392,784 363,193
Dividends on Common Stock
(1994 - $.395; 1993 - $.385) 14,634 14,072
Balance at June 30 $378,150 $349,121
Earnings Per Common Share $ .26 $ .09
Weighted Average Common Shares Outstanding 37,145,132 35,212,644
See Notes to Consolidated Financial Statements
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Item 1. - Financial Statements (cont.)
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Nine Months Ended
June 30,
1994 1993
(Thousands of Dollars)
INCOME
Operating Revenues $1,000,135 $871,535
Operating Expenses
Purchased Gas 472,498 383,982
Operation Expense 198,888 187,386
Maintenance 23,749 18,231
Property, Franchise and Other Taxes 85,872 78,546
Depreciation, Depletion and Amortization 55,849 53,443
Income Taxes - Net 50,066 39,308
886,922 760,896
Operating Income 113,213 110,639
Other Income 2,849 3,864
Income Before Interest Charges 116,062 114,503
Interest Charges
Interest on Long-Term Debt 26,613 29,717
Other Interest 7,977 10,457
34,590 40,174
Income Before Cumulative Effect 81,472 74,329
Cumulative Effect of Change in
Accounting for Income Taxes 3,826 -
Net Income Available for Common Stock 85,298 74,329
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 335,907 314,334
421,205 388,663
Dividends on Common Stock
(1994 - $1.165; 1993 - $1.135) 43,055 39,542
Balance at June 30 $ 378,150 $349,121
Earnings Per Common Share
Income Before Cumulative Effect $2.21 $2.16
Cumulative Effect of Change in
Accounting for Income Taxes .10 -
Net Income Available for Common Stock $2.31 $2.16
Weighted Average Common Shares Outstanding 36,981,546 34,369,675
See Notes to Consolidated Financial Statements
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Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheet
June 30,
1994 September 30,
(Unaudited) 1993
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,102,571 $2,039,436
Less - Accumulated Depreciation, Depletion
and Amortization 587,331 561,433
1,515,240 1,478,003
Current Assets
Cash and Temporary Cash Investments 15,321 13,595
Receivables - Net 142,845 86,957
Unbilled Utility Revenue 12,578 27,210
Gas Stored Underground 14,277 22,120
Materials and Supplies - at average cost 23,019 20,848
Unrecovered Purchased Gas Costs 4,658 20,772
Prepayments 20,592 17,094
233,290 208,596
Other Assets
Recoverable Future Taxes 102,961 -
Deferred Contract Reformation Costs 10,079 24,862
Unamortized Debt Expense 26,523 28,735
Other Regulatory Assets 34,246 37,788
Deferred Charges 8,455 2,249
Other 24,329 21,307
206,593 114,941
$1,955,123 $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
June 30,
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 - 37,185,953 Shares and 36,661,008
Shares, Respectively $ 37,186 $ 36,661
Paid in Capital 376,394 363,677
Earnings Reinvested in the Business 378,150 335,907
Total Common Stock Equity 791,730 736,245
Long-Term Debt, Net of Current Portion 462,500 478,417
Total Capitalization 1,254,230 1,214,662
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 24,800 196,800
Current Portion of Long-Term Debt 115,917 -
Accounts Payable 42,554 42,893
Amounts Payable to Customers 45,617 40,776
Other Accruals and Current Liabilities 110,837 69,523
339,725 349,992
Deferred Credits
Taxes Refundable to Customers 31,985 -
Unamortized Investment Tax Credit 14,229 14,743
Accumulated Deferred Income Taxes 279,783 188,793
Other Deferred Credits 35,171 33,350
361,168 236,886
Commitments and Contingencies - -
$1,955,123 $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)
Nine Months Ended
June 30,
1994 1993
(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $ 85,298 $ 74,329
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 55,849 53,443
Deferred Income Taxes (663) 6,066
Other 4,213 4,329
140,871 138,167
Change in:
Receivables and Unbilled Utility Revenue (41,256) (49,105)
Gas Stored Underground and Materials and
Supplies 5,672 21,190
Unrecovered Purchased Gas Costs 16,114 11,359
Prepayments (3,498) (1,912)
Accounts Payable (339) 642
Amounts Payable to Customers 4,841 (12,668)
Other Accruals and Current Liabilities 64,257 55,150
Other Assets and Liabilities - Net 7,401 (7,721)
Net Cash Provided by
Operating Activities 194,063 155,102
INVESTING ACTIVITIES
Capital Expenditures (87,904) (98,750)
Other 3,084 194
Net Cash Used in Investing Activities (84,820) (98,556)
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper (172,000) (71,600)
Proceeds from Issuance of Long-Term Debt 100,000 99,000
Reduction of Long-Term Debt - (111,380)
Proceeds from Issuance of Common Stock 7,006 77,417
Dividends Paid on Common Stock (42,523) (38,152)
Net Cash Used in
Financing Activities (107,517) (44,715)
Net Increase in Cash and
Temporary Cash Investments 1,726 11,831
Cash and Temporary Cash Investments
at October 1 13,595 76,278
Cash and Temporary Cash Investments at June 30 $ 15,321 $ 88,109
See Notes to Consolidated Financial Statements
<PAGE 8>
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 nine months ended June 30, 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. Earnings during the summer months tend to
decline and may reach a point where expenses exceed revenues. 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 collects 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 began passing back its portion of this refund
to its New York customers and its Pennsylvania customers over a one year period
beginning in March 1994 and August 1994, respectively.
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 nine months ended June 30,
1994 and 1993, amounted to $34,258,000 and $33,046,000, respectively. Net
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Item 1. Financial Statements (cont.)
to $23,873,000 and $16,368,000, respectively.
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
that effectively hedge a portion of the market risk associated with
fluctuations in the price of natural gas and crude oil. The agreements call
for Seneca to receive monthly payments from (or make payments to) other parties
based upon the differential between a fixed and a variable price as specified
by the agreement. The current natural gas agreements run through December 1995
and have a remaining aggregate notional amount of 19,000,000 million British
Thermal Units of natural gas equivalent. The current crude oil agreements run
from October 1994 through September 1997 and have an aggregate notional amount
of 723,000 barrels of crude oil equivalent.
NFR participates in the natural 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 at risk in the event of nonperformance by
counterparties on natural gas and crude oil swap agreements and natural gas
futures, respectively, but Seneca and NFR do not anticipate nonperformance by
any of these counterparties.
The Company currently has authorization from the SEC to enter into
interest rate swap agreements up to a notional amount of $200,000,000 and has
requested authorization from the SEC to increase the notional amount to
$350,000,000. Currently, no such agreements are 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 $91,300,000. The majority of these costs relate to gas supply
realignment (GSR) and stranded costs. This estimate 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. The current estimate
of transition costs reflects a $55,700,000, or 38%, reduction from Distribution
Corporation's initial estimate. The initial estimate was determined from
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Item 1. Financial Statements (cont.)
information provided in the Order 636 compliance filings of Supply Corporation
and the five interstate pipeline companies that directly serve Supply
Corporation. The reduction in the initial estimate is mainly the result of
Supply Corporation's upstream pipeline companies' settlements and proposed
settlements before the FERC, in which Distribution Corporation actively
challenged the eligibility and prudency of transition cost claims. In
addition, Distribution Corporation's current estimate of transition costs
reflects revised estimates made by upstream pipeline companies. Distribution
Corporation believes it has made a conservative estimate based upon what it
considers to be the best available information. However, events may occur
which could significantly change this estimate, as is evidenced by the
reduction of its initial estimate.
To date, approximately $38,900,000 of transition costs have been accepted
by the FERC for billing to Distribution Corporation or Supply Corporation,
subject to refund. This is exclusive of $14,700,000 of Supply Corporation's
over-recovered purchased gas costs refunded to Distribution Corporation on
September 30, 1993. Distribution Corporation 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, state commissions and the courts.
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 $59,500,000. On July 19, 1994, the PSC issued an order on
Distribution Corporation's August 27, 1993 rate filing. This order, among
other things, authorized transition cost recovery of up to $11 million annually
from sales customers through the monthly Gas Adjustment Clause (GAC).
Distribution Corporation had begun collecting transition costs from sales
customers in New York through the monthly GAC, effective February 1, 1994,
based upon a PSC staff proposal in the above rate proceeding. The recovery of
transition costs from transportation customers remains unresolved. The PSC has
postponed its decision on transportation customers' allocable share of
transition costs pending further consideration of the issue in a generic
restructuring case (the Generic Case) which began in October 1993. In a report
issued in the Generic Case, the PSC staff recommended that transition costs,
exclusive of under-recovered purchased gas costs, be allocated between sales
and transportation customers. An order was expected to be issued in the
Generic Case before the 1994-1995 heating season; however, it has met with some
delay. Distribution Corporation has been an active participant in this
proceeding. The PSC has expressly approved Distribution Corporation's
continued deferral of transition costs relating to transportation customers
until resolution in the Generic Case.
Currently, Distribution Corporation has estimated that transition costs
allocable to the Pennsylvania jurisdiction are approximately $31,800,000. On
October 15, 1993, the Pennsylvania Public Utility Commission (PaPUC) issued a
policy statement on the recovery of transition costs. The policy statement
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Item 1. Financial Statements (cont.)
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, GSR and
stranded costs from its customers. Distribution Corporation is also allowed
quarterly updates for transition cost recovery.
Management believes that any transition costs resulting from the
implementation of Order 636 which have been determined to be both eligible and
prudently incurred should be fully recoverable from the respective customers of
Supply Corporation and Distribution Corporation.
NOTE 3 - Corporate Realignment
Penn-York/Supply Corporation Merger. On July 1, 1994, the merger of Penn-York
into Supply Corporation became effective. Supply Corporation continues to
provide all the services Penn-York provided under the same rates, terms and
conditions.
Empire/Seneca Merger. On July 1, 1994, the merger of Empire into Seneca became
effective. This merger combines the Company's Appalachian, Gulf Coast and West
Coast exploration and production operations under Seneca. In anticipation of
this combination, Supply Corporation's exploration and production activities
were transferred to Empire, effective January 1, 1994.
Management believes that these mergers, which 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, will result in 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
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Item 1. Financial Statements (cont.)
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.
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. The additional deferred
taxes amounted to $102,961,000 at June 30, 1994.
At June 30, 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 $176,285 $ -
Exploration and intangible well
drilling costs 76,096 -
Other 70,562 -
Total Deferred Tax Liabilities 322,943 -
Deferred Tax Assets:
Deferred investment tax credits (8,793) -
Overheads capitalized for tax purposes (9,004) -
Tax credit carryforwards (5,615) -
Provisions for rate contingencies and
refunds - (621)
Unrecovered purchased gas costs - (12,270)
Other (19,748) -
Total Deferred Tax Assets (43,160) (12,891)
Total Net Deferred Income Taxes $279,783 $(12,891)
* Included on the Consolidated Balance Sheet in "Other Accruals and Current
Liabilities."
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Item 1. Financial Statements (cont.)
The components of federal and state income taxes included in the
Consolidated Statement of Income are as follows (in thousands):
Nine Months Ended
June 30,
1994 1993
Operating Expenses:
Current Income Taxes -
Federal $44,501 $28,575
State 6,228 4,667
Deferred Income Taxes (663) 6,066
50,066 39,308
Other Income
Deferred Investment Tax Credit (514) (525)
Cumulative effect prior to
October 1, 1993 of applying SFAS
No. 109 (3,826) -
Total Income Taxes $45,726 $38,783
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):
Nine Months Ended
June 30,
1994 1993
Net income available for common stock $85,298 $74,329
Total income taxes 45,726 38,783
Income before income taxes 131,024 113,112
Income tax expense, computed at
statutory rate of 35% in 1994
and 34% in 1993 45,858 38,458
Increase (reduction) in taxes resulting from:
Current state income taxes 4,049 3,080
Depreciation 1,646 1,973
Production tax credits (1,261) (2,096)
Miscellaneous (740) (2,632)
Income taxes before cumulative effect 49,552 38,783
Cumulative effect prior to October 1, 1993 of
applying SFAS No. 109 (3,826) -
Total Income Taxes $45,726 $38,783
<PAGE 14>
Item 1. Financial Statements (cont.)
NOTE 5 - Capitalization
Common Stock. During the nine months ended June 30, 1994, the Company issued
160,834 shares of common stock under the Company's Customer Stock Purchase Plan
and 94,800 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, from 1996
through 2001. Restrictions on 8,000 shares will lapse respecting approximately
one-fourth of such shares on each January 2, from 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.
On July 1, 1994, the Company redeemed $19,917,000 remaining outstanding
principal amount of its 9-1/2% debentures due July 1, 2019 for $21,337,000,
including redemption premium. The principal amount has been classified on the
Consolidated Balance Sheet as "Current Portion of Long-Term Debt" at June 30,
1994. The Company used additional short-term borrowings to redeem these
debentures.
On July 14, 1994, the Company issued $50,000,000 of medium-term notes due
July 1999, at an interest rate of 7.25%. After reflecting underwriting
discounts and commissions, the proceeds to the Company amounted to $49,766,000.
Also on July 14, 1994, the Company issued $50,000,000 of medium-term notes due
July 2024, at an interest rate of 8.48%. These notes are callable beginning
July 1999. After reflecting underwriting discounts and commissions, the
proceeds to the Company amounted to $49,649,500. The proceeds of both
issuances were used to reduce outstanding short-term borrowings. Accordingly,
as of June 30, 1994, $100,000,000 of short-term borrowings has been
reclassified to "Long-Term Debt, Net of Current Portion" on the Consolidated
Balance Sheet and included as "Proceeds from Issuance of Long-Term Debt" on the
Consolidated Statement of Cash Flows.
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
<PAGE 15>
Item 1. Financial Statements (cont.)
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 $22,139,000 of post-retirement benefit cost has been
recorded for the nine months ended June 30, 1994. Of this amount, $1,317,000
has been deferred for regulatory purposes and $20,822,000 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
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 and Supply Corporation represent virtually all of
the Company's total post-retirement benefit costs. The PSC, PaPUC and the FERC
<PAGE 16>
Item 1. Financial Statements (Concl.)
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 and
Supply Corporation 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 17>
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 June 30, 1994
was $9.8 million, or $.26 per common share. This compares with $3.2 million or
$.09 per common share, for the quarter ended June 30, 1993.
Net income available for common stock for the nine months ended June 30,
1994 was $85.3 million, or $2.31 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 $81.5 million, or $2.21 per common share. Net income
available for common stock for the nine months ended June 30, 1993 was $74.3
million, or $2.16 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 increase in earnings for both the quarter and the nine months ended
June 30, 1994, compared with the same periods of the prior year, is
attributable to higher earnings in both the regulated and the nonregulated
operations of the Company. In its regulated operations, the Utility Operation
benefited from increased throughput coupled with State of New York Public
Service Commission (PSC) and Pennsylvania Public Utility Commission (PaPUC)
authorization to earn a return on increased capital investment. Higher
earnings of the Pipeline and Storage segment reflect Supply Corporation's
favorable rate settlement approved by the FERC in November 1993. The quarter
ended June 30, 1994, was also favorably impacted by Supply Corporation's
Federal Energy Regulatory Commission's (FERC) mandated change, under Order 636,
to a straight fixed-variable (SFV) rate design, which shifts revenues from the
colder weather quarters to warmer ones.
Earnings of the Company's nonregulated operations improved for the quarter
ended June 30, 1994, primarily as a result of the Exploration and Production
segment's increase in oil and gas production which more than compensated for
lower oil and gas prices, as well as a decline in Section 29 nonconventional
fuel tax credits. For the nine months ended June 30, 1994, the increase in the
earnings of the Company's nonregulated operations reflect the improved
performance of its gas marketing subsidiary and its timber operations. In
addition, the Company's pipeline construction subsidiary's results have
improved over the prior year. The Exploration and Production segment's
earnings were down slightly for the nine months ended June 30, 1994, despite
increased oil and gas production and higher gas prices, as greater income tax
expense resulted partly from a decline in Section 29 nonconventional fuel tax
credits, an increase in the federal tax rate, and higher state taxes.
A more detailed discussion of current period results can be found in the
business segment information that follows.
<PAGE 18>
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 Nine Months Ended
June 30, June 30,
1994 1993 %Change 1994 1993 %Change
Utility Operation
Retail Sales:
Residential 14,633 13,161 11.2 84,258 79,894 5.5
Commercial 4,032 3,754 7.4 25,072 23,621 6.1
Industrial 768 874 (12.1) 5,613 5,785 (3.0)
19,433 17,789 9.2 114,943 109,300 5.2
Transportation 13,800 12,917 6.8 42,776 39,655 7.9
33,233 30,706 8.2 157,719 148,955 5.9
Pipeline and Storage
Wholesale Sales* - 17,252(100.0) - 117,410(100.0)
Transportation 58,033 26,609 118.1 246,857 100,996 144.4
58,033 43,861 32.3 246,857 218,406 13.0
Less-Intersegment
Throughput:
Sales - 16,752(100.0) - 110,890(100.0)
Transportation 27,890 6,905 303.9 149,436 25,448 487.2
27,890 23,657 17.9 149,436 136,338 9.6
Total System
Throughput 63,376 50,910 24.5 255,140 231,023 10.4
* 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 Nine Months Ended
June 30, June 30,
1994 1993 %Change 1994 1993 %Change
Gas Production - (MMcf)
Gulf Coast 4,569 3,452 32.4 12,084 8,901 35.8
West Coast 158 288 (45.1) 540 870 (37.9)
Appalachia 1,566 1,621 (3.4) 4,689 4,943 (5.1)
6,293 5,361 17.4 17,313 14,714 17.7
Oil Production - (Thousands of Barrels)
Gulf Coast 212 113 87.6 464 280 65.7
West Coast 107 111 (3.6) 301 331 (9.1)
Appalachia 2 3 (33.3) 8 9 (11.1)
321 227 41.4 773 620 24.7
<PAGE 19>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
OPERATING REVENUES
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 % Change 1994 1993 %Change
Regulated
Utility Operation
Retail Revenues:
Residential $117,036 $105,997 10.4 $611,532 $545,488 12.1
Commercial 27,261 25,234 8.0 162,739 141,819 14.8
Industrial 3,738 4,665 (19.9) 27,743 27,814 (0.3)
148,035 135,896 8.9 802,014 715,121 12.2
Off-System Sales 2,375 - - 4,132 - -
Transportation 10,238 7,721 32.6 31,476 25,382 24.0
Other 1,068 988 8.1 3,260 2,686 21.4
161,716 144,605 11.8 840,882 743,189 13.1
Pipeline and Storage
Wholesale Revenues* - 84,809(100.0) - 417,170(100.0)
Storage Service 14,499 9,417 54.0 44,152 28,040 57.5
Transportation 22,022 7,858 183.7 67,998 27,327 148.8
Other 877 494 77.5 2,823 1,864 51.4
37,398 102,578 (63.5) 114,973 474,401 (75.8)
Nonregulated
Exploration and
Production 20,096 16,672 20.5 53,085 44,430 19.5
Other 17,806 11,151 59.7 55,765 30,234 84.4
37,902 27,823 36.2 108,850 74,664 45.8
Less-Intersegment
Revenues 20,735 89,481 (76.8) 64,570 420,719 (84.7)
$216,281 $185,525 16.6 $1,000,135 $871,535 14.8
* 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 Nine Months Ended
June 30, June 30,
1994 1993 % Change 1994 1993 %Change
Regulated
Utility Operation $ 5,788 $ 2,848 103.2 $100,710 $ 95,257 5.7
Pipeline and Storage 13,057 9,779 33.5 46,338 45,313 2.3
Nonregulated
Exploration and
Production 6,947 4,326 60.6 16,912 12,664 33.5
Other (5) 231(102.2) 1,833 (1,539)219.1
6,942 4,557 52.3 18,745 11,125 68.5
Corporate (907) (651)(39.3) (2,514) (1,748)(43.8)
$24,880 $16,533 50.5 $163,279 $149,947 8.9
<PAGE 20>
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 nine months ended June 30, 1994, increased $2.9 million and $5.5
million, respectively, as compared with the same periods a year ago. Total
throughput for the Utility Operation increased 2.5 billion cubic feet (Bcf) and
8.8 Bcf for the quarter and nine 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 mainly due to higher throughput 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 covers the eight-month period
from October through May and serves to diminish the impact on earnings of
deviations from normal weather. Nonetheless, not all of the increase in
throughput in the New York jurisdiction was subject to the WNC. For the nine
months ended June 30, 1994, Distribution Corporation's WNC resulted in a
benefit to its customers of $5.8 million, while for the quarter ended June 30,
1994, which was warmer than normal yet still colder than last year, the WNC
preserved $.7 million of pretax operating income.
Both the quarter and nine months ended June 30, 1994 showed increased
operating expenses compared with the same periods of the prior year. The
severe cold weather during January and February 1994 caused an unusually high
number of repairs of line leaks and related restoration work, which has
increased operation and maintenance expense. In addition, increased operating
expenses included higher labor and benefits, revenue and other taxes and
depreciation.
Degree Days
Three Months Ended June 30:
Percent Colder (Warmer)
Than
Normal 1994 1993 Normal Last Year
Buffalo 929 877 843 (5.6) 4.0
Erie 876 887 785 1.3 13.0
Nine Months Ended June 30:
Buffalo 6,535 6,826 6,510 4.5 4.9
Erie 6,102 6,624 5,973 8.6 10.9
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
<PAGE 21>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
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.
On July 19, 1994, the PSC issued an order authorizing a base rate increase
of $11.1 million, or 1.7%, with a return on equity of 10.7%. In addition, the
PSC authorized transition cost recovery of up to $11 million annually from
sales customers through the monthly Gas Adjustment Clause (GAC). New rates
became effective July 24, 1994.
Distribution Corporation had begun collecting transition costs from sales
customers in New York through the monthly GAC, effective February 1, 1994,
based upon a PSC staff proposal in the above rate proceeding. The recovery of
transition costs from transportation customers remains unresolved. The PSC has
postponed its decision on transportation customers' allocable share of
transition costs pending further consideration of the issue in a generic
restructuring case (the Generic Case) which began in October 1993. In a report
issued in the Generic Case, the PSC staff recommended that transition costs,
exclusive of under-recovered purchased gas costs, be allocated between sales
and transportation customers. An order was expected to be issued in the
Generic Case before the 1994-1995 heating season; however, it has met with some
delay. Distribution Corporation has been an active participant in this
proceeding. The PSC has expressly approved Distribution Corporation's
continued deferral of transition costs relating to transportation customers
until resolution in the Generic Case.
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.
Distribution Corporation expects to file a rate case in its New York
jurisdiction by the end of calendar 1994.
Pennsylvania Jurisdiction:
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.
In March 1993, Distribution Corporation filed with the 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
<PAGE 22>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
from the implementation of FERC Order 636. Under this order, Distribution
Corporation began collecting, effective December 1, 1993, GSR and stranded
costs from its customers. Distribution Corporation is also allowed quarterly
updates for transition cost recovery. 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.
General rate increases do not reflect the recovery of purchased gas costs.
Such costs are recovered through operation of the purchased gas adjustment
clauses.
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage segment
for the quarter and nine months ended June 30, 1994, increased $3.3 million and
$1 million, respectively, compared with the same periods a year ago. This
segment had a 14.2 Bcf and a 28.5 Bcf increase in throughput for the quarter
and nine months ended June 30, 1994, compared with the same periods of the
prior year, which is attributable to increased utilization of the Niagara Spur
Loop (the Spur), the expanded capacity of the Spur and weather that was colder
than last year. However, under Supply Corporation's SFV rate design, discussed
below, this higher throughput had only a small impact on earnings.
The most significant impact on pretax operating income for the quarter
ended June 30, 1994 was the effect of Supply Corporation's 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). The change to the SFV rate design accounted for an
approximate $4.1 million increase in revenues and pretax operating income for
the three months ended June 30, 1994, compared with the same period of the
prior year. For the nine months ended June 30, 1994, change to the SFV rate
design reduced revenues and pretax operating income by $4.5 million.
The increase in pretax operating income for the quarter and nine months
ended June 30, 1994 also reflects the favorable rate settlement filed with the
FERC in October 1993. Revenues for the quarter and nine months ended June 30,
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, it was determined that the
estimated refund provision was too high and revenues were understated for the
quarter and nine months ended June 30, 1993, by approximately $2.2 million and
$7.7 million, respectively. This revenue was recognized in the fourth quarter
of fiscal 1993.
<PAGE 23>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
While this segment incurred higher operating expenses for both the three
and nine months ended June 30, 1994, compared with the prior year periods, the
nine months ended June 30, 1994, includes the recording by Supply Corporation
of the receipt of approximately $1.7 million 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 will produce revenues of approximately
$121 million annually.
Supply Corporation expects to file a rate case 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 nine months ended June 30, 1994,
increased $2.6 million and $4.2 million, respectively, compared with the same
periods a year ago. The increases were mainly because of successes in the Gulf
Coast with respect to both offshore drilling and horizontal drilling in central
Texas.
For the quarter ended June 30, 1994 compared with the prior year quarter,
gas production was up 32.4% in the Gulf Coast operations and 17.4% overall.
The Company's oil production increased 87.6% in the Gulf Coast region (mainly
due to condensate from gas wells) and 41.4% overall. The weighted average
prices received in the quarter ended June 30, 1994, for gas and oil were below
those received in the prior year's quarter by $.19 per Mcf and $1.62 per
barrel, respectively. Nonetheless, efforts to stabilize prices through hedging
activities contributed approximately $.8 million of operating revenues for the
current quarter. At present the Company's goal is to hedge approximately
two-thirds of its Gulf Coast gas and oil production.
For the nine months ended June 30, 1994 compared with the prior years nine
month period, gas production was up 35.8% in the Gulf Coast operations and
17.7% overall. Oil production increased 65.7% in the Gulf Coast region (mainly
due to condensate production) and 24.7% overall. This, coupled with an
increase in the average price received for gas production of $.13 per Mcf for
Gulf Coast production and $.05 per Mcf overall, outweighed the impact of lower
overall average prices received for oil production of $2.97 per barrel.
Hedging activity contributed approximately $.4 million of operating revenues
for the nine months ended June 30, 1994.
<PAGE 24>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Other Nonregulated.
Operating income before income taxes associated with this segment for the
quarter and nine months ended June 30, 1994, decreased $.2 million and
increased $3.4 million, respectively, compared with the same periods a year
ago. The decline in the quarter resulted from fewer construction projects for
UCI, the Company's pipeline construction subsidiary. However, UCI's results
have improved for the nine month period, compared with the same period in the
prior year. Both the quarter and nine months ended June 30, 1994 reflect
continued improved performance of the Company's gas marketing subsidiary, NFR,
and the Company's timber operations.
Income Taxes.
Income taxes increased $3.6 million and $10.8 million, respectively, for
the quarter and nine months ended June 30, 1994, compared with the same periods
a year ago, mainly because of an increase in pretax income. The increase in
income taxes also reflects the increase in the federal tax rate from 34% to 35%
and lower Section 29 nonconventional fuel tax credits. These credits, which
relate to production from qualified gas wells, decreased approximately $.3
million for the quarter and $.8 million for the nine months ended June 30,
1994, as the production from qualified gas wells declined.
Interest Charges.
Total interest charges decreased $2 million and $5.6 million, respectively,
for the quarter and nine months ended June 30, 1994, compared with the same
periods of the prior year. Interest on long-term debt decreased $1.3 million
and $3.1 million, respectively, for the quarter and nine month period, mainly
because of lower interest rates due to the refinancing activities that have
occurred since November 1992. Other interest decreased $.7 million and $2.5
million for the quarter and nine month period, respectively, as a result of a
decline in interest on over-recovered gas costs and, for the nine month period,
decreased interest on short-term debt because of lower average amounts
outstanding and a slightly lower weighted average interest rate. Interest on
short-term debt was up slightly for the quarter, reflecting higher interest
rates and higher average amounts outstanding.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the nine 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
<PAGE 25>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
for funds used during construction. For the nine months ended June 30, 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 on cash
flow is tempered in the Utility Operation's New York rate jurisdiction by its
WNC and in the Pipeline and Storage segment by Supply Corporation's SFV rate
design. In addition, effective August 1, 1993, under FERC Order 636, Supply
Corporation no longer buys gas and therefore incurs no over/under recovered
purchased gas costs.
Because of the seasonal nature of the Company's heating business, revenues
are relatively high during the nine months ended June 30, and the Consolidated
Balance Sheet at the end of June 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 June
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 $194.1 million for the
nine months ended June 30, 1994, an increase of $39 million compared with the
same period of the prior year. This increase mainly reflects higher net
income, after adjustment for noncash items, and an increase in upstream
pipeline company refunds received.
Investing Cash Flow
Capital Expenditures
The Company's capital expenditures totaled $91.1 million during the nine
months ended June 30, 1994. This total includes $3.2 million of gas production
assets acquired in exchange for Company common stock. Total expenditures for
the nine month period represent 60% of the total current capital expenditure
budget for fiscal 1994 of $151.1 million.
The original fiscal 1994 capital expenditure budget has been increased by
$3.9 million mainly to include expenditures by the Pipeline and Storage segment
for compressor station emission controls under the Clean Air Act Amendments of
1990 and for storage well reconditioning. However, the Pipeline and Storage
segment expects that a portion of its original 1994 capital budget will now be
spent in fiscal 1995. Significant capital expenditures related to Supply
<PAGE 26>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Corporation's Laurel Fields Storage Project are not expected to be incurred
until 1996. Filings with the FERC were made on June 28, 1994 to implement this
project. Laurel Fields is a 19 Bcf underground natural gas storage development
project.
The following table presents capital expenditures for the nine months ended
June 30, 1994, by business segment:
(in thousands) Percentage
Regulated
Utility Operation $39,298 43.1%
Pipeline and Storage 11,732 12.9
Nonregulated
Exploration and Production 37,975 41.7
Other 2,083 2.3
40,058 44.0
$91,088 100.0%
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.
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.
Approximately 87% 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
<PAGE 27>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
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
On July 1, 1994, the Company redeemed $19.9 million remaining outstanding
principal amount of 9-1/2% debentures due July 1, 2019 for $21.3 million,
including redemption premium. The principal amount has been classified on the
Consolidated Balance Sheet as "Current Portion of Long-Term Debt" at June 30,
1994. The Company used additional short-term borrowings to redeem these
debentures.
On July 14, 1994, the Company issued $50 million of medium-term notes due
July 1999, at an interest rate of 7.25%. After reflecting underwriting
discounts and commissions, the proceeds to the Company amounted to $49.8
million. Also on July 14, 1994, the Company issued $50 million of medium-term
notes due July 2024, at an interest rate of 8.48%. These notes are callable
beginning July 1999. After reflecting underwriting discounts and commissions,
the proceeds to the Company amounted to $49.6 million. The proceeds of both
issuances were used to reduce outstanding short-term borrowings. Accordingly,
as of June 30, 1994, $100 million of short-term borrowings has been
reclassified to "Long-Term Debt, Net of Current Portion" on the Consolidated
Balance Sheet and included as "Proceeds from Issuance of Long-Term Debt" on the
Consolidated Statement of Cash Flows.
After reflecting the $100 million aggregate amount of medium-term notes
issued in July 1994, the Company has SEC authority remaining under a shelf
registration filed in March 1993 to issue and sell up to $220 million of
debentures and/or medium-term notes. The amounts and timing of the issuance
and sale of these debentures and/or medium-term notes will depend on market
conditions and the requirements of the Company.
Consolidated short-term borrowings decreased by $172 million during the
first nine months of fiscal 1994. $100 million of this decrease reflects the
reclassification of short-term borrowing to long-term debt, discussed above.
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 certain natural gas and
crude oil price swap agreements and in the gas futures market as a means of
hedging a portion of the market risk associated with fluctuations in the market
price of natural gas and crude oil. In addition, the Company has SEC authority
to enter into interest rate swap agreements. For further discussion, see
disclosure under "Financial Instruments" in Note 1, "Summary of Significant
Accounting Policies."
In addition to the litigation discussed in Part II, Item 1, of this report,
<PAGE 28>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
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 contained in its
indenture covering long-term debt, at June 30, 1994, the Company would have
been permitted to issue up to a maximum of $583 million in additional long-term
unsecured indebtedness, subject to maturity and long-term interest rates. In
addition, at June 30, 1994, the Company had regulatory authorizations and
unused short-term credit lines that would have permitted it to borrow an
additional $275.2 million of short-term debt.
<PAGE 29>
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 30>
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.
Effective January 14, 1994, TGX purportedly effected a partial assignment
of its interest under the Paragon Contract to an unaffiliated third-party, with
whom Distribution Corporation subsequently entered into arrangements designed
to supersede the terms of the Paragon Contract, prospectively. The referenced
transactions did not materially increase (and potentially may have decreased)
Distribution Corporation's exposure in the New York Litigation.
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
<PAGE 31>
Item 1. Legal Proceedings - (Concl.)
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
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 5. Other Information
On June 9, 1994, at a regular meeting of the Board of Directors, Dr.
Bernard S. Lee 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 June 30, 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 June 30, 1994 and 1993.
(b) Reports on Form 8-K
None
<PAGE 32>
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: August 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
06/30/94 1993 1992 1991 1990 1989
EARNINGS:
<S> <C> <C> <C> <C> <C> <C>
Income Before Interest Charges(1) $127,057 $125,742 $118,222 $110,240 $109,781 $104,065
Allowance for Borrowed Funds
Used in Construction 252 174 1,088 2,278 1,273 775
Federal Income Tax 37,073 21,148 17,680 (3,929) 17,435 18,085
State Income Tax 4,540 2,979 3,426 342 2,419 4,168
Deferred Income Taxes - Net(3) 10,194 16,923 14,130 26,880 7,657 3,624
Investment Tax Credit - Net (686) (698) (711) (746) (798) (890)
Rentals(2) 5,600 5,621 5,857 4,915 4,915 4,915
$184,030 $171,889 $159,692 $139,980 $142,682 $134,742
FIXED CHARGES:
Interest and Amortization
of Premium and Discount
on Funded Debt $ 35,403 $ 38,507 $ 39,949 $ 41,916 $ 37,236 $ 29,949
Interest on Commercial Paper
and Short-Term Notes Payable 6,276 7,465 12,093 11,933 12,521 15,339
Other Interest(1) 3,270 4,727 6,958 9,679 9,298 7,132
Rentals(2) 5,600 5,621 5,857 4,915 4,915 4,915
$ 50,549 $ 56,320 $ 64,857 $ 68,443 $ 63,970 $ 57,335
Ratio of Earnings to
Fixed Charges 3.64 3.05 2.46 2.05 2.23 2.35
Note: (1) For the twelve months ended June 30, 1994, and the fiscal years ended September 30, 1993 and 1992,
$1,618,000, $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 component 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 June 30, 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
June 30,
1994 1993
(Thousands of Dollars)
INCOME
Operating Revenues $1,148,982 $996,592
Operating Expenses
Purchased Gas 497,521 411,514
Operation Expense 270,420 247,922
Maintenance 29,830 23,449
Property, Franchise and Other Taxes 102,719 94,797
Depreciation, Depletion and Amortization 71,832 67,951
Income Taxes - Net 51,803 34,836
1,024,125 880,469
Operating Income 124,857 116,123
Other Income 3,818 4,955
Income Before Interest Charges 128,675 121,078
Interest Charges
Interest on Long-Term Debt 35,403 40,032
Other Interest 10,912 15,457
46,315 55,489
Income Before Cumulative Effect 82,360 65,589
Cumulative Effect of Change
in Accounting for Income Taxes 3,826 -
Net Income Available for Common Stock $ 86,186 $ 65,589
Earnings Per Common Share
Income Before Cumulative Effect $2.24 $1.95
Cumulative Effect of Change
in Accounting for Income Taxes .10 -
Net Income Available for Common Stock $2.34 $1.95
Weighted Average Common Shares Outstanding 36,892,256 33,602,164
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-END> JUN-30-1994
<CASH> 15,321
<SECURITIES> 0
<RECEIVABLES> 149,120
<ALLOWANCES> 6,275
<INVENTORY> 37,296
<CURRENT-ASSETS> 233,290
<PP&E> 2,102,571
<DEPRECIATION> 587,331
<TOTAL-ASSETS> 1,955,123
<CURRENT-LIABILITIES> 339,725
<BONDS> 462,500
<COMMON> 37,186
0
0
<OTHER-SE> 754,544
<TOTAL-LIABILITY-AND-EQUITY> 1,955,123
<SALES> 1,000,135
<TOTAL-REVENUES> 1,002,984
<CGS> 836,856
<TOTAL-COSTS> 836,856
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,590
<INCOME-PRETAX> 131,538
<INCOME-TAX> 50,066
<INCOME-CONTINUING> 81,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,826
<NET-INCOME> 85,298
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 2.31
</TABLE>
