- -------------------------------------------------------------------------------
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 December 31, 1997
-----------------
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
---------- ----------
(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)
----------------------------------------------------
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 January 31, 1998:
38,251,307 shares.
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<PAGE>
Company or Group of Companies for which Report is Filed:
- -------------------------------------------------------
NATIONAL FUEL GAS COMPANY (Company or Registrant)
SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution
Corporation)
National Fuel Gas Supply Corporation (Supply Corporation)
Seneca Resources Corporation (Seneca)
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)
Niagara Energy Trading Inc (NET)
Niagara Independence Marketing Company (NIM)
Seneca Independence Pipeline Company (SIP)
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 Ended
December 31, 1997 and 1996 4
b. Consolidated Balance Sheets - December 31, 1997 and
September 30, 1997 5 - 6
c. Consolidated Statement of Cash Flows - Three
Months Ended December 31, 1997 and 1996 7
d. Notes to Consolidated Financial Statements 8 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Part II. Other Information
--------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities 29
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 29
Signature 30
* The Company has nothing to report under this item.
<PAGE>
This Form 10-Q contains "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements should be
read with the cautionary statements included in this Form 10-Q at Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (MD&A), under the heading "Safe Harbor for Forward-Looking
Statements." Forward-looking statements are all statements other than statements
of historical fact, including, without limitation, those statements that are
designated with a "1" following the statement, as well as those statements that
are identified by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions.
<PAGE>
Part I. - Financial Information
- -------------------------------
Item 1. Financial Statements
- -----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Three Months Ended
December 31,
------------------------
1997 1996
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $371,021 $363,492
-------- --------
Operating Expenses
Purchased Gas 164,267 164,091
Operation 69,847 68,423
Maintenance 6,347 5,471
Property, Franchise and Other Taxes 24,210 24,556
Depreciation, Depletion and Amortization 32,272 26,589
Income Taxes - Net 22,505 22,209
-------- --------
319,448 311,339
-------- --------
Operating Income 51,573 52,153
Other Income 1,168 737
-------- --------
Income Before Interest Charges and Minority
Interest in Foreign Subsidiaries 52,741 52,890
-------- --------
Interest Charges
Interest on Long-Term Debt 11,447 10,178
Other Interest 4,040 4,122
-------- --------
15,487 14,300
-------- --------
Minority Interest in Foreign Subsidiaries (427) -
-------- --------
Net Income Available for Common Stock 36,827 38,590
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 472,595 422,874
-------- --------
509,422 461,464
Dividends on Common Stock
(1997 - $.435; 1996 - $.42) 16,582 15,910
-------- --------
Balance at December 31 $492,840 $445,554
======== ========
Earnings Per Common Share:
Basic $0.96 $1.02
Diluted $0.95 $1.01
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,197,757 37,952,194
Used in Diluted Calculation 38,630,484 38,277,745
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
December 31,
1997 September 30,
(Unaudited) 1997
----------- -------------
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,775,126 $2,668,478
Less - Accumulated Depreciation,
Depletion and Amortization 896,646 849,112
---------- ----------
1,878,480 1,819,366
---------- ----------
Current Assets
Cash and Temporary Cash Investments 37,497 14,039
Receivables - Net 169,333 107,417
Unbilled Utility Revenue 58,691 20,433
Gas Stored Underground 19,942 29,856
Materials and Supplies - at average cost 22,682 19,115
Prepayments 19,105 17,807
---------- ----------
327,250 208,667
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Other Assets
Recoverable Future Taxes 91,011 91,011
Unamortized Debt Expense 22,821 23,394
Other Regulatory Assets 47,526 48,350
Investment in Unconsolidated Foreign
Subsidiary - 18,887
Deferred Charges 8,559 12,025
Other 52,048 45,631
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221,965 239,298
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$2,427,695 $2,267,331
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
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National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
December 31,
1997 September 30,
(Unaudited) 1997
----------- -------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 100,000,000 Shares;
Issued and Outstanding - 38,248,600
Shares and 38,165,888 Shares,
Respectively $ 38,249 $ 38,166
Paid in Capital 407,938 405,028
Earnings Reinvested in the Business 492,840 472,595
Cumulative Translation Adjustment (4,388) (2,085)
---------- ----------
Total Common Stock Equity 934,639 913,704
Long-Term Debt, Net of Current Portion 586,273 581,640
---------- ----------
Total Capitalization 1,520,912 1,495,344
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Minority Interest in Foreign Subsidiaries 20,799 -
---------- ----------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 217,000 92,400
Current Portion of Long-Term Debt 53,027 103,359
Accounts Payable 83,844 74,105
Amounts Payable to Customers 9,117 10,516
Other Accruals and Current Liabilities 108,430 83,793
---------- ----------
471,418 364,173
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Deferred Credits
Accumulated Deferred Income Taxes 289,611 288,555
Taxes Refundable to Customers 19,427 19,427
Unamortized Investment Tax Credit 11,889 12,041
Other Deferred Credits 93,639 87,791
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414,566 407,814
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Commitments and Contingencies - -
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$2,427,695 $2,267,331
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
National Fuel Gas Company
-------------------------
Consolidated Statement of Cash Flows
------------------------------------
(Unaudited)
-----------
Three Months Ended
December 31,
-----------------------
1997 1996
---- ----
(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $ 36,827 $ 38,590
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation, Depletion and Amortization 32,272 26,589
Deferred Income Taxes 910 5,476
Minority Interest in Foreign Subsidiaries 427 -
Other 82 3,475
Change in:
Receivables and Unbilled Utility Revenue (93,268) (137,432)
Gas Stored Underground and Materials and
Supplies 10,129 17,843
Unrecovered Purchased Gas Costs - (10,848)
Prepayments (669) 10,043
Accounts Payable 5,807 21,442
Amounts Payable to Customers (1,399) (3,979)
Other Accruals and Current Liabilities 28,032 30,991
Other Assets and Liabilities - Net (2,078) 6,419
-------- --------
Net Cash Provided by
Operating Activities 17,072 8,609
-------- --------
INVESTING ACTIVITIES
Capital Expenditures (37,946) (34,695)
Investment in Foreign Subsidiaries,
Net of Cash Acquired (15,871) -
Other 1,080 239
-------- --------
Net Cash Used in Investing Activities (52,737) (34,456)
-------- --------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper 124,600 52,600
Reduction of Long-Term Debt (50,536) -
Proceeds from Issuance of Common Stock 1,608 3,724
Dividends Paid on Common Stock (16,549) (15,841)
-------- --------
Net Cash Provided by
Financing Activities 59,123 40,483
-------- --------
Net Increase in Cash and Temporary
Cash Investments 23,458 14,636
Cash and Temporary Cash Investments
at October 1 14,039 19,320
-------- --------
Cash and Temporary Cash Investments at December 31 $ 37,497 $ 33,956
======== ========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
National Fuel Gas Company
-------------------------
Notes to Consolidated Financial Statements
------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation. During the quarter ended December 31, 1997,
Horizon's wholly-owned subsidiary, Beheer-En-Beleggingsmaatschappij Bruwabel,
B.V. (Bruwabel) increased its ownership interest in Severoceske Teplarny, a.s.
and its subsidiaries (SCT) from 36.8% at September 30, 1997 to 70.8% at December
31, 1997. As a result of this increase in ownership interest, the Company now
consolidates SCT into its accounts whereas the equity method was previously
used. "Minority Interest in Foreign Subsidiaries" represents the minority
stockholders' share of the equity and net income of SCT.
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 presented. The fiscal 1998 consolidated financial statements will be
examined by the Company's independent accountants after the end of the fiscal
year. The consolidated financial statements and notes thereto, included herein,
should be read in conjunction with the financial statements and notes for the
years ended September 30, 1997, 1996 and 1995, that are included in the
Company's combined Annual Report to Shareholders / Form 10-K for 1997.
The earnings for the quarter ended December 31, 1997, should not be
taken as a prediction for the fiscal year ending September 30, 1998, 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.
Distribution Corporation's Pennsylvania jurisdiction does not have a weather
normalization clause. 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.
Oil and Gas Exploration and Development Costs. Oil and Gas exploration and
development costs are capitalized under the full-cost method of accounting as
prescribed by the Securities and Exchange Commission (SEC). All costs directly
associated with property acquisition, exploration and development activities are
capitalized, with the principal limitation that such capitalized amounts not
exceed the present value (discounted at 10%) of estimated future net revenues
from production of proved gas and oil reserves plus the lower of cost or market
of unevaluated properties, net of related income tax effect (the full-cost
ceiling). Future net revenue is estimated based on end-of-quarter prices
adjusted for contracted price changes. If capitalized costs exceed the full-cost
ceiling at the end of any quarter, a permanent impairment is required to be
charged to earnings in that quarter. Such a charge would have no effect on the
Company's cash flow.
At December 31, 1997, Seneca's capitalized costs under the full-cost
method of accounting were below the full-cost ceiling. Since December 31, 1997,
oil and gas prices have dropped to a level which, if they do not improve and
there are no other factors such as proved reserve additions to mitigate the
adverse impact of the low prices, would require the recognition of an impairment
at March 31, 1998. Based on estimated prices, the amount of the impairment could
be in the range of $25 million to $75 million (pretax). Due
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
to the volatile nature of oil and gas prices, the actual amount of impairment,
if any, cannot be determined until March 31, 1998.
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 three months ended December 31,
1997 and 1996, amounted to $10.3 million and $8.6 million, respectively. Income
taxes paid during the three months ended December 31, 1997 and 1996, amounted to
$1.4 million and $6.0 million, respectively.
Details of the SCT acquisition during the quarter ended December 31,
1997, are as follows:
($ millions)
------------
Assets acquired $74.3
Liabilities assumed (33.2)
Existing investment at acquisition (18.9)
Cash acquired at acquisition (6.3)
-----
Cash paid, net of cash acquired $15.9
=====
Reclassification. Certain prior year amounts have been reclassified to conform
with current year presentation.
Earnings per Common Share. Basic earnings per common share is computed by
dividing income available for common stock by the weighted average number of
common shares outstanding for the period. Diluted earnings per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Such additional shares are added to the denominator of the basic earnings per
common share calculation in order to calculate diluted earnings per common
share. The only potentially dilutive securities the Company has outstanding are
stock options. The diluted weighted average shares outstanding shown on the
Consolidated Statement of Income reflects the potential dilution as a result of
these stock options. Such dilution was determined using the Treasury Stock
Method as required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
NOTE 2 - Income Taxes
The components of federal and state income taxes included in the
Consolidated Statement of Income are as follows (in thousands):
Three Months Ended
December 31,
------------------
1997 1996
---- ----
Operating Expenses:
Current Income Taxes -
Federal $18,921 $15,140
State 2,112 1,593
Foreign 562 -
Deferred Income Taxes 910 5,476
------- -------
22,505 22,209
Other Income:
Deferred Investment Tax Credit (152) (167)
Minority Interest in Foreign Subsidiaries (210) -
------- -------
Total Income Taxes $22,143 $22,042
======= =======
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
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):
Three Months Ended
December 31,
------------------
1997 1996
---- ----
Net income available for common stock $36,827 $38,590
Total income taxes 22,143 22,042
------- -------
Income before income taxes $58,970 $60,632
======= =======
Income tax expense, computed at federal
statutory rate of 35% 20,640 21,222
Increase (reduction) in taxes resulting from:
Current state income taxes, net of federal
income tax benefit 1,373 1,035
Depreciation 662 415
Production tax credits (103) (107)
Miscellaneous (429) (523)
------- -------
Total Income Taxes $22,143 $22,042
======= =======
Significant components of the Company's deferred tax liabilities and
assets were as follows (in thousands):
At December 31, 1997 At September 30, 1997
-------------------- ---------------------
Deferred Tax Liabilities:
Excess of tax over book
depreciation $189,329 $190,913
Exploration and intangible
well drilling costs 122,067 117,759
Other 62,263 62,189
-------- --------
Total Deferred Tax
Liabilities 373,659 370,861
-------- --------
Deferred Tax Assets:
Overheads capitalized for
tax purposes (20,202) (19,406)
Other (63,846) (62,900)
-------- --------
Total Deferred Tax Assets (84,048) (82,306)
-------- --------
Total Net Deferred Income
Taxes $289,611 $288,555
======== ========
NOTE 3- Capitalization
Common Stock. During the three months ended December 31, 1997, the Company
issued 82,712 shares of common stock under the Company's stock award and option
plans, including 7,609 shares of restricted stock.
On December 11, 1997, 658,500 stock options were granted under the
stock award and option plans at an exercise price of $44.875 per share.
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
Long-Term Debt. SCT has a term loan in the amount of 150 million Czech Koruna
(CZK) which translates to $4.4 million as of December 31, 1997. The principal
will be paid in installments over the term of the loan, which matures in June
2006. The interest rate on this loan is set at the six month PRIBOR (Prague
Interbank Offered Rates) rate plus 1%, which was 15.45% as of December 31, 1997.
Two additional SCT loans in the amount of 15 million CZK ($0.4 million) have an
interest rate set at the Komercni Banka, a.s. rate plus 1.5%, which was 15.80%
as of December 31, 1997. The principal on these two additional loans will be
paid in installments over the term of the loans, which mature in December 1999
and December 2000.
NOTE 4- Derivative Financial Instruments
The Company, in its Exploration and Production operations, has
entered into certain price swap agreements to manage a portion of the market
risk associated with fluctuations in the price of natural gas and crude oil,
thereby providing more stability to the operating results of that business
segment. These agreements are not held for trading purposes. The price swap
agreements call for the Company to receive monthly payments from (or make
payment 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 are highly correlated with the
market prices received by the Company for its natural gas and crude oil
production.
The following summarizes the Company's settlements under price swap
agreements for the quarters ended December 31, 1997 and 1996, respectively:
Quarter Ended Quarter Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Natural Gas Swap Agreements:
Notional Amount - Equivalent Billion
Cubic Feet (Bcf) 7.4 6.5
Range of Fixed Prices per Thousand
Cubic Feet (Mcf) $1.77 - $2.55 $1.71 - $2.10
Weighted Average Fixed Price per Mcf $1.96 $1.96
Range of Variable Prices per Mcf $2.56 - $3.44 $1.86 - $4.11
Weighted Average Variable Price per Mcf $3.04 $2.95
Loss $(7,949,000) $(6,462,000)
Crude Oil Swap Agreements:
Notional Amount - Equivalent
Barrels (bbl) 234,000 310,000
Range of Fixed Prices per bbl $17.50 - $19.77 $17.40 - $18.33
Weighted Average Fixed Price per bbl $18.23 $17.91
Range of Variable Prices per bbl $18.32 - $21.28 $23.55 - $25.12
Weighted Average Variable Price per bbl $19.94 $24.52
Loss $ (438,000) $(2,093,000)
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
The Company had the following swap agreements outstanding at December
31, 1997:
Natural Gas Swap Agreements:
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 17.1 $2.00 - $2.55 $2.18
1999 10.5 $2.00 - $2.35 $2.22
2000 1.3 $2.29 $2.29
----
28.9
====
Crude Oil Swap Agreements:
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent bbl) Prices Per bbl Fixed Price Per bbl
- ---------- ---------------- -------------- -------------------
1998 657,000 $17.50 - $20.56 $19.04
1999 135,000 $19.30 - $20.56 $19.86
-------
792,000
=======
Gains or losses from these price swap agreements are accrued in
operating revenues on the Consolidated Statement of Income at the contract
settlement dates. At December 31, 1997, the Company had an unrecognized loss of
approximately $1.9 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, through its natural gas marketing operations,
participates in the natural gas futures market to manage a portion of the market
risk associated with fluctuations in the price of natural gas. Such futures are
not held for trading purposes. At December 31, 1997, the Company had the
following futures contracts outstanding:
Long "Buy" Positions
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 5.9 $2.04 - $3.75 $2.65
1999 1.6 $2.04 - $2.74 $2.47
---
7.5
===
Short "Sell" Positions
National Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 2.9 $2.35 - $3.77 $2.71
1999 0.1 $2.41 - $2.42 $2.42
---
3.0
===
Gains or losses from natural gas futures are recorded in Other
Deferred Credits on the Consolidated Balance Sheet until the hedged commodity
transaction occurs, at which point they are reflected in operating revenues in
the Consolidated Statement of Income. At December 31, 1997, the Company had
unrealized gains of approximately $0.5 million related to these futures
contracts. The Company recorded a gain of approximately $1.3 million during the
quarter ended December 31, 1997 and a loss of approximately $25,000 during
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
the quarter ended December 31, 1996. Since these futures contracts qualify and
have been designated as hedges, any gains or losses resulting from market price
changes are substantially offset by the related commodity transaction.
The Company 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 ended December 31, 1997 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 under the price swap agreements and futures
contracts they have issued. The Company is exposed to such credit risk when
fluctuations in natural gas and crude oil market prices result in the Company
recognizing gains on the price swap agreements and futures contracts that it has
entered into. When credit risk arises, such risk to the Company is mitigated by
the fact that the counterparties, or the parent companies of such
counterparties, are investment grade financial institutions. In those instances
where the Company is not dealing directly with the parent company, the Company
has obtained guarantees from the parent company of the counterparty that has
issued the price swap agreements. 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 5 - 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 $10.9 million
to $11.6 million. At December 31, 1997, Distribution Corporation has recorded
the minimum liability of $10.9 million. The ultimate cost to Distribution
Corporation with respect to the remediation of these sites will depend on such
factors as the remediation plan selected, the extent of the site contamination,
the number of additional potentially responsible parties at each site and the
portion, if any, attributed to Distribution Corporation. 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 and Pennsylvania, Distribution Corporation is recovering
site investigation and remediation costs in rates. Accordingly, the Consolidated
Balance Sheet at December 31, 1997 includes related regulatory assets in the
amount of approximately $10.3 million. For further discussion, see disclosure in
Note H - Commitments and Contingencies under the heading "Environmental Matters"
in Item 8 of the Company's 1997 Form 10-K.
<PAGE>
Item 1. Financial Statements (Concl.)
- --------------------------------------
Other. The Company is involved in litigation arising in the normal course of
business. The Company is involved in 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 regulatory matters could
have a material effect on earnings and cash flows, none of this litigation, and
none of these 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 $36.8 million, or $0.96 per common share
($0.95 per common share on a diluted basis), during the quarter ended December
31, 1997. This compares with earnings of $38.6 million, or $1.02 per common
share ($1.01 per common share on a diluted basis), during the quarter ended
December 31, 1996.
The $0.06 per common share decrease in earnings resulted from a
decrease in earnings of the Company's Exploration and Production segment, offset
in part by increases in earnings of the Utility, Pipeline and Storage and
International segments.
The earnings of the Exploration and Production segment decreased
because of lower natural gas and oil production coupled with a decrease in the
weighted average price received for oil and because of higher depletion expense.
The earnings of the Utility segment increased because of lower operation and
maintenance (O&M) expense combined with a rate increase effective in October
1997 in the New York jurisdiction. The higher earnings of the Pipeline and
Storage segment resulted from higher revenue from unbundled pipeline sales and
open access transportation and lower O&M expense. The International segment
experienced a lower loss during the quarter ended December 31, 1997 than the
quarter ended December 31, 1996 primarily because of expenses associated with
the dissolution of the Horizon partnership known as Sceptre Power Company that
were recorded in December 1996. In addition, the current quarter's earnings
include Horizon's share of earnings from its investment in Severoceske Teplarny,
a.s. (SCT), a company with district heating and power generation operations
located in the northern part of the Czech Republic.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
OPERATING REVENUES
(in thousands)
Three Months Ended
December 31,
-----------------------------
1997 1996 % Change
---- ---- --------
Utility
Retail Revenues:
Residential $209,737 $213,626 (1.8)
Commercial 45,201 50,655 (10.8)
Industrial 6,412 6,229 2.9
-------- --------
261,350 270,510 (3.4)
Off-System Sales 14,750 14,858 (0.7)
Transportation 15,182 11,242 35.0
Other (441) 1,009 NM
-------- --------
290,841 297,619 (2.3)
-------- --------
Pipeline and Storage
Storage Service 16,486 16,387 0.6
Transportation 23,768 24,182 (1.7)
Other 5,604 3,925 42.8
-------- --------
45,858 44,494 3.1
-------- --------
Exploration and Production 24,708 30,082 (17.9)
International 11,589 728 NM
Other Nonregulated 24,177 15,746 53.5
-------- --------
60,474 46,556 29.9
-------- --------
Less-Intersegment Revenues 26,152 25,177 3.9
-------- --------
$371,021 $363,492 2.1
======== ========
OPERATING INCOME (LOSS) BEFORE INCOME TAXES
(in thousands)
Three Months Ended
December 31,
-----------------------------
1997 1996 % Change
---- ---- --------
Utility $47,476 $45,725 3.8
Pipeline and Storage 22,850 19,463 17.4
Exploration and Production 2,296 12,576 (81.7)
International 886 (3,090) 128.7
Other Nonregulated 1,072 399 168.7
Corporate (502) (711) 29.4
------- -------
$74,078 $74,362 (3.8)
======= =======
<PAGE>
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
December 31,
-------------------------
1997 1996 % Change
---- ---- --------
Utility Gas Sales
Residential 24,789 25,804 (3.9)
Commercial 5,914 6,837 (13.5)
Industrial 1,242 1,298 (4.3)
Off-System 4,478 4,047 10.6
------- -------
36,423 37,986 (4.1)
------- -------
Non-Utility Gas Sales
Production(in equivalent MMcf) 10,890 12,368 (12.0)
------- -------
Total Gas Sales 47,313 50,354 (6.0)
------- -------
Transportation
Utility 14,650 13,887 5.5
Pipeline and Storage 94,403 86,000 9.8
Nonregulated 276 - NM
------- -------
109,329 99,887 9.5
------- -------
Marketing Volumes 5,182 4,516 14.7
------- -------
Less-Inter and Intrasegment Volumes:
Transportation 44,392 43,684 1.6
Production 994 1,116 (10.9)
------- -------
45,386 44,800 1.3
------- -------
Total System Natural Gas
Volumes 116,438 109,957 5.9
======= =======
NM = Not meaningful.
Utility.
Operating income before income taxes for the Utility segment
increased $1.8 million for the quarter ended December 31, 1997, compared with
the same period a year ago. This resulted primarily from a general base rate
increase in the New York Jurisdiction effective October 1, 1997 ($7.2 million on
an annual basis) and from lower O&M expense, mainly related to labor and benefit
expense reduction.
Operating revenues for the Utility segment decreased $6.8 million for
the quarter ended December 31, 1997, compared with the same period a year ago.
This decrease reflects the recovery of lower gas costs which resulted from a
decrease in the average price of purchased gas ($4.41 per Mcf and $4.69 per Mcf
during the quarters ended December 31, 1997 and 1996, respectively) as well as a
1.6 billion cubic feet (Bcf) decrease in gas sales, offset in part by the
positive impact of a general base rate increase discussed above. The decrease in
gas sales reflects the migration of certain retail customers to transportation
service in both the New York and Pennsylvania jurisdictions, as a result of new
aggregator services. This is discussed further in the "Rate Matters" section
that follows. Other operating revenues in the quarter ended December 31, 1997
were reduced by a $1.1 million refund provision to the Utility's customers for a
50% sharing of earnings over a predetermined amount in accordance with the New
York rate settlement of July 1996. The cumulative estimated refund provision
liability, including amounts accrued in fiscal
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
1997, is $4.1 million. The final amount owed to customers, if any, will not be
known until after September 30, 1998, which is the conclusion of the settlement
period.
Degree Days.
Three Months Ended December 31:
- -------------------------------
Percent (Warmer) Colder
in 1997 Than
Normal 1997 1996 Normal 1996
- -------------------------------------------------------------------------
Buffalo 2,262 2,294 2,256 1.4 1.7
Erie 2,045 2,096 2,128 2.5 (1.5)
- -------------------------------------------------------------------------
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage
segment increased $3.4 million for the quarter ended December 31, 1997, as
compared with the same period a year ago. This increase reflects the increase in
revenues associated with unbundled pipeline sales and the addition of new
customers, as well as a decrease in O&M expense. O&M expense decreased $1.9
million as a result of lower labor and benefit expense as well as a reversal of
a portion of a reserve set up for the Laurel Fields Storage Project. The
Pipeline and Storage segment was able to recapture approximately $1.0 million by
selling preliminary engineering, survey, environmental, and archeological
information from the Laurel Fields Project to Independence Pipeline Company,
which intends to build a 370-mile interstate pipeline system designed to
transport about 900,000 dekatherms (Dth) per day of natural gas from Defiance,
Ohio to Leidy, Pennsylvania. The preliminary information for the Laurel Fields
Storage Project pertained to the area around Leidy, Pennsylvania.
While transportation volumes for the current quarter increased 8.4
Bcf from the quarter ended December 31, 1996, largely due to increased usage by
existing customers, 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 decreased $10.3 million compared with the same period a
year ago, primarily as a result of lower weighted average prices received for
oil, decreased natural gas and oil production, and higher depletion expense.
Lower quarter end prices for both oil and natural gas and a negative reserve
revision associated with West Cameron 552 resulted in increased depletion
expense, determined on the unit of revenue method. Oil and condensate production
decreased 81,000 barrels (bbls), or 15.8% with a significant contributor being
the decline in production of Vermilion 252. Natural gas production declined 1.0
Bcf, or 10.7%, compared with the same period a year ago. A significant
contributor to the decrease in production was the expected decline in production
of West Cameron 552 and the unexpected delays in production from eight
successful wells. There was a slight reduction in hedging losses for the
quarter. Present prices are expected to result in a hedging gain in the second
quarter.1 See further discussion of the Company's hedging activities under
"Financing Cash Flow" and in Note 4 - Derivative Financial Instruments.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
As discussed in Note 1 to the financial statements, Seneca follows the
full-cost method of accounting for its oil and gas operations. Under this
method, capitalized costs are limited to a full-cost ceiling. If capitalized
cost exceed the full-cost ceiling at the end of any quarter, a permanent
impairment is required to be charged to earnings in that quarter. Such a charge
would have no effect on the Company's cash flow. At December 31, 1997, Seneca's
capitalized costs under the full-cost method of accounting were below the
full-cost ceiling. Since December 31, 1997, oil and gas prices have dropped to a
level which, if they do not improve and there are no other factors such as
proved reserve additions to mitigate the adverse impact of the low prices, would
require the recognition of an impairment at March 31, 1998. Based on estimated
prices, the amount of the impairment could be in the range of $25 million to $75
million (pretax).1 Due to the volatile nature of oil and gas prices, the actual
amount of impairment, if any, cannot be determined until March 31, 1998.
PRODUCTION VOLUMES
Exploration and Production.
Three Months Ended
December 31,
-------------------------
1997 1996 % Change
---- ---- --------
Gas Production - (MMcf)
Gulf Coast 6,842 7,801 (12.3)
West Coast 254 214 18.7
Appalachia 1,208 1,281 (5.7)
----- -----
8,304 9,296 (10.7)
===== =====
Oil Production - (Thousands of Barrels)
Gulf Coast 314 384 (18.2)
West Coast 114 126 (9.5)
Appalachia 3 2 50.0
----- -----
431 512 (15.8)
===== =====
WEIGHTED AVERAGE PRICES
Exploration and Production.
Three Months Ended
December 31,
-------------------------
1997 1996 % Change
---- ---- --------
Weighted Avg. Gas Price/Mcf
Gulf Coast $3.04 $2.93 3.8
West Coast $2.40 $1.62 48.1
Appalachia $3.01 $2.46 22.4
Weighted Average $3.01 $2.84 6.0
Weighted Average After Hedging $2.06 $2.14 (3.7)
Weighted Avg. Oil Price/bbl
Gulf Coast $19.01 $24.28 (21.7)
West Coast $15.90 $20.84 (23.7)
Appalachia $19.23 $22.89 (16.0)
Weighted Average $18.19 $23.43 (22.4)
Weighted Average After Hedging $17.17 $19.34 (11.2)
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
International
Operating income before taxes for the International segment increased
$4.0 million for the quarter ended December 31, 1997, compared with the same
period a year ago. The current quarter's results include 100% of the pretax
operating income of Severoceske Teplarny, a.s. (SCT), a company with district
heating and power generation operations located in the northern part of the
Czech Republic. Horizon first acquired a 34% interest in SCT in April 1997 and
increased its ownership to 70.8% as of December 31, 1997. The minority interest
in SCT is shown separately on the Consolidated Statement of Income after
operating results. In addition, the December 1996 quarter included non-recurring
expenses associated with the dissolution of the Horizon Energy Development, Inc.
partnership known as Sceptre Power Company.
Other Nonregulated.
The Other Nonregulated operations experienced an increase in
operating income before income taxes of $0.7 million for the quarter ended
December 31, 1997, compared with the same period a year ago. This increase is
the result of improved performance in the Company's timber operations. Partly
offsetting this was lower margins and higher operating expenses of NFR, the
Company's energy marketing subsidiary.
Income Taxes.
Income taxes increased $0.3 million for the current quarter mainly
because of foreign income taxes from SCT.
Interest Charges.
Total interest charges increased $1.2 million for the quarter ended
December 31, 1997, compared with the same period a year ago: interest on
long-term debt increased $1.3 million while other interest decreased $0.1
million. The increase in interest on long-term debt can be attributed primarily
to a higher average amount of long-term debt outstanding mainly as a result of
$100 million of medium-term notes issued in August 1997.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the three month period
consisted of cash provided by operating activities and short-term bank loans and
commercial paper.
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, minority
interest in foreign subsidiaries 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 the
impact of rate cases. In the Utility segment, supplier refunds, over- or
under-recovered purchased gas costs and weather also significantly impact cash
flow. The Company considers supplier refunds and over-recovered purchased gas
costs as a substitute for short-term borrowings. The impact of weather on
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
cash flow is tempered in the Utility segment's New York rate jurisdiction by its
weather normalization clause and in the Pipeline and Storage segment by Supply
Corporation's SFV rate design.
Because of the seasonal nature of the Company's heating business,
revenues are relatively high during the quarter ended December 31 and
receivables and unbilled utility revenue historically increase from September to
December with the beginning of winter weather.
The storage gas inventory normally declines during the first and
second quarters of the fiscal year and is replenished during the third and
fourth quarters. Under the last-in, first-out (LIFO) method of accounting, the
current cost of replacing gas withdrawn from storage is recorded in the
Consolidated Statement of Income and a reserve for gas replacement is recorded
in the Consolidated Balance Sheet and is included under the caption "Other
Accruals and Current Liabilities." Such reserve is reduced as the inventory is
replenished.
Net cash provided by operating activities totaled $17.1 million for
the quarter ended December 31, 1997, compared with $8.6 million provided by
operating activities in the quarter ended December 31, 1996. The majority of the
increase in cash provided by operating activities occurred in the Pipeline and
Storage segment and the Exploration and Production segment. The Pipeline and
Storage segment experienced an increase in cash receipts from transportation and
storage service as well as from unbundled pipeline sales. The Exploration and
Production segment experienced higher cash receipts from the sale of oil and
gas, lower cash disbursements for federal taxes and a decrease in cash outlays
to cover unrealized losses on its open oil and gas price swap positions. The
increases to cash flow in the Exploration and Production segment were partly
offset by higher O&M costs.
Investing Cash Flow.
Capital Expenditures and Other Investing Activities
- ---------------------------------------------------
Capital expenditures represents the Company's additions to property,
plant and equipment and are exclusive of investments in corporations and/or
partnerships. Such investments are treated separately in the Statement of Cash
Flows.
The Company's capital expenditures totaled $37.9 million during the
three month period. Total expenditures for the quarter represent 17.8% of the
total capital expenditure budget for fiscal 1998 of $212.5 million. The
following table presents first quarter capital expenditures by business segment:
(in thousands)
--------------
Utility $13,605
Pipeline and Storage 4,051
Exploration and Production 19,944
International 17
Other Nonregulated 329
-------
$37,946
=======
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Utility
- -------
The bulk of the Utility capital expenditures were made for
replacement of mains and main extensions, as well as for the replacement of
service lines.
Pipeline and Storage
- --------------------
The bulk of the Pipeline and Storage capital expenditures were made
for additions, improvements, and replacements to this segment's transmission and
storage systems. Approximately $0.5 million was spent on the 1998 Niagara
Expansion Project. As part of this expansion, Supply Corporation began
transportation service for an additional 25,000 Dth per day in November 1997.
Supply Corporation has filed for Federal Energy Regulatory Commission (FERC)
approval concerning an additional 23,000 Dth per day expansion of firm winter
only capacity. Supply Corporation anticipates receiving such FERC approval by
April or May of 1998.1 There has been no change in status regarding Supply
Corporation's proposed 1999 Niagara Expansion Project.
In June 1997, the Company announced its intention to join as an equal
partner in the Independence Pipeline Project, which is designed to bring gas
from Defiance, Ohio to Leidy, Pennsylvania and is expected to cost $675
million.1 The Independence Pipeline Project as filed with the FERC will consist
of approximately 370 miles of 36-inch diameter pipe with an initial capacity of
approximately 900,000 Dth per day. In September 1997, the Company formed a new
subsidiary, Seneca Independence Pipeline Company (SIP), which has agreed to
purchase, upon receipt of regulatory approval, a one-third general partnership
interest in Independence Pipeline Company, a Delaware general partnership.
If the Independence Pipeline Project is not constructed, SIP's share
of the development costs is estimated not to exceed $6.0 million to $8.0
million.1 During the first quarter of fiscal 1998 approximately $0.1 million in
preliminary survey costs had been incurred on the Independence Pipeline Project.
Short-term borrowings are currently being used to finance development costs.
In November 1996, Supply Corporation entered into a Memorandum of
Understanding (the MOU) with Green Canyon Gathering Company, a subsidiary of El
Paso Energy regarding a project to develop, construct, finance, own and operate
natural gas gathering and processing facilities offshore and onshore Louisiana,
at an estimated total cost of about $200 million.1 The MOU has been amended
several times since then, and currently provides for the parties to (i) share
past and future development costs for the Project through December 31, 1998, and
(ii) negotiate toward definitive agreements to form one or more 50-50 entities
and to finance, develop, build, own and operate the Project. The FERC ruled in
March 1997 that most of the Project would be jurisdictional, so additional
regulatory filings would be necessary to construct and operate the Project. The
parties will prepare and make those filings whenever justified by customer
demand. If the MOU expires without any additional filings at the FERC, Supply
Corporation's share of the development costs through December 31, 1998 is
unlikely to exceed $1.2 million, of which Supply Corporation had paid about $1.0
million as of December 31, 1997.1 These paid costs are recorded in Deferred
Charges on the Consolidated Balance Sheet at December 31, 1997. Supply
Corporation is currently using short-term borrowings to finance the Project.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Exploration and Production
- --------------------------
Exploration and Production segment capital expenditures included
approximately $16.4 million on the offshore program in the Gulf of Mexico,
including offshore drilling expenditures, offshore construction, lease
acquisition and geological and geophysical expenditures. Offshore exploratory
and development drilling was concentrated on West Cameron 182, High Island 194,
High Island 179 and High Island A356. Offshore construction occurred primarily
at West Cameron 540. Offshore lease acquisitions included successful bids on
eight leases at the State of Texas lease sale. Offshore geological and
geophysical expenditures were made for purchases of 3-D seismic data.
Exploration and Production capital expenditures also included
approximately $3.5 million on the onshore program, including onshore drilling
and construction costs for wells located in Louisiana and Texas, as well as
onshore geological and geophysical costs, including the purchase of certain 3-D
seismic data.
In November 1997, Seneca signed a letter of intent with the Whittier
Trust Company to purchase for cash properties in the Midway-Sunset and Lost
Hills field in the San Joaquin Basin of California. This potential acquisition
will complement the Exploration and Production segment's reserve mix, bringing
its new potential reserve base to 58% oil and 42% gas.1 This potential
acquisition would also provide the Exploration and Production segment with the
opportunity to continue its focus of growth by increasing its activities in the
domestic onshore areas.1 The purchase price of these properties is expected to
be in the range of $130 million to $150 million and is dependent upon various
factors, including acceptance by Trust participants and swapping of certain
Coalinga field properties for additional properties in the Midway-Sunset
fields.1 Currently, due diligence and the writing of a detailed purchase
agreement are proceeding.
In January 1998, Seneca announced the signing of a letter of intent
to acquire HarCor Energy, Inc., (Harcor) for a total cash price of $32.5
million, or $2.00 per share of HarCor common stock. The HarCor properties are
located on the west side of the San Joaquin Basin in California. These
properties are unique for California in that they produce higher gravity oil
than is generally found in this area, as well as producing gas. Included in this
acquisition is a gas processing plant and associated pipelines. Also included in
this acquisition is approximately $54 million of 14 7/8% senior secured debt and
other liabilities of HarCor. The sale is dependent upon various factors
including Seneca's acquisition of certain other oil and gas assets, proper
approvals and due diligence review. The closing of the proposed sale is expected
to occur by June 1998.1
The Company intends to use long-term debt to finance most of the
acquisition costs associated with the Whittier Trust Company properties and
HarCor common stock.1
International
- -------------
In December 1997, Bruwabel acquired an additional 34% equity interest
in SCT for $22.2 million, including legal and finders fees, thus raising its
total ownership to 70.8%. The acquisition was financed with short-term
borrowings. The Czech Commercial Code requires that a shareholder that achieves
certain ownership interests in a company (50%, 66.66%, or 75%) must extend a
tender offer to the remaining minority shareholders of that company. Bruwabel
recently issued such a tender offer for the remaining shares of SCT which will
remain open through the beginning of April 1998. If Bruwabel were
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
to acquire the remaining 29.2% equity interest in SCT as a result of this tender
offer, the maximum additional investment in SCT would be approximately 215
million Czech Koruna, which translates to approximately $6.2 million at the
December 31, 1997 exchange rate. Any shares acquired through this tender offer
would be financed with short-term borrowings.
In January 1998, Bruwabel entered into an agreement to purchase 75.3%
of the outstanding shares of Prvni severozapadni teplarenska, a.s. (PSZT), a
company with wholesale district heating and power generation operations located
in Komorany, Czech Republic. The operations of PSZT are in close proximity to
SCT in the northern part of the Czech Republic. For calendar 1996, PSZT reported
profits of approximately $3.0 million. The purchase price is approximately $60
million. The purchase price has been deposited in an escrow account in the Czech
Republic pending the completion of certain conditions precedent that must be met
before the transaction can be finalized. The amount deposited into escrow was
financed with short-term borrowings. If the conditions precedent are not
satisfied and the transaction is not completed, the principal and interest from
the escrow account will be returned to Bruwabel.
Bruwabel's investment in the Czech Republic is valued in Czech
Korunas, and as such, this investment is subject to currency exchange risk when
the Czech Korunas are translated into U.S. Dollars. During the first quarter of
1998, the Czech Koruna devalued in relation to the U.S. Dollar, resulting in a
$2.3 million negative adjustment to the Cumulative Translation Adjustment in
Common Stock Equity on the Consolidated Balance Sheets. This negative adjustment
could reverse and potentially become a positive adjustment to Common Stock
Equity if the Czech Koruna increases in value in relation to the U.S. Dollar.
Further devaluations in the Czech Koruna would result in additional negative
adjustments to the Cumulative Translation Adjustment. Management cannot predict
whether the Czech Koruna will increase or decrease in value against the U.S.
Dollar.1
Other Nonregulated
- ------------------
Other Nonregulated capital expenditures consisted primarily of
furniture, equipment and computer hardware and software for the office location
of the Company's gas marketing operation.
Other cash provided by or used in investing activities reflects cash
received on the sale of the Company's investment in property, plant and
equipment and cash used for other investments.
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.1
Financing Cash Flow.
Consolidated short-term debt increased by $124.6 million during the
first quarter. The Company continues to consider short-term bank loans and
commercial paper important sources of cash for temporarily financing capital
expenditures, gas-in-storage inventory, unrecovered purchased gas costs,
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
exploration and development expenditures and other working capital needs. In
addition, the Company considers supplier refunds and over-recovered purchasedgas
costs as a substitute for short-term debt. Fluctuations in these items can have
a significant impact on the amount and timing of short-term debt.
The Company's present liquidity position is believed to be adequate
to satisfy known demands.1 Under the Company's covenants contained in its
indenture covering long-term debt, at December 31, 1997, the Company would have
been permitted to issue up to a maximum of $662.0 million in additional
long-term unsecured indebtedness, in light of then current long-term interest
rates. In addition, at December 31, 1997, the Company had regulatory
authorizations and unused short-term credit lines that would have permitted it
to borrow an additional $383.0 million of short-term debt.
As discussed in Note 1 to the financial statements, Seneca may be
required to recognize a $25.0 million to $75.0 million (pretax) impairment of
its oil and gas assets at March 31, 1998. Had this impairment occurred at
December 31, 1997, the maximum amount of additional long-term unsecured
indebtedness that the Company would have been permitted to issue under its
indenture would have ranged from $589.0 million (assuming a $75.0 million pretax
impairment) to $637.0 million (assuming a $25.0 million pretax impairment).
The amounts and timing of the issuance and sale of debt and/or equity
securities will depend on market conditions, regulatory authorizations and the
requirements of the Company.
The Company, through Seneca, has entered into certain price swap
agreements to manage 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 December 31, 1997,
Seneca utilized natural gas and crude oil swap agreements with notional amounts
of 7.4 equivalent Bcf and 234,000 equivalent bbl, respectively. These hedging
activities resulted in the recognition of a pretax loss of approximately $8.4
million. This loss was offset by higher prices received for actual natural gas
and crude oil production.
At December 31, 1997, Seneca had natural gas swap agreements
outstanding with a notional amount of approximately 28.9 equivalent Bcf at
prices ranging from $2.00 per Mcf to $2.55 per Mcf. The weighted average fixed
price of these swap agreements is approximately $2.20 per Mcf.
Seneca also had crude oil swap agreements outstanding at December 31,
1997 with a notional amount of 792,000 equivalent bbl at prices ranging from
$17.50 per bbl to $20.56 per bbl. The weighted average fixed price of these swap
agreements is approximately $19.18 per bbl.
The Company, through NFR, participates in the natural gas futures
market to manage a portion of the market risk associated with fluctuations in
the price of natural gas. Such futures are not held for trading purposes. During
the quarter ended December 31, 1997, NFR recognized a pre-tax gain of
approximately $1.3 million related to such futures contracts. Since these
futures contracts qualify and have been designated as hedges, any gains or
losses resulting from market price changes are substantially offset by the
related commodity transaction.
At December 31, 1997, NFR had long positions in the futures market
amounting to a notional amount of 7.5 Bcf at prices ranging from $2.04 per Mcf
to $3.75 per Mcf. The weighted average contract price of these futures contracts
is approximately $2.61 per Mcf. NFR had short positions in the
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
futures market amounting to a notional amount of 3.0 Bcf at prices ranging from
$2.35 per Mcf to $3.77 per Mcf. The weighted average contract price of these
futures contracts is approximately $2.71 per Mcf.
In addition, the Company has SEC authority to enter into certain
interest rate swap agreements. For further discussion, refer to Note 4 -
Derivative Financial Instruments.
The Company's credit risk is the risk of loss that the Company would
incur as a result of nonperformance by counterparties pursuant to the terms of
their contractual obligations related to derivative financial instruments. 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.1 For further discussion, refer to Note 4 - Derivative Financial
Instruments.
The Company is involved in litigation arising in the normal course of
business. The Company is involved in 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
regulatory matters could have a material effect on earnings and cash flows in
the year of resolution, none of this litigation and none of these regulatory
matters are expected to change materially the Company's present liquidity
position, nor have a material adverse effect on the financial condition of the
Company at this time.1
RATE MATTERS
Utility Operation
New York Jurisdiction
- ---------------------
In November 1995, Distribution Corporation filed in its New York jurisdiction a
request for an annual 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
was approved by the Public Service Commission of the State of New York (PSC).
Effective October 1, 1996 and October 1, 1997, Distribution Corporation received
annual base rate increases of $7.2 million. The settlement did not specify a
rate of return on equity. Generally, 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
ratepayers. As a result of this sharing mechanism, Distribution Corporation
recorded an estimated cumulative refund provision to its customers of $3.0
million ($2.0 million after-tax) during the fourth quarter of 1997. An
additional $1.1 million ($0.72 million after tax) was accrued during the quarter
ended December 31, 1997. The final amount owed to customers, if any, will not be
known until the conclusion of the settlement period.
In June 1997, the PSC issued an order requiring jurisdictional
utilities to file plans to offer heating customers a fixed price service option
for the coming winter heating season. The order also directed the utilities to
submit proposals for increased supply diversity with a view toward fostering
price stability. In August 1997, Distribution Corporation filed in its New York
jurisdiction a plan to comply with the PSC's order and the PSC subsequently
approved the plan in October 1997. The fixed price service option that was
approved gives heating customers the opportunity to be guaranteed a fixed unit
price for natural gas during the billing period of December 1997 through April
1998. The option was made available on a first-come, first-served basis to a
maximum of 100,000 heating customers. Approximately 11,000 heating customers
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
chose the fixed price service option, which will fix the monthly gas adjustment
at $.13832 per hundred cubic feet, which is 20% less than the average gas
adjustment experienced during the 1996 - 1997 heating season, but higher than
the gas adjustment experienced during the 1995 - 1996 heating season.
Distribution Corporation locked in commodity prices for approximately 30% of the
New York jurisdiction's planned purchases during the period of November 1997
through March 1998. Other components of heating customers rates will remain
unchanged.
New York's gas industry restructuring effort continues to develop at a
slow pace. As of the end of September 1997, 14,000 small volume customers across
the state chose aggregator services over their utility. In Distribution
Corporation's service territory, 1,500 small volume customers (out of over
500,000) are purchasing gas from eight aggregators, for a total annual load of
just over 1 Bcf. The Company's marketing affiliate, NFR, is one of the
participating aggregators. At the urging of the PSC, Distribution Corporation
began to offer storage release service to aggregators on June 27, 1997.
Currently, Distribution's is the only actual release storage service available
in New York State. Whether aggregators find the service attractive enough to
increase marketing activity remains to be seen.
Pennsylvania Jurisdiction
- -------------------------
Distribution Corporation currently does not have a rate case on file
with the Pennsylvania Public Utility Commission (PaPUC). Management will
continue to monitor its financial position in the Pennsylvania jurisdiction to
determine the necessity of filing a rate case in the future.
Effective October 1, 1997, Distribution Corporation commenced service
of the PaPUC approved customer choice pilot program called Energy Select. Energy
Select, which will last one and one-half years, allows approximately 19,000
small commercial and residential customers of Distribution Corporation in the
greater Sharon, Pennsylvania area to purchase gas supplies from qualified,
participating non-utility suppliers (or marketers) of gas. Distribution
Corporation is not a supplier of gas in this pilot. Under Energy Select,
Distribution Corporation will continue to deliver the gas to the customer's home
or business and will remain responsible for reading customer meters, the safety
and maintenance of its pipeline system and responding to gas emergencies. NFR
is a participating supplier in Energy Select.
A gas restructuring bill was introduced in the Pennsylvania General
Assembly proposing to amend the Public Utility Code to allow all retail
customers, including residential, the ability to choose their own gas supplier.
Identified as Senate Bill No. 943, it was not enacted into law in 1997. In
December 1997, the Chairman of the PaPUC convened a collaborative of gas
industry interests to develop a consensus bill using Senate Bill No. 943 as the
starting point. As a member of the utility interest group, Distribution
Corporation is and will continue to be an active participant in the
collaborative. The Company is not able to predict the outcome of the bill.
General rate increases in both the New York and Pennsylvania
jurisdictions 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. Supply Corporation currently does not have a rate case on
file with the FERC. Its last case was settled with the FERC in February 1996. As
part of that settlement, Supply Corporation agreed not to seek recovery of
revenues related to certain terminated service from storage
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
customers until April 1, 2000, as long as the terminations were not greater than
approximately 30% of the terminable service. Management has been successful in
marketing and obtaining executed contracts for such terminated storage service
and does not anticipate a problem in obtaining executed contracts for additional
terminated storage service as it arises.1
OTHER MATTERS
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 $10.9 million
to $11.6 million.1 At December 31, 1997, Distribution Corporation has recorded
the minimum liability of $10.9 million. The ultimate cost to Distribution
Corporation with respect to the remediation of these sites will depend on such
factors as the remediation plan selected, the extent of the site contamination,
the number of additional potentially responsible parties at each site and the
portion, if any, attributed to Distribution Corporation.1 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 and Pennsylvania, Distribution Corporation is recovering
site investigation and remediation costs in rates. For further discussion, see
disclosure in Note H - Commitments and Contingencies under the heading
"Environmental Matters" in Item 8 of the Company's 1997 Form 10-K.
Year 2000. The Company is preparing all of its computer systems to be Year 2000
compliant. Management has completed a detailed analysis of its computer systems
to identify the systems that could be affected and has developed a conversion
plan to resolve the issue. For various vendor supplied software, the Company is
in the process of obtaining upgrades that are Year 2000 compliant. For
internally developed software, changes to such software are being made and
tested. The cost of upgrading systems is being expensed as incurred. Management
estimates that such cost will total approximately $1.0 million.1 Despite the
Company's goal to have its information systems Year 2000 compliant early in
calendar 1999, the Company has no control over the systems of third parties with
whom it interfaces.1 However, major third parties have been put on notice that
the Company expects their products and services to perform as expected after
January 1, 2000. The Company cannot predict the potential adverse consequences
that could result if such third parties are not Year 2000 compliant.
Safe Harbor for Forward-Looking Statements. The Company is including the
following cautionary statement in this Form 10-Q to make applicable and take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by, or on behalf of,
the Company. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts. From time to time, the Company may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of the
Company, are also expressly qualified by these cautionary
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
statements. Certain statements contained herein, including those which are
designated with a "1", are forward-looking statements and accordingly involve
risks and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. The
forward-looking statements contained herein are based on various assumptions,
many of which are based, in turn, upon further assumptions. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statement:
1. Changes in economic conditions, demographic patterns and weather conditions
2. Changes in the availability and/or price of natural gas and oil
3. Inability to obtain new customers or retain existing ones
4. Significant changes in competitive factors affecting the Company
5. Governmental/regulatory actions and initiatives, including those
affecting financings, allowed rates of return, industry and rate
structure, franchise renewal, and environmental/safety requirements
6. Unanticipated impacts of restructuring initiatives in the natural gas and
electric industries
7. Significant changes from expectations in actual capital expenditures and
operating expenses and unanticipated project delays
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments
9. Ability to successfully identify and finance oil and gas property
acquisitions and ability to operate existing and any subsequently
acquired properties
10. Ability to successfully identify, drill for and produce economically viable
natural gas and oil reserves
11. Changes in the availability and/or price of derivative financial instruments
12. Inability of the various counterparties to meet their obligations with
respect to the Company's financial instruments
13. Regarding foreign operations - changes in foreign trade and monetary
policies, laws and regulations related to foreign operations, political
and governmental changes, inflation and exchange rates, taxes and
operating conditions
14. Significant changes in tax rates or policies or in rates of inflation or
interest
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Concl.)
------------------------------
15. Significant changes in the Company's relationship with its employees and
the potential adverse effects if labor disputes or grievances were to
occur
16. Changes in accounting principles and/or the application of such principles
to the Company
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Not applicable.
Part II. Other Information
- ---------------------------
Item 2. Changes in Securities
- ------------------------------
On October 1, 1997, the Company issued 700 unregistered shares of Company common
stock to the seven non-employee directors of the Company, 100 shares to each
such director. These shares were issued as partial consideration for the
directors' service as directors during the quarter ended December 31, 1997,
pursuant to the Company's Retainer Policy for Non-Employee Directors. These
transactions were exempt from registration by Section 4(2) of the Securities Act
of 1933, as amended, as transactions not involving a public offering.
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 December 31, 1997.
(27) Financial Data Schedule
(99) National Fuel Gas Company Consolidated
Statement of Income for the Twelve Months
Ended December 31, 1997 and 1996.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
-------------------------
(Registrant)
/s/ Joseph P. Pawlowski
-----------------------
Joseph P. Pawlowski
Treasurer and Principal
Accounting Officer
Date: February 17, 1998
-----------------
<TABLE>
<CAPTION>
EXHIBIT 12
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
UNAUDITED
Twelve Months Fiscal Year Ended September 30
Ended -------------------------------------------------------
December 31, 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------
EARNINGS:
Income Before Interest Charges and Minority
Interest in Foreign Subsidiaries (2) $169,633 $169,783 $159,599 $128,061 $127,885 $125,742
Allowance for Borrowed Funds Used in Con 342 346 205 195 209 174
Federal Income Tax 62,150 57,807 55,148 30,522 36,630 21,148
State Income Tax 7,587 7,067 7,266 4,905 6,309 2,979
Deferred Inc. Taxes - Net (3) (767) 3,800 3,907 8,452 4,853 16,919
Investment Tax Credit - Net (650) (665) (665) (672) (682) (693)
Rentals (1) 5,259 5,328 5,640 5,422 5,730 5,621
-------- ------- -------- -------- -------- --------
$243,554 $243,466 $231,100 $176,885 $180,934 $171,890
======== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest & Amortization of Premium and
Discount of Funded Debt $43,400 $42,131 $40,872 $40,896 $36,699 $38,507
Interest on Commercial Paper and
Short-Term Notes Payable 8,217 8,808 7,872 6,745 5,599 7,465
Other Interest (2) 5,007 4,502 6,389 4,721 3,361 4,727
Rentals (1) 5,259 5,328 5,640 5,422 5,730 5,621
------- ------- ------- ------- ------- -------
$61,883 $60,769 $60,773 $57,784 $51,389 $56,320
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.94 4.01 3.80 3.06 3.52 3.05
</TABLE>
Notes:
(1) Rentals shown above represent the portion of all rentals (other than
delay rentals) deemed representative of the interest factor.
(2) Twelve months ended December 31, 1997 and, fiscal 1997, 1996, 1995, 1994
and 1993 reflect the reclassification of $1,716, $1,716, $1,716, $1,716,
$1,674 and $1,374, 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> 03-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,878,480
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 327,250
<TOTAL-DEFERRED-CHARGES> 8,559
<OTHER-ASSETS> 213,406
<TOTAL-ASSETS> 2,427,695
<COMMON> 38,249
<CAPITAL-SURPLUS-PAID-IN> 407,938
<RETAINED-EARNINGS> 492,840
<TOTAL-COMMON-STOCKHOLDERS-EQ> 934,639
0
0
<LONG-TERM-DEBT-NET> 586,273
<SHORT-TERM-NOTES> 162,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 55,000
<LONG-TERM-DEBT-CURRENT-PORT> 53,027
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 636,756
<TOT-CAPITALIZATION-AND-LIAB> 2,427,695
<GROSS-OPERATING-REVENUE> 371,021
<INCOME-TAX-EXPENSE> 22,505
<OTHER-OPERATING-EXPENSES> 296,943
<TOTAL-OPERATING-EXPENSES> 319,448
<OPERATING-INCOME-LOSS> 51,573
<OTHER-INCOME-NET> 1,168
<INCOME-BEFORE-INTEREST-EXPEN> 52,741
<TOTAL-INTEREST-EXPENSE> 15,487
<NET-INCOME> 36,827
0
<EARNINGS-AVAILABLE-FOR-COMM> 36,827
<COMMON-STOCK-DIVIDENDS> 16,582
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 17,072
<EPS-PRIMARY> .96
<EPS-DILUTED> .95
</TABLE>
Exhibit 99
Form 10-Q
December 31, 1997
NATIONAL FUEL GAS
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Twelve Months Ecded
December 31,
----------------------------------
1997 1996
(Thousands of Dollars)
INCOME
Operating Revenues $1,273,341 $1,255,181
Operating Expenses
Purchased Gas 528,786 508,489
Operation 263,753 284,811
Maintenance 26,573 25,599
Property, Franchise and Other Taxes 100,204 100,111
Depreciation, Depletion and Amortization 117,333 103,227
Income Taxes - Net 68,969 69,689
---------- ----------
1,105,618 1,091,926
---------- ----------
Operation Income 167,723 163,255
Other Income 3,627 3,664
---------- ----------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiary 171,350 166,919
---------- ----------
Interest Charges
Interest on Long-Term Debt 43,400 40,763
Other Interest 14,598 15,286
---------- ----------
57,998 56,049
---------- ----------
Minority Interest in Foreign Subsidiary (427) -
---------- ----------
Net Income Available for Common Stock $ 112,925 $ 110,870
========== ==========
Earnings Per Common Share
Basic $ 2.96 $ 2.94
========== ==========
Diluted $ 2.93 $ 2.92
========== ==========
Weighted Average Common Shares Outstanding
Basic 38,145,411 37,741,855
========== ==========
Diluted 38,528,929 37,998,578
========== ==========
