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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 June 30, 1996
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Commission File Number 1-3880
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NATIONAL FUEL GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 13-1086010
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Lafayette Square
Buffalo, New York 14203
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(Address of principal executive offices) (Zip Code)
(716) 857-6980
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(Registrant's telephone number, including area code)
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $1 par value, outstanding at July 31, 1996:
37,772,653 shares.
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<PAGE>
Company or Group of Companies for which Report is Filed:
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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)
National Fuel Resources, Inc. (NFR)
Horizon Energy Development, Inc. (Horizon)
Leidy Hub, Inc. (Leidy Hub)
Data-Track Account Services, Inc. (Data-Track)
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
Nine Months Ended June 30, 1996 and 1995 3 - 4
b. Consolidated Balance Sheets - June 30, 1996 and
September 30, 1995 5 - 6
c. Consolidated Statement of Cash Flows - Nine
Months Ended June 30, 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 16 - 28
Part II. Other Information
--------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
* The Company has nothing to report under this item.
<PAGE>
Part I. - Financial Information
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Item 1. - Financial Statements
- ------------------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Three Months Ended
June 30,
------------------
1996 1995
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $239,330 $193,461
-------- --------
Operating Expenses
Purchased Gas 80,078 60,153
Operation Expense 63,663 62,733
Maintenance 6,104 6,539
Property, Franchise and Other Taxes 23,582 20,881
Depreciation, Depletion and Amortization 26,533 17,930
Income Taxes - Net 9,683 6,238
-------- --------
209,643 174,474
-------- --------
Operating Income 29,687 18,987
Other Income 1,172 3,210
-------- --------
Income Before Interest Charges 30,859 22,197
-------- --------
Interest Charges
Interest on Long-Term Debt 10,539 9,694
Other Interest 3,010 3,522
-------- --------
13,549 13,216
-------- --------
Net Income Available for Common Stock 17,310 8,981
EARNINGS REINVESTED IN THE BUSINESS
Balance at April 1 437,913 408,306
-------- --------
455,223 417,287
Dividends on Common Stock
(1996 - $.42; 1995 - $.405) 15,784 15,097
-------- --------
Balance at June 30 $439,439 $402,190
======== ========
Earnings Per Common Share $0.46 $0.24
===== =====
Weighted Average Common Shares Outstanding 37,674,241 37,421,500
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. - Financial Statements (Cont.)
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National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
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Nine Months Ended
June 30,
-----------------
1996 1995
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $1,048,034 $851,555
---------- --------
Operating Expenses
Purchased Gas 460,020 329,349
Operation Expense 205,686 203,954
Maintenance 19,274 18,646
Property, Franchise and Other Taxes 83,040 75,725
Depreciation, Depletion and Amortization 72,086 53,796
Income Taxes - Net 62,267 51,354
-------- --------
902,373 732,824
-------- --------
Operating Income 145,661 118,731
Other Income 2,979 4,686
-------- --------
Income Before Interest Charges 148,640 123,417
-------- --------
Interest Charges
Interest on Long-Term Debt 30,413 30,463
Other Interest 12,833 10,095
-------- --------
43,246 40,558
-------- --------
Net Income Available for Common Stock 105,394 82,859
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 380,123 363,854
-------- --------
485,517 446,713
Dividends on Common Stock
(1996 - $1.23; 1995 - $1.195) 46,078 44,523
-------- --------
Balance at June 30 $439,439 $402,190
======== ========
Earnings Per Common Share $2.81 $2.22
===== =====
Weighted Average Common Shares Outstanding 37,555,248 37,385,301
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
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National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
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June 30,
1996 September 30,
(Unaudited) 1995
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(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,417,648 $2,322,335
Less - Accumulated Depreciation, Depletion
and Amortization 740,262 673,153
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1,677,386 1,649,182
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Current Assets
Cash and Temporary Cash Investments 15,368 12,757
Receivables - Net 156,466 75,933
Unbilled Utility Revenue 13,187 20,838
Gas Stored Underground 12,579 25,589
Materials and Supplies - at average cost 23,610 24,374
Prepayments 16,726 29,753
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237,936 189,244
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Other Assets
Recoverable Future Taxes 92,868 94,053
Unamortized Debt Expense 25,705 26,976
Other Regulatory Assets 58,966 37,040
Deferred Charges 7,987 8,653
Other 39,900 33,154
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225,426 199,876
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$2,140,748 $2,038,302
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
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National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
June 30,
1996 September 30,
(Unaudited) 1995
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(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 100,000,000 Shares; Issued
and Outstanding - 37,708,120 Shares and
37,434,363 Shares, Respectively $ 37,708 $ 37,434
Paid in Capital 391,333 383,031
Earnings Reinvested in the Business 439,439 380,123
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Total Common Stock Equity 868,480 800,588
Long-Term Debt, Net of Current Portion 574,000 474,000
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Total Capitalization 1,442,480 1,274,588
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Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 87,200 147,600
Current Portion of Long-Term Debt 30,000 88,500
Accounts Payable 61,845 53,842
Amounts Payable to Customers 10,314 51,001
Other Accruals and Current Liabilities 122,622 52,118
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311,981 393,061
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Deferred Credits
Accumulated Deferred Income Taxes 290,033 288,763
Taxes Refundable to Customers 23,080 23,080
Unamortized Investment Tax Credit 12,879 13,380
Other Deferred Credits 60,295 45,430
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386,287 370,653
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Commitments and Contingencies - -
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$2,140,748 $2,038,302
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. - Financial Statements (Cont.)
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National Fuel Gas Company
-------------------------
Consolidated Statement of Cash Flows
------------------------------------
(Unaudited)
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Nine Months Ended
June 30,
------------------
1996 1995
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(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $105,394 $ 82,859
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization 72,086 53,796
Deferred Income Taxes 9,332 8,352
Other 4,534 3,489
Change in:
Receivables and Unbilled Utility Revenue (72,882) (12,107)
Gas Stored Underground and Materials and
Supplies 13,774 8,645
Prepayments 13,027 (1,347)
Accounts Payable 8,003 (33,981)
Amounts Payable to Customers (40,687) 16,623
Other Accruals and Current Liabilities 61,760 47,548
Other Assets and Liabilities - Net 4,356 13,916
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Net Cash Provided by
Operating Activities 178,697 187,793
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INVESTING ACTIVITIES
Capital Expenditures (115,874) (135,198)
Other (1,326) 10,616
-------- --------
Net Cash Used in Investing Activities (117,200) (124,582)
-------- --------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper (60,400) (39,300)
Net Proceeds from Issuance of Long-Term Debt 99,650 99,099
Reduction of Long-Term Debt (58,500) (96,000)
Proceeds from Issuance of Common Stock 5,759 2,328
Dividends Paid on Common Stock (45,395) (44,097)
-------- --------
Net Cash Used in
Financing Activities (58,886) (77,970)
-------- --------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 2,611 (14,759)
Cash and Temporary Cash Investments
at October 1 12,757 29,016
-------- --------
Cash and Temporary Cash Investments at June 30 $ 15,368 $ 14,257
======== ========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
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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 nine months ended June 30, 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. Earnings during the summer months tend to
decline and may reach a point where expenses exceed revenues. The impact of
abnormal weather on earnings during the heating season is partially reduced by
the operation of a weather normalization clause included in Distribution
Corporation's New York tariff. The weather normalization clause is effective for
October through May billings. In addition, Supply Corporation's straight
fixed-variable rate design, which allows for recovery of substantially all fixed
costs in the demand or reservation charge, reduces the earnings impact of
weather.
Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement
of Cash Flows, the Company considers all highly liquid debt instruments
purchased with a maturity of generally three months or less to be cash
equivalents. Cash interest payments during the nine months ended June 30, 1996
and 1995, amounted to $36.7 million and $37.1 million, respectively. Net income
taxes paid during the nine months ended June 30, 1996 and 1995 amounted to $49.2
million and $25.6 million, respectively.
Gas Stored Underground - Current. Gas stored underground is carried at lower of
cost or market. Distribution Corporation's inventory cost at June 30, 1996 of
approximately $9.0 million has been determined under the last-in, first-out
(LIFO) method and Supply Corporation's inventory cost of approximately $3.6
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.
<PAGE>
Item 1. Financial Statements (Cont.)
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As of June 30, 1996, Distribution Corporation's estimate of its
exposure to outstanding transition costs claims is in the range of $12.8 million
to $65.2 million. The estimated maximum exposure is declining as transition
costs are incurred and paid. At June 30, 1996, Distribution Corporation has
recorded the minimum liability and corresponding regulatory asset of $12.8
million. In addition, Distribution Corporation's estimated share of Supply
Corporation's $10.4 million of stranded gathering costs at June 30, 1996 is
approximately $9.7 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 of Supply Corporation's net
investment in production and gathering plant is being recovered over a five year
period as a stranded transition cost. The unamortized portion amounts to
approximately $10.4 million at June 30, 1996 and is included in Other Regulatory
Assets on the Consolidated Balance Sheet.
<PAGE>
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):
Nine Months Ended
June 30,
-----------------
1996 1995
---- ----
Operating Expenses:
Current Income Taxes -
Federal $47,947 $37,790
State 4,988 5,212
Deferred Income Taxes 9,332 8,352
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62,267 51,354
Other Income:
Deferred Investment Tax Credit (501) (515)
------- -------
Total Income Taxes $61,766 $50,839
======= =======
Total income taxes as reported differ from the amounts that were
computed by applying the federal income tax rate to income before income taxes.
The following is a reconciliation of this difference (in thousands):
Nine Months Ended
June 30,
-----------------
1996 1995
---- ----
Net income available for common stock $105,394 $ 82,859
Total income taxes 61,766 50,839
-------- --------
Income before income taxes $167,160 $133,698
======== ========
Income tax expense, computed at
statutory rate of 35% $58,506 $46,794
Increase (reduction) in taxes resulting from:
Current state income taxes, net of federal
income tax benefit 3,266 3,388
Depreciation 1,544 1,779
Production tax credits (408) (690)
Miscellaneous (1,142) (432)
-------- -------
Total Income Taxes $ 61,766 $50,839
======== =======
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
At June 30, 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 $185,177 $ - $185,595 $ -
Exploration and
intangible well
drilling costs 96,161 - 84,380 -
Other 67,155 - 67,831 -
-------- ------- -------- -------
Total Deferred Tax
Liabilities 348,493 - 337,806 -
-------- ------- -------- -------
Deferred Tax Assets:
Deferred investment
tax credits (7,861) - (7,860) -
Overheads capitalized
for tax purposes (13,107) - (11,766) -
Unrecovered purchased
gas costs - (1,444) - (8,322)
Other (37,492) - (29,417) -
-------- ------- -------- -------
Total Deferred Tax
Assets (58,460) (1,444) (49,043) (8,322)
-------- ------- -------- -------
Total Net Deferred
Income Taxes $290,033 $(1,444) $288,763 $(8,322)
======== ======= ======== =======
* Included on the Consolidated Balance Sheets in "Other Accruals and Current
Liabilities."
Note 4 - Capitalization
Common Stock. During the nine months ended June 30, 1996, the Company issued
88,100 shares of common stock under the Company's section 401(k) Plans, 90,559
shares to participants in the Company's Dividend Reinvestment Plan, and 21,973
shares to participants in the Company's Customer Stock Purchase Plan.
Additionally, 73,125 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, the adoption of which was subsequently approved by the
Securities and Exchange Commission (SEC), pursuant to the Public Utility Holding
Company Act of 1935, as amended. On June 13, 1996, the Company's Board of
directors declared a dividend of one right (Right) for each share of common
stock held by the shareholders of record on July 31, 1996.
The Rights become exercisable ten days after an acquirer (a) announces
it has acquired or has the right to acquire 10% or more of the Company's voting
stock, or (b) announces a tender offer which would result in it owning 10% or
more of the Company's voting stock. If the Rights become exercisable, each
Company stockholder, except an acquirer, will 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 acquirer, having a market
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
value equal to twice the Right's then current purchase price. If a Right were
currently exercisable, it would entitle a Company stockholder, other than an
acquirer, to purchase $130 worth of Company common stock (or the common stock of
the acquirer) for $65. The Rights have a term of ten years.
The Board of Directors is able to exchange the Rights at an exchange
ratio of one share of common stock per Right. It also is able to redeem, in
whole but not in part, the Rights at a price of $0.01 per Right anytime until
ten days after an acquirer announces that 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 authorization from the SEC to issue and
sell up to $150.0 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>
Item 1. Financial Statements (Cont.)
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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 nine-month periods ended June 30, 1996 and 1995,
respectively:
Quarter Ended Quarter Ended
June 30, 1996 June 30, 1995
------------- -------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Billion
Cubic Feet (Bcf) 5.6 5.0
Fixed Prices per Thousand Cubic
Feet (Mcf) $1.71 - $1.99 $1.74 - $2.16
Variable Prices per Mcf $2.27 - $2.70 $1.59 - $1.77
Gain (Loss) $(3,311,000) $1,342,000
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent
Barrels (bbl) 314,000 185,000
Fixed Prices per bbl $17.40 - $19.25 $16.68 - $19.60
Variable Prices per bbl $20.43 - $23.30 $18.40 - $19.89
Loss $(1,020,000) $(185,000)
Nine Months Ended Nine Months Ended
June 30, 1996 June 30, 1995
----------------- -----------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Bcf 17.5 9.7
Fixed Prices per Mcf $1.71 - $3.05 $1.74 - $2.39
Variable Prices per Mcf $1.67 - $3.43 $1.36 - $1.77
Gain (Loss) $(6,602,000) $4,311,000
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent bbl 732,000 516,000
Fixed Prices per bbl $17.40 - $19.25 $16.68 - $19.60
Variable Prices per bbl $17.40 - $23.30 $17.16 - $19.89
Loss $(1,236,000) $(338,000)
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
The Company had the following price swap agreements outstanding at
June 30, 1996.
Natural Gas Price Swap Agreements:
Notional Amount
Fiscal Year (Equivalent Bcf) Fixed Price Per Mcf
- ----------- ---------------- -------------------
1996 5.6 $1.71 - $1.99
1997 24.9 $1.71 - $2.10
1998 9.7 $1.77 - $2.06
1999 1.1 $2.00
----
41.3
====
Crude Oil Price Swap Agreements:
Notional Amount
Fiscal Year (Equivalent bbl) Fixed Price Per bbl
- ----------- ---------------- -------------------
1996 339,000 $17.40 - $19.25
1997 1,218,000 $17.40 - $18.33
1998 396,000 $17.50 - $18.31
---------
1,953,000
=========
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 June 30, 1996, the Company had
unrecognized losses of approximately $19.1 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, at the time they are entered into. 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 $300.0 million. No such agreements were entered into during the
quarter or nine months ended June 30, 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.
<PAGE>
Item 1. Financial Statements (Concl.)
- --------------------------------------
Note 6 - Retirement Plan and Other Post-Employment Benefits
On July 29, 1996, the Company announced a special early retirement
offer (SERO) to certain salaried, non-union hourly and union employees of
Distribution Corporation and Supply Corporation who have completed at least five
years of service and have attained at least 55 years of age on or before October
1, 1996. Approximately 400 employees are eligible for the SERO. The offer must
be accepted by any eligible employee by August 31, 1996 and will become
effective October 1, 1996. Management's estimate of the pre-tax expense
associated with this SERO is approximately $7 million to $9 million. A charge to
earnings will be reflected in the Company's fourth quarter financial results
after the number of employees accepting the offer is known.
Note 7 - 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 $8.7 million to
$10.1 million. At June 30, 1996, Distribution Corporation has recorded the
minimum liability of $8.7 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 June 30, 1996
includes related regulatory assets in the amount of approximately $8.0 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. 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.
The Company's earnings were $17.3 million, or $0.46 per common share,
during the quarter ended June 30, 1996. This compares with earnings of $9.0
million, or $0.24 per common share, during the quarter ended June 30, 1995.
The Company's earnings were $105.4 million, or $2.81 per common
share, during the nine months ended June 30, 1996. This compares with earnings
of $82.9 million, or $2.22 per common share during the nine months ended June
30, 1995.
The increase in earnings for the quarter and nine months ended June
30, 1996 is primarily attributable to the higher earnings of the Company's
Exploration and Production and Utility segments. 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 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 nine-month
period.
The Pipeline and Storage segment contributed to the increase in
earnings for the quarter ended June 30, 1996, primarily because of the February
1996 Federal Energy Regulatory Commission (FERC) approval of Supply
Corporation's rate case. New rates were in effect for the entire quarter ended
June 30, 1996. For the nine months ended June 30, 1996, however, the Pipeline
and Storage segment experienced a decrease in earnings as revenues related to
unbundled pipeline sales and open access transportation decreased from the prior
year. This decrease was partly offset by the impact of Supply Corporation's rate
increase which became effective on April 1, 1996 retroactive to June 1, 1995.
Since the rate increase was retroactive, earnings for the nine months ended June
30, 1996 include approximately $1.2 million, or $0.03 per share related to
fiscal 1995.
The Other Nonregulated operations experienced a decline in earnings
for the quarter and nine months ended June 30, 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 in more detail under
"International Investments" on page 24, on May 11, 1996, Horizon obtained from
certain lenders a commitment to provide the debt financing necessary to
construct a power plant in Pakistan. It is expected that the lenders will
reimburse Horizon in the future for certain expenses related to this project.
The decline in earnings for the quarter and nine months ended June 30, 1996 can
also be attributed to the gain on the sale of the Company's pipeline
construction equipment, net of certain accrued expenses, during the quarter
ended June 30,1995.
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.)
-----------------------------
<TABLE>
<CAPTION>
OPERATING REVENUES
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Regulated
Utility
Retail Revenues:
Residential $123,214 $103,661 18.9 $ 614,691 $507,479 21.1
Commercial 27,133 24,017 13.0 152,784 124,446 22.8
Industrial 3,799 3,506 8.4 20,407 16,048 27.2
-------- -------- ---------- --------
154,146 131,184 17.5 787,882 647,973 21.6
Off-System Sales 5,976 5,518 8.3 25,272 15,809 59.9
Transportation 13,218 10,580 24.9 39,428 33,689 17.0
Other 784 1,193 (34.3) 2,617 3,698 (29.2)
-------- -------- ---------- --------
174,124 148,475 17.3 855,199 701,169 22.0
-------- -------- ---------- --------
Pipeline and Storage
Storage Service 16,630 14,499 14.7 51,653 45,011 14.8
Transportation 22,825 21,994 3.8 69,476 67,313 3.2
Other 706 2,583 (72.7) 8,898 14,245 (37.5)
-------- -------- ---------- --------
40,161 39,076 2.8 130,027 126,569 2.7
-------- -------- ---------- --------
Exploration and
Production 31,367 14,318 119.1 84,512 41,587 103.2
Other Nonregulated 19,161 13,287 44.2 59,243 48,901 21.1
-------- -------- ---------- --------
50,528 27,605 83.0 143,755 90,488 58.9
-------- -------- ---------- --------
Less-Intersegment
Revenues 25,483 21,695 17.5 80,947 66,671 21.4
-------- -------- ---------- --------
$239,330 $193,461 23.7 $1,048,034 $851,555 23.1
======== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -------------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Utility $10,323 $ 4,999 106.5 $119,676 $ 97,547 22.7
Pipeline and Storage 17,345 16,559 4.7 56,797 58,508 (2.9)
Exploration and
Production 12,683 4,833 162.4 35,012 11,939 193.3
Other Nonregulated (564) (620) 9.0 (1,863) 3,859 (148.3)
Corporate (417) (546) 23.6 (1,694) (1,768) 4.2
------- ------- -------- --------
$39,370 $25,225 56.1 $207,928 $170,085 22.2
======= ======= ======== ========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
<TABLE>
<CAPTION>
SYSTEM NATURAL GAS VOLUMES
(millions of cubic feet-MMcf)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Utility Gas Sales
Residential 15,138 14,088 7.5 84,513 73,565 14.9
Commercial 3,720 3,860 (3.6) 23,259 20,392 14.1
Industrial 880 1,035 (15.0) 4,577 4,093 11.8
Off-System 2,190 2,956 (25.9) 8,600 7,746 11.0
------ ------ ------- -------
21,928 21,939 (0.1) 120,949 105,796 14.3
------ ------ ------- -------
Non-Utility Gas Sales
Gas Sales for Resale - 94 NM - 323 NM
Production (in
equivalent MMcf) 13,055 6,535 99.8 36,309 19,128 89.8
------ ------ ------- -------
13,055 6,629 96.9 36,309 19,451 86.7
------ ------ ------- -------
Total Gas Sales 34,983 28,568 22.5 157,258 125,247 25.6
------ ------ ------- -------
Transportation
Utility 15,196 13,789 10.2 47,983 43,275 10.9
Pipeline and Storage 63,174 64,344 (1.8) 281,074 242,172 16.1
Nonregulated 91 377 (75.9) 559 1,954 (71.4)
------ ------ ------- -------
78,461 78,510 (0.1) 329,616 287,401 14.7
------ ------ ------- -------
Marketing Volumes 5,089 5,193 (2.0) 17,929 15,607 14.9
------ ------ ------- -------
Less-Intersegment Volumes:
Transportation 28,075 27,728 1.3 149,766 137,462 9.0
Production 1,145 1,329 (13.8) 3,620 3,720 (2.7)
Gas Sales - - - 814 8 NM
Marketing 24 - NM 119 - NM
------ ------ ------- -------
29,244 29,057 0.6 154,319 141,190 9.3
------ ------ ------- -------
Total System Natural Gas
Volumes 89,289 83,214 7.3 350,484 287,065 22.1
====== ====== ======= =======
</TABLE>
NM = Not meaningful.
Utility.
Operating revenues for the Utility segment increased $25.6 million
and $154.0 million, respectively, for the quarter and nine months ended June 30,
1996, as compared with the same periods a year ago. These increases reflect the
recovery of increased gas costs mainly because of higher residential gas sales
in the quarter and higher total gas sales for the nine-month period as well as
an increase in the average cost of purchased gas. In addition, higher
transportation volumes in both the quarter and nine-month period increased the
Utility segment's operating revenues. Overall, Utility gas sales and
transportation volumes increased 1.4 billion cubic feet (Bcf) and 19.9 Bcf,
respectively, for the quarter and nine-month periods. Weather in Distribution
Corporation's service territory that was colder than last year contributed
significantly to the increase in volumes. The increase in operating revenues for
both the quarter and nine-month period also reflects general rate increases of
$14.2 million and $6.0 million, respectively, in the New York and
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Pennsylvania rate jurisdictions, effective in September 1995. For the nine-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 $5.3 million and $22.1 million, respectively, for the quarter and nine
months ended June 30, 1996, as compared with the same periods a year ago. This
resulted primarily from the general rate increases, discussed above, an emphasis
on controlling operation and maintenance expenses and colder weather. Although
the New York jurisdiction of Distribution Corporation has a weather
normalization clause (WNC) which mitigates the impact of weather on its utility
customers, the mechanism is only in effect for October through May billings. An
increase in weather related throughput subsequent to the May billing cycle
benefited earnings in the quarter ended June 30, 1996, while a weather related
decline in throughput for the same non-weather normalized period during the
quarter ended June 30, 1995 reduced earnings for that quarter. Nonetheless, for
the entire quarter ended June 30, 1996, the WNC resulted in a benefit to
customers of $3.6 million, and for the nine months ended June 30, 1996, the WNC
resulted in a benefit to customers of $10.6 million.
Degree Days
Three Months Ended June 30:
--------------------------
Percent Colder
Than
Normal 1996 1995 Normal 1995
- ------------------------------------------------------------------
Buffalo 918 1,032 943 12.4 9.4
Erie 880 954 919 8.4 3.8
Nine Months Ended June 30:
-------------------------
Buffalo 6,559 7,057 6,000 7.6 17.6
Erie 6,158 6,645 5,633 7.9 18.0
- ------------------------------------------------------------------
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage
segment increased $0.8 million for the quarter ended June 30, 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. New rates were in
effect for all of the quarter ended June 30, 1996.
For the nine months ended June 30, 1996, operating income before
income taxes decreased $1.7 million compared with the same period a year ago.
The decrease is attributable primarily to lower revenues related to unbundled
pipeline sales and open access transportation. This decrease was partly offset
by the implementation of new rates which became effective on April 1, 1996
retroactive to June 1, 1995. Since the new rates were retroactive, the nine
months ended June 30, 1996 include approximately $1.2 million, or $0.03 per
share, related to fiscal 1995.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Exploration and Production.
Operating income before income taxes from the Company's Exploration and
Production segment increased $7.9 million and $23.1 million, respectively, for
the quarter and nine months ended June 30, 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 4.3 Bcf and 13.2 Bcf,
respectively, for the quarter and nine-month periods, and the weighted average
price received for this production increased $0.75 per thousand cubic feet (Mcf)
and $0.66 per Mcf, respectively. Oil and condensate production increased 363,000
barrels (bbls) and 668,000 bbls, respectively, for the quarter and nine-month
periods, and the weighted average price received for this production increased
$3.21 per bbl and $2.56 per bbl, respectively. The increase in natural gas and
oil production is attributable primarily to Gulf Coast production from West
Cameron 552, West Delta Block 30, Vermilion 252, and to the Hamp Lease in
California.
The fluctuation in prices denoted above does not reflect gains and
losses from hedging activities. These hedging activities reduced operating
revenues by $4.3 million and $7.8 million, respectively, for the quarter and
nine months ended June 30, 1996. For the quarter and nine months ended June 30,
1995, hedging activities contributed $1.2 million and $4.0 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>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
PRODUCTION VOLUMES
Exploration and Production.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
Gas Production - (MMcf)
Gulf Coast 8,202 3,835 113.9 24,201 10,952 121.0
West Coast 242 195 24.1 747 536 39.4
Appalachia 1,350 1,424 (5.2) 4,107 4,395 (6.6)
----- ----- ------ ------
9,794 5,454 79.6 29,055 15,883 82.9
===== ===== ====== ======
Oil Production - (Thousands of Barrels)
Gulf Coast 397 63 530.2 805 218 269.3
West Coast 142 111 27.9 392 311 26.0
Appalachia 4 6 (33.3) 12 12 -
--- --- ----- ---
543 180 201.7 1,209 541 123.5
=== === ===== ===
WEIGHTED AVERAGE PRICES
Exploration and Production.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
Weighted Avg. Gas Price/Mcf
Gulf Coast $2.48 $1.68 47.6 $2.35 $1.59 47.8
West Coast $1.25 $1.30 (3.8) $1.21 $1.46 (17.1)
Appalachia $2.89 $1.98 46.0 $2.63 $2.02 30.2
Weighted Average Price $2.50 $1.75 42.9 $2.36 $1.70 38.8
Weighted Avg. Oil Price/bbl
Gulf Coast $20.87 $17.84 17.0 $19.81 $16.93 17.0
West Coast $18.68 $16.66 12.1 $16.95 $15.86 6.9
Appalachia $20.22 $17.00 18.9 $18.07 $16.21 11.5
Weighted Average Price $20.29 $17.08 18.8 $18.86 $16.30 15.7
Other Nonregulated.
The Other Nonregulated segment experienced operating losses before
income taxes during the quarters ended June 30, 1996 and June 30, 1995, with
only a slight improvement when comparing the two quarters. The operating loss
before income taxes during the quarter ended June 30, 1996 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 in more
detail under "International Investments" on page 24, on May 11, 1996, Horizon
obtained from certain lenders a commitment to provide the debt financing
necessary to construct a power plant in Pakistan. It is expected that the
lenders will reimburse Horizon in the future for certain expenses related to
this project. The operating loss before income taxes during the quarter ended
June 30, 1995 was primarily attributable to higher operating expenses from UCI,
the Company's pipeline construction subsidiary,
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
as a result of management's decision to discontinue its pipeline construction
operations. As a result of this decision, approximately $1.0 million of expenses
were accrued. UCI also recorded a gain of approximately $2.5 million related to
the sale of its pipeline construction equipment, which was recorded below the
"Operating Income" line as "Other Income."
For the nine months ended June 30, 1996, operating income before income
taxes decreased $5.7 million compared with the same period a year ago. The
decrease is attributable to the expenses incurred by Horizon, as discussed
above, partly offset by a lower pretax operating loss by UCI as its operations
are now discontinued.
Income Taxes.
Income taxes increased $3.4 million and $10.9 million, respectively,
for the quarter and nine months ended June 30, 1996, mainly because of an
increase in pretax income.
Interest Charges.
Total interest charges increased $0.3 million and $2.7 million,
respectively, for the quarter and nine months ended June 30, 1996. For the
quarter, interest on long-term debt increased $0.8 million while other interest
decreased $0.5 million. The increase in interest on long-term debt for the
quarter can be attributed to a higher average amount of long-term debt compared
with the same period a year ago. The decrease in other interest for the quarter
is mainly a result of lower average short-term borrowings compared with the same
period a year ago.
For the nine months ended June 30, 1996, the $2.7 million increase in
interest expense resulted primarily from higher average short-term borrowings
compared with the same period a year ago.
Subsequent Event.
On July 29, 1996, the Company announced a special early retirement
offer (SERO) to certain salaried, non-union hourly and union employees of
Distribution Corporation and Supply Corporation who have completed at least five
years of service and have attained at least 55 years of age on or before October
1, 1996. Approximately 400 employees are eligible for the SERO. The offer must
be accepted by any eligible employee by August 31, 1996 and will become
effective October 1, 1996. Management's estimate of the pre-tax expense
associated with this SERO is approximately $7 million to $9 million. A charge to
earnings will be reflected in the Company's fourth quarter financial results
after the number of employees accepting the offer is known.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the nine-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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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 straight
fixed-variable (SFV) rate design.
Because of the seasonal nature of the Company's heating business,
revenues are relatively high during the nine months ended June 30 and
receivables historically increase from September to June 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-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 $178.7 million for
the nine months ended June 30, 1996, a decrease of $9.1 million compared with
$187.8 million provided by operating activities for the nine months ended June
30, 1995. This shift in cash flow can be attributed primarily to an increase in
receivable balances, mainly in the Utility and Exploration and Production
segments, and a decrease in amounts owed to customers in the Utility segment.
These are offset partly by higher net income and higher payable balances in the
Utility and Exploration and Production segments.
Investing Cash Flow
Capital Expenditures
- --------------------
The Company's capital expenditures totaled $115.9 million during the
nine months ended June 30, 1996. Total expenditures for the nine-month period
represent 67% of the total current capital expenditure budget for fiscal 1996 of
$172.9 million.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The following table presents capital expenditures for the nine months
ended June 30, 1996, by business segment:
(in thousands)
--------------
Utility $43,342
Pipeline and Storage 12,846
Exploration and Production 57,938
Other Nonregulated 2,914
--------
117,040
Intersegment Elimination (1,166)
--------
$115,874
========
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 $38.6
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, Vermilion 309 and Viosca Knoll
432 through federal lease sales.
Approximately $19.3 million was spent on the Exploration and Production
segment's onshore program, including horizontal drilling in central Texas and
recompletion activity in California.
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.
International Investments
- -------------------------
On May 11, 1996, Horizon and its equity partners obtained from
certain lenders a commitment, which is subject to standard conditions precedent,
to provide the debt financing necessary to construct a 151 Megawatt power plant
near Kabirwala, Punjab Province in east-central Pakistan. Horizon, along with
the Fauji Foundation of Pakistan and the Asian Development Bank, will be an
equity investor in a new corporation, the Fauji Kabirwala Power Company
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Limited (FKPC). FKPC will own and operate the combined cycle gas-fired power
plant, which is projected to cost $170 million. 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 of equity. Horizon's equity investment
is projected to be approximately $18 million, with the remainder coming from the
Fauji Foundation and the Asian Development Bank, the lead lender for the
project.
Certain conditions precedent, including receipt of required permits
from local and regional as well as central governmental agencies in Pakistan,
must be satisfied 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 by
the end of September or in October 1996. The plant is expected to achieve
commercial operations less than two years thereafter.
On June 25, 1996, Horizon purchased Beheer-en Beleggingsmaatschappij
Bruwabel B.V. (Bruwabel) from a subsidiary of Cinergy Corporation. Bruwabel is a
Dutch company that in turn directly or indirectly owns three Czech corporations.
Bruwabel's principal assets are a power development group, which is involved in
development initiatives for the conversion of district heating plants into
cogeneration facilities, and a district heating plant located in the eastern
part of the Czech Republic. Horizon plans to convert the heating plant to a
combined-cycle cogeneration facility, with electrical output of up to 50
Megawatts.
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.
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 $60.4 million during the
first nine 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 June 30, 1996, the Company would have been
permitted to issue up to a maximum of $632.0 million in additional long-term
unsecured indebtedness, in light of then current long-term interest
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
rates. In addition, at June 30, 1996, the Company had regulatory authorizations
and unused short-term credit lines that would have permitted it to borrow an
additional $512.8 million of short-term debt.
The Company currently has authorization from the Securities and
Exchange Commission (SEC) to issue and sell up to $150.0 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 June 30,
1996, Seneca utilized natural gas and crude oil price swap agreements with
notional amounts of 5.6 equivalent Bcf and 314,000 equivalent bbl, respectively.
These hedging activities reduced operating revenues by approximately $4.3
million. For the nine months ended June 30, 1996, Seneca utilized natural gas
and crude oil price swap agreements with notional amounts of 17.5 equivalent Bcf
and 732,000 equivalent bbl, respectively. These hedging activities reduced
operating revenues by approximately $7.8 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 June 30, 1996, Seneca had natural gas price swap agreements
outstanding with a notional amount of 41.3 equivalent Bcf at prices ranging from
$1.71 per Mcf to $2.10 per Mcf. Seneca also had crude oil price swap agreements
outstanding at June 30, 1996 with a notional amount of 1,953,000 equivalent bbl
at prices ranging from $17.40 per bbl to $19.25 per bbl. In addition, the
Company has SEC authority to enter into certain interest rate swap agreements.
For further discussion, refer to Note 5 - Derivative Financial Instruments.
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
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 with the parties in
this rate proceeding has been approved by the State of New York Public Service
Commission (PSC). 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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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.
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, effective May 1, 1996 on a temporary
basis, was made in compliance with the PSC's March 28, 1996 Order regarding
Restructuring of the Emerging Competitive Natural Gas Market. Under the plan,
all customers are 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. Final PSC approval of the April 30, 1996 filing is pending.
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 currently does not have a rate case on file
with the Pennsylvania Public Utility Commission (PaPUC). 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 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Concl.)
------------------------------
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 authorizing an annual rate
increase of approximately $6.0 million 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. An open season was recently completed concerning an additional 2.1
Bcf of such storage service, which will become available on April 1, 1997, and
management is currently evaluating the results.
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended June 30, 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 June 30, 1996 and 1995.
(b) Reports on Form 8-K
(i) Report on Form 8-K was filed on June 14,
1996.
Date of Report - June 13, 1996.
Item 5. Other Events. Shareholder Rights
Plan.
<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
undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
(Registrant)
/s/Joseph P. Pawlowski
--------------------------------------
Joseph P. Pawlowski
Treasurer and
Principal Accounting Officer
Date: August 9, 1996
--------------
EXHIBIT 12
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
UNAUDITED
Twelve Fiscal Year Ended September 30
Months Ended ----------------------------------------
6/30/96 1995 1994 1993 1992 1991
------------ ---- ---- ---- ---- ----
EARNINGS:
<S> <C> <C> <C> <C> <C> <C>
Income Before Interest Charges (2) $153,283 $128,061 $127,885 $125,742 $118,222 $110,240
Allowance for Borrowed Funds Used in Construction 175 195 209 174 1,088 2,278
Federal Income Tax 40,679 30,522 36,630 21,148 17,680 (3,929)
State Income Tax 4,681 4,905 6,309 2,979 3,426 341
Deferred Inc. Taxes - Net (3) 9,437 8,452 4,853 16,919 14,125 26,873
Investment Tax Credit - Net (663) (672) (682) (693) (706) (738)
Rentals (1) 5,664 5,422 5,730 5,621 5,857 4,915
-------- -------- -------- -------- -------- --------
$213,256 $176,885 $180,934 $171,890 $159,692 $139,980
======== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest & Amortization of Premium and
Discount of Funded Debt $40,846 $40,896 $36,699 $38,507 $39,949 $41,916
Interest on Commercial Paper and
Short-Term Notes Payable 7,739 6,745 5,599 7,465 12,093 11,933
Other Interest (2) 6,452 4,721 3,361 4,727 6,958 9,679
Rentals (1) 5,664 5,422 5,730 5,621 5,857 4,915
------- ------- ------- ------- ------- -------
$60,701 $57,784 $51,389 $56,320 $64,857 $68,443
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.51 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 June 30, 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> 09-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,677,386
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 237,936
<TOTAL-DEFERRED-CHARGES> 7,987
<OTHER-ASSETS> 217,439
<TOTAL-ASSETS> 2,140,748
<COMMON> 37,708
<CAPITAL-SURPLUS-PAID-IN> 391,333
<RETAINED-EARNINGS> 439,439
<TOTAL-COMMON-STOCKHOLDERS-EQ> 868,480
0
0
<LONG-TERM-DEBT-NET> 574,000
<SHORT-TERM-NOTES> 52,200
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 35,000
<LONG-TERM-DEBT-CURRENT-PORT> 30,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 581,068
<TOT-CAPITALIZATION-AND-LIAB> 2,140,748
<GROSS-OPERATING-REVENUE> 1,048,034
<INCOME-TAX-EXPENSE> 62,267
<OTHER-OPERATING-EXPENSES> 840,106
<TOTAL-OPERATING-EXPENSES> 902,373
<OPERATING-INCOME-LOSS> 145,661
<OTHER-INCOME-NET> 2,979
<INCOME-BEFORE-INTEREST-EXPEN> 148,640
<TOTAL-INTEREST-EXPENSE> 43,246
<NET-INCOME> 105,394
0
<EARNINGS-AVAILABLE-FOR-COMM> 105,394
<COMMON-STOCK-DIVIDENDS> 46,078
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 178,697
<EPS-PRIMARY> 2.81
<EPS-DILUTED> 2.81
</TABLE>
EXHIBIT 99
NATIONAL FUEL GAS COMPANY
-------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
(UNAUDITED)
-----------
Twelve Months Ended
June 30,
-------------------
1996 1995
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $1,171,974 $992,746
---------- --------
Operating Expenses
Purchased Gas 481,564 354,739
Operation Expense 268,518 265,489
Maintenance 26,347 25,876
Property, Franchise and Other Taxes 99,152 93,642
Depreciation, Depletion and Amortization 90,273 72,511
Income Taxes - Net 54,792 49,080
---------- ----------
1,020,646 861,337
---------- ----------
Operating Income 151,328 131,409
Other Income 3,671 5,516
----------- ----------
Income Before Interest Charges 154,999 136,925
---------- ----------
Interest Charges
Interest on Long-Term Debt 40,846 40,549
Other Interest 15,725 12,506
---------- ----------
56,571 53,055
---------- ----------
Income Before Cumulative Effect 98,428 83,870
Cumulative Effect of Change
in Accounting - (589)
---------- ----------
Net Income Available for Common Stock $ 98,428 $ 83,281
========== ==========
Earnings Per Common Share
Income Before Cumulative Effect $2.62 $2.25
Cumulative Effect of Change
in Accounting - (.02)
----- -----
Net Income Available for Common Stock $2.62 $2.23
===== =====
Weighted Average Common Shares Outstanding 37,524,074 37,348,237
========== ==========
