- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
--------------
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 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, 1996:
37,672,141 shares.
- -------------------------------------------------------------------------------
<PAGE 2>
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)
Highland Land & Minerals, Inc. (Highland)
Leidy Hub, Inc. (Leidy Hub)
Data-Track Account Services, Inc. (Data-Track)
National Fuel Resources, Inc. (NFR)
Horizon Energy Development, Inc. (Horizon)
Utility Constructors, Inc. (UCI)
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, 1996 and 1995 3 - 4
b. Consolidated Balance Sheets - March 31, 1996 and
September 30, 1995 5 - 6
c. Consolidated Statement of Cash Flows - Six
Months Ended March 31, 1996 and 1995 7
d. Notes to Consolidated Financial Statements 8 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 27
Part II. Other Information
--------------------------
Item 1. Legal Proceedings 27 - 28
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
* The Company has nothing to report under this item.
<PAGE 3>
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,
------------------
1996 1995
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $492,376 $378,762
-------- --------
Operating Expenses
Purchased Gas 246,984 165,789
Operation Expense 75,356 74,379
Maintenance 7,146 6,215
Property, Franchise and Other Taxes 35,556 31,777
Depreciation, Depletion and Amortization 23,960 17,537
Income Taxes - Net 33,743 26,608
-------- --------
422,745 322,305
-------- --------
Operating Income 69,631 56,457
Other Income 863 631
-------- --------
Income Before Interest Charges 70,494 57,088
-------- --------
Interest Charges
Interest on Long-Term Debt 9,587 10,396
Other Interest 5,215 3,385
-------- --------
14,802 13,781
-------- --------
Net Income Available for Common Stock 55,692 43,307
EARNINGS REINVESTED IN THE BUSINESS
Balance at January 1 397,398 379,723
-------- --------
453,090 423,030
Dividends on Common Stock
(1996 - $.405; 1995 - $.395) 15,177 14,724
-------- --------
Balance at March 31 $437,913 $408,306
======== ========
Earnings Per Common Share $1.48 $1.16
===== =====
Weighted Average Common Shares Outstanding 37,551,990 37,409,275
========== ==========
See Notes to Consolidated Financial Statements
<PAGE 4>
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,
------------------
1996 1995
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $808,704 $658,094
-------- --------
Operating Expenses
Purchased Gas 379,942 269,196
Operation Expense 142,023 141,222
Maintenance 13,170 12,107
Property, Franchise and Other Taxes 59,458 54,843
Depreciation, Depletion and Amortization 45,553 35,866
Income Taxes - Net 52,584 45,116
-------- --------
692,730 558,350
-------- --------
Operating Income 115,974 99,744
Other Income 1,806 1,476
-------- --------
Income Before Interest Charges 117,780 101,220
-------- --------
Interest Charges
Interest on Long-Term Debt 19,874 20,769
Other Interest 9,823 6,573
-------- --------
29,697 27,342
-------- --------
Net Income Available for Common Stock 88,083 73,878
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 380,123 363,854
-------- --------
468,206 437,732
Dividends on Common Stock
(1996 - $.81; 1995 - $.79) 30,293 29,426
-------- --------
Balance at March 31 $437,913 $408,306
======== ========
Earnings Per Common Share $2.35 $1.98
===== =====
Weighted Average Common Shares Outstanding 37,496,080 37,367,200
========== ==========
See Notes to Consolidated Financial Statements
<PAGE 5>
Item 1. Financial Statements (Cont.)
- -------------------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
March 31,
1996 September 30,
(Unaudited) 1995
----------- -------------
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,376,634 $2,322,335
Less - Accumulated Depreciation, Depletion
and Amortization 719,284 673,153
---------- ----------
1,657,350 1,649,182
---------- ----------
Current Assets
Cash and Temporary Cash Investments 18,788 12,757
Receivables - Net 229,205 75,933
Unbilled Utility Revenue 58,792 20,838
Gas Stored Underground 4,660 25,589
Materials and Supplies - at average cost 23,536 24,374
Prepayments 25,746 29,753
---------- ----------
360,727 189,244
---------- ----------
Other Assets
Recoverable Future Taxes 93,263 94,053
Unamortized Debt Expense 26,118 26,976
Other Regulatory Assets 54,104 37,040
Deferred Charges 9,839 8,653
Other 35,778 33,154
---------- ----------
219,102 199,876
---------- ----------
$2,237,179 $2,038,302
========== ==========
See Notes to Consolidated Financial Statements
<PAGE 6>
Item 1. Financial Statements (Cont.)
- -------------------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
March 31,
1996 September 30,
(Unaudited) 1995
----------- -------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 100,000,000 Shares; Issued
and Outstanding - 37,599,121 Shares and
37,434,363 Shares, Respectively $ 37,599 $ 37,434
Paid in Capital 388,042 383,031
Earnings Reinvested in the Business 437,913 380,123
---------- ----------
Total Common Stock Equity 863,554 800,588
Long-Term Debt, Net of Current Portion 574,000 474,000
---------- ----------
Total Capitalization 1,437,554 1,274,588
---------- ----------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 110,500 147,600
Current Portion of Long-Term Debt 30,000 88,500
Accounts Payable 98,296 53,842
Amounts Payable to Customers 35,380 51,001
Other Accruals and Current Liabilities 150,160 52,118
---------- ----------
424,336 393,061
---------- ----------
Deferred Credits
Accumulated Deferred Income Taxes 290,129 288,763
Taxes Refundable to Customers 23,080 23,080
Unamortized Investment Tax Credit 13,046 13,380
Other Deferred Credits 49,034 45,430
---------- ----------
375,289 370,653
---------- ----------
Commitments and Contingencies - -
---------- ----------
$2,237,179 $2,038,302
========== ==========
See Notes to Consolidated Financial Statements
<PAGE 7>
Item 1. - Financial Statements (Cont.)
- --------------------------------------
National Fuel Gas Company
-------------------------
Consolidated Statement of Cash Flows
------------------------------------
(Unaudited)
-----------
Six Months Ended
March 31,
------------------
1996 1995
---- ----
(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $ 88,083 $ 73,878
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization 45,553 35,866
Deferred Income Taxes 1,199 3,399
Other 3,697 2,722
Change in:
Receivables and Unbilled Utility Revenue (191,226) (84,114)
Gas Stored Underground and Materials and
Supplies 21,767 17,867
Prepayments 4,007 (5,447)
Accounts Payable 44,454 (18,268)
Amounts Payable to Customers (15,621) 9,526
Other Accruals and Current Liabilities 98,135 81,490
Other Assets and Liabilities - Net (60) 10,565
------- --------
Net Cash Provided by
Operating Activities 99,988 127,484
------- --------
INVESTING ACTIVITIES
Capital Expenditures (70,674) (96,485)
Other (340) 2,432
-------- --------
Net Cash Used in Investing Activities (71,014) (94,053)
------- --------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper (37,100) (21,800)
Net Proceeds from Issuance of Long-Term Debt 99,650 -
Reduction of Long-Term Debt (58,500) -
Proceeds from Issuance of Common Stock 3,226 2,308
Dividends Paid on Common Stock (30,219) (29,373)
-------- --------
Net Cash Used in
Financing Activities (22,943) (48,865)
-------- --------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 6,031 (15,434)
Cash and Temporary Cash Investments
at October 1 12,757 29,016
-------- --------
Cash and Temporary Cash Investments at March 31 $ 18,788 $ 13,582
======== ========
See Notes to Consolidated Financial Statements
<PAGE 8>
Item 1. Financial Statements (Cont.)
- -------------------------------------
National Fuel Gas Company
-------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
Quarterly Earnings. The Company, in its opinion, has included all adjustments
that are necessary for a fair statement of the results of operations for the
periods. The 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, 1995, 1994 and 1993, that are included in the
Company's combined Annual Report to Shareholders/Form 10-K for 1995. The fiscal
1996 consolidated financial statements will be examined by the Company's
independent accountants after the end of the fiscal year.
The earnings for the six months ended March 31, 1996 should not be
taken as a prediction for the fiscal year ending September 30, 1996, 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, 1996
and 1995, amounted to $28.8 million and $26.2 million, respectively. Net income
taxes paid during the six months ended March 31, 1996 and 1995 amounted to $32.0
million and $20.8 million, respectively.
Gas Stored Underground - Current. Gas stored underground is carried at lower of
cost or market. Distribution Corporation's inventory cost at March 31, 1996 of
approximately $0.4 million has been determined under the last-in, first-out
(LIFO) method and Supply Corporation's inventory cost of approximately $4.3
million has been determined under the average cost method. Supply Corporation
adopted the average cost method to value gas received from shippers under tariff
allowances that is not consumed in operations.
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 to it by Supply Corporation and other upstream pipeline companies.
As of March 31, 1996, Distribution Corporation's estimate of its
exposure to outstanding transition costs claims is in the range of $6.8
million to $68.4 million. The estimated maximum exposure is declining as
transition costs are incurred and paid. At March 31, 1996, Distribution
<PAGE 9>
Item 1. Financial Statements (Cont.)
- -------------------------------------
Corporation has recorded the minimum liability and corresponding regulatory
asset of $6.8 million. In addition, Distribution Corporation's estimated share
of Supply Corporation's stranded gathering costs is approximately $10.2 million.
See further discussion under "Gathering Rates" below. Distribution Corporation
is currently recovering transition costs from its sales and transportation
customers in New York and Pennsylvania.
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. Management believes that any
transition costs resulting from the implementation of the FERC's Order 636 which
have been determined to be both eligible and prudently incurred should be fully
recoverable from customers.
Gathering Rates. A Stipulation and Agreement complying with the FERC's
directives under its restructuring orders to fully unbundle the production and
gathering cost of service from the transmission cost of service, and to
establish a separate gathering rate, was approved by the FERC in February 1996.
As approved, the Stipulation and Agreement permits Supply Corporation to fully
recover its net investment in production and gathering plant, as well as its
production and gathering cost of service. A portion (approximately $10.9
million) of Supply Corporation's net investment in production and gathering
plant will be recovered over a five year period as a stranded transition cost.
This amount has been reclassified from net plant to a regulatory asset on the
Consolidated Balance Sheet at March 31, 1996.
<PAGE 10>
Item 1. Financial Statements (Cont.)
- -------------------------------------
Note 3 - Income Taxes
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,
----------------
1996 1995
---- ----
Operating Expenses:
Current Income Taxes -
Federal $46,696 $36,471
State 4,689 5,246
Deferred Income Taxes 1,199 3,399
------- -------
52,584 45,116
Other Income:
Deferred Investment Tax Credit (334) (343)
------- -------
Total Income Taxes $52,250 $44,773
======= =======
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,
----------------
1996 1995
---- ----
Net income available for common stock $88,083 $73,878
Total income taxes 52,250 44,773
------- --------
Income before income taxes $140,333 $118,651
======== ========
Income tax expense, computed at
statutory rate of 35% 49,117 $41,528
Increase (reduction) in taxes resulting from:
Current state income taxes, net of federal
income tax benefit 3,048 3,410
Depreciation 1,215 1,185
Production tax credits (278) (495)
Miscellaneous (852) (855)
-------- -------
Total Income Taxes $52,250 $44,773
======== =======
<PAGE 11>
Item 1. Financial Statements (Cont.)
- -------------------------------------
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
At March 31, 1996 At September 30, 1995
------------------------- -------------------------
Accumulated Deferred Accumulated Deferred
Deferred Income Taxes Deferred Income Taxes
Income Taxes Current* Income Taxes Current*
------------ ------------ ------------ ------------
Deferred Tax Liabilities:
Excess of tax over book
depreciation $186,364 $ - $185,595 $ -
Exploration and
intangible well
drilling costs 91,868 - 84,380 -
Other 67,890 - 67,831 -
-------- -------- -------- -------
Total Deferred Tax
Liabilities 346,122 - 337,806 -
-------- -------- -------- -------
Deferred Tax Assets:
Deferred investment
tax credits (7,860) - (7,860) -
Overheads capitalized
for tax purposes (12,685) - (11,766) -
Unrecovered purchased
gas costs - (9,280) - (8,322)
Other (35,448) - (29,417) -
--------- -------- -------- -------
Total Deferred Tax
Assets (55,993) (9,280) (49,043) (8,322)
--------- -------- -------- -------
Total Net Deferred
Income Taxes $290,129 $(9,280) $288,763 $(8,322)
========= ======== ======== =======
* Included on the Consolidated Balance Sheets in "Other Accruals and Current
Liabilities."
Note 4 - Capitalization
Common Stock. During the six months ended March 31, 1996, the Company issued
52,200 shares of common stock under the Company's section 401(k) Plans, 47,764
shares to participants in the Company's Dividend Reinvestment Plan, and 8,917
shares to participants in the Company's Customer Stock Purchase Plan.
Additionally, 55,877 shares of common stock were issued under the Company's
stock option and stock award plans.
On March 19, 1996, the Company's Board of Directors adopted a
shareholder rights plan, subject to the approval of the Securities and
Exchange Commission (SEC) under the Public Utility Holding Company Act. If
approved by the SEC, the shareholders of record of the Company's common stock,
as of a date to be established by the Board of Directors, would be issued a
dividend of one right for each share of common stock held. Each right would
entitle the holder to purchase from the Company one-half of one share of
common stock at a price of $130 per share ($65 per half share), subject to
adjustment (Purchase Price). The rights would become exercisable ten days
after someone (an acquirer) (a) announces it has acquired or has the right to
acquire 10% of the Company's voting stock, or (b) announces a tender offer
<PAGE 12>
Item 1. Financial Statements (Cont.)
- -------------------------------------
which would result in it owning 10% or more of the Company's voting stock. If
the rights become exercisable, each holder, except an acquirer, would be able to
exercise a right and receive common stock (or, in certain cases, cash, property
or other securities) of the Company or common stock of the acquiring company
having a market value equal to twice the right's then current Purchase Price.
The rights would have a term of ten years. The Board of Directors would be able
to exchange the rights at an exchange ratio of one share of common stock per
right. It would also be able to redeem the rights at a price of $0.01 per right
anytime until ten days after someone announces it has acquired or has the right
to acquire 10% or more of the Company's voting stock.
Long-Term Debt. In December 1995, the Company retired $58.5 million of maturing
medium-term notes with short-term borrowings. This consisted of $38.5 million of
8.90% medium-term notes and $20.0 million of 8.875% medium-term notes.
In March 1996, the Company issued $100.0 million of 5.58% medium-term
notes due in March 1999. After reflecting underwriting discounts and
commissions, the net proceeds to the Company amounted to $99.7 million.
The Company currently has an effective shelf registration under the
Securities Act of 1933, as amended, to issue and sell up to $20.0 million of
debentures and/or medium-term notes.
New Accounting Pronouncement. In October 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" (SFAS 123). This statement
establishes a fair value based method of accounting for employee stock options
or similar equity instruments and encourages all companies to adopt that method
of accounting for all of their employee stock compensation plans.
Measurement of compensation cost under SFAS 123, if adopted, is
effective for all awards granted after the beginning of the fiscal year in which
that method is first applied. Management is currently reviewing the provisions
of SFAS 123 and has not decided whether to adopt the fair value based
measurement provisions. If the fair value based measurement provisions of SFAS
123 are adopted, they are not expected to have a material impact on the results
of operations or financial condition of the Company.
SFAS 123 allows companies to continue to measure compensation cost
for employee stock options or similar equity instruments using the method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Companies electing to remain with this method
are required to make pro forma disclosures of net income and earnings per share
as if SFAS 123 accounting had been applied. The Company is required to adopt the
disclosure requirements of SFAS 123 for its fiscal year ending September 30,
1997.
<PAGE 13>
Item 1. Financial Statements (Cont.)
- -------------------------------------
Note 5 - Derivative Financial Instruments
The Company, in its Exploration and Production operations, 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 the Company 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." These variable prices represent the current market
prices at the locations where the Company delivers its natural gas and crude oil
production.
The following summarizes the Company's activity under price swap
agreements for the quarter and six-month periods ended March 31, 1996 and 1995,
respectively:
Quarter Ended Quarter Ended
March 31, 1996 March 31, 1995
-------------- --------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Billion
Cubic Feet (Bcf) 6.5 3.0
Fixed Prices per Thousand Cubic
Feet (Mcf) $1.71 - $3.05 $1.74 - $2.16
Variable Prices per Mcf $1.96 - $3.43 $1.43 - $1.64
Gain (Loss) $(3,649,000) $1,554,000
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent
Barrels (bbl) 204,000 180,000
Fixed Prices per bbl $17.40 - $18.50 $16.68 - $18.50
Variable Prices per bbl $18.70 - $21.18 $17.99 - $18.55
Loss $(220,000) $(155,000)
Six Months Ended Six Months Ended
March 31, 1996 March 31, 1995
---------------- ----------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Bcf 11.9 4.7
Fixed Prices per Mcf $1.71 - $3.05 $1.74 - $2.39
Variable Prices per Mcf $1.67 - $3.43 $1.36 - $1.73
Gain (Loss) $(3,291,000) $2,969,000
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent bbl 418,000 331,000
Fixed Prices per bbl $17.40 - $19.00 $16.68 - $18.50
Variable Prices per bbl $17.40 - $21.18 $17.16 - $18.55
Loss $(216,000) $(153,000)
<PAGE 14>
Item 1. Financial Statements (Cont.)
- -------------------------------------
The Company had the following price swap agreements outstanding at
March 31, 1996.
Natural Gas Price Swap Agreements:
Notional Amount
Fiscal Year (Equivalent Bcf) Fixed Price Per Mcf
- ----------- ---------------- -------------------
1996 11.1 $1.71 - $1.99
1997 19.5 $1.71 - $2.00
1997 0.9 (1)
1998 4.8 $1.77 - $1.95
1998 0.3 (1)
----
36.6
====
Crude Oil Price Swap Agreements:
Notional Amount
Fiscal Year (Equivalent bbl) Fixed Price Per bbl
- ----------- ---------------- -------------------
1996 528,000 $17.40 - $18.50
1997 978,000 $17.40 - $18.33
1998 396,000 $17.50 - $18.31
---------
1,902,000
=========
(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. At March 31, 1996, the Company had
unrecognized losses of approximately $12.7 million related to price swap
agreements which are offset by corresponding unrecognized gains from the
Company's anticipated natural gas and crude oil production over the terms of the
price swap agreements.
The Company has SEC authority to enter into interest rate swaps and
other derivative instruments associated with long-term borrowings up to a
notional amount of $350.0 million at any one time outstanding. All such interest
rate swaps and other derivative instruments must be directly related to then
outstanding long or short-term debt. The Company also has SEC authority to enter
into interest rate and currency exchange agreements associated with short-term
borrowings covering a total principal amount of
<PAGE 15>
Item 1. Financial Statements (Concl.)
- --------------------------------------
$300.0 million. No such agreements were entered into during the quarter or six
months ended March 31, 1996 and none are currently outstanding.
Credit Risk. Credit risk relates to the risk of loss that the Company would
incur as a result of nonperformance by counterparties pursuant to the terms of
their contractual obligations. The Company is at risk in the event of
nonperformance by counterparties on its derivative financial instruments. The
counterparties to the Company's derivative financial instruments are investment
grade financial institutions. Furthermore, the Company has guarantees from
counterparty affiliates on a large portion of its derivative financial
instruments. Accordingly, the Company does not anticipate any material impact to
its financial position, results of operations or cash flow as a result of
nonperformance by counterparties.
Note 6 - Commitments and Contingencies
Environmental Matters. The Company is subject to various federal, state and
local laws and regulations relating to the protection of the environment. The
Company has established procedures for on-going evaluation of its operations to
identify potential environmental exposures and assure compliance with regulatory
policies and procedures.
It is the Company's policy to accrue estimated environmental clean-up
costs when such amounts can reasonably be estimated and it is probable that the
Company will be required to incur such costs. Distribution Corporation has
estimated that clean-up costs related to several former manufactured gas plant
sites and several other waste disposal sites are in the range of $8.8 million to
$10.2 million. At March 31, 1996, Distribution Corporation has recorded the
minimum liability of $8.8 million. The Company is currently not aware of any
material additional exposure to environmental liabilities. However, changes in
environmental regulations or other factors could adversely impact the Company.
In New York, Distribution Corporation is recovering site
investigation and remediation costs in rates. In Pennsylvania, Distribution
Corporation expects to recover such costs in rates, as the Pennsylvania Public
Utility Commission has allowed recovery of other environmental clean-up costs in
rate cases. Accordingly, the Consolidated Balance Sheet at March 31, 1996
includes related regulatory assets in the amount of approximately $8.1 million.
For further discussion, see disclosure in Note H - Commitments and Contingencies
under the heading "Environmental Matters" in Item 8 of the Company's 1995 Form
10-K.
Other. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
Earnings.
The Company's earnings were $55.7 million, or $1.48 per common share,
during the quarter ended March 31, 1996. This compares with earnings of $43.3
million, or $1.16 per common share, during the quarter ended March 31, 1995.
The Company's earnings were $88.1 million, or $2.35 per common share,
during the six months ended March 31, 1996. This compares with earnings of $73.9
million, or $1.98 per common share during the six months ended March 31, 1995.
<PAGE 16>
The increase in earnings for the quarter and six months ended March
31, 1996 is primarily attributable to the higher earnings of the Company's
Utility and Exploration and Production segments. The earnings of the Utility
segment reflect the positive impact of colder weather, new rates that became
effective in September 1995 in both the New York and Pennsylvania jurisdictions,
and operation and maintenance expense savings. Additionally, new rates that
became effective in December 1994 in the Pennsylvania jurisdiction have
contributed to higher earnings for the six-month period. The earnings of the
Exploration and Production segment increased because of higher natural gas and
oil production coupled with an increase in the weighted average price received
for this production.
The Pipeline and Storage segment contributed to the increase in
earnings for the quarter ended March 31, 1996, primarily because of the February
1996 Federal Energy Regulatory Commission (FERC) approval of Supply
Corporation's rate case. With this approval, new rates became effective on April
1, 1996 retroactive to June 1, 1995. Earnings for the quarter reflect the impact
of the rate increase for the period of June 1, 1995 to March 31, 1996. For the
six months ended March 31, 1996, however, the Pipeline and Storage segment
experienced a decrease in earnings as the positive impact of the new rates was
more than offset by lower revenues related to unbundled pipeline sales and open
access transportation.
The Other Nonregulated operations experienced a decline in earnings
for the quarter and six months ended March 31, 1996 mainly because of expenses
associated with developing international opportunities. Many of these expenses
may be reimbursed to the Company upon the occurrence of certain events and at
such time would be taken into earnings. As discussed under "International
Investment" on page 24, on May 11, 1996, Horizon obtained a commitment for
financing on a power plant project in Pakistan. Certain expenses related to this
project will be reimbursed to Horizon in the future.
A more detailed discussion of current period results can be found in
the business segment information that follows.
<PAGE 17>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
OPERATING REVENUES
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
Regulated
Utility
Retail Revenues:
Residential $299,236 $237,240 26.1 $491,476 $403,818 21.7
Commercial 79,855 60,727 31.5 125,651 100,429 25.1
Industrial 11,317 7,075 60.0 16,609 12,542 32.4
-------- -------- -------- --------
390,408 305,042 28.0 633,736 516,789 22.6
Off-System Sales 9,625 8,063 19.4 19,297 10,291 87.5
Transportation 15,359 14,230 7.9 26,209 23,109 13.4
Other 1,026 1,234 (16.9) 1,833 2,505 (26.8)
-------- -------- -------- --------
416,418 328,569 26.7 681,075 552,694 23.2
-------- -------- -------- --------
Pipeline and Storage
Storage Service 20,130 15,622 28.9 35,023 30,512 14.8
Transportation 23,606 23,042 2.4 46,651 45,319 2.9
Other 5,894 2,978 97.9 8,192 11,662 (29.8)
-------- -------- -------- --------
49,630 41,642 19.2 89,866 87,493 2.7
-------- -------- -------- --------
Exploration and
Production 30,172 12,995 132.2 53,145 27,269 94.9
Other Nonregulated 27,745 18,525 49.8 40,082 35,613 12.5
-------- -------- -------- --------
57,917 31,520 83.7 93,227 62,882 48.3
-------- -------- -------- --------
Less-Intersegment
Revenues 31,589 22,969 37.5 55,464 44,975 23.3
-------- -------- -------- --------
$492,376 $378,762 30.0 $808,704 $658,094 22.9
======== ======== ======== ========
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
Utility $ 68,721 $59,200 16.1 $109,353 $ 92,548 18.2
Pipeline and Storage 23,246 18,662 24.6 39,451 41,948 (6.0)
Exploration and
Production 12,825 3,357 282.0 22,329 7,106 214.2
Other Nonregulated (844) 2,376 (135.5) (1,298) 4,480 (129.0)
Corporate (574) (530) (8.3) (1,277) (1,222) (4.5)
-------- ------- -------- --------
$103,374 $83,065 24.4 $168,558 $144,860 16.4
======== ======= ======== ========
<PAGE 18>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
SYSTEM NATURAL GAS VOLUMES
(millions of cubic feet-MMcf)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
Utility Gas Sales
Residential 41,904 36,644 14.4 69,375 59,477 16.6
Commercial 12,183 10,320 18.1 19,539 16,532 18.2
Industrial 2,426 1,704 42.4 3,697 3,058 20.9
Off-System 2,273 3,683 (38.3) 6,410 4,790 33.8
------- ------- ------- -------
58,786 52,351 12.3 99,021 83,857 18.1
------- ------- ------- -------
Non-Utility Gas Sales
Gas Sales for Resale 114 137 (16.8) 187 229 (18.3)
Production(in
equivalent MMcf) 12,535 5,991 109.2 23,254 12,593 84.7
------- ------- ------- -------
12,649 6,128 106.4 23,441 12,822 82.8
------- ------- ------- -------
Total Gas Sales 71,435 58,479 22.2 122,462 96,679 26.7
------- ------- ------- -------
Transportation
Utility 19,229 17,444 10.2 32,787 29,486 11.2
Pipeline and Storage 124,459 105,973 17.4 217,900 177,828 22.5
Nonregulated 163 766 (78.7) 468 1,577 (70.3)
------- ------- ------- -------
143,851 124,183 15.8 251,155 208,891 20.2
------- ------- ------- -------
Marketing Volumes 8,060 5,943 35.6 12,840 10,414 23.3
------- ------- ------- -------
Less-Intersegment Volumes:
Transportation 71,491 66,911 6.8 121,691 109,734 10.9
Production 1,183 1,382 (14.4) 2,475 2,391 3.5
Gas Sales 443 - NM 814 8 NM
Marketing 20 - NM 95 - NM
------- ------- ------- -------
73,137 68,293 7.1 125,075 112,133 11.5
------- ------- ------- -------
Total System Natural Gas
Volumes 150,209 120,312 24.8 261,382 203,851 28.2
======= ======= ======= =======
NM = Not meaningful.
Utility.
Operating revenues for the Utility segment increased $87.8 million and
$128.4 million, respectively, for the quarter and six months ended March 31,
1996, as compared with the same periods a year ago. These increases reflect the
recovery of increased gas costs mainly because of higher gas sales as well as an
increase in the average cost of purchased gas. Colder weather contributed
significantly to the increase in gas sales, which increased 6.4 billion cubic
feet (Bcf) and 15.2 Bcf, respectively, for the quarter and six-month periods.
The increase in operating revenues for both the quarter and six-month period
also reflect general rate increases of $14.2 million and $6.0
<PAGE 19>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
million, respectively, in the New York and Pennsylvania rate jurisdictions,
effective in September 1995. For the six-month period, the increase in operating
revenues also reflects a general rate increase of $4.8 million in the
Pennsylvania rate jurisdiction, effective in December 1994.
Operating income before income taxes for the Utility segment
increased $9.5 million and $16.8 million, respectively, for the quarter and six
months ended March 31, 1996, as compared with the same periods a year ago. This
resulted primarily from weather in Distribution Corporation's service territory
that was colder than last year (see table below), which contributed to an
increase in gas sales, as discussed above. The impact of colder weather was
greatest in the Pennsylvania jurisdiction since Pennsylvania does not have a
weather normalization clause (WNC). The impact of weather in the New York
jurisdiction was tempered by that jurisdiction's WNC, which resulted in a
benefit to customers of $5.0 million and $7.0 million, respectively, for the
quarter and six-month periods. Rate increases discussed above and lower
operation and maintenance (O & M) expense also contributed to the increase in
operating income before income taxes. Lower O & M reflects a lower number of
employees and the streamlining of operations to gain operational and economic
efficiencies.
Degree Days
Three Months Ended March 31:
---------------------------
Percent Colder
Than
Normal 1996 1995 Normal Last Year
- ---------------------------------------------------------------------
Buffalo 3,387 3,595 3,121 6.1 15.2
Erie 3,233 3,450 2,999 6.7 15.0
Six Months Ended March 31:
--------------------------
Buffalo 5,641 6,025 5,057 6.8 19.1
Erie 5,278 5,691 4,714 7.8 20.7
- ---------------------------------------------------------------------
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage
segment increased $4.6 million for the quarter ended March 31, 1996, as compared
with the same period a year ago. The increase is attributable primarily to the
February 1996 FERC approval of Supply Corporation's rate case. With this
approval, new rates became effective on April 1, 1996 retroactive to June 1,
1995. Earnings for the quarter reflect the impact of the rate increase for the
period of June 1, 1995 to March 31, 1996. This impact amounted to approximately
$2.7 million, or $0.07 per share, including $0.05 per share related to prior
quarters.
For the six months ended March 31, 1996, operating income before
income taxes decreased $2.5 million compared with the same period a year ago.
The decrease is attributable primarily to lower revenues related to
<PAGE 20>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
unbundled pipeline sales and open access transportation. This decrease was
partly offset by the increase resulting from the implementation of new rates
discussed above.
While transportation volumes in this segment increased 18.5 Bcf and
40.1 Bcf, respectively, for the quarter and six months ended March 31, 1996, the
increase in volumes did not have a significant impact on earnings as a result of
Supply Corporation's straight fixed-variable (SFV) rate design.
Exploration and Production.
Operating income before income taxes from the Company's Exploration and
Production segment increased $9.5 million and $15.2 million, respectively, for
the quarter and six months ended March 31, 1996, compared with the same periods
a year ago, mainly because of increased natural gas and oil production combined
with higher weighted average prices for both natural gas and oil. As indicated
in the tables below, natural gas production increased 5.3 Bcf and 8.8 Bcf,
respectively, for the quarter and six-month periods, and the weighted average
price received for this production increased $0.94 per thousand cubic feet (Mcf)
and $0.60 per Mcf, respectively. Oil and condensate production increased 204,000
barrels (bbls) and 305,000 bbls, respectively, for the quarter and six-month
periods, and the weighted average price received for this production increased
$2.54 per bbl and $1.79 per bbl, respectively. The increase in natural gas and
oil production is attributable primarily to production from West Cameron 552,
West Delta Block 30, Vermilion 252, and the Hamp Lease.
The fluctuation in prices denoted above does not reflect gains and
losses from hedging activities. These hedging activities reduced operating
revenues by $3.9 million and $3.5 million, respectively, for the quarter and six
months ended March 31, 1996. For the quarter and six months ended March 31,
1995, hedging activities contributed $1.4 million and $2.8 million,
respectively, to operating revenues. As the Company utilizes its hedging program
to effectively manage the market risk associated with fluctuations in the price
of natural gas and crude oil, any gains or losses on hedging transactions are
offset by lower or higher prices received for actual natural gas and crude oil
production. Refer to further discussion of the Company's hedging activities
under "Financing Cash Flow" and in Note 5 - Derivative Financial Instruments.
<PAGE 21>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
PRODUCTION VOLUMES
Exploration and Production.
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
Gas Production - (MMcf)
Gulf Coast 8,703 3,369 158.3 15,999 7,117 124.8
West Coast 248 175 41.7 505 341 48.1
Appalachia 1,363 1,451 (6.1) 2,756 2,971 (7.2)
------ ----- ------ -----
10,314 4,995 106.5 19,260 10,429 84.7
====== ===== ====== ======
Oil Production - (Thousands of Barrels)
Gulf Coast 239 66 262.1 408 155 163.2
West Coast 126 97 29.9 250 199 25.6
Appalachia 5 3 66.7 8 7 14.3
--- --- --- ---
370 166 122.9 666 361 84.5
=== === === ===
WEIGHTED AVERAGE PRICES
Exploration and Production.
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
Weighted Avg. Gas Price/Mcf
Gulf Coast $2.55 $1.48 72.3 $2.28 $1.54 48.1
West Coast $1.18 $1.41 (16.3) $1.19 $1.55 (23.2)
Appalachia $2.97 $2.05 44.9 $2.51 $2.05 22.4
Weighted Average Price $2.58 $1.64 57.3 $2.28 $1.68 35.7
Weighted Avg. Oil Price/bbl
Gulf Coast $19.66 $17.10 15.0 $18.78 $16.56 13.4
West Coast $17.03 $15.59 9.2 $15.96 $15.41 3.6
Appalachia $17.17 $15.65 9.7 $16.84 $15.47 8.9
Weighted Average Price $18.73 $16.19 15.7 $17.70 $15.91 11.3
Other Nonregulated.
Operating income before income taxes associated with this segment
decreased $3.2 million and $5.8 million, respectively, for the quarter and six-
month period, compared with the same periods a year ago. The decrease for both
periods is primarily attributable to expenses incurred by Horizon, the Company's
foreign and domestic energy projects subsidiary, in developing international
opportunities. Many of these expenses may be reimbursed to Horizon upon the
occurrence of certain events and at such time would be taken into earnings. As
discussed under "International Investment" on page 24, on May 11, 1996, Horizon
obtained a commitment for financing on a power plant project in Pakistan.
Certain expenses related to this project will be reimbursed to Horizon in the
future.
<PAGE 22>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Income Taxes.
Income taxes increased $7.1 million and $7.5 million, respectively, for
the quarter and six months ended March 31, 1996, mainly because of an increase
in pretax income.
Interest Charges.
Total interest charges increased $1.0 million and $2.4 million,
respectively, for the quarter and six months ended March 31, 1996. Other
interest increased $1.8 million and $3.3 million for the quarter and six-month
period, respectively, mainly as a result of increases in short-term borrowings.
Interest on long-term debt decreased $0.8 million and $0.9 million,
respectively, for the quarter and six-month period, mainly because of a lower
average amount of long-term debt compared to the same periods a year ago.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the six-month period
consisted of cash provided by operating activities, long-term debt, 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,
Dividend Reinvestment Plan and section 401(k) Plans.
Operating Cash Flow
Internally generated cash from operating activities consists of net
income available for common stock, adjusted for noncash expenses, noncash income
and changes in operating assets and liabilities. Noncash items include
depreciation, depletion and amortization, deferred income taxes and allowance
for funds used during construction.
Cash provided by operating activities in the Utility 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 segment,
fluctuations in weather and over- or under-recovered purchased gas costs. The
impact of weather on cash flow is tempered in the Utility segment'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 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. For storage gas inventory accounted for under the last-in, first-
<PAGE 23>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
out (LIFO) method, the current cost of replacing gas withdrawn from storage is
recorded in the Consolidated Statement of Income and a reserve for gas
replacement is recorded in the Consolidated Balance Sheet and is included under
the caption "Other Accruals and Current Liabilities." Such reserve is reduced as
the inventory is replenished.
Net cash provided by operating activities totaled $100.0 million for
the six months ended March 31, 1996, a decrease of $27.5 million compared with
$127.5 million provided by operating activities for the six months ended March
31, 1995. This shift in cash flow can be attributed primarily to an increase in
receivable balances, offset partly by higher payable balances, in the Utility
and Exploration and Production segments.
Investing Cash Flow
Capital Expenditures
- --------------------
The Company's capital expenditures totaled $70.7 million during the six
months ended March 31, 1996. Total expenditures for the six-month period
represent 41% of the total current capital expenditure budget for fiscal 1996 of
$172.9 million.
The following table presents capital expenditures for the six months
ended March 31, 1996, by business segment:
(in thousands) Percentage
-------------- ----------
Utility $26,609 37.7
Pipeline and Storage 7,760 11.0
Exploration and Production 35,153 49.7
Other Nonregulated 1,152 1.6
------- -----
$70,674 100.0
======= =====
The bulk of the Utility segment'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.
The bulk of the Pipeline and Storage segment's capital expenditures
were made for additions, improvements and replacements to this segment's
transmission and storage systems.
The Exploration and Production segment spent approximately $19.3
million on its offshore program in the Gulf of Mexico, including offshore lease
acquisitions and drilling and construction expenditures. Lease acquisitions
included the acquisition of Galveston Block 225 through a federal lease sale.
Approximately $15.7 million was spent on the Exploration and Production
segment's onshore program, including horizontal onshore drilling in central
Texas and Seneca's development drilling program in California.
<PAGE 24>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
At the April 24, 1996 Federal Louisiana Offshore Lease Sale, Seneca was
the high bidder on two of four bids for offshore leases. The two bids, which
still must be awarded, totaled $4.5 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 segment 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.
International Investment
- ------------------------
On May 11, 1996, Horizon obtained a commitment for financing on a deal
to construct, own and operate a 151 Megawatt power plant near Kabirwala, Punjab
Province in east-central Pakistan. Horizon is to become an equity partner with
the Fauji Foundation of Pakistan and the Asian Development Bank in a new
venture, Fauji Kabirwala Power Company Limited (FKPC), which will own and
operate the $170 million gas-fired, combined cycle turbine facility. The Fauji
Foundation and Horizon's affiliate, Sceptre Power Company, are joint developers
of the project.
The project will be financed with $127.5 million of non-recourse
project-financed debt and $42.5 million in equity. Horizon's equity investment
will be approximately $18 million, with the remainder coming from the Fauji
Foundation and the Asian Development Bank, the lead lender for the project.
Certain permits must be received from local and regional as well as
central governmental agencies in Pakistan before the funding will become
available and the project can proceed.
The project will utilize low Btu gas from two nearby fields in
combination with pipeline quality gas to provide electric generating capacity.
The power will be sold to the Pakistan Water and Power Development Authority
under a 30-year power purchase agreement. Construction is expected to begin
before September 30, 1996. The plant should be in commercial operation in
under two years thereafter.
Financing Cash Flow
In December 1995, the Company retired $38.5 million of maturing 8.90%
medium-term notes and $20.0 million of 8.875% medium-term notes. Short-term
borrowings were used to retire the medium-term notes.
<PAGE 25>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
In March 1996, the Company issued $100.0 million of 5.58% medium-term
notes due in March 1999. After reflecting underwriting discounts and
commissions, the net proceeds to the Company amounted to $99.7 million.
Consolidated short-term debt decreased by $37.1 million during the
first six months of fiscal 1996. 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's present liquidity position is believed to be adequate to
satisfy known demands. Under the Company's covenants contained in its indenture
covering long-term debt, at March 31, 1996, the Company would have been
permitted to issue up to a maximum of $622 million in additional long-term
unsecured indebtedness, in light of then current long-term interest rates. In
addition, at March 31, 1996, the Company had regulatory authorizations and
unused short-term credit lines that would have permitted it to borrow an
additional $489.5 million of short-term debt.
The Company currently has an effective shelf registration under the
Securities Act of 1933, as amended, to issue and sell up to $20 million of
debentures and/or medium term notes.
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. During the quarter ended March 31,
1996, Seneca utilized natural gas and crude oil price swap agreements with
notional amounts of 6.5 equivalent Bcf and 204,000 equivalent bbl, respectively.
These hedging activities reduced operating revenues by approximately $3.9
million. For the six months ended March 31, 1996, Seneca
utilized natural gas and crude oil price swap agreements with notional amounts
of 11.9 equivalent Bcf and 418,000 equivalent bbl, respectively. These hedging
activities reduced operating revenues by approximately $3.5 million. As the
Company utilizes its hedging program to effectively manage the market risk
associated with fluctuations in the price of natural gas and crude oil, any
gains or losses on hedging transactions are offset by lower or higher prices
received for actual natural gas and crude oil production.
At March 31, 1996, Seneca had natural gas price swap agreements
outstanding with a notional amount of 37.7 equivalent Bcf at prices ranging from
$1.71 per Mcf to $2.00 per Mcf. Seneca also had crude oil price swap agreements
outstanding at March 31, 1996 with a notional amount of 1,902,000 equivalent bbl
at prices ranging from $17.40 per bbl to $18.50 per bbl. In addition, the
Company has Securities and Exchange Commission (SEC) authority to enter into
certain interest rate swap agreements. For further discussion, refer to Note 5 -
Derivative Financial Instruments.
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
<PAGE 26>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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
materially change the Company's present liquidity position.
RATE MATTERS
Utility
New York Jurisdiction
- ---------------------
In November 1995, Distribution Corporation filed in its New York
jurisdiction a request for an annual base rate increase of $28.9 million with a
requested return on equity of 11.5%. A two year settlement has been entered into
with the parties in this rate proceeding. The settlement calls for annual base
rate increases of $7.2 million in each of the fiscal years beginning October 1,
1996 and October 1, 1997 with no specified rate of return on equity. Earnings
above a 12% return on equity (excluding certain items and determined on a
cumulative basis over the three years ending September 30, 1998) will be shared
equally between shareholders and rate payers. The settlement, which must be
approved by the State of New York Public Service Commission (PSC), is expected
to be addressed by the PSC in mid to late May 1996.
On April 30, 1996, Distribution Corporation made a filing with the
PSC that will provide a framework for a plan to make it possible for its
residential and small commercial customers to purchase gas from a supplier other
than Distribution Corporation. This filing was made in compliance with the PSC's
March 28, 1996 Order regarding Restructuring of the Emerging Competitive Natural
Gas Market. Under the proposed plan, customers would be able to choose from whom
they want to buy gas, which could be Distribution Corporation, another utility,
or a non-utility supplier or marketer. If a customer purchases gas from a
supplier other than Distribution Corporation, the supplier would obtain and
transport the gas to Distribution Corporation's pipeline system and Distribution
Corporation would then deliver the gas to the customer. Distribution Corporation
would continue to be responsible for maintaining its pipelines and responding to
safety calls, but billing and other traditional services would be assumed by the
alternate supplier.
In October 1994, Distribution Corporation filed in its New York
jurisdiction a request for an annual base rate increase of $56.5 million with a
requested return on equity of 12.85%. In September 1995, the PSC issued an order
authorizing an annual base rate increase of $14.2 million with a return on
equity of 10.4%. The new rates became effective as of September 20, 1995.
Pennsylvania Jurisdiction
- -------------------------
Distribution Corporation elected not to file a rate case in March
1996 because cost control efforts in the Pennsylvania jursidiction have proven
effective. Distribution Corporation will continue to monitor its financial
position in the Pennsylvania jurisdiction to determine the necessity of filing a
rate case in the future.
On March 15, 1995, Distribution Corporation filed in its Pennsylvania
jurisdiction a request for an annual base rate increase of $22.0 million with a
return on equity of 13.25%. In September 1995, the Pennsylvania Public Utility
<PAGE 27>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Concl.)
-----------------------------
Commission (PaPUC) approved a settlement authorizing an annual base rate
increase of $6.0 million with no specified rate of return on equity. The new
rates became effective as of September 27, 1995.
On March 8, 1994, Distribution Corporation filed in its Pennsylvania
jurisdiction a request for an annual base rate increase of $16.0 million 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 base
rate increase of $4.8 million 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 $21.0 million, with a requested return on equity of 12.6%. In
February 1996, the FERC approved a settlement which will increase Supply
Corporation's revenues by approximately $6.0 million annually from current
levels, with a return on equity of 11.3%. The new rates were put into effect on
April 1, 1996, retroactive to June 1, 1995. With this settlement, Supply
Corporation agreed not to seek recovery for increased cost of service until
April 1, 1998.
As part of the settlement discussed above, Supply Corporation also
agreed not to seek recovery of revenues related to terminated Penn-York service
from other storage customers until April 1, 2000, as long as the terminations
were not greater than approximately 30% of the terminable service. Supply
Corporation did receive notification of the termination of 3.3 Bcf of such
service, effective March 31, 1996. However, Supply Corporation has successfully
obtained executed contracts for all 3.3 Bcf at discounted prices. Such discounts
will not have a material impact on the results of operations for Supply
Corporation.
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings
- ---------------------------
Paragon/TGX 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
<PAGE 28>
Item 1. Legal Proceedings (Concl.)
- -----------------------------------
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 $21.9 million (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.
On September 29, 1994, Paragon/TGX served an amended answer and
counterclaim. That pleading restated Paragon/TGX's claims for unquantified money
damages respecting Distribution Corporation's alleged (i) breach of contract
price and "take-or-pay" provisions, (ii) "lack of good faith . . . material
breach" of the contract, and (iii) repudiation of the contract. The pleading
also added two new, but unquantified claims - (i) consequential damages suffered
upon the sale of properties and assignment of the Paragon Contract at less than
full value, and (ii) damages related to the allegation that Distribution
Corporation "tortiously and with intent injured TGX in the conduct of its
business." Distribution filed a timely reply to Paragon/TGX's claims.
In April 1996, Distribution Corporation, Paragon/TGX and the PSC
entered into a settlement agreement under which all litigation involving the
Paragon Contract was resolved. Distribution Corporation made a payment of $7.2
million in satisfaction of all claims. On April 18, 1996, the PSC issued an
order authorizing Distribution Corporation to utilize pipeline supplier refunds
to fund most of the settlement payment that was allocable to New York.
Distribution Corporation has deferred and is expected to recover the portion
allocable to Pennsylvania in a future gas cost proceeding. This settlement
reduced Distribution Corporation's net income by approximately $0.4 million.
<PAGE 29>
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, 1996. At that meeting, the shareholders elected directors
and appointed independent accountants.
The total votes were as follows:
Against
For or Withheld Abstain
---------- ----------- -------
(i) Election of directors to serve
for a three-year term:
- Robert T. Brady 30,557,104 543,281 -
- William J. Hill 30,574,683 525,702 -
- Bernard J. Kennedy 30,592,435 507,950 -
- Leonard Rochwarger 30,548,496 551,889 -
(ii) Appointment of Price Waterhouse LLP
as independent accountants 30,503,552 259,538 337,295
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
(4) Third Supplemental Indenture dated as of
December 1, 1982 to Indenture dated as of
October 15, 1974, between the Company and
The Bank of New York (formerly Irving Trust
Company) (Incorporated herein by reference
as Exhibit 4(a)(4) in File No. 33-49401).
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended March 31, 1996 and the
fiscal years ended September 30, 1991
through 1995.
(27) Financial Data Schedule
(99) National Fuel Gas Company Consolidated
Statement of Income for the Twelve
Months Ended March 31, 1996 and 1995.
(b) Reports on Form 8-K
None
<PAGE 30>
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
undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
(Registrant)
/s/Joseph P. Pawlowski
--------------------------------------
Joseph P. Pawlowski
Treasurer and
Principal Accounting Officer
Date: May 15, 1996
------------
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF EXHIBIT 12
EARNINGS TO FIXED CHARGES
UNAUDITED
Twelve Fiscal Year Ended September 30
Months Ended ---------------------------------------------------------
3/31/96 1995 1994 1993 1992 1991
-----------------------------------------------------------------------
EARNINGS:
<S> <C> <C> <C> <C> <C> <C>
Income Before Interest Charges (2) $144,621 $128,061 $127,885 $125,742 $118,222 $110,240
Allowance for Borrowed Funds Used in Construction 149 195 209 174 1,088 2,278
Federal Income Tax 40,748 30,522 36,630 21,148 17,680 (3,929)
State Income Tax 4,347 4,905 6,309 2,979 3,426 341
Deferred Inc. Taxes - Net (3) 6,256 8,452 4,853 16,919 14,125 26,873
Investment Tax Credit - Net (670) (672) (682) (693) (706) (738)
Rentals (1) 5,650 5,422 5,730 5,621 5,857 4,915
-----------------------------------------------------------------------
$201,101 $176,885 $180,934 $171,890 $159,692 $139,980
=======================================================================
FIXED CHARGES:
Interest & Amortization of Premium and
Discount of Funded Debt $40,001 $40,896 $36,699 $38,507 $39,949 $41,916
Interest on Commercial Paper and
Short-Term Notes Payable 8,541 6,745 5,599 7,465 12,093 11,933
Other Interest (2) 6,128 4,721 3,361 4,727 6,958 9,679
Rentals (1) 5,650 5,422 5,730 5,621 5,857 4,915
-----------------------------------------------------------------------
$60,320 $57,784 $51,389 $56,320 $64,857 $68,443
=======================================================================
RATIO OF EARNINGS TO FIXED CHARGES 3.33 3.06 3.52 3.05 2.46 2.05
</TABLE>
Notes:
(1) Rentals shown above represent the portion of all rentals (other than
delay rentals) deemed representative of the interest factor.
(2) The twelve month period ended March 31, 1996, and the fiscal years
1995, 1994, 1993 and 1992 reflect the reclassification of $1,716,
$1,716, $1,674, $1,374 and $1,129, respectively, representing the loss
on reacquired debt amortized during each period, from Other Interest
Charges to Operation Expense.
(3) Deferred Income Taxes - Net for fiscal 1994 excludes the cumulative
effect of changes in accounting.
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-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,657,350
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 360,727
<TOTAL-DEFERRED-CHARGES> 9,839
<OTHER-ASSETS> 209,263
<TOTAL-ASSETS> 2,237,179
<COMMON> 37,599
<CAPITAL-SURPLUS-PAID-IN> 388,042
<RETAINED-EARNINGS> 437,913
<TOTAL-COMMON-STOCKHOLDERS-EQ> 863,554
0
0
<LONG-TERM-DEBT-NET> 574,000
<SHORT-TERM-NOTES> 40,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 70,000
<LONG-TERM-DEBT-CURRENT-PORT> 30,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 659,125
<TOT-CAPITALIZATION-AND-LIAB> 2,237,179
<GROSS-OPERATING-REVENUE> 808,704
<INCOME-TAX-EXPENSE> 52,584
<OTHER-OPERATING-EXPENSES> 640,146
<TOTAL-OPERATING-EXPENSES> 692,730
<OPERATING-INCOME-LOSS> 115,974
<OTHER-INCOME-NET> 1,806
<INCOME-BEFORE-INTEREST-EXPEN> 117,780
<TOTAL-INTEREST-EXPENSE> 29,697
<NET-INCOME> 88,083
0
<EARNINGS-AVAILABLE-FOR-COMM> 88,083
<COMMON-STOCK-DIVIDENDS> 30,293
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 99,988
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.35
</TABLE>
EXHIBIT 99
NATIONAL FUEL GAS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Twelve Months Ended
March 31,
-------------------
1996 1995
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $1,126,105 $1,015,568
---------- ----------
Operating Expenses
Purchased Gas 461,831 370,735
Operation Expense 267,587 266,520
Maintenance 26,782 28,029
Property, Franchise and Other Taxes 96,452 96,145
Depreciation, Depletion and Amortization 81,478 73,993
Income Taxes - Net 51,346 47,942
---------- ----------
985,476 883,364
---------- ----------
Operating Income 140,629 132,204
Other Income 5,708 3,316
----------- ----------
Income Before Interest Charges 146,337 135,520
---------- ----------
Interest Charges
Interest on Long-Term Debt 40,001 39,719
Other Interest 16,237 11,127
---------- ----------
56,238 50,846
---------- ----------
Income Before Cumulative Effect 90,099 84,674
Cumulative Effect of Change
in Accounting - (589)
---------- ----------
Net Income Available for Common Stock $ 90,099 $ 84,085
========== ==========
Earnings Per Common Share
Income Before Cumulative Effect $2.41 $2.27
Cumulative Effect of Change
in Accounting - (.02)
----- -----
Net Income Available for Common Stock $2.41 $2.25
===== =====
Weighted Average Common Shares Outstanding 37,461,235 37,279,331
========== ==========
