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, 1995
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.)
10 Lafayette Square
Buffalo, New York 14203
(Address of principal executive offices) (Zip Code)
(716) 857-6980
(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, 1995: 37,432,208 shares.
<PAGE>
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)
Seneca Resources Corporation (Seneca)
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
Nine Months Ended June 30, 1995 and 1994 3 - 4
b. Consolidated Balance Sheets - June 30, 1995 and
September 30, 1994 5 - 6
c. Consolidated Statement of Cash Flows - Nine
Months Ended June 30, 1995 and 1994 7
d. Notes to Consolidated Financial Statements 8 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 28
Part II. Other Information
Item 1. Legal Proceedings 29 - 30
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 *
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
* The Company has nothing to report under this item.
<PAGE>
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,
1995 1994
(Thousands of Dollars)
INCOME
Operating Revenues $191,480 $216,281
------- -------
Operating Expenses
Purchased Gas 60,153 76,342
Operation Expense 62,733 63,769
Maintenance 6,539 8,687
Property, Franchise and Other Taxes 20,881 23,383
Depreciation, Depletion and Amortization 17,930 19,220
Income Taxes - Net 5,455 5,098
------- -------
173,691 196,499
------- -------
Operating Income 17,789 19,782
Other Income 3,210 1,033
------- -------
Income Before Interest Charges 20,999 20,815
------- -------
Interest Charges
Interest on Long-Term Debt 9,694 8,865
Other Interest 3,522 2,117
------- -------
13,216 10,982
------- -------
Net Income Available for Common Stock 7,783 9,833
EARNINGS REINVESTED IN THE BUSINESS
Balance at April 1 402,336 382,951
------- -------
410,119 392,784
Dividends on Common Stock
(1995 - $.405; 1994 - $.395) 15,097 14,634
------- -------
Balance at June 30 $395,022 $378,150
======= =======
Earnings Per Common Share $ .21 $ .26
==== ====
Weighted Average Common Shares Outstanding 37,421,500 37,145,132
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
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,
1995 1994
(Thousands of Dollars)
INCOME
Operating Revenues $839,708 $1,000,135
------- ---------
Operating Expenses
Purchased Gas 329,349 472,498
Operation Expense 203,954 198,888
Maintenance 18,646 23,749
Property, Franchise and Other Taxes 75,725 85,872
Depreciation, Depletion and Amortization 53,796 55,849
Income Taxes - Net 46,674 50,066
------- ---------
728,144 886,922
------- ---------
Operating Income 111,564 113,213
Other Income 4,686 2,849
------- ---------
Income Before Interest Charges 116,250 116,062
------- ---------
Interest Charges
Interest on Long-Term Debt 30,463 26,613
Other Interest 10,095 7,977
------- ---------
40,558 34,590
------- ---------
Income Before Cumulative Effect 75,692 81,472
Cumulative Effect of Change in
Accounting for Income Taxes - 3,826
------- ---------
Net Income Available for Common Stock 75,692 85,298
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 363,854 335,907
------- ---------
439,546 421,205
Dividends on Common Stock
(1995 - $1.195: 1994 - $1.165) 44,524 43,055
------- ---------
Balance at June 30 $395,022 $ 378,150
======= =========
Earnings Per Common Share
Income Before Cumulative Effect $2.02 $2.21
Cumulative Effect of Change in
Accounting for Income Taxes - .10
---- ----
Net Income Available for Common Stock $2.02 $2.31
==== ====
Weighted Average Common Shares Outstanding 37,385,301 36,981,546
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
June 30,
1995 September 30,
(Unaudited) 1994
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,274,472 $2,166,256
Less - Accumulated Depreciation,
Depletion and Amortization 659,006 623,517
--------- ---------
1,615,466 1,542,739
--------- ---------
Current Assets
Cash and Temporary Cash Investments 14,257 29,016
Receivables - Net 112,724 95,993
Unbilled Utility Revenue 12,188 17,311
Gas Stored Underground 13,691 34,711
Materials and Supplies - at average cost 24,324 23,796
Prepayments 21,957 20,111
--------- ---------
199,141 220,938
--------- ---------
Other Assets
Recoverable Future Taxes 98,659 99,742
Unamortized Debt Expense 27,373 28,396
Other Regulatory Assets 33,672 47,737
Deferred Charges 11,699 15,796
Other 32,825 26,309
--------- ---------
204,228 217,980
--------- ---------
$2,018,835 $1,981,657
========= =========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
June 30,
1995 September 30,
(Unaudited) 1994
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 100,000,000 Shares;
Issued and Outstanding - 37,422,313
Shares and 37,278,409 Shares,
Respectively $ 37,422 $ 37,278
Paid in Capital 382,816 379,156
Earnings Reinvested in the Business 395,022 363,854
--------- ---------
Total Common Stock Equity 815,260 780,288
Long-Term Debt, Net of Current Portion 504,000 462,500
--------- ---------
Total Capitalization 1,319,260 1,242,788
--------- ---------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 73,200 112,500
Current Portion of Long-Term Debt 58,500 96,000
Accounts Payable 34,312 66,667
Amounts Payable to Customers 55,337 38,714
Other Accruals and Current Liabilities 96,553 61,368
--------- ---------
317,902 375,249
--------- ---------
Deferred Credits
Accumulated Deferred Income Taxes 288,396 273,560
Taxes Refundable to Customers 31,688 31,688
Unamortized Investment Tax Credit 13,542 14,057
Other Deferred Credits 48,047 44,315
--------- ---------
381,673 363,620
--------- ---------
Commitments and Contingencies - -
--------- ---------
$2,018,835 $1,981,657
========= =========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. - Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
June 30,
1995 1994
(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $ 75,692 $ 85,298
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 53,796 55,849
Deferred Income Taxes 8,352 (663)
Other 3,489 4,213
Change in:
Receivables and Unbilled Utility Revenue (11,608) (41,256)
Gas Stored Underground and Materials
and Supplies 20,492 5,672
Unrecovered Purchased Gas Costs - 16,114
Prepayments (1,846) (3,498)
Accounts Payable (32,355) (339)
Amounts Payable to Customers 16,623 4,841
Other Accruals and Current Liabilities 41,243 64,257
Other Assets and Liabilities - Net 13,014 7,401
------- -------
Net Cash Provided by Operating Activities 186,892 194,063
------- -------
INVESTING ACTIVITIES
Capital Expenditures (135,198) (87,904)
Other 10,616 3,084
------- -------
Net Cash Used in Investing Activities (124,582) (84,820)
------- -------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and
Commercial Paper (39,300) (172,000)
Proceeds from Issuance of Long-Term Debt 100,000 100,000
Reduction of Long-Term Debt (96,000) -
Proceeds from Issuance of Common Stock 2,328 7,006
Dividends Paid on Common Stock (44,097) (42,523)
-------- -------
Net Cash Used in
Financing Activities (77,069) (107,517)
-------- -------
Net Increase (Decrease) in Cash and
Temporary Cash Investments (14,759) 1,726
Cash and Temporary Cash Investments
at October 1 29,016 13,595
------- -------
Cash and Temporary Cash Investments
at June 30 $ 14,257 $ 15,321
======= =======
See Notes to Consolidated Financial Statements
<PAGE>
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 1995 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, 1994, 1993 and 1992, that are included in the Company's 1994
Annual Report to the Securities and Exchange Commission (SEC) on Form 10-K.
The earnings for the nine months ended June 30, 1995 should not be
taken as a prediction for the fiscal year ending September 30, 1995, 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.
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, 1995
and 1994, amounted to $37,123,000 and $34,258,000, respectively. Net income
taxes paid during the nine months ended June 30, 1995 and 1994 amounted to
$25,569,000 and $23,873,000, respectively.
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. These agreements are not held for
trading purposes. The price swap agreements call for Seneca to receive monthly
payments from (or make payments to) other parties based upon the difference
between a fixed and a variable price as specified by the agreement. The variable
price is either a crude oil price quoted on the New York Mercantile Exchange or
a quoted natural gas price in "Inside FERC".
<PAGE>
Item 1. Financial Statements (Cont.)
The following summarizes Seneca's activity under swap agreements for the
quarter and nine month period ended June 30, 1995:
Quarter Ended Nine Months Ended
June 30, 1995 June 30, 1995
Natural Gas Swap Agreements:
Notional Amount - Equivalent
Billion Cubic Feet (Bcf) 5.0 9.7
Fixed Prices per Thousand
Cubic Feet (Mcf) $1.73 - $2.16 $1.73 - $2.38
Variable Prices per Mcf $1.59 - $1.76 $1.35 - $1.76
Gain $1,342,000 $4,312,000
Crude Oil Swap Agreements:
Notional Amount - Equivalent
Barrels (bbl) 185,000 516,000
Fixed Prices per bbl $16.68 - $19.60 $16.68 - $19.60
Variable Prices per bbl $18.40 - $19.89 $17.16 - $19.89
Loss $(185,000) $(338,000)
Seneca had the following swap agreements outstanding at June 30, 1995:
Natural Gas Swap Agreements:
Notional Amount
Fiscal Year (Equivalent Bcf) Fixed Price per Mcf
----------- ---------------- -------------------
1995 6.6 $1.74 - $2.16
1996 18.2 $1.70 - $2.16
1996 1.7 (1)
1997 4.4 $1.70 - $1.98
1997 .6 (1)
----
31.5
Crude Oil Swap Agreements:
Notional Amount
Fiscal Year (Equivalent bbl) Fixed Price per bbl
----------- ---------------- -------------------
1995 150,000 $18.22 - $19.54
1996 686,000 $18.00 - $19.00
1997 516,000 $18.00 - $18.33
1998 96,000 $18.31
---------
1,448,000
(1) Price to be set according to market prices at a future date.
Gains or losses from these price swap agreements are reflected in operating
revenues on the Consolidated Statement of Income at the time of settlement with
the other parties, which is when the underlying hedged commodity transaction
occurs.
Seneca is at risk in the event of nonperformance by counterparties on
natural gas and crude oil price swap agreements, but Seneca does not anticipate
nonperformance by any of these counterparties.
<PAGE>
Item 1. Financial Statements (Cont.)
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.
The Company has requested authorization from the SEC for additional authority to
enter into interest rate swaps and certain other derivative instruments
associated with long-term borrowings up to a notional amount of $350,000,000
outstanding at any time. Currently, no such agreements are outstanding.
New Accounting Pronouncement. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" (SFAS 121). This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. Essentially, SFAS 121
requires review of these assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. SFAS 121
also requires that a rate-regulated enterprise recognize an impairment for the
amount of costs excluded when a regulator excludes all or part of a cost from an
enterprise's rate base or when regulatory assets are no longer probable of
recovery.
The Company has until the first quarter of the fiscal year ending
September 30, 1997 to adopt this statement. Early application is encouraged.
Impairment losses resulting from the application of SFAS 121 are to be reported
as a component of income from continuing operations in the period in which the
recognition criteria are first applied and met. Initial application of SFAS 121
to assets that are being held for disposal at the date of adoption are to be
reported as a cumulative effect of a change in accounting principle.
At this time, the adoption of SFAS 121 is not expected to have a
material impact on the Company's results of operations or financial condition.
NOTE 2 - Regulatory Matters
FERC Order 636 Transition Costs. As a result of the industrywide restructuring
under the Federal Energy Regulatory Commission's (FERC) Order 636,
Distribution Corporation is incurring transition costs billed by Supply
Corporation and other upstream pipeline companies.
At June 30, 1995, Distribution Corporation's estimate of its exposure
to outstanding transition cost claims is in the range of $7,800,000 to
$73,600,000. The majority of these costs relate to gas supply realignment (GSR)
costs and stranded transportation contract costs. The estimate includes a
minimal amount for stranded production or gathering facilities related to two
upstream pipeline companies. Distribution Corporation does not anticipate
incurring any stranded production or gathering facility costs from Supply
Corporation (see discussion of Supply Corporation's settlement in principle
regarding its gathering rates on pages 11-12) nor does it anticipate incurring
any significant costs from the other three upstream pipeline companies serving
the National Fuel system. The estimated maximum exposure is declining as
transition costs are incurred and paid. At June 30, 1995, Distribution
Corporation has recorded the minimum liability and corresponding regulatory
asset of $7,800,000.
<PAGE>
Item 1. Financial Statements (Cont.)
Distribution Corporation has authorization from the State of New York
Public Service Commission (PSC) to recover up to $11,000,000 annually of
transition costs from sales customers in New York through the monthly Gas
Adjustment Clause (GAC). Distribution Corporation will defer, for recovery in
future periods, any amounts that may exceed the $11,000,000 annual amount.
The recovery of transition costs from transportation customers in New
York was addressed in a December 20, 1994 PSC order issued in a generic
restructuring case (the Generic Case). In the Generic Case, the PSC authorized
gas utilities to file revised tariffs, subject to PSC approval, providing that
transportation customers be assigned a per-unit charge that is equal to 50% of
the per-unit charge being collected from sales customers for GSR and stranded
costs. At June 30, 1995, Distribution Corporation had deferred transition costs
related to transportation customers in its New York jurisdiction amounting to
$2,697,000. Of this amount, $704,000 has been allocated to sales customers based
on the PSC order in the Generic Case and is being recovered from such customers
through the monthly GAC. Distribution Corporation has filed draft tariff sheets
with respect to the remaining balance of $1,993,000 and is awaiting PSC approval
before recovery from transportation customers can begin.
In its Pennsylvania jurisdiction, Distribution Corporation is
recovering GSR and stranded transition costs from its customers through a
separate surcharge, which includes a volumetric true-up mechanism. Distribution
Corporation is recovering under-recovered purchased gas transition costs from
its Pennsylvania sales customers through its gas cost recovery rates.
Distribution Corporation will continue to actively challenge relevant
FERC filings made by the upstream pipeline companies to ensure the eligibility
and prudency of all transition cost claims. This industrywide issue will
potentially involve years of rate proceedings before the FERC, state commissions
and the courts. 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.
Gathering Rates. Supply Corporation has approximately $20,000,000 of net
production and gathering facilities used, in part, to gather natural gas of
local producers, including the Company's production in the Appalachian Region.
Currently, Supply Corporation has a partially unbundled gathering rate in place
under an interim settlement with customers and local producers. In its
restructuring orders, the FERC has directed Supply Corporation to fully unbundle
the production and gathering cost of service from the transmission cost of
service, and to establish a separate gathering rate. In August 1994, Supply
Corporation submitted an offer of settlement (the Settlement) which if approved
would have provided for a ten-year transition to fully unbundled rates beginning
July 1, 1995. On April 12, 1995, the FERC issued an Order on Settlement and
Establishing Procedures. This order neither modified nor rejected the
Settlement, but stated several factors which the FERC felt should be considered
in a settlement resolving the gathering issue. The preeminent factor appears to
be the FERC's preference that gathering rates be unbundled much sooner than ten
years. Five years is mentioned as an acceptable target. The order further
<PAGE>
Item 1. Financial Statements (Cont.)
provides for additional settlement discussions facilitated by the Chief
Administrative Law Judge. Those discussions resulted in a settlement in
principle, arrived at in mid-July 1995. Under this settlement in principle,
approximately $8,000,000 of the production and gathering facilities will be
refunctionalized as transmission, storage or general plant, or sold to local
distribution corporations (LDCs). Approximately $12,000,000 will be considered
gathering, $11,000,000 of which will be classified as a regulatory asset and
amortized over five years. The remaining facilities will continue to be
depreciated over their remaining estimated economic life. As a consequence, the
Company believes that it will fully recover its investment in production and
gathering facilities. Pursuant to this settlement in principle, two gathering
services will be established, firm and interruptible. Firm gathering service
will be available for LDCs' retail obligations off the gathering system and
interruptible service will apply to conventional gathering obligations. The
Company believes that these two services will afford it a reasonable opportunity
to recover its gathering cost of service. A Stipulation and Agreement
incorporating this settlement in principle will be filed with the FERC in August
1995, and the Company expects that it will be approved before the end of fiscal
1995.
NOTE 3 - Income Taxes
On October 1, 1993, the Company adopted SFAS 109, "Accounting for
Income Taxes" (SFAS 109). The cumulative effect of this change increased net
income for the nine months ended June 30, 1994 by $3,826,000 as a result of the
reduction in deferred income taxes associated with the Company's nonregulated
operations.
At June 30, 1995, 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 $178,709 $ -
Exploration and intangible well
drilling costs 85,928 -
Other 70,033 -
------- -------
Total Deferred Tax Liabilities 334,670 -
------- -------
Deferred Tax Assets:
Deferred investment tax credits (8,388)
Overheads capitalized for tax purposes (10,155)
Provisions for rate contingencies and
refunds - (686)
Unrecovered purchased gas costs - (11,376)
Other (27,731) -
------ ------
Total Deferred Tax Assets (46,274) (12,062)
------ ------
Total Net Deferred Income Taxes $288,396 $(12,062)
======= ======
* Included on the Consolidated Balance Sheets in "Other Accruals and
Current Liabilities."
<PAGE>
Item I. 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,
1995 1994
Operating Expenses:
Current Income Taxes -
Federal $33,930 $44,501
State 4,392 6,228
Deferred Income Taxes 8,352 (663)
------ ------
46,674 50,066
Other Income
Deferred Investment Tax Credit (515) (514)
Cumulative effect prior to
October 1, 1993 of applying SFAS
No. 109 - (3,826)
------ ------
Total Income Taxes $46,159 $45,726
====== ======
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,
1995 1994
Net income available for common stock $ 75,692 $ 85,298
Total income taxes 46,159 45,726
------- -------
Income before income taxes 121,851 131,024
Income tax expense, computed at
statutory rate of 35% 42,648 45,858
Increase (reduction) in taxes resulting from:
Current state income taxes 2,854 4,049
Depreciation 1,779 1,646
Production tax credits (690) (1,261)
Miscellaneous (432) (740)
Adoption of SFAS 109 - (3,826)
------- -------
Total Income Taxes $ 46,159 $ 45,726
======= =======
NOTE 4 - Capitalization
Common Stock. During the nine months ended June 30, 1995, the Company
issued 45,531 shares of its common stock under the Company's Customer Stock
Purchase Plan and 88,000 shares of its common stock to participants in the
Company's section 401(k) plans. During the second quarter of fiscal 1995, the
Company's Customer Stock Purchase Plan and section 401(k) plans began purchasing
shares of Company common stock on the open market.
<PAGE>
Item 1. Financial Statements (Cont.)
In December 1994, 8,000 shares of restricted stock were awarded under
the 1993 Award and Option Plan. Restrictions on these shares will lapse for
approximately one-fourth of such shares on each January 2, for the years 2002
through 2005.
Long-Term Debt. On May 1, 1995, the Company retired $55,000,000 of 6.07%
medium-term notes and $20,000,000 of 6.10% medium-term notes, both of which
matured on that date.
On June 8, 1995 and June 23, 1995, the Company retired $20,000,000 of 9.32%
medium-term notes and $1,000,000 of 6.10% medium-term notes, respectively, which
matured on those dates.
On June 12, 1995, the Company issued $50,000,000 of 7.375% medium-term
notes due in June 2025. After reflecting underwriting discounts and commissions,
the proceeds to the Company amounted to $49,273,500.
On July 3, 1995, the Company issued $50,000,000 of 6.08% medium-term notes
due in July 1998. As the proceeds of this issuance were used to reduce
short-term borrowings, at June 30, 1995, $50,000,000 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. After reflecting underwriting
discounts and commissions, the proceeds to the Company amounted to $49,825,000.
NOTE 5 - 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, none of this litigation, and none of these
other regulatory matters, is expected, at this time, to have a material effect
on the financial condition of the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Earnings.
Earnings were $ 7.8 million, or $ .21 per common share, during the
quarter ended June 30, 1995. This compares with earnings of $9.8 million, or
$.26 per common share, during the quarter ended June 30, 1994.
Earnings were $75.7 million, or $2.02 per common share, during the nine
months ended June 30, 1995. This compares with earnings of $85.3 million, or
$2.31 per common share during the nine months ended June 30, 1994. The nine
months ended June 30, 1994 included earnings of $3.8 million 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). Earnings before the
cumulative effect of the change in accounting for income taxes amounted to $81.5
million, or $2.21 per common share.
The decrease in earnings for the quarter is attributable to lower
earnings of the Company's Exploration and Production and Utility segments. The
decrease in earnings of the Exploration and Production segment is primarily the
result of the Company's decision, based on low gas prices, to delay Gulf Coast
activity which caused reduced levels of gas and oil production. The Utility
Operation had lower earnings because of a decrease in residential and commercial
throughput. Decreased earnings in these segments were partly offset by increased
earnings in the Company's Other Nonregulated segment resulting from a gain on
the sale of equipment, net of accrued expenses, by the Company's pipeline
construction subsidiary. This sale pertained to a strategic decision to
discontinue the major operations of this subsidiary. The gain on the sale of
pipeline construction equipment is included below the "Operating Income" line in
"Other Income" while the accrued expenses are included in "Operating Expenses."
Earnings of the Company's Pipeline and Storage segment remained level with the
prior year as higher interest expense was mostly offset by lower operating
expenses.
The decrease in earnings for the nine month period, before the
cumulative effect of the change in accounting for income taxes, is attributable
to lower earnings of the Company's Exploration and Production, Utility and
Pipeline and Storage segments. Exploration and Production earnings declined
because of a decrease in production and the decline in gas prices, as discussed
above. The Utility operation's earnings suffered from the warm weather and the
impact of lower normalized usage per residential and commercial account. The
Pipeline and Storage segment experienced lower earnings, primarily because last
year's first quarter benefited from the nonrecurring receipt of refunds of prior
costs related to joint storage sites. This, combined with higher interest
expense more than offset a reduction in operating expenses. Decreased earnings
in these three major business segments were partly offset by increased earnings
in the Company's Other Nonregulated segment resulting from the gain on the sale
of equipment, net of accrued expenses, by the Company's pipeline construction
subsidiary, as discussed above, combined with higher earnings of the Company's
gas marketing and timber operations. In addition, Corporate operations are
benefiting from cost
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
saving measures including the relocation of corporate headquarters from New York
City to Buffalo.
A more detailed discussion of current period results can be found in the
business segment information that follows.
OPERATING REVENUES
(in thousands) Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
1995 1994 % Change 1995 1994 % Change
---- ---- -------- ---- ---- --------
Regulated
Utility Operation
Retail Revenues:
Residential $103,661 $117,036 (11.4) $507,479 $ 611,532 (17.0)
Commercial 24,017 27,261 (11.9) 124,446 162,739 (23.5)
Industrial 3,506 3,738 (6.2) 16,048 27,743 (42.2)
------- ------- ------- ---------
131,184 148,035 (11.4) 647,973 802,014 (19.2)
Off-System Sales 5,518 2,375 132.3 15,809 4,132 282.6
Transportation 10,580 10,238 3.3 33,689 31,476 7.0
Other 1,193 1,068 11.7 3,698 3,260 13.4
------- ------- ------- ---------
148,475 161,716 (8.2) 701,169 840,882 (16.6)
------- ------- ------- ---------
Pipeline and Storage
Storage Service 14,499 14,499 - 45,011 44,152 1.9
Transportation 21,994 22,022 (.1) 67,313 67,998 (1.0)
Other 602 877 (31.4) 2,398 2,823 (15.1)
------- ------- ------- ---------
37,095 37,398 (.8) 114,722 114,973 (.2)
------- ------- ------- ---------
Nonregulated Exploration
and Production 14,318 20,096 (28.8) 41,587 53,085 (21.7)
Other 13,287 17,806 (25.4) 48,901 55,765 (12.3)
------- ------- ------- ---------
27,605 37,902 (27.2) 90,488 108,850 (16.9)
------- ------- ------- ---------
Less-Intersegment
Revenues 21,695 20,735 4.6 66,671 64,570 3.3
------- ------- ------- ---------
$191,480 $216,281 (11.5) $839,708 $1,000,135 (16.0)
======= ======= ======= =========
OPERATING INCOME (LOSS)
BEFORE INCOME TAXES
(in thousands) Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
1995 1994 % Change 1995 1994 % Change
---- ---- -------- ---- ---- --------
Regulated
Utility Operation $ 4,999 $ 5,788 (13.6) $ 97,547 $100,710 (3.1)
Pipeline and
Storage 14,578 13,057 11.6 46,661 46,338 0.7
Nonregulated
Exploration and
Production 4,833 6,947 (30.4) 11,939 16,912 (29.4)
Other (620) (5) NM 3,859 1,833 110.5
Corporate (546) (907) 39.8 (1,768) (2,514) 29.7
------ ------ ------ -------
$23,244 $24,880 (6.6) $158,238 $163,279 (3.1)
====== ====== ======= =======
NM = Not Meaningful
<PAGE>
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, 1995, decreased $0.8 million and $3.2
million, respectively, as compared with the same periods a year ago. This
resulted primarily from warmer weather, which contributed to reductions in
throughput of 0.5 billion cubic feet (Bcf) and 16.4 Bcf, respectively, for the
quarter and nine month period. Additionally, pretax operating income for the
quarter and nine months ended June 30, 1995 was negatively impacted by lower
normalized usage per residential and commercial account than that established in
the rate-making process. The decrease in the Utility Operation's operating
revenues for the quarter and nine months ended June 30, 1995, compared with the
same periods of the prior year, reflects decreased gas costs mainly because of
lower throughput as well as a decline in the average cost of purchased gas.
The impact of weather for the quarter ended June 30, 1995 was greatest
in the New York jurisdiction. While the New York jurisdiction has a weather
normalization clause (WNC), the WNC is only in effect for October through May
billings. Although weather for the quarter ended June 30, 1995 was colder than
normal, the month of June 1995 was warmer than normal. This contributed
significantly to Distribution Corporation's 0.5 Bcf reduction in throughput,
most of which occurred in the New York jurisdiction, resulting in lost margins
on gas sales. For the quarter ended June 30, 1995, the WNC resulted in a net
benefit to customers of $0.3 million as a result of colder than normal weather
for the two months ended May 1995. By comparison, for the quarter ended
June 30, 1994, the WNC preserved pretax operating income of $0.7 million as
weather was warmer than normal for the two months ended May 1994.
For the nine months ended June 30, 1995, the impact of weather was
greatest in the Pennsylvania jurisdiction since Pennsylvania does not have a
WNC. However, margins lost due to weather in the Pennsylvania jurisdiction were
partly mitigated by Distribution Corporation's ability to retain a portion of
the margins on off-system sales. The impact of weather in the New York
jurisdiction during the nine months ended June 30, 1995 was largely mitigated by
its WNC. For the nine months ended June 30, 1995, the WNC preserved pretax
operating income of $8.2 million as weather, overall, was warmer than normal for
the period of October 1994 through May 1995. This contrasts with a net benefit
to customers of $5.8 million during the nine months ended June 30, 1994 as
weather, overall, was colder than normal during the period of October 1993
through May 1994.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Degree Days
Three Months Ended June 30:
Percent Colder (Warmer)
Than
Normal 1995 1994 Normal Last Year
- -------------------------------------------------------------------------
Buffalo 922 943 877 2.3 % 7.5%
Erie 877 919 887 4.8 % 3.6%
Nine Months Ended June 30:
Buffalo 6,519 6,000 6,826 (8.0)% (12.1)%
Erie 6,028 5,633 6,624 (6.6)% (15.0)%
- -------------------------------------------------------------------------
SYSTEM THROUGHPUT
(millions of cubic feet-MMcf)
Three Months Ended Nine Months Ended
June 30, June 30,
1995 1994 % Change 1995 1994 % Change
Utility Operation
Retail Sales:
Residential 14,088 14,633 (3.7) 73,565 84,258 (12.7)
Commercial 3,860 4,032 (4.3) 20,392 25,072 (18.7)
Industrial 1,035 768 34.8 4,092 5,613 (27.1)
------- ------- ------- -------
18,983 19,433 (2.3) 98,049 114,943 (14.7)
Transportation 13,789 13,800 (.1) 43,276 42,776 1.2
------- ------- ------- -------
32,772 33,233 (1.4) 141,325 157,719 (10.4)
------- ------- ------- -------
Pipeline and Storage
Transportation 64,344 58,075 10.8 242,172 248,060 (2.4)
------- ------- ------- -------
Other 134 146 (8.2) 457 416 9.9
------- ------- ------- -------
Less-Intersegment
Throughput:
Transportation 27,728 27,931 (.7) 137,461 149,930 (8.3)
------- ------- ------- -------
Total System
Throughput 69,522 63,523 9.4 246,493 256,265 (3.8)
======= ======= ======= =======
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage
segment for the quarter ended June 30, 1995 increased $1.5 million compared with
the same period a year ago. This increase primarily reflects lower operating
expenses. Throughput increased 6.3 Bcf for the quarter and can be attributed to
increased Canadian gas throughput through the Niagara Spur Loop. However, as
expected, this increase did not have a significant impact on pretax operating
income and earnings as a result of Supply Corporation's straight fixed-variable
(SFV) rate design.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
For the nine months ended June 30, 1995, operating income before income
taxes increased $0.3 million compared with the same period a year ago. This
slight increase reflects lower operating expenses for the nine months ended June
30, 1995 being mostly offset by the nonrecurring receipt of joint storage site
refunds in the first quarter of fiscal 1994.
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, 1995,
decreased $2.1 million and $5.0 million, respectively, compared with the same
periods a year ago mainly because of decreased natural gas and oil production
combined with a lower weighted average price received for gas. System natural
gas production decreased 0.8 Bcf and 1.4 Bcf, respectively, for the quarter and
nine months ended June 30, 1995. Oil and condensate production were down 141,000
barrels (bbl) and 232,000 bbl for the quarter and nine month period,
respectively. The production decrease reflects the Company's decision to delay
Gulf Coast activity pending higher gas prices.
The weighted average price received for natural gas decreased $.40 per
Mcf and $.57 per Mcf for the quarter and nine months ended June 30, 1995,
respectively. The weighted average price received for oil increased $1.13 per
bbl and $1.97 per bbl for the quarter and nine months ended June 30, 1995,
respectively. The increase in average oil prices did not offset lower
production. The impact of the fluctuation in oil and gas prices was stabilized
by Seneca's hedging program, which contributed a net $1.2 million and $4.0
million to operating revenues for the quarter and nine months ended June 30,
1995, respectively. Refer to further discussion of Seneca's hedging activities
under "Financing Cash Flow" and in Note 1 - Summary of Significant Accounting
Policies.
PRODUCTION VOLUMES
Exploration and Production
Three Months Ended Nine Months Ended
June 30, June 30,
1995 1994 % Change 1995 1994 % Change
Gas Production - (MMcf)
Gulf Coast 3,835 4,569 (16.1) 10,952 12,084 (9.4)
West Coast 195 158 23.4 536 540 (0.7)
Appalachia 1,424 1,566 (9.1) 4,395 4,689 (6.3)
----- ----- ------ ------
5,454 6,293 (13.3) 15,883 17,313 (8.3)
===== ===== ====== ======
Oil Production - (Thousands of Barrels)
Gulf Coast 63 212 (70.3) 218 464 (53.0)
West Coast 111 107 3.7 311 301 3.3
Appalachia 6 2 200.0 12 8 50.0
--- --- --- ---
180 321 (43.9) 541 773 (30.0)
=== === === ===
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
WEIGHTED AVERAGE PRICES
Exploration and Production
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
1995 1994 % Change 1995 1994 % Change
---- ---- -------- ---- ------ --------
Weighted Avg. Gas Price/Mcf
Gulf Coast $1.68 $1.98 (15.2) $1.59 $2.12 (25.0)
West Coast $1.30 $1.56 (16.7) $1.46 $1.59 (8.2)
Appalachia $1.98 $2.70 (26.7) $2.02 $2.75 (26.5)
Weighted Average
Price $1.75 $2.15 (18.6) $1.70 $2.27 (25.1)
Weighted Avg. Oil Price/bbl
Gulf Coast $17.84 $16.45 8.4 $16.93 $15.06 12.4
West Coast $16.66 $14.98 11.2 $15.86 $13.18 20.3
Appalachia $17.00 $14.33 18.6 $16.21 $15.31 5.9
Weighted Average
Price $17.08 $15.95 7.1 $16.30 $14.33 13.7
Other Nonregulated.
Operating income before income taxes associated with this segment
decreased $0.6 million for the quarter ended June 30, 1995. The decrease can be
attributed to higher operating expenses from UCI, the Company's pipeline
construction subsidiary, as a result of management's decision to discontinue its
pipeline construction operations. As a result of this decision, approximately
$1.0 million of expenses were accrued. UCI also recorded a gain of approximately
$2.5 million related to the sale of its pipeline construction equipment, which
was recorded below the "Operating Income" line as "Other Income."
For the nine months ended June 30, 1995, operating income before income
taxes increased $2.0 million compared with the same period a year ago. The
increase reflects improved performance by UCI prior to the discontinuance of its
pipeline construction operations. It also reflects improved performance by NFR,
the Company's gas marketing subsidiary, as a result of an increase in marketing
volumes and improved margins. In addition, timber operations showed improved
results.
Income Taxes.
Income taxes increased $0.4 million for the quarter ended June 30, 1995
and decreased $3.4 million for the nine months ended June 30, 1995. The increase
for the quarter reflects lower Section 29 nonconventional fuel tax credits.
These credits, which relate to production from qualified gas wells, decreased
approximately $0.3 million for the quarter. While these credits decreased $0.6
million for the nine months ended June 30, 1995, the decrease in income taxes
for the nine month period primarily reflects a decrease in pretax income.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Interest Charges.
Total interest charges increased $2.2 million and $6.0 million,
respectively, for the quarter and nine months ended June 30, 1995. Interest on
long-term debt increased $0.8 million and $3.9 million, respectively, for the
quarter and nine month period, mainly because of a higher average amount of
long-term debt compared to the same periods a year ago. Other interest increased
$1.4 million and $2.1 million for the quarter and nine month period,
respectively, as a result of increases in short-term borrowing rates and
increased interest expense on Amounts Payable to Customers.
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.
However, during the second quarter of fiscal 1995, the Company's Customer Stock
Purchase Plan and section 401(k) plans began purchasing shares of Company common
stock on the open market.
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 nine months ended June 30, 1994, a
noncash income item also included the cumulative effect of 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 supplier refunds, the impact of rate cases and for the Utility
Operation, fluctuations in weather and over- or under-recovered purchased gas
costs. The impact of weather on cash flow is tempered in the Utility Operation's
New York rate jurisdiction by its WNC. The Pipeline and Storage segment's cash
flow is not significantly impacted by weather because of Supply Corporation's
SFV rate design.
Because of the seasonal nature of the Company's heating business,
revenues are relatively high during the nine months ended June 30 and
receivables historically increase from September to June.
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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
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 $186.9 million for
the nine months ended June 30, 1995, a decrease of $7.2 million compared with
$194.1 million provided by operating activities for the nine months ended June
30, 1994. The Exploration and Production segment's lower production and earnings
coupled with its lower payable balances resulted in a decline in that segment's
operating cash flow. This was partly offset by a decrease in receivable balances
of the Utility Operation and the Other Nonregulated segment combined with
over-recovery of gas costs by the Utility Operation.
Investing Cash Flow
Capital Expenditures
The Company's capital expenditures totaled $135.2 million during the
nine months ended June 30, 1995. Total capital expenditures for the nine month
period represent 74% of the total current capital expenditure budget for fiscal
1995 of $183.8 million.
The following table presents capital expenditures for the nine months
ended June 30, 1995, by business segment:
(in thousands) Percentage
Utility Operation $ 47,428 35.1 %
Pipeline and Storage 33,684 24.9
Exploration and Production 46,222 34.2
Other Nonregulated 7,864 5.8
------- -----
$135,198 100.0%
======= =====
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, to a minor extent, the installation of new services.
Pipeline and Storage capital expenditures include approximately $4.8
million in connection with its link with the Empire State Pipeline at Grand
Island, New York and approximately $5.1 million related to compressor engine
emission controls necessary to comply with the Clean Air Act Amendments of 1990.
In addition, capital expenditures were made for additions, improvements, and
replacements to this segment's transmission and storage systems.
Supply Corporation has filed at the Federal Energy Regulatory Commission
(FERC) a letter withdrawing its application to construct the facilities
associated with the Laurel Fields Storage Project. Supply Corporation has taken
this action in contemplation of filing a revised application later this year
which will seek authority for the development of some or all of the proposed
Laurel Fields storage facilities together with all related transmission
facilities.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
The majority of the Exploration and Production segment's capital
expenditures were made for the exploration and development of oil and gas
properties offshore in the Gulf of Mexico. Seneca Resources was high bidder on
eleven of fourteen tracts on which it placed bids in the Central Gulf of Mexico
federal lease sale. Through June 30, 1995, bids on six of the eleven blocks were
approved and awarded to Seneca in the amount of $3.2 million, and bid deposits
on the remaining five tracts were made in the amount of $0.7 million. Subsequent
to June 30, 1995, Seneca was awarded four of the remaining five tracts. Also
during the nine months ended June 30, 1995, Seneca completed the purchase of a
240-acre oil field located in the Silverthread Field in California for $3.5
million.
Other Nonregulated capital expenditures consisted primarily of
timberland purchases.
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. While the majority
of capital expenditures in the Utility Operation are necessitated by the
continuing need for replacement and upgrading of mains and service lines, the
magnitude of future capital expenditures in the Company's other business
segments depends, to a large degree, upon market conditions. Expenditures in the
Pipeline and Storage segment are also dependent on 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 $4.0 million of cash was received during the nine months ended
June 30, 1995, related to the sale of certain gas reserves in the Gulf of
Mexico. Proceeds of this sale were credited to the full cost pool. During the
third quarter of fiscal 1995, approximately $6.2 million of cash was received
related to the sale of UCI's pipeline construction equipment.
The Company is currently awaiting SEC approval of its filing under the
Public Utility Holding Company Act of 1935, as amended (the Holding Company
Act), for permission to acquire all of the issued and outstanding common stock
of Horizon Energy Development, Inc. (Horizon), a newly formed New York
corporation. Horizon is seeking authorization to invest in exempt wholesale
generators, foreign utility companies and domestic power projects.
Financing Cash Flow
On May 1, 1995, the Company retired $55 million of 6.07%
medium-term notes and $20 million of 6.10% medium-term notes, both of
which matured on that date.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
On June 8, 1995 and June 23, 1995, the Company retired $20 million of
9.32% medium-term notes and $1 million of 6.10% medium-term notes,
respectively, which matured on those dates.
On June 12, 1995, the Company issued $50 million of 7.375% medium-term
notes due in June 2025. After reflecting underwriting discounts and commissions,
the proceeds to the Company amounted to $49.3 million.
On July 3, 1995, the Company issued $50 million of 6.08% medium-term
notes due in July 1998. As the proceeds of this issuance were used to reduce
short-term borrowings, at June 30, 1995, $50 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 underwriting
discounts and commissions, the proceeds to the Company amounted to $49.8
million.
After reflecting the $100 million aggregate amount of medium-term notes
issued in June and July of 1995, the Company has registered under the Securities
Act of 1933, as amended, and has authority under the Holding Company Act to
issue and sell up to $120 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 debt at June 30, 1995 reflects the $50 million
reduction in short-term borrowings as a result of the July 3, 1995 issuance of
$50 million of 6.08% medium-term notes, which is discussed above. This reduction
in short-term borrowings contributed to the overall decrease of $39.3 million in
consolidated short-term debt during the first nine months of fiscal 1995. 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, is engaged in certain price swap
agreements as a means of managing a portion of the market risk associated with
fluctuations in the market price of natural gas and crude oil. These price swap
agreements are not held for trading purposes. For the quarter ended June 30,
1995 Seneca utilized natural gas and crude oil swap agreements with notional
amounts of 5.0 equivalent Bcf and 185,000 equivalent bbl, respectively. This
activity resulted in a net gain of approximately $1.2 million.
For the nine months ended June 30, 1995, Seneca utilized natural gas
and crude oil swap agreements with notional amounts of 9.7 equivalent Bcf and
516,000 equivalent bbl, respectively. This activity resulted in a net gain of
approximately $4.0 million.
At June 30, 1995, Seneca had natural gas swap agreements outstanding
with a notional amount of approximately 31.5 equivalent Bcf at prices ranging
from $1.70 per Mcf to $2.16 per Mcf. Seneca also had crude oil swap agreements
outstanding at June 30, 1995 with a notional amount of 1,448,000 equivalent bbl
at prices
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
ranging from $18.00 per bbl to $19.54 per bbl. In addition, the Company has SEC
authority to enter into certain 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, 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, 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, and after reflecting the $50 million of 6.08% medium-term notes
issued on July 3, 1995, the Company would have been permitted to issue up to a
maximum of $545 million in additional long-term unsecured indebtedness at June
30, 1995, subject to long-term interest rates. In addition, at June 30, 1995,
after reflecting the repayment of short-term debt with the proceeds of the
$50 million of 6.08% medium-term notes issued on July 3, 1995, the Company
had regulatory authorizations and unused short-term credit lines that would have
permitted it to borrow an additional $326.8 million of short-term debt.
RATE MATTERS
Utility Operation
New York Jurisdiction
In October 1994, Distribution Corporation filed in its New York
jurisdiction a request for an annual rate increase of $56.5 million, or 8.9%,
with a requested return on equity of 12.85%. In March 1995, the New York Public
Service Commission (PSC) staff filed its case stating that the annual rate
increase should be $13.0 million, with a return on equity of 11.1%. On June 15,
1995, an Administrative Law Judge (ALJ) issued his recommended decision
regarding Distribution Corporation's requested rate increase. The ALJ
recommended an annual rate increase of $21.7 million with a return on equity of
10.4%. Proceedings in this rate case are ongoing and management cannot predict
their outcome. New rates are expected to become effective in September 1995.
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 the FERC's Order 636, which represented 3.8% of the total 8.5% requested
increase.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
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 recovery of transition costs arising from the
FERC's Order 636 of up to $11 million annually from sales customers through the
monthly Gas Adjustment Clause (GAC). Distribution Corporation will defer, for
recovery in future periods, any amounts that may exceed the $11 million annual
amount. New rates became effective July 24, 1994.
The recovery of transition costs from transportation customers in New
York was addressed in a December 20, 1994 PSC Order issued in a generic
restructuring case (the Generic Case). In the Generic Case, the PSC authorized
gas utilities to file revised tariffs, subject to PSC approval, providing that
transportation customers be assigned a per-unit charge that is equal to 50% of
the per-unit charge being collected from sales customers for gas supply
realignment (GSR) costs and stranded costs. At June 30, 1995, Distribution
Corporation had deferred transition costs related to transportation customers in
its New York jurisdiction amounting to approximately $2.7 million. Of this
amount, $0.7 million has been allocated to sales customers based on the PSC
order in the Generic Case and is being recovered through the monthly GAC. Of the
remaining balance of $2.0 million, Distribution has filed draft tariff sheets
and is awaiting PSC approval before recovery from transportation customers can
begin.
In addition to addressing transition cost recovery related to
transportation customers, the December 20, 1994 PSC Order in the Generic Case
addresses key issues such as unbundling, rate design and the extent of state
regulation. Implementation will likely be achieved by each utility on a
case-by-case basis. In addition, the PSC has convened a generic proceeding to
develop, among other things, an appropriate performance-based gas cost incentive
mechanism and address concepts of affordability in utility service. It is
anticipated that an order will be issued in this case in late autumn of 1995.
Pennsylvania Jurisdiction
On March 15, 1995, Distribution Corporation filed in its Pennsylvania
jurisdiction a request for an annual rate increase of $22 million, or 9.1%, with
a return on equity of 13.25%. On August 10, 1995, a settlement in principle
was signed by the major parties in this case on all outstanding issues. The
settlement in principle provides, among other things, for a rate increase of $6
million, or 2.8%. However, this amount is not final until a settlement document
has been approved by the presiding ALJ and the Pennsylvania Public Utility
Commission (PaPUC). Rates will become effective on or about the date the
PaPUC approves this settlement.
On March 8, 1994, Distribution Corporation filed in its Pennsylvania
jurisdiction a request for an annual rate increase of $16 million, or 6.8%, with
a return on equity of 12.25%. A proposal for a WNC was included in this filing.
On December 6, 1994, an order was issued by the PaPUC authorizing an annual rate
increase of $4.8 million, or 2.0 %, with a return on equity of 11.0% and without
a WNC. The new rates became effective as of December 7, 1994.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
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. For a discussion of Supply Corporation's gathering rates,
refer to Note 2 - Regulatory Matters.
On October 31, 1994, Supply Corporation filed for an annual rate
increase of $21 million, with a requested return on equity of 12.6%. Settlement
discussions to resolve the various issues have achieved a settlement in
principle. This settlement in principle will increase Supply's revenues by
approximately $6.4 million annually. The former Penn-York Energy Corporation
(Penn-York) services, which were merged into Supply Corporation effective July
1, 1994, will be rolled-in for ratemaking purposes. Approximately two-thirds of
the former Penn-York service is now on year-to-year contracts and Supply
Corporation has agreed not to seek recovery of revenues related to terminated
Penn-York service from other storage customers for 5 years, as long as the
terminations are not greater than 25 to 30 percent of the terminable service.
Supply also agreed not to seek recovery for increased cost of service for three
years. It is expected that a Stipulation and Agreement incorporating the
settlement in principle will be filed with the FERC in August 1995 and approved
before the end of fiscal 1995.
OTHER MATTERS
New Accounting Pronouncement. In March 1995, the FASB issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121). This statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. For a further discussion
of what this new accounting standard entails and its impact on the Company, see
Note 1 - Summary of Significant Accounting Policies.
Public Utility Holding Company Act. The Company is one of fourteen utility
holding companies registered under the Holding Company Act. In July 1994, the
SEC hosted a "Roundtable" to discuss modernization or repeal of the 60 year old
statute. In June 1995, the SEC issued a report in which the SEC proposed that
Congress should either repeal or significantly modify the Holding Company Act.
The report also included recommendations for administrative reform pending
legislative consideration of the repeal/modification options.
As its preferred option, the SEC has recommended to Congress the
conditional repeal of the Holding Company Act. Under this option, Congress would
repeal the Holding Company Act, but at the same time, enact legislation that
would allow the various state regulatory commissions to have access to those
books and records of companies in the holding company system that would be
necessary for effective regulation, and for federal audit authority and
oversight of affiliate transactions.
<PAGE>
Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Concl.)
The administrative recommendations contained in the report include
proposed rule changes that would reduce the regulatory burdens affecting utility
holding companies. These rule changes, some of which have already been adopted,
would significantly reduce the number of applications filed under the Holding
Company Act, exempt routine financings and expand diversification opportunities.
The Company is unable to predict what action, if any, Congress may take
with respect to the SEC's recommendations.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Paragon/TGX Litigation
A. New York Litigation
Since November 30, 1984, Distribution Corporation has been involved in
litigation 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). Distribution Corporation sought 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, and continuing through December, 1993,
when Paragon/TGX purported to assign the Paragon Contract, Distribution
Corporation 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.
On December 3, 1991 the U.S. Court of Appeals for the Second Circuit
(the Second Circuit) issued an opinion regarding a partial summary judgment
granted by the District Court. The Second Circuit essentially held that the
Disapproval Order had "voided the Contract's price term," but 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. The Second Circuit also remanded the case to the District
Court for further proceedings.
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.
Various motions have been heard before the District Court. A United
States Magistrate Judge is now handling other preliminary matters and discovery
issues before the case is ultimately set for trial.
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
<PAGE>
Item 1. Legal Proceedings - (Concl.)
agreement between TGX and Distribution Corporation, approved by the Bankruptcy
Court in August, 1992, the "turnover" proceeding was discussed and Distribution
Corporation paid TGX $2,940,000 in consideration, among other things, of TGX
releasing Distribution Corporation from certain claims and undertaking to credit
said amount against the amount, if any, which is ultimately adjudged due TGX
and/or Paragon in the New York Litigation. TGX is still free to pursue its
breach of contract counterclaims in the New York Litigation.
C. State Commission Proceedings
In an order issued in Case 93-G-0352, et al., on May 5, 1995, the PSC
granted Distribution Corporation authority to recover via its rates the New York
allocable share ($2,006,000) of the partial settlement payment described above
under "Louisiana Litigation". Distribution Corporation has already recovered the
Pennsylvania allocable share ($934,000) of the partial settlement payment.
The May 5, 1995 PSC order did not address the New York Public Service
Law section 110(4) issues described in the PSC's Order Instituting Proceeding
because the PSC determined there was "no properly reviewable contract" that had
been filed with it. No Party filed a Petition for Rehearing of the Order.
Distribution Corporation has begun to recover the settlement payment via revised
rates.
<PAGE>
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, 1995 and the fiscal years ended
September 30, 1990 through 1994.
(27) Financial Data Schedule
(99) National Fuel Gas Company Consolidated
Statement of Income for the Twelve Months
Ended June 30, 1995 and 1994.
(b) Reports on Form 8-K
(I) None
<PAGE>
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 11, 1995
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended June 30, 1995 and the
fiscal years ended September 30, 1990 through
1994.
(27) Financial Data Schedule
(99) National Fuel Gas Company Consolidated Statement
of Income for the Twelve Months Ended June 30,
1995 and 1994.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL
FUEL GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> JUN-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,615,466
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 199,141
<TOTAL-DEFERRED-CHARGES> 11,699
<OTHER-ASSETS> 192,529
<TOTAL-ASSETS> 2,018,835
<COMMON> 37,422
<CAPITAL-SURPLUS-PAID-IN> 382,816
<RETAINED-EARNINGS> 395,022
<TOTAL-COMMON-STOCKHOLDERS-EQ> 815,260
0
0
<LONG-TERM-DEBT-NET> 504,000
<SHORT-TERM-NOTES> 73,200
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 58,500
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 567,875
<TOT-CAPITALIZATION-AND-LIAB> 2,018,835
<GROSS-OPERATING-REVENUE> 839,708
<INCOME-TAX-EXPENSE> 46,674
<OTHER-OPERATING-EXPENSES> 681,470
<TOTAL-OPERATING-EXPENSES> 728,144
<OPERATING-INCOME-LOSS> 111,564
<OTHER-INCOME-NET> 4,686
<INCOME-BEFORE-INTEREST-EXPEN> 116,250
<TOTAL-INTEREST-EXPENSE> 40,558
<NET-INCOME> 75,692
0
<EARNINGS-AVAILABLE-FOR-COMM> 75,692
<COMMON-STOCK-DIVIDENDS> 44,524
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 186,892
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.02
</TABLE>
EXHIBIT 99
NATIONAL FUEL GAS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Twelve Months Ended
June 30,
1995 1994
(Thousands of Dollars)
INCOME
Operating Revenues $ 980,898 $1, 148,982
--------- ----------
Operating Expenses
Purchased Gas 354,538 497,521
Operation Expense 265,489 270,420
Maintenance 25,876 29,830
Property, Franchise and Other Taxes 93,642 102,719
Depreciation, Depletion and Amortization 72,712 71,832
Income Taxes - Net 44,400 51,803
--------- ---------
856,657 1,024,125
Operating Income 124,241 124,857
Other Income 5,516 3,818
--------- ---------
Income Before Interest Charges 129,757 128,675
--------- ---------
Interest Charges
Interest on Long-Term Debt 40,549 35,403
Other Interest 12,506 10,912
--------- ---------
53,055 46,315
Income Before Cumulative Effect 76,702 82,360
Cumulative Effect of Changes
in Accounting (589) 3,826
--------- ---------
Net Income Available for Common Stock $ 76,113 $ 86,186
========= =========
Earnings Per Common Share
Income Before Cumulative Effect $2.05 $2.24
Cumulative Effect of Changes
in Accounting (.02) .10
---- ----
Net Income Available for Common Stock $2.03 $2.34
==== ====
Weighted Average Common Shares Outstanding 37,348,237 36,892,256
========== ==========
<TABLE>
<CAPTION>
EXHIBIT 12
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
(UNAUDITED)
Twelve Fiscal Year Ended September 30
Months Ended
6/30/95 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Income Before Interest Charges (2) $128,046 $127,885 $125,742 $118,222 $110,240 $109,781
Allowance for Borrowed Funds
Used in Construction 205 209 174 1,088 2,278 1,273
Federal Income Tax 26,960 36,630 21,148 17,680 (3,929) 17,435
State Income Tax 4,464 6,309 2,979 3,426 342 2,419
Deferred Inc. Taxes - Net (3) 12,980 4,857 16,923 14,130 26,880 7,657
Investment Tax Credit - Net (686) (685) (698) (711) (746) (798)
Rentals (1) 5,397 5,730 5,621 5,857 4,915 4,915
------- ------- ------- ------- ------- -------
$177,366 $180,935 $171,889 $159,692 $139,980 $142,682
======= ======= ======= ======= ======= =======
FIXED CHARGES:
Interest & Amortization of Premium and
Discount of Funded Debt $40,549 $36,699 $38,507 $39,949 $41,916 $37,236
Interest on Commercial Paper and
Short-Term Notes Payable 6,204 5,599 7,465 12,093 11,933 12,521
Other Interest (2) 4,795 3,361 4,727 6,958 9,679 9,298
Rentals (1) 5,397 5,730 5,621 5,857 4,915 4,915
------ ------ ------ ------ ------ ------
$56,945 $51,389 $56,320 $64,857 $68,443 $63,970
====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES 3.11 3.52 3.05 2.46 2.05 2.23
<FN>
Notes:
(1) Rentals shown above represent the portion of all rentals (other than
delay rentals) deemed representative of the interest factor.
(2) The twelve months ended 6/30/95, fiscal 1994 and fiscal 1993 reflect
the reclassification of $1,712, $1,674 and $1,374, respectively,
representing the loss on reacquired debt amortized during each
period, from Other Interest Charges to Operation Expense.
(3) Deferred Income Taxes - Net for the twelve months ended 9/30/94
excludes the cumulative effect of changes in accounting.
</FN>
</TABLE>
