<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 April 30, 1995: 37,421,463 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)
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
Six Months Ended March 31, 1995 and 1994 3 - 4
b. Consolidated Balance Sheets - March 31, 1995 and
September 30, 1994 5 - 6
c. Consolidated Statement of Cash Flows - Six
Months Ended March 31, 1995 and 1994 7
d. Notes to Consolidated Financial Statements 8 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 24
Part II. Other Information
Item 1. Legal Proceedings 25 - 26
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
* The Company has nothing to report under this item.
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Part I. - Financial Information
Item 1. - Financial Statements
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Three Months Ended
March 31,
1995 1994
(Thousands of Dollars)
INCOME
Operating Revenues $376,680 $473,722
Operating Expenses
Purchased Gas 165,789 251,998
Operation Expense 74,379 71,572
Maintenance 6,215 9,646
Property, Franchise and Other Taxes 31,777 37,206
Depreciation, Depletion and Amortization 17,537 18,744
Income Taxes - Net 25,786 29,870
321,483 419,036
Operating Income 55,197 54,686
Other Income 631 776
Income Before Interest Charges 55,828 55,462
Interest Charges
Interest on Long-Term Debt 10,396 8,865
Other Interest 3,385 2,758
13,781 11,623
Net Income Available for Common Stock 42,047 43,839
EARNINGS REINVESTED IN THE BUSINESS
Balance at January 1 375,013 353,342
417,060 397,181
Dividends on Common Stock
(1995 - $.395; 1994 - $.385) 14,724 14,230
Balance at March 31 $402,336 $382,951
Earnings Per Common Share $1.12 $1.18
Weighted Average Common Shares Outstanding 37,409,275 37,049,775
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)
Six Months Ended
March 31,
1995 1994
(Thousands of Dollars)
INCOME
Operating Revenues $648,228 $783,854
Operating Expenses
Purchased Gas 269,196 396,156
Operation Expense 141,222 135,120
Maintenance 12,107 15,062
Property, Franchise and Other Taxes 54,843 62,489
Depreciation, Depletion and Amortization 35,866 36,629
Income Taxes - Net 41,219 44,967
554,453 690,423
Operating Income 93,775 93,431
Other Income 1,476 1,815
Income Before Interest Charges 95,251 95,246
Interest Charges
Interest on Long-Term Debt 20,769 17,748
Other Interest 6,573 5,859
27,342 23,607
Income Before Cumulative Effect 67,909 71,639
Cumulative Effect of Change in
Accounting for Income Taxes - 3,826
Net Income Available for Common Stock 67,909 75,465
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 363,854 335,907
431,763 411,372
Dividends on Common Stock
(1995 - $.79 ; 1994 - $.77) 29,427 28,421
Balance at March 31 $402,336 $382,951
Earnings Per Common Share
Income Before Cumulative Effect $1.82 $1.95
Cumulative Effect of Change in
Accounting for Income Taxes - .10
Net Income Available for Common Stock $1.82 $2.05
Weighted Average Common Shares Outstanding 37,367,200 36,899,747
See Notes to Consolidated Financial Statements
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Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
March 31,
1995 September 30,
(Unaudited) 1994
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,252,292 $2,166,256
Less - Accumulated Depreciation, Depletion
and Amortization 651,766 623,517
1,600,526 1,542,739
Current Assets
Cash and Temporary Cash Investments 13,582 29,016
Receivables - Net 159,199 95,993
Unbilled Utility Revenue 37,720 17,311
Gas Stored Underground 5,935 34,711
Materials and Supplies - at average cost 24,839 23,796
Prepayments 26,057 20,111
267,332 220,938
Other Assets
Recoverable Future Taxes 99,020 99,742
Unamortized Debt Expense 27,234 28,396
Other Regulatory Assets 37,447 47,737
Deferred Charges 14,287 15,796
Other 32,065 26,309
210,053 217,980
$2,077,911 $1,981,657
See Notes to Consolidated Financial Statements
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Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
March 31,
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 - 37,421,463 Shares and 37,278,409
Shares, Respectively $ 37,421 $ 37,278
Paid in Capital 382,797 379,156
Earnings Reinvested in the Business 402,336 363,854
Total Common Stock Equity 822,554 780,288
Long-Term Debt, Net of Current Portion 404,000 462,500
Total Capitalization 1,226,554 1,242,788
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 90,700 112,500
Current Portion of Long-Term Debt 154,500 96,000
Accounts Payable 50,025 66,667
Amounts Payable to Customers 48,240 38,714
Other Accruals and Current Liabilities 129,524 61,368
472,989 375,249
Deferred Credits
Accumulated Deferred Income Taxes 284,823 273,560
Taxes Refundable to Customers 31,688 31,688
Unamortized Investment Tax Credit 13,714 14,057
Other Deferred Credits 48,143 44,315
378,368 363,620
Commitments and Contingencies - -
$2,077,911 $1,981,657
See Notes to Consolidated Financial Statements
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Item 1. - Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
March 31,
1995 1994
(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $ 67,909 $ 75,465
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 35,866 36,629
Deferred Income Taxes 3,399 2,031
Other 2,723 3,082
Change in:
Receivables and Unbilled Utility Revenue (83,615) (150,882)
Gas Stored Underground and Materials and
Supplies 27,733 16,685
Unrecovered Purchased Gas Costs - 17,778
Prepayments (5,946) (6,334)
Accounts Payable (16,642) 27,227
Amounts Payable to Customers 9,526 (24,741)
Other Accruals and Current Liabilities 75,966 103,903
Other Assets and Liabilities - Net 10,565 3,561
Net Cash Provided by
Operating Activities 127,484 100,578
INVESTING ACTIVITIES
Capital Expenditures (96,485) (57,197)
Other 2,432 3,002
Net Cash Used in Investing Activities (94,053) (54,195)
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper (21,800) (17,200)
Proceeds from Issuance of Common Stock 2,308 5,228
Dividends Paid on Common Stock (29,373) (28,293)
Net Cash Used in
Financing Activities (48,865) (40,265)
Net Increase (Decrease) in Cash and
Temporary Cash Investments (15,434) 6,118
Cash and Temporary Cash Investments
at October 1 29,016 13,595
Cash and Temporary Cash Investments at March 31 $ 13,582 $ 19,713
See Notes to Consolidated Financial Statements
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Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Quarterly Earnings. The Company, in its opinion, has included all adjustments
that are necessary for a fair statement of the results of operations for the
periods. The fiscal 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 six months ended March 31, 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. 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 six months ended March 31,
1995 and 1994, amounted to $26,198,000 and $24,453,000, respectively. Net
income taxes paid during the six months ended March 31, 1995 and 1994 amounted
to $20,806,000 and $15,616,000, 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".
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Item 1. Financial Statements (Cont.)
The following summarizes Seneca's activity under swap agreements for the
quarter and six month period ended March 31, 1995:
Quarter Ended Six Months Ended
March 31, 1995 March 31, 1995
Natural Gas Swap Agreements:
Notional Amount - Equivalent
Billion Cubic Feet (Bcf) 3.0 4.7
Fixed Prices per Thousand Cubic
Feet (Mcf) $1.66 - $2.06 $1.66 - $2.27
Variable Prices per Mcf $1.36 - $1.56 $1.29 - $1.64
Gain or (Loss) $1,600,000 $3,100,000
Crude Oil Swap Agreements:
Notional Amount - Equivalent
Barrels (bbl) 180,000 331,000
Fixed Prices per bbl $16.68 - $18.50 $16.68 - $18.50
Variable Prices per bbl $17.99 - $18.55 $17.16 - $18.55
Gain or (Loss) $(200,000) $(300,000)
Seneca had the following swap agreements outstanding at March 31, 1995:
Natural Gas Swap Agreements:
Notional Amount
Fiscal Year (Equivalent Bcf) Fixed Price per Mcf
1995 8.2 $1.66 - $2.06
1996 3.7 $1.66 - $2.06
1996 3.4 (1)
1997 1.1 (1)
16.4
Crude Oil Swap Agreements:
Notional Amount
Fiscal Year (Equivalent bbl) Fixed Price per bbl
1995 260,000 $16.68 - $18.72
1997 182,000 $18.33
442,000
(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.
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
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Item 1. Financial Statements (Cont.)
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 FERC's Order 636, Distribution Corporation is incurring transition
costs billed by Supply Corporation and other upstream pipeline companies.
At March 31, 1995, Distribution Corporation's estimate of its exposure to
outstanding transition cost claims is in the range of $4,600,000 to
$76,500,000. The majority of these costs relate to gas supply realignment
(GSR) costs and stranded costs and is exclusive of any potential stranded costs
related to production plant or gathering facilities which pipeline companies,
including Supply Corporation, may file for at a future date. At March 31,
1995, the Company has recorded the minimum liability and corresponding
regulatory asset of $4,600,000.
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 the December 20, 1994 PSC order issued in a generic
restructuring case (the Generic Case). In the Generic Case, the PSC authorized
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Item 1. Financial Statements (Cont.)
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 March 31, 1995, Distribution Corporation had deferred transition
costs related to transportation customers in its New York jurisdiction
amounting to $2,531,000. Of this amount, Distribution Corporation has
calculated, based upon the PSC order in the Generic Case, that approximately
$827,000 is allocable to, and recoverable from, sales customers and the
remaining approximate $1,704,000 is allocable to, and recoverable from
transportation customers. In February 1995, Distribution Corporation filed
draft tariff sheets regarding the $1,704,000 and is awaiting PSC approval of
such tariff sheets before recovery from transportation customers can begin.
Distribution Corporation began collecting the $827,000 from its sales customers
through the monthly GAC beginning April 1, 1995.
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 $19,000,000 of
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 its gathering rate effective July 1, 1995. 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. Generally favorable comments on the Settlement were filed. Opposition
came largely from offsystem customers claiming that they should not have any
cost responsibility for the production and gathering plant because it is not
necessary to provide service to them. 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 provides for additional settlement discussions
facilitated by the Chief Administrative Law Judge. The first settlement
discussions were held on April 17, 1995 and the next meeting is scheduled for
May 12, 1995. The Company believes that its investment in production and
gathering facilities will be fully recovered.
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Item 1. Financial Statements (Cont.)
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 six months ended March 31, 1994 by $3,826,000 as a result of the
reduction in deferred income taxes associated with the Company's nonregulated
operations.
At March 31, 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 $177,282 $ -
Exploration and intangible well
drilling costs 84,243 -
Other 67,814 -
Total Deferred Tax Liabilities 329,339 -
Deferred Tax Assets:
Deferred investment tax credits (8,388) -
Overheads capitalized for tax purposes (9,849) -
Provisions for rate contingencies and
refunds - (686)
Unrecovered purchased gas costs - (12,394)
Other (26,279) -
Total Deferred Tax Assets (44,516) (13,080)
Total Net Deferred Income Taxes $284,823 $(13,080)
* Included on the Consolidated Balance Sheets in "Other Accruals and Current
Liabilities."
The components of federal and state income taxes included in the
Consolidated Statement of Income are as follows (in thousands):
Six Months Ended
March 31,
1995 1994
Operating Expenses:
Current Income Taxes -
Federal $33,257 $37,756
State 4,563 5,180
Deferred Income Taxes 3,399 2,031
41,219 44,967
Other Income
Deferred Investment Tax Credit (343) (343)
Cumulative effect prior to
October 1, 1993 of applying SFAS
No. 109 - (3,826)
Total Income Taxes $40,876 $40,798
<PAGE>
Item 1. Financial Statements (Concl.)
Total income taxes as reported differ from the amounts that were computed
by applying the federal income tax rate to income before income taxes. The
following is a reconciliation of this difference (in thousands):
Six Months Ended
March 31,
1995 1994
Net income available for common stock $67,909 $75,465
Total income taxes 40,876 40,798
Income before income taxes 108,785 116,263
Income tax expense, computed at
statutory rate of 35% 38,075 40,692
Increase (reduction) in taxes resulting from:
Current state income taxes 2,966 3,366
Depreciation 1,185 1,128
Production tax credits (495) (751)
Miscellaneous (855) 189
Adoption of SFAS 109 - (3,826)
Total Income Taxes $40,876 $40,798
NOTE 4 - Capitalization
Common Stock. During the six months ended March 31, 1995, the Company issued
45,531 shares of common stock under the Company's Customer Stock Purchase Plan
and 88,000 shares 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 open market shares.
In December 1994, 8,000 shares of restricted stock were awarded under the
1993 Award and Option Plan. Restrictions on these shares will lapse respecting
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 refunded, with short-term
borrowings, $75,000,000 of medium-term notes which matured on that date. This
amount is included in "Current Portion of Long-Term Debt" on the Consolidated
Balance Sheet at March 31, 1995.
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 to have a material effect on the
financial condition of the Company at this time.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Earnings.
Earnings were $42.0 million, or $1.12 per common share, during the quarter
ended March 31, 1995. This compares with earnings or $43.8 million, or $1.18
per common share, during the quarter ended March 31, 1994.
Earnings were $67.9 million, or $1.82 per common share, during the six
months ended March 31, 1995. This compares with earnings of $75.5 million, or
$2.05 per common share during the six months ended March 31, 1994. The six
months ended March 31, 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 Boards'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 $71.6 million, or $1.95 per common share.
The decrease in earnings for the quarter and six 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, Pipeline and
Storage and Utility segments. The decrease in earnings for the Exploration and
Production segment resulted primarily from lower natural gas prices and the
delay of some drilling, workovers, recompletions and commencement of production
pending higher gas prices. The Pipeline and Storage segment experienced a
decline in earnings for the quarter and six month period as a result of higher
interest expense on borrowings. The earnings of the Pipeline and Storage
segment for the six months ended March 31, 1995 also declined because the first
quarter of fiscal 1994 benefited from the nonrecurring receipt of refunds of
prior costs related to joint storage sites. Earnings in the Utility Operation
were negatively impacted by warmer weather and lower normalized usage per
residential and commercial account than was established in the rate-making
process. Decreased earnings in the Company's three major business segments
were partly offset by increased earnings in the Company's Other Nonregulated
segment as the Company's pipeline construction and gas marketing subsidiaries
benefited from improved margins while the Company's timber operations had
higher log sales.
A more detailed discussion of current period results can be found in the
business segment information that follows.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands) Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 % Change 1995 1994 % Change
Regulated
Utility Operation $59,200 $61,289 (3.4) $ 92,548 $ 94,921 (2.5)
Pipeline and Storage 16,580 16,553 .2 32,082 33,281 (3.6)
Nonregulated
Exploration and
Production 3,357 6,380 (47.4) 7,106 9,964 (28.7)
Other 2,376 1,203 97.5 4,480 1,838 143.7
5,733 7,583 (24.4) 11,586 11,802 (1.8)
Corporate (530) (869) 39.0 (1,222) (1,606) 23.9
$80,983 $84,556 (4.2) $134,994 $138,398 (2.5)
OPERATING REVENUES
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 % Change 1995 1994 % Change
Regulated
Utility Operation
Retail Revenues:
Residential $237,240 $297,836 (20.3) $403,818 $494,496 (18.3)
Commercial 60,727 85,117 (28.7) 100,429 135,478 (25.9)
Industrial 7,075 15,611 (54.7) 12,542 24,005 (47.8)
305,042 398,564 (23.5) 516,789 653,979 (21.0)
Off-System Sales 8,063 1,757 358.9 10,291 1,757 485.7
Transportation 14,230 13,026 9.2 23,109 21,238 8.8
Other 1,234 1,121 10.1 2,505 2,192 14.3
328,569 414,468 (20.7) 552,694 679,166 (18.6)
Pipeline and Storage
Storage Service 15,622 15,100 3.5 30,512 29,653 2.9
Transportation 23,042 23,295 (1.1) 45,319 45,977 (1.4)
Other 896 1,064 (15.8) 1,796 1,945 (7.7)
39,560 39,459 0.3 77,627 77,575 0.1
Nonregulated
Exploration and
Production 12,995 18,656 (30.3) 27,269 32,988 (17.3)
Other 18,525 23,174 (20.1) 35,613 37,960 (6.2)
31,520 41,830 (24.6) 62,882 70,948 (11.4)
Less-Intersegment
Revenues 22,969 22,035 4.2 44,975 43,835 2.6
$376,680 $473,722 (20.5) $648,228 $783,854 (17.3)
<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 six months ended March 31, 1995, decreased $2.1 million and $2.4
million, respectively, as compared with the same periods a year ago. This
resulted primarily from warmer weather, which contributed to reductions in
throughput of 9.7 billion cubic feet (Bcf) and 15.9 Bcf, respectively, for the
quarter and six month period. Additionally, pretax operating income for the
quarter and six months ended March 31, 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 six months ended March 31, 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 warmer weather was greatest in the Pennsylvania jurisdiction
since Pennsylvania does not have a weather normalization clause (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 warmer weather experienced by
the New York jurisdiction was tempered by its WNC, which preserved pretax
operating income of $4.2 million and $8.5 million, respectively, for the
quarter and six months ended March 31, 1995. For the quarter and six months
ended March 31, 1994, the WNC resulted in a benefit to customers of $5.3
million and $6.5 million, respectively, as weather was colder than normal.
Degree Days
Three Months Ended March 31:
Percent Colder (Warmer)
Than
Normal 1995 1994 Normal Last Year
Buffalo 3,337 3,121 3,622 (6.5)% (13.8)%
Erie 3,195 2,999 3,554 (6.1)% (15.6)%
Six Months Ended March 31:
Buffalo 5,597 5,057 5,949 (9.6)% (15.0)%
Erie 5,151 4,714 5,737 (8.5)% (17.8)%
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
SYSTEM THROUGHPUT
(millions of cubic feet-MMcf)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 % Change 1995 1994 % Change
Utility Operation
Retail Sales:
Residential 36,644 42,627 (14.0) 59,477 69,624 (14.6)
Commercial 10,320 13,318 (22.5) 16,532 21,040 (21.4)
Industrial 1,704 3,129 (45.5) 3,058 4,845 (36.9)
48,668 59,074 (17.6) 79,067 95,509 (17.2)
Transportation 17,444 16,719 4.3 29,487 28,977 1.8
66,112 75,793 (12.8) 108,554 124,486 (12.8)
Pipeline and Storage
Transportation 105,973 110,214 (3.8) 177,828 189,985 (6.4)
Other 186 209 (11.0) 323 270 19.6
Less-Intersegment
Throughput:
Transportation 62,999 71,425 (11.8) 105,718 121,546 (13.0)
Total System
Throughput 109,272 114,791 (4.8) 180,987 193,195 (6.3)
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage segment
for the quarter ended March 31, 1995 did not change significantly from the same
period a year ago. Throughput declined 4.2 Bcf for the quarter. However, as
expected, this decline 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.
For the six months ended March 31, 1995, operating income before income
taxes decreased $1.2 million compared with the same period a year ago. This
resulted primarily because last year's first quarter benefited from the
nonrecurring receipt of refunds of prior costs related to joint storage sites.
Exploration and Production.
Operating income before income taxes from the Company's Exploration and
Production operations for the quarter and six months ended March 31, 1995,
decreased $3.0 million and $2.9 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 1.2 Bcf and 0.6 Bcf, respectively, for the quarter and
six months ended March 31, 1995. Oil and condensate production were down
81,000 barrels (bbl) and 91,000 bbl for the quarter and six month period,
respectively. The production decrease reflects the Company's decision to delay
some drilling, workovers, recompletions and commencement of production pending
higher gas prices. The weighted average price received for natural gas
decreased $.75 per Mcf to $1.64 per Mcf and decreased $.66 per Mcf to $1.68 per
Mcf for the quarter and six months ended March 31, 1995, respectively. The
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
weighted average price received for oil increased $3.47 per bbl to $16.19 per
bbl and increased $2.73 per bbl to $15.91 per bbl for the quarter and six
months ended March 31, 1995, respectively. The impact of the fluctuation in
oil and gas prices was stabilized by Seneca's hedging program, which
contributed a net $1.4 million and $2.8 million to operating revenues for the
quarter and six months ended March 31, 1995, respectively. Refer to further
discussion of Seneca's hedging activities in Note 1 - Summary of Significant
Accounting Policies.
In April 1995, Seneca announced an oil discovery at Vermillion Block 252
offshore of Louisiana in the Gulf of Mexico. This discovery, in which Seneca
has a minimum 65% working interest, is expected to come on production in March
1996. Commencement of production at Seneca's gas discovery at West Cameron 552
continues to be dependent on the price of gas.
PRODUCTION VOLUMES
Exploration and Production
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 % Change 1995 1994 % Change
Gas Production - (MMcf)
Gulf Coast 3,369 4,439 (24.1) 7,117 7,516 (5.3)
West Coast 175 174 0.6 341 381 (10.5)
Appalachia 1,451 1,537 (5.6) 2,971 3,123 (4.9)
4,995 6,150 (18.8) 10,429 11,020 (5.4)
Oil Production - (Thousands of Barrels)
Gulf Coast 66 153 (56.9) 155 252 (38.5)
West Coast 97 92 5.4 199 194 2.6
Appalachia 3 2 50.0 7 6 16.7
166 247 (32.8) 361 452 (20.1)
Other Nonregulated.
Operating income before income taxes associated with this segment for the
quarter and six months ended March 31, 1995, increased $1.2 million and $2.6
million, respectively, compared with the same periods a year ago. The
increases in both periods reflect improved performance by the Company's gas
marketing operations, its pipeline construction subsidiary and its timber
operations. NFR, the Company's gas marketing subsidiary, improved its
performance primarily as a result of improved margins. UCI, the Company's
pipeline construction subsidiary incurred a smaller loss in this year's
quarter, and for the six month period, earned a small profit compared to a loss
in the same period a year ago. Timber operations reflect increased log sales.
Because of a slowdown in pipeline construction and despite the recent
improvement in the earnings of UCI, the Company has decided to sell UCI's
pipeline construction equipment at an auction later in May 1995. UCI will
retain well maintenance and highway construction equipment. Management does
not expect the discontinuance of pipeline construction operations to have a
material impact on the financial condition or results of operations of the
Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Income Taxes.
Income taxes decreased $4.1 million and $3.7 million, respectively, for the
quarter and six months ended March 31, 1995, mainly because of a decrease in
pretax income. The decrease for the quarter can also be attributed to lower
state income taxes in the Utility Operation's Pennsylvania jurisdiction. This
relates to a change in the methodology in the recording of Pennsylvania state
income tax on unbilled revenues, which was implemented in March 1994, causing
state income taxes for the quarter ended March 31, 1994 to be inflated.
Interest Charges.
Total interest charges increased $2.1 million and $3.7 million,
respectively, for the quarter and six months ended March 31, 1995. Interest on
long-term debt increased $1.5 million and $3.0 million, respectively, for the
quarter and six month period, mainly because of a higher average amount of
long-term debt compared to the same periods a year ago. Other interest
increased $.6 million and $.7 million for the quarter and six month period,
respectively, as a result of increases in short-term borrowing rates.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the six month period consisted
of cash provided by operating activities and short-term bank loans and
commercial paper. These sources were supplemented by issuances of common stock
under the Company's Customer Stock Purchase Plan and section 401(k) Plans.
However, during the second quarter of fiscal 1995, the Company's Customer Stock
Purchase Plan and section 401(k) plans began purchasing open market shares.
Operating Cash Flow
Internally generated cash from operating activities consists of net income
available for common stock, adjusted for noncash expenses, noncash income and
changes in operating assets and liabilities. Noncash items include
depreciation, depletion and amortization, deferred income taxes and allowance
for funds used during construction. For the six months ended March 31, 1994, a
noncash income item also included the cumulative effect of a required change in
accounting for income taxes in accordance with SFAS 109.
Cash provided by operating activities in the Utility Operation and the
Pipeline and Storage segments may vary substantially from period to period
because of 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 six months ended March 31 and receivables and
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
unbilled utility revenue historically increase from September to March because
of winter weather.
The storage gas inventory normally declines during the first and second
quarters of the fiscal year and is replenished during the third and fourth
quarters. Under the last-in, first-out (LIFO) method of accounting, the
current cost of replacing gas withdrawn from storage is recorded in the
Consolidated Statement of Income and a reserve for gas replacement is recorded
in the Consolidated Balance Sheet and is included under the caption "Other
Accruals and Current Liabilities". Such reserve is reduced as the inventory is
replenished.
Net cash provided by operating activities totaled $127.5 million for the
six months ended March 31, 1995, an increase of $26.9 million compared with
$100.6 million provided by operating activities for the six months ended March
31, 1994. The Pipeline and Storage segment had higher cash flow from
operations as compared to the prior year, due in part to Supply Corporation's
initial funding, in March 1994, of its post-retirement benefit costs. The
other non-regulated operations also had higher cash flow from operations due to
higher earnings and lower receivable balances. The Utility Operation had a
slight increase in operating cash flow due to a variety of factors, including
over-recovery of gas costs and lower receivable balances. The Exploration and
Production segment experienced a decline in its cash flow from operations due
to lower production and earnings.
Investing Cash Flow
Capital Expenditures
The Company's capital expenditures totaled $96.5 million during the six
months ended March 31, 1995. Total expenditures for the six month period
represent 53% of the total current capital expenditure budget for fiscal 1995
of $183.8 million.
The following table presents capital expenditures for the six months ended
March 31, 1995, by business segment:
(in thousands) Percentage
Utility Operation $31,431 32.6 %
Pipeline and Storage 29,093 30.2
Exploration and Production 29,416 30.5
Other Nonregulated 6,545 6.7
$96,485 100.0%
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
Pipeline and Storage capital expenditures include $4.9 million in
connection with its link with the Empire State Pipeline at Grand Island, New
York and $3.7 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.
In a January 23, 1995 letter to the FERC, Supply Corporation informed the
FERC that it no longer intends to construct its Laurel Fields project in
phases, but rather intends to seek authorization to construct the project as a
whole. An "open season" is being held through May 16, 1995, in part, to
identify prospective customers for this project. The timing of this project is
still not finalized.
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. In April 1995, Seneca recommenced
activity in its onshore Gulf Cost program which it had delayed earlier in the
year due to low gas prices.
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 continued 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 $2.1 million of cash was received in the first quarter of fiscal
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.
Financing Cash Flows
Consolidated short-term debt decreased by $21.8 million during the first
six 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 currently has an effective shelf registration under the
Securities Act of 1933, as amended, and has authority under the Public Utility
Holding Company Act of 1935, as amended, to issue and sell up to $220 million
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
of debentures and/or medium term notes. Depending on market conditions and the
requirements of the Company, the Company may issue and sell as much as
approximately $100 million of the debentures and/or medium-term notes within
the remainder of fiscal 1995. The proceeds of such sales would be used to
refund maturing long-term debt, to replace outstanding short-term borrowings,
to finance a portion of the Company's capital expenditures and/or for other
general corporate purposes.
On May 1, 1995, the Company refunded, with short-term borrowings, $75
million of medium-term notes which matured on that date. This amount is
included in "Current Portion of Long-Term Debt" on the Consolidated Balance
Sheet at March 31, 1995.
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. 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, upon refunding $75 million of medium-term notes on May 1, 1995,
the Company would have been permitted to issue up to a maximum of $600 million
in additional long-term unsecured indebtedness, subject to maturity and
long-term interest rates. In addition, at March 31, 1995, the Company had
regulatory authorizations and unused short-term credit lines that would have
permitted it to borrow an additional $309.3 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%.
Proceedings in this rate case are ongoing and management cannot predict their
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont.)
outcome. New rates are expected to become effective in August or 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.
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 the 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 March 31, 1995, Distribution
Corporation had deferred transition costs related to transportation customers
in its New York jurisdiction amounting to approximately $2.5 million. Of this
amount, Distribution Corporation has calculated, based upon the PSC Order in
the Generic Case, that approximately $0.8 million is allocable to, and
recoverable from, sales customers and the remaining approximate $1.7 million is
allocable to, and recoverable from, transportation customers. In February
1995, Distribution Corporation filed draft tariff sheets regarding the $1.7
million and is awaiting PSC approval of such tariff sheets before recovery from
transportation customers can begin. Distribution began recovering the $0.8
million from its sales customers through the monthly GAC beginning April 1,
1995.
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.
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%. Proceedings in this rate case are ongoing
and management cannot predict their outcome. New rates are expected to become
effective in December 1995.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Concl.)
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.
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 are ongoing and all parties have
presented their positions. Currently, it appears all issues can be resolved
through settlement. In the event some issues are not settled, a hearing to
resolve them is scheduled for January 9, 1996. On April 27, 1995, Supply
Corporation made a filing with the FERC which was intended to resolve a dispute
over the proper allocation of transportation costs to the former Penn-York
Energy Corporation (Penn-York) services (Penn-York was merged into Supply
Corporation effective July 1, 1994). The FERC rejected that filing as
inadequately supported, and directed Supply Corporation to refile with
additional supporting data no later than May 15, 1995. Under ordinary
circumstances Supply Corporation would have been able to put new rates into
effect on May 1, 1995, subject to refund. Until the cost allocation dispute is
resolved, however, no new rates can become effective.
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.
<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 before discovery
resumes and 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 agreement between TGX and Distribution Corporation, approved
<PAGE>
Item 1. Legal Proceedings - (Concl.)
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
secion 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. The Parties' time to file Petitions for Rehearing of the
Order expires on June 4, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of National Fuel Gas Company was held on
February 15, 1995. At that meeting, the shareholders elected directors,
appointed independent accountants, and approved the Annual At Risk Compensation
Incentive Plan.
The total votes were as follows:
Against
For or Withheld Abstain
(i) Election of directors to serve
for a three-year term:
- Philip C. Ackerman 29,109,063 413,760 -
- John M. Brown 29,048,865 473,958 -
- Luiz F. Kahl 29,077,567 445,256 -
- Bernard S. Lee 29,118,958 403,865 -
(ii) Appointment of Price Waterhouse
as independent accountants 28,986,754 272,692 263,377
(iii) Approval of the Annual At Risk
Compensation Incentive Plan 25,035,493 3,283,597 938,063
Item 5. Other Information
On March 15, 1995, at a regular meeting of the Board of Directors, Mr.
Robert T. Brady was elected a director to serve until the 1996 Annual Meeting
when he is expected to stand for reelection.
<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 March 31, 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 March 31,
1995 and 1994.
(b) Reports on Form 8-K
(i) Report on Form 8-K was filed on March 22, 1995.
Date of Report - March 3, 1995
Item 5. Other Events. Announcements made by
National Fuel executives at a seminar for
Security Analysts on March 3, 1995.
<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: May 12, 1995
<TABLE>
<CAPTION>
EXHIBIT 12
NATIONAL FUEL GAS COMPANY
COMPUTATION OF ACTUAL RATIO OF
EARNINGS TO FIXED CHARGES
(UNAUDITED)
(Thousands of Dollars)
Twelve
Months
Ended Year Ended September 30
03/31/95 1994 1993 1992 1991 1990
EARNINGS:
<S> <C> <C> <C> <C> <C> <C>
Income Before Interest Charges(2) $127,851 $127,885 $125,742 $118,222 $110,240 $109,781
Allowance for Borrowed Funds
Used in Construction 192 209 174 1,088 2,278 1,273
Federal Income Tax 32,828 36,630 21,148 17,680 (3,929) 17,435
State Income Tax 5,693 6,309 2,979 3,426 342 2,419
Deferred Income Taxes - Net(3) 5,528 4,857 16,923 14,130 26,880 7,657
Investment Tax Credit - Net (686) (685) (698) (711) (746) (798)
Rentals(1) 5,526 5,730 5,621 5,857 4,915 4,915
$176,932 $180,935 $171,889 $159,692 $139,980 $142,682
FIXED CHARGES:
Interest and Amortization
of Premium and Discount
on Funded Debt $ 39,719 $ 36,699 $ 38,507 $ 39,949 $ 41,916 $ 37,236
Interest on Commercial Paper
and Short-Term Notes Payable 5,755 5,599 7,465 12,093 11,933 12,521
Other Interest(2) 3,864 3,361 4,727 6,958 9,679 9,298
Rentals(1) 5,526 5,730 5,621 5,857 4,915 4,915
$ 54,864 $ 51,389 $ 56,320 $ 64,857 $ 68,443 $ 63,970
Ratio of Earnings to
Fixed Charges 3.22 3.52 3.05 2.46 2.05 2.23
<FN>
Note: (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 3/31/95, fiscal 1994 and fiscal 1993 reflect the reclassification of
$1,699, $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 3/31/95 and the fiscal year ended 9/30/94
excludes the cumulative effect of changes in accounting.
</FN>
</TABLE>
EXHIBIT 99
NATIONAL FUEL GAS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Twelve Months Ended
March 31,
1995 1994
(Thousands of Dollars)
INCOME
Operating Revenues $1,005,701 $1,118,226
Operating Expenses
Purchased Gas 370,726 482,416
Operation Expense 266,520 267,770
Maintenance 28,029 27,045
Property, Franchise and Other Taxes 96,145 101,218
Depreciation, Depletion and Amortization 74,001 71,465
Income Taxes - Net 44,045 48,245
879,466 998,159
Operating Income 126,235 120,067
Other Income 3,316 3,963
Income Before Interest Charges 129,551 124,030
Interest Charges
Interest on Long-Term Debt 39,719 36,668
Other Interest 11,127 11,608
50,846 48,276
Income Before Cumulative Effect 78,705 75,754
Cumulative Effect of Changes
in Accounting (589) 3,826
Net Income Available for Common Stock $ 78,116 $ 79,580
Earnings Per Common Share
Income Before Cumulative Effect $2.11 $2.08
Cumulative Effect of Changes
in Accounting (.02) .11
Net Income Available for Common Stock $2.09 $2.19
Weighted Average Common Shares Outstanding 37,279,331 36,410,456
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> 06-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> MAR-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,600,526
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 267,332
<TOTAL-DEFERRED-CHARGES> 14,287
<OTHER-ASSETS> 195,766
<TOTAL-ASSETS> 2,077,911
<COMMON> 37,421
<CAPITAL-SURPLUS-PAID-IN> 382,797
<RETAINED-EARNINGS> 402,336
<TOTAL-COMMON-STOCKHOLDERS-EQ> 822,554
0
0
<LONG-TERM-DEBT-NET> 404,000
<SHORT-TERM-NOTES> 70,700
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 20,000
<LONG-TERM-DEBT-CURRENT-PORT> 154,500
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 606,157
<TOT-CAPITALIZATION-AND-LIAB> 2,077,911
<GROSS-OPERATING-REVENUE> 648,228
<INCOME-TAX-EXPENSE> 41,219
<OTHER-OPERATING-EXPENSES> 513,234
<TOTAL-OPERATING-EXPENSES> 554,453
<OPERATING-INCOME-LOSS> 93,775
<OTHER-INCOME-NET> 1,476
<INCOME-BEFORE-INTEREST-EXPEN> 95,251
<TOTAL-INTEREST-EXPENSE> 27,342
<NET-INCOME> 67,909
0
<EARNINGS-AVAILABLE-FOR-COMM> 67,909
<COMMON-STOCK-DIVIDENDS> 29,427
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 127,484
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.82
</TABLE>
