<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1993
Commission File Number 1-3751
ARKLA, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or jurisdiction of incorporation or organization)
EMPLOYER IDENTIFICATION
(I.R.S. No. 72-0120530)
1600 SMITH, 11th FLOOR, HOUSTON, TEXAS 77002
(Address of principle executive office)
(713) 654-5100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
Common Stock, $.625 par value New York Stock Exchange
Convertible Exchangeable Preferred New York Stock Exchange
Stock, Series A, Cumulative, $0.10 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. { }
The aggregate market value of the voting stock held by non-affiliates:
$899,451,548 Common Stock, $.625 par value, based upon the closing sales price
on March 15, 1994 as reported on the New York Stock Exchange, using
beneficial ownership of stock rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934 and excluding stock owned by affiliates.
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 122,369,914 shares of Common
Stock, $.625 par value, as of March 15, 1994.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Arkla, Inc. Annual Report to Stockholders for the
fiscal year ended December 31, 1993, are incorporated by reference in Parts I,
II and IV herein.
2. Arkla, Inc. definitive Proxy Statement respecting the Annual Meeting of
Stockholders to be held on May 10, 1994, to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (to the extent set forth in Items 10,
11, 12 and 13 of Part III of this report) is incorporated by reference.
The Exhibits included in this report are indexed on pages 23 through 24.
<PAGE> 2
ARKLA, INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS.
Arkla, Inc. (the "Company") was incorporated in 1928 under the laws of the
State of Delaware and is principally engaged in the distribution and
transmission of natural gas including gathering, storage and marketing of
natural gas. See "Natural Gas Distribution" and "Natural Gas Pipeline". The
Company previously conducted operations in the exploration and production of
natural gas and the radio communications business, but on December 31, 1992,
and July 31, 1992, respectively, the Company completed the sale of its
exploration and production subsidiary, Arkla Exploration Company ("AEC"), to
Seagull Energy Corporation ("Seagull") and completed the sale of its radio
communications subsidiary, E.F. Johnson Company ("Johnson"). This terminated
the Company's activities in the exploration and production business and in the
radio communication business. The Company has also participated in several
other acquisitions, dispositions and mergers in recent years, see "Mergers,
Acquisitions and Dispositions". The revenue, operating profit and identifiable
assets of the natural gas segment exceed 90% of the respective totals for the
Company. Accordingly, the Company is not required to report on a "segment"
basis, although the Company is organized into, and the following business
discussions focus on, two operating units -- Natural Gas Distribution and
Natural Gas Pipeline -- to reflect the natural division of the Company's
operations.
NATURAL GAS DISTRIBUTION.
The Company's natural gas distribution business is conducted through its
three divisions, Arkansas Louisiana Gas Company ("ALG"), Entex and Minnegasco,
and their affiliates. Through these divisions and their affiliates, the Company
engages in both the natural gas distribution sales and transport businesses.
ALG provides service in approximately 624 communities in the states of
Arkansas, Louisiana, Oklahoma, Texas and Kansas. The largest communities
served through ALG are the metropolitan areas of Little Rock, Arkansas, and
Shreveport, Louisiana. In 1993, approximately 71% of ALG's total throughput
was composed of sales of gas at retail and approximately 29% was attributable
to transportation services. For the same period, in excess of 95% of ALG's
supplies were obtained from Arkla Energy Resources Company ("AER Co."), and
Mississippi River Transmission Corporation ("MRT"), or through transportation
agreements with Arkla Energy Marketing Company ("AEM"). In May of 1993, ALG,
AER Co. and UtiliCorp United Inc. ("UtiliCorp", an affiliate of Peoples Natural
Gas Company) entered into a definitive agreement pursuant to which the Company
expects to sell to UtiliCorp, subject to Federal Energy Regulatory Commission
("FERC") approval, the Kansas distribution properties of ALG together with
certain related pipeline assets of AER Co. Upon completion, this sale will
terminate the Company's distribution and transmission operations in Kansas.
Entex provides service in approximately 502 communities in the states of
Texas, Louisiana and Mississippi. The largest community served by Entex is the
metropolitan area of Houston, Texas. In 1993, approximately 87% of Entex's
total throughput was composed of sales of gas at retail and approximately 13%
was attributable to transportation services. For the same period, Entex's
principal suppliers of gas were Enron Gas Services Corporation, MidCon Texas
Pipeline Co., Koch
<PAGE> 3
Gateway Pipeline Company, and certain affiliates of each such company. No
other supplier accounted for in excess of 10% of Entex's purchases.
During a portion of 1993, Minnegasco provided service in 285
communities in the states of Minnesota, Nebraska and South Dakota. The major
communities served by Minnegasco in 1993 included Minneapolis, Minnesota and
its suburbs; Lincoln, Nebraska; and Sioux Falls, South Dakota. In February
1993, Minnegasco completed the sale of its Nebraska distribution system to
UtiliCorp for $75.3 million in cash. In August of 1993, Minnegasco completed
the exchange of its South Dakota distribution properties plus $38 million in
cash for the Minnesota distribution properties of Midwest Gas, a division of
Midwest Power System Inc. ("Midwest"). The UtiliCorp and Midwest transactions
terminated Minnegasco's distribution operations outside of Minnesota. In 1993,
approximately 95% of Minnegasco's total throughput was composed of sales of gas
at retail and approximately 5% was attributable to transportation services.
For the same period, Minnegasco's principal pipeline service providers were
Northern Natural Gas Company, Viking Gas Transmission Company, Minnesota
Intrastate Transmission System and Natural Gas Pipeline Company of America.
For the same period, Minnegasco's principal suppliers of gas were Pan Alberta
Gas, AEM, Northern Natural and Western Gas Marketing. No other supplier of
natural gas accounted for more than 10% of Minnegasco's purchases.
The following table summarizes by state the number of communities and the
estimated number of customers served by the Company as of December 31, 1993:
SERVICE AREA LOCATIONS COMMUNITIES SERVED NUMBER OF CUSTOMERS
Texas 365 1,160,947
Minnesota 204 599,067
Arkansas 383 422,187
Louisiana 179 261,456
Oklahoma 94 115,523
Mississippi 91 115,841
Kansas 14 23,001
----- ---------
Total 1,330 2,698,022
The following table summarizes the estimated number of customers served
by each of the divisions as of December 31, 1993 and 1992:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1993 1992
--------- ---------
<S> <C> <C>
Customers by Division
Entex 1,359,467 1,342,743
ALG 739,488 735,494
Minnegasco(1) 599,067 679,428
--------- ---------
Total 2,698,022 2,757,665
</TABLE>
(1) The estimated number of Minnegasco customers for 1992 includes customers
in Nebraska and South Dakota. The Nebraska distribution properties were sold
in February of 1993, and the South Dakota distribution properties were
exchanged for additional Minnesota distribution properties in August
of 1993.
The Company's approximately 53,523 linear miles of gas distribution
mains vary in size from one-half inch to 24 inches. Generally, in each of the
cities, towns and rural areas it serves, the Company owns the underground gas
mains and service lines, metering and regulating equipment located on customers'
premises, and the district regulating equipment necessary for pressure
maintenance. With a few exceptions, the measuring stations at which the Company
receives gas from its suppliers are owned, operated and maintained by suppliers,
and the distribution facilities of the Company begin at the outlet of the
measuring equipment. These facilities include odorizing equipment usually
located on the land owned by suppliers and district regulator installations, in
most cases located on small parcels of land which are leased or owned by the
Company.
Throughput information for each of the distribution divisions is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
Throughput 1993 1992 1991
----- ----- -----
(billions of cubic feet)
<S> <C> <C> <C>
Entex 252.9 224.9 206.3
ALG 126.4 115.3 113.1
Minnegasco 138.7 151.5 154.7
----- ----- -----
Total 518.0 491.7 474.1
===== ===== =====
</TABLE>
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Consolidated revenue, throughput and customer data of the distribution
divisions are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
(in millions of dollars)
<S> <C> <C> <C>
1993 1992 1991
Revenue ---- ---- ----
-------
Sales $2,032.7 $1,787.4 $1,724.0
Transportation 21.6 26.4 26.4
Other 22.6 21.4 21.2
-------- -------- --------
Total $2,076.9 $1,835.2 $1,771.6
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
(billions of cubic feet)
<C> <C> <C>
1993 1992 1991
---- ---- ----
Throughput
----------
Sales
Residential 193.6 185.7 187.1
Commercial 126.7 123.9 124.2
Industrial 111.7 99.5 77.9
Sales for resale 10.2 3.6 12.8
Transportation 75.8 79.0 72.1
----- ----- -----
Total 518.0 491.7 474.1
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
Approximate Average No. of ---- ---- ----
--------------------------
Customers
---------
<S> <C> <C> <C>
Residential 2,424,758 2,477,102 2,446,375
Commercial 221,103 230,069 226,383
Industrial 2,624 2,699 2,736
Sales for resale 11 7 8
--------- --------- ---------
Total 2,648,496 2,709,877 2,675,502
========= ========= =========
</TABLE>
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In almost all of the communities in which it provides service, the city
or other relevant governmental body has granted the Company a franchise to
serve, and its service is subject to the terms and conditions of the franchise.
In most instances the Company's franchise is not exclusive. The rates at which
the Company provides service at retail to its residential and commercial
customers are, in all instances, subject to regulation by the relevant state
public service commissions and, in Texas also by municipalities. The services
provided by the Company to its industrial customers are largely unregulated in
Texas and Louisiana, and are subject to regulatory supervision of differing
degrees in each of the other states. See "Regulation."
NATURAL GAS PIPELINE.
The Company's transmission activities are conducted by the Arkla
Pipeline Group ("APG"). In March 1993, the Company transferred assets,
liabilities and service obligations of Arkla Energy Resources ("AER"), a
division of the Company, into a newly-formed wholly-owned subsidiary of Arkla,
Inc., AER Co., pursuant to an order from FERC approving the transfer. As a
result, APG now includes AER Co., an interstate pipeline subsidiary of the
Company, MRT, an interstate pipeline subsidiary of the Company and AEM, a
subsidiary which serves as the Company's principal natural gas supply
aggregator and marketer, and affiliate companies associated with each. Through
these subsidiaries, APG engages in both the natural gas sales and
transportation businesses. During 1994, the Company plans to spend
approximately $39 million to upgrade certain facilities in order to increase
deliverability to other interstate pipelines at inteconnects near Perryville,
Louisiana. The upgrades are intended to facilitate the creation of a natural
gas marketing "hub".
On June 30, 1993, the Company completed the sale of its intrastate
pipeline business as conducted by Louisiana Intrastate Gas Corporation and its
subsidiaries, LIG Chemical Company, LIG Liquids Corporation and Tuscaloosa
Pipeline (the "LIG Group"), to a subsidiary of Equitable Resources, Inc.
("Equitable") for $191 million in cash. The Company acquired the LIG Group in
July of 1989. The LIG Group operated a natural gas pipeline system located
wholly within Louisiana. Its total throughput was 103.4 million MMBtu for the
six months ended June 30, 1993.
During 1993, the Company also evaluated strategic alternatives with
respect to its interstate pipeline business, ranging from contractual alliances
to the sale of all or a portion of such business. In July 1993, based on its
evaluation, the Company's Management and Board of Directors concluded that it
is in the best interests of the Company's stockholders for the Company to
retain full ownership and operating control of its interstate pipeline
business.
In October 1993, the Company made a filing with the FERC which, if
approved, would allow the Company to transfer the natural gas gathering assets
of AER Co. into a wholly-owned subsidiary to be called Arkla Gathering Services
Company ("Arkla Gathering"). Arkla Gathering, if authorized by the FERC, will
own and operate 3,500 miles of gathering pipeline which collect gas from more
than 200 separate systems in major producing fields in Arkansas, Oklahoma,
Louisiana and Texas. While the scope of the FERC's jurisdiction over Arkla
Gathering is unclear, the Company believes that it would not generally be
subject to traditional cost-of-service rate regulation.
Effective as of December 31, 1993, the Company completed a
comprehensive settlement agreement with certain subsidiaries of Samson
Investment Company pursuant to which a number of outstanding contractual
arrangements between the parties were terminated or substantially modified (see
"Natural Gas Pipeline" under "Material Changes in the Results of Continuing
Operations", included in the 1993 Annual Report to Stockholders and incorporated
herein by reference).
AER Co. owns and operates a natural gas pipeline system located in
portions of Arkansas, Louisiana, Mississippi, Missouri, Kansas, Oklahoma,
Tennessee and Texas. As described above under "Natural Gas Distribution", in
May of 1993 AER Co. entered into a definitive agreement pursuant
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<PAGE> 6
to which it expects to sell to UtiliCorp its pipeline assets in Kansas,
including the Winfield, Kansas Storage field described below, subject to FERC
approval. At December 31, 1993, the AER Co. system consisted of approximately
6,612 miles of transmission lines and approximately 3,500 miles of gathering
lines. The AER Co. pipeline system extends generally in an easterly direction
from the Anadarko Basin area of the Texas Panhandle and western Oklahoma
through the Arkoma Basin area of eastern Oklahoma and Arkansas to the
Mississippi River. Additional pipelines extend from east Texas to north
Louisiana and central Arkansas, and from the mainline system in Oklahoma and
Arkansas to south central Kansas and southwest Missouri. The system has
extensive gas gathering facilities throughout the Anadarko and Arkoma Basins,
and in east Texas and north Louisiana and also operates various product
extraction plants and compressor facilities related to its gas transmission
business. AER Co.'s bundled firm and interruptible sales services were
eliminated on September 1, 1993 when it "unbundled" these services into the
separate components of gas supply, transmission, and storage pursuant to
FERC Order 636, see "Regulatory". AER Co.'s peak day gas handled during the
1993/94 heating season was approximately 2.43 billion cubic feet ("Bcf"). The
system transports gas for third parties as an "open access" transporter, makes
sales of gas directly to end users located along its system, and delivers gas
to the Company's distribution divisions for retail sales. In 1993, AER Co.'s
throughput totaled 617.5 Bcf which consisted of 9% sales service and 91%
transportation service. Approximately 21% of the total throughput was
attributable to services provided to ALG, 10% was attributable to services
provided to MRT, and 27% was attributable to gas marketed by AEM to other
parties. No other customer or supplier accounted for more than 10%
of AER Co.'s throughput.
The MRT system consists of approximately 2,200 miles of pipeline
serving principally the greater St. Louis area in Missouri and Illinois. This
pipeline system includes the "Main Line System," the "East Line," and the "West
Line." The Main Line System includes three transmission lines extending
approximately 435 miles from Perryville, Louisiana, to the greater St. Louis
area. The East Line, also a main transmission line, extends approximately 94
miles from southwestern Illinois to St. Louis. The West Line extends
approximately 140 miles from east Texas to Perryville, Louisiana. The system
also incudes various other branch, lateral, transmission and gathering lines
and compressor stations. During 1993, MRT's throughput totaled 317.6 Bcf which
consisted of 19% sales service and 81% transportation service. Approximately
half of MRT's total 1993 volumes were delivered to its traditional markets
along its system in Missouri, Illinois and Arkansas with the remaining volumes
delivered to off-system customers. MRT's bundled firm and interruptible sales
services were eliminated on November 1, 1993 when it "unbundled" those services
into the separate components of gas supply, transmission, and storage pursuant
to FERC Order 636, see "Regulatory". MRT's peak day delivery during the
1993/94 heating season to its traditional market was approximately 950,000
MMBtu, which consisted of 100% transportation volumes. MRT's largest customer
is Laclede Gas Company, which serves metropolitan St. Louis and to which MRT
provides service under several long-term firm transportation and storage
agreements and an agency agreement.
The Company owns and operates seven gas storage fields. Four storage
fields are associated with AER Co.'s pipeline and have a combined maximum
deliverability of approximately 600 million cubic Feet ("mmcf") per day and
a working gas capacity of approximately 20.3 Bcf. AER Co. also owns a 10%
interst in Koch Gateway Pipeline Company's Bistineau storage field which
provides an additional 100 mmcf/per day of deliverability and additional
working gas capacity of 8 Bcf. The two largest AER Co. storage fields are
located in Oklahoma: the Ada field - capable of delivering approximately 330
mmcf per day, and the Chiles Dome field - capable of delivering approximately
200 mmcf per day. The other AER Co. storage fields, Ruston and Collinson, are
located near Ruston, La. and Winfield, Kansas. Three storage fields are
associated with MRT's pipeline and have a maximum aggregate deliverability of
approximately 750 mmcf per day and a working gas capacity of approximately
31 Bcf. The substantial portion of such capacity is located in two fields in
north central Louisiana, near Ruston. The other MRT storage field is located
at St. Jacob, Illinois. The Company utilizes its gas storage fields primarily
to meet peak demands during winter months.
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AEM markets gas on both a short-term (spot) and long-term basis.
Pricing may be market-based or fixed. Fixed priced sales (or purchases) are
hedged using gas futures contracts or other derivative hedging tools. See
Notes 1 and 3 of Notes to Consolidated Financial Statements. AEM supplies are
purchased from others on both a short-term and long-term basis. Most supplies
are priced on a market sensitive basis. Sales for 1993 were 245 Bcf of which
approximately 72% was to unaffiliated parties. Customers are located both on
the AER Co. system and other pipelines. Gas is transported to customers using
both firm and interruptible transportation.
All of the APG entities are primarily supplied by gas purchased
directly in the field from producers, and in the case of MRT and AEM, also from
marketers. During 1993, APG's largest suppliers were Arco Oil and Gas Company,
Ward Gas Marketing and Premier Gas Company, which accounted for 8.4%,
5.5%, and 3.7% of APG's purchases, respectively. During 1993, MRT acquired
approximately 44% of its supplies from affiliated companies. Substantially
all of the gas purchased by AER Co. and AEM is delivered by the suppliers
directly into the facilities of AER Co. In excess of 90% of the gas purchased
for resale or transportation by MRT is delivered through various transportation
arrangements, primarily with Natural Gas Pipeline Company of America,
Trunkline Gas Company, and AER Co. During 1993,
approximately 65% of MRT's supplies were transported by AER Co.
As a result of the transfer of assets, liabilities and service
obligations from AER to AER Co., the FERC now has jurisdiction over its
interstate pipeline business, including transportation services and
certain of AER Co.'s transactions with affiliates of the Company, which
historically were subject to state regulatory oversight. The FERC has
jurisdiction over MRT with regard to its interstate pipeline business. Sales
and services provided by AEM are generally not subject to any form of
regulation. See "Regulation."
The Company sold LIG to Equitable in June, 1993. LIG's results of
operations have been excluded from the following data. LIG's operating revenues
were $151.1 million for the six months ended June 30, 1993 and $296.2 million
and $278.9 million for 1992 and 1991, respectively. LIG's total throughput was
103.4 million MMBtu for the six months ended June 30, 1993 and 244.1 million
MMBtu and 240.2 million MMBtu for 1992 and 1991, respectively.
Consolidated throughput and revenues for APG are as follows:
Year Ended December 31(1)
1993 1992 1991
---- ---- ----
Throughput (million MMBtu)
Sales 174.8 150.0 229.1
Transportation 780.1 752.5 629.8
Order 636 elimination (24.2)(2) -- --
----- ----- -----
Total 930.7 902.5 858.9
===== ===== =====
Revenues (in millions of
dollars)
Sales $ 874.2 $ 752.9 $ 890.9
Transportation 138.7 102.0 106.7
-------- -------- --------
Total $1,012.9 $ 854.9 $ 997.6
======== ======== ========
(1) Reported on a consolidated basis for the group. Does not include services
provided by one member of the group to another, but includes services provided
by members of the group to the Company's distribution division. Generally,
sales by AEM of gas transported through AER Co. are treated as transportation,
while sales by MRT of gas received through transportation from AER Co. are
treated as sales.
(2) Prior to the implementation of unbundled services pursuant to FERC Order
636, AER's and MRT's sales rate covered all related services, including
transportation to the customer's facility. Under FERC Order 636, when AER and
MRT act as a merchant, the sales transaction is independent of (and may not
include) the transportation of the volume sold. Therefore, when the sold
volumes are also transported by AER and MRT, the throughput statistics will
include the same physical volumes in both the sales and transportation
categories, requiring an elimination to prevent the overstatement of actual
total throughput.
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During the 1980s, the Company, as most other pipelines, was compelled
to resolve a number of significant disputes with its suppliers under contracts
which allegedly required the Company to take or, if not taken pay for,
quantities of gas in excess of its available sales markets and/or at prices
generally above the levels required by such markets. These disputes, generally
referred to as "take-or-pay" claims, have been resolved in a number of ways,
including both buy-out/buy-downs and payments for gas in advance of its
delivery. While the majority of such claims have been settled, the Company is
committed, under certain of these settlements, to make additional payments
although such commitments are not material to the Company's capital
requirements in any year and, in the aggregate, are exceeded by cash inflows
under other such agreements. In the third quarter of 1989, the Company
recorded a pre-tax Special Charge of $269 million related to these claims.
The amount shown as "Gas Purchased in Advance of Delivery" in the
Company's Consolidated Balance Sheet and the component of "Investments and
Other Assets" bearing the same caption (See Note 1 of Notes to Consolidated
Financial Statements) represents, in substantial part, amounts paid to
suppliers in conjunction with the above referenced settlements. These
prepayments for gas were made at varying prices but have been reduced to their
estimated net realizable value (which approximates fair value) and, to the
extent that the Company is unable to realize at least this amount through sale
of the gas as delivered over the life of these agreements, its earnings will be
adversely affected, although such impact is not expected to be material in any
individual year.
In addition, the Company's Consolidated Balance Sheet includes an
accrual representing its estimate of the amount it will be required to pay in
settlement of all remaining claims, including those not yet asserted. While
the Company can provide no assurance that such accrual will ultimately prove
adequate, in the opinion of Management the shortfall, if any, will be
immaterial.
The Company is committed under certain agreements to purchase
certain quantities of gas in the future. At December 31, 1993, the Company had
the following gas take commitments under its agreements which are not
variable-market-based priced:
Volume Value Price
------ ----- -----
(millions ($ in millions) ($/MMBtu)
of MMBtu)
1994 20.6 $52.6 $2.55
1995 18.7 46.3 2.48
1996 14.9 37.3 2.50
1997 13.9 33.6 2.43
Beyond 1997 17.8 $39.3 $2.21
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<PAGE> 9
At December 31, 1993, the Company had the following gas take
commitments under its agreements which are variable-market-based priced, valued
using an average spot price of approximately $2.05/MMBtu:
Average
Volume Value Price
------ ----- ------
(millions of ($ in millions) ($/MMBtu)
MMBtu)
1994 75.7 $154.8 $2.04
1995 11.3 23.9 2.11
1996 5.4 11.6 2.15
1997 4.0 8.4 2.12
Beyond 1997 6.7 $14.2 $2.12
To minimize the risk from market fluctuations in the price of natural
gas and related transportation, the Company enters into futures transactions,
swaps and purchases options in order to hedge certain commitments to buy and
sell natural gas (see Notes 1 and 3 of Notes to Consolidated Financial
Statements).
To the extent the Company does not have or believes that it may not
retain markets for the above volumes of gas which are expected to generate
total consideration which equals or exceeds the amounts it is obligated to pay
for such volumes, it has established financial reserves. The adequacy of these
reserves over the life of the relevant agreements depends upon, among other
factors, the spot price of gas at the time such volumes are purchased for
resale and the extent to which the Company's existing markets are affected by
FERC Order 636, including actions which may be taken by Local Distribution
Companies in response to such Order. While the Company can provide no
assurance that its reserves will ultimately prove adequate, based on the
information currently available, the Company does not anticipate that it will
incur losses in conjunction with delivery and resale of the above volumes which
are materially in excess of previously recorded financial reserves.
MARKET FACTORS.
The Company's business is generally affected by a number of market
factors, including competition, seasonality and the general economic climate.
Increasingly, the activities of the Company's transmission and marketing units
are most significantly affected by national trends in these areas. On the
other hand, the results of the Company's distribution units continue to be
influenced most significantly by local trends in these factors.
Historically, competition in the sale and transportation of natural
gas was limited due to the pervasive nature of the regulation of the industry
and the long-term nature of the service obligations assumed by its
participants. As a result, the Company's results of operations were largely
determined by local factors, including the effects of local regulation. Over
the past few years, however, regulatory and economic developments have
significantly reduced the influence of such factors, particularly with respect
to the Company's transmission and marketing operations. At the federal level,
regulations governing natural gas transmission and marketing have been
redesigned in order to promote intense competition between natural gas
transporters and marketers. From an economic perspective, in recent years the
energy industry, including the natural gas industry, has been characterized by
a surplus of product deliverability (and, in the case of natural gas
transportation in certain locations during certain seasons, a surplus of
capacity), which also has increased the level of competition.
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<PAGE> 10
Currently, the Company generally faces competition in all aspects of
its operations, both from other companies engaged in the natural gas business
and from companies providing other energy products. This has an effect both on
the quantity of the services sold by the Company and the prices it receives. At
all levels of the industry in which the Company is engaged, competition
generally occurs on the basis of price, the ability to meet individual customer
requirements, access to supplies and markets and reliability. In the current
environment, the ability of the Company to respond to this competition is tied
directly to its ability to maintain operational flexibility, achieve low
operating costs and maintain continued access to reliable sources of
competitively priced gas and a broad range of gas markets.
The level of competition is especially intense in connection with the
services provided by the Company's transmission and marketing units. As a
result of fundamental changes in the regulatory environment over the past few
years, the natural gas and gas transportation markets in which the Company's
pipeline units compete have become increasingly national in scope. In many
instances, the gas transported through the Company's pipelines and sold by the
Company's marketing units is bound for customers located outside of the
Company's historic service areas, where it competes for market share with gas
produced from other regions of the United States and, in certain instances,
Canada. With respect to the services provided in the Company's historic
service areas, the Company's transmission and marketing units are only one of
several pipeline systems and natural gas marketers providing service in all or
a part of the area. The competitors in such areas are also participants in
other markets and as a result, the availability and price of their services are
determined by broader factors than simply local conditions. The Company also
faces competition in these areas from new entrants.
These developments have had the effect of increasing the number of
competitors and competitive options faced by the Company. As a consequence,
changes in the market for natural gas and gas transportation services at the
national level increasingly influence the demand and prices paid for the
natural gas and gas transportation services offered by the Company.
Additionally, to the extent that the customers served by those units are
relatively large volume customers using gas to meet industrial or electric
power generation requirements, the Company faces significant competition from
fuel oil, waste products used as a source of fuel for the generation of
process heat or steam, energy conservation products, and, with respect to
electric generation customers, low cost energy available to such customers from
other electric generators.
Largely as a result of increasing competition, the Company
discontinued the application of Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" to AER Co.'s
transactions and balances in 1992, see Note 10 of Notes to Consolidated
Financial Statements included in the Company's 1993 Annual Report to
Stockholders and incorporated herein by reference. These trends in
competition are expected to continue, although not necessarily at the same rate
as in the past.
The Company's distribution units also face competition. As with
customers served by the Company's transmission and marketing units, over the
last few years the Company's small industrial and large commercial customers
served through its distribution units increasingly have been the target of
other companies engaged in the natural gas business seeking to sell gas
directly or transport third-party gas to such customers served through its
distribution units through new facilities, thereby bypassing the facilities
installed by the Company to serve such customers. The Company has met such
competition by adopting new programs which, in some instances, have provided
its competitors with access to its sales customers, but through the use of the
Company's facilities. The
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<PAGE> 11
Company also faces competition with respect to such customers from fuel oil,
electricity, energy conservation products, and in certain instances, liquid
petroleum gas.
While with certain limited exceptions, the Company currently is not in
direct competition with any other distributors of natural gas with respect to
its existing small commercial and residential customers, the Company
nevertheless faces significant competition for such customers from electric
utilities and providers of energy conservation products. Moreover, while the
Company currently holds franchises in almost all of the communities which it
serves, such franchises generally are not by their terms exclusive and
competition has been experienced in certain instances as the Company has sought
to extend service from existing service areas to geographically adjacent areas.
In addition to competition, the Company's business also is affected at
all levels by seasonality and general economic conditions. Because one of the
significant markets for natural gas is use in space heating, demand for natural
gas and gas transportation services is generally seasonal in nature. In recent
years, the Company's transmission and marketing units have increased the volume
of their off-season sales by expanding their markets to include additional
industrial users of gas, gas-fired electric generators, and customers seeking
gas in the summer to fill storage. Even with increased summer demand, however,
the price of natural gas and gas transportation services continues to be
seasonal in nature, with prices significantly lower in the summer than in
winter. While the Company's distribution units also have sought to increase
the level of their off-season sales, the opportunity to do so within their
historic service areas is limited.
General economic conditions also significantly influence the demand for
gas. The national demand for gas has increased in recent years and currently
is expected to continue to increase in future years. This, in turn, at certain
times and in certain market segments has influenced the price for natural gas
and gas transportation services. However, this increased demand for gas is
somewhat tied to the overall state of economic activity and there can be no
assurance that current levels of demand will continue or that, if they
continue, they will necessarily have a significant effect on the price of or
demand for the Company's products or services. From the perspective of the
Company's local distribution units, the economic conditions prevailing in the
Company's historic service areas continue to have a significant effect on the
results of their operations. Unlike the Company's transmission and marketing
units, the local distribution units are not readily able to redirect their
activities to other markets when the demand for gas in their local service
areas declines. In recent years, the level of economic activity in the areas
served by these units has remained relatively stable.
REGULATION.
The Company's business operations are significantly affected by
regulation. This regulation occurs at all levels -- federal, state and local
- -- and has the effect, among other things, of: (i) requiring that the Company
seek and obtain certain approvals before it may undertake certain acts, (ii)
regulating the level of rates which the Company may charge for certain of its
services and products, and (iii) imposing certain conditions on the Company's
conduct of its business.
The Company is most affected by the regulations of the FERC. In 1992,
the FERC promulgated its Order 636, a comprehensive revision of its regulations
regarding the sale and transportation of natural gas. Of significance to the
Company, Order 636 requires interstate pipelines to adopt new terms and
conditions of service which (i) eliminate the ability of those pipelines to
make sales of gas on terms more advantageous than those which can be offered by
other sellers of gas, (ii) provide holders of firm transportation capacity
entitlements on those pipelines with the ability essentially to assign those
entitlements to third parties, (iii) provide holders
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<PAGE> 12
of transportation capacity entitlements on those pipelines with the ability
freely to change the points at which they deliver gas to or receive gas from
such pipelines, subject only to certain operational limitations, and (iv)
eliminate the right of local distribution companies to require service from
those pipelines in the absence of a contract.
As promulgated by the FERC, Order 636 is to be implemented through the
adoption by each interstate pipeline of conforming changes to the pipeline's
tariffs. AER made several compliance filings in 1993 and implemented
restructured services effective September 1, 1993. MRT also made several Order
636 compliance filings in 1993 and implemented restructured services on its
system November 1, 1993. Pursuant to its restructuring tariff and the requests
of its customers, MRT allocated all of its firm system capacity, including firm
storage capacity, to its pre-Order 636 sales and transportation customers. In
addition to firm and interruptible transportation and storage services, MRT
provides unbundled sales and/or agency services in accordance with Order 636 to
the majority of MRT's former bundled firm sales customers.
These changes are likely to increase the level of competition faced by
the Company's transmission and marketing units. Third-party sellers of gas
will be in a position to compete on an equal footing with the Company's
pipelines and marketing units in the sale of long-term, firm supplies of gas.
Holders of firm transportation capacity entitlements on the Company's pipelines
will be in a position to market their unused capacity rights in direct
competition with unused capacity offered by the Company. In addition, Order
636 requires that pipelines offer their services on an "unbundled" basis --
that is, customers must be offered the opportunity to purchase gathering,
storage and transmission services separately, rather than as a "bundled"
package. As a result, customers will be in a position to pick and choose among
the Company's transportation products depending on those customers' individual
needs and the availability and pricing of alternate supplies of such services.
In past periods, pipelines have incurred substantial costs as similar
changes in the direction of the FERC's regulations have resulted in significant
economic dislocations in the industry. While pipelines were permitted to
recover a portion of those costs in their rates, a significant portion
ultimately was absorbed by the pipelines without recovery.
In an effort to avoid a similar outcome in this instance, Order 636
provides that pipelines will be permitted to include in the calculation of
their future rates any similar "transition costs" incurred as a result of the
changes required by Order 636. In addition, Order 636 authorizes pipelines to
formulate their future rates in a manner which is intended to minimize the
economic effect which otherwise might result from permitting holders of firm
capacity transportation entitlements to compete directly with the pipeline for
transportation customers. However, competitive and other economic conditions
may prevent pipelines from charging the maximum rates which are designed to
reflect all of these costs.
The changes to the industry brought about by Order 636 also have
affected and will continue to affect the business environment in which the
Company's local distribution units operate in those geographical areas where
gas supplies are delivered on interstate pipelines. The impact is less
pronounced in the case of Entex, where a significant portion of supplies are
delivered on intrastate pipelines. The Order has increased, and in some cases
likely will continue to increase, the number and diversity of potential
suppliers and products available to meet the supply needs of each unit. In
addition, the requirement that pipelines "unbundle" their services permits the
Company's distribution units to avoid the purchase -- and, thus, the cost --
of services which they do not require. On the other hand,the elimination of
the right of local distribution companies to require service from interstate
pipelines in the absence of a contract will expose local distributors to an
increased risk of supply disruption and the potential for increased review from
some state regulatory agencies. In addition, the ability of holders of firm
transportation capacity entitlements to assign their capacity rights to other
parties, coupled with the ability of those holders to change the points at
which that capacity is used, likely will increase the competitive pressures
faced by local distributors. This is because such provisions will expand the
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<PAGE> 13
incentives for and capabilities of third parties to build new facilities from
nearby pipelines which bypass the existing facilities of the incumbent local
distributors.
Under Order 636, the Company's distribution units have incurred
increased costs as a result of the recovery by their pipeline suppliers
through their rates of those pipelines' Order 636-related "transition costs".
In some cases, the recovery of transition costs remains unresolved. In
addition, the ratemaking provisions of Order 636 have increased the fixed costs
incurred by distribution companies in reserving firm transportation capacity on
their pipeline suppliers. While the Company's distribution units generally
expect to be able to recover all of these increased costs in their retail
rates, the resulting increases may adversely affect their competitive posture
relative to alternate fuels and suppliers.
The Company is unable to predict at present the extent, if any, to
which Order 636 will have an effect on the Company's various operating units.
Moreover, the Company notes that nearly all of the regulations promulgated by
the FERC in this area since 1985 have been the subject of a substantial amount
of litigation, including appeals to various courts, and that several of those
regulations have been further modified as a result of such litigation. In line
with that history, Order 636 currently is the subject of both further requests
for modification and court appeals. Until such time as all such requests for
modifications and appeals are resolved, considerable uncertainty will remain in
the industry.
In addition to those matters arising out of Order 636, the Company
also is involved in other significant proceedings before the FERC.
In one such set of proceedings, AER Co. and MRT currently are
seeking approval to sell approximately 250 mmcf per day of capacity in AER
Co.'s Line AC and certain other facilities to ANR Pipeline Company (ANR
Pipeline). During 1992, the FERC approved the sale, subject however to certain
conditions. In AER Co.'s opinion, certain of these conditions broaden the
scope of the rights to be conveyed to ANR Pipeline substantially beyond those
contemplated by AER Co. in the calculation of the purchase price. As a result,
AER Co. and MRT have requested that the FERC reconsider that portion of its
order, and AER Co., MRT and ANR Pipeline have deferred the closing of the
transaction pending the outcome of that request. During 1993, the parties
entered into agreements amending the proposed transaction and have requested
FERC approval of the amended transaction. The Company currently cannot predict
with certainty either the outcome of, nor the timing of the FERC's action on
its request. This sale by AER Co. and MRT to ANR Pipeline is also subject to
approval by the Federal Trade Commission.
As circumstances warrant, both AER Co. and MRT regularly seek
authorization from the FERC for changes in their rates. Both AER Co. and MRT
currently are before the FERC seeking increases in their FERC jurisdictional
rates.
At the state and local level, the primary effect of regulation of the
Company relates to the rates charged by the Company's various distribution
units for the services they provide to their customers. These services
generally include both transportation and sale services. Currently, Minnegasco
and ALG have applications for an increase in their local rates pending,
respectively, before the appropriate Minnesota, Arkansas, and Oklahoma
regulatory agencies.
In addition to regulation of the Company's distribution rates, state
and local regulatory bodies also issue the franchises and certificates of
public convenience and necessity which govern most services provided by the
Company at retail.
Regulations at both the federal and state levels also have other
effects on the competitive environment in which the Company operates.
Historically, the regulatory regimes applicable at both the federal and state
level restricted the amount of facilities which could be installed to serve a
given
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<PAGE> 14
customer. Customarily, these regulations did not allow for the construction of
"duplicate" facilities by a second supplier to a given customer if the customer
already was being adequately served by its existing supplier. Since the
mid-1980's, however, these regulatory restrictions gradually have been eroded
and other companies competing for the sale or transportation of gas to
customers presently served or capable of being served through facilities owned
by the Company have been permitted to use existing facilities owned by others
or to construct new facilities, thereby entirely bypassing the Company's
facilities. In certain instances, these proposals require the advance approval
of various regulatory bodies before they may be implemented. In the past,
certain such proposals have been approved and, when approved and implemented,
have resulted in reductions in the level of services provided by the Company to
its customers. In other situations, proposals to bypass facilities owned by
the Company have not been approved. The Company is not able at present to
predict either the outcome of any current or future proceedings or the effect,
if any, which they ultimately may have on the Company.
Certain business activities of the Company in the United States are
subject to existing federal, state and local laws and regulations governing
environmental quality and pollution control. During 1988, the Company
implemented a plan to contain and dispose of polychlorinated biphenyls
("PCB's") which, upon inspection, were found to exist in certain isolated
sections of the MRT system. The Company advised the Environmental Protection
Agency ("EPA") of the results of MRT's review and its remediation plan. MRT's
remediation efforts were completed in 1992 and the EPA has made an inspection
of MRT's facilities without raising any additional issues.
With the acquisition of DEI in November 1990, the Company acquired
Minnegasco, a natural gas distribution company headquartered in Minneapolis,
Minnesota, which owns or is otherwise associated with a number of sites where
manufactured gas plants ("MGPs") were previously operated.
From the late 1800s to 1960, Minnegasco and its predecessors
manufactured gas at a site in Minnesota, located in Minneapolis near the
Mississippi River, (the "Minneapolis Site") which site is on Minnesota's
Permanent List of Environmental Priorities. Minnegasco is working with the
Minnesota Pollution Control Agency to implement an appropriate response action.
At this time, however, the specific method and extent of required remediation
are not known for the entire site.
There are six other former MGP sites in Minnesota in the service
territory in which Minnegasco operated at December 31, 1993. Of these six
sites, Minnegasco believes that three were neither owned nor operated by
Minnegasco, two were owned at one time by Minnegasco but were operated by
others and are currently owned by others, and one is presently owned by
Minnegasco but was operated by others. In addition, there are seven former MGP
sites in Nebraska and two in South Dakota in the service territory in which
Minnegasco operated at December 31, 1992, but as part of the sale of the
Nebraska operations (see "Natural Gas Distribution"), the buyer has assumed
liability for five Nebraska sites. Minnegasco had previously disposed of the
other two Nebraska sites. The South Dakota sites were not operated by
Minnegasco or its predecessors. Minnegasco believes it is not liable for
remediation of the Nebraska and South Dakota sites.
At December 31, 1993, Minnegasco has deferred $1.3 million related to
the Minneapolis Site and has estimated a range of $23 million to $89 million
for the possible remediation of the Minnesota sites. At December 31, 1993, the
Company has an accrual of $26.8 million to cover the probable costs of
remediation. In connection with its 1992 rate case, Minnegasco was allowed to
recover through rates over five years, without carrying costs, the deferred
costs at December 31, 1992, and was allowed $3.1 million annually to cover
on-going clean-up costs. In accordance with SFAS 71, a regulatory asset has
been recorded equal to the amount accrued.
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<PAGE> 15
The Company is pursuing recovery of costs from its insurers and other
potentially responsible parties.
In addition to the Minnesota MGP sites described above, the Company's
distribution divisions are investigating the possibility that the Company or
predecessor companies may be or may have been associated with other MPG sites
in the service territories of the distribution divisions. At the present time,
the Company is aware of some plant sites in addition to the Minnesota sites and
is investigating certain other locations. While the Company's evaluation of
these other MGP sites is in its preliminary stages, it is likely that some
compliance costs will be identified and become subject to reasonable
quantification. To the extent that such potential costs are quantified, as
with the Minnesota remediation costs for MGP described herein, the Company
expects to provide an appropriate accrual and seek recovery for such
remediation costs through rates.
In addition, the Company, as well as other similarly situated firms in
the industry, is investigating the possibility that it may elect or be required
to perform remediation of various sites where meters containing mercury were
disposed of improperly, or where mercury from such meters may have leaked or
been disposed of improperly. While the Company's evaluation of this issue is
in its preliminary stages, it is likely that compliance costs will be
identified and become subject to reasonable quantification.
To the extent that such potential costs are quantified, the Company
will provide an appropriate accrual and, to the extent justified based on the
circumstances within each of the Company's regulatory jurisdictions, set up
regulatory assets in anticipation of recovery through the ratemaking process.
The Company is also subject to laws and regulations concerning
pipeline operations and occupational safety, the administration of certain
employee benefit plans, and certain other matters. Compliance with these
regulations to date has not had a material direct impact on the capital
expenditures, earnings or the competitive position of the Company. Inasmuch as
such laws and regulations are frequently amended or reinterpreted, the Company
is unable to predict the future impact of complying with present or future
regulations.
Other legislative proposals affecting the industry recently have been
and may be introduced before the Congress and state legislatures, and the FERC
and various state agencies currently have under consideration various policies
and proposals, in addition to those discussed above, that may affect the
natural gas industry. It is not possible to predict what actions,
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<PAGE> 16
if any, the Congress, the FERC or the states will take on these matters, or the
effect any such legislation, policies, or proposals may have on the activities
of the Company.
MERGERS, ACQUISITIONS AND DISPOSITIONS.
All levels of the natural gas industry -- transmission and marketing,
distribution, and exploration and production -- have undergone a number of
acquisitions, divestitures and combinations in recent years, and the Company
has been a party to several such transactions, including, as previously
described, the exchange of Minnegasco's South Dakota distribution properties in
August of 1993, the sale of the LIG Group in June of 1993 and the sale of
Minnegasco's Nebraska distribution properties in February 1993, and as
described more fully below, the sale of the Company's exploration and
production business in December 1992, the sale of Dyco Petroleum and the
acquisition of The Hunter Company in 1991, its merger with Diversified
Energies, Inc. ("DEI") the parent company of Minnegasco in 1990, its
acquisition of the LIG Group in 1989 and its merger with Entex in 1988. As
previously described, the Company has executed a definitive agreement pursuant
to which it expects to sell its Kansas distribution property and certain
related pipeline assets in the first half of 1994. The Company reviews
possible transactions from time to time and may engage in other business
combinations in the future that are not specifically described herein.
On December 31, 1992, the Company completed the sale of the stock of
AEC to Seagull for approximately $397 million in cash (including $7.3 million
removed from AEC just prior to closing). This sale terminated the Company's
activities in the exploration and production business and, accordingly, in 1992
the Company reclassified the results of operations of AEC to discontinued
operations herein and in the accompanying Consolidated Financial Statements.
The Company previously conducted operations in the radio communications
business through Johnson and EnScan, Inc. ("EnScan"), which were acquired in
conjunction with the merger with DEI. In early 1992, EnScan merged with
Itron, Inc. ("Itron") of Spokane, Washington, of which, after Itron's 1993
issuance of additional common stock in its initial public offering, the
Company now owns common stock representing ownership of approximately 18.5%
(recorded at approximately $34 million) of the combined enterprise, which is
managed by Itron. Based on recent price quotations on the NASDAQ, the market
value of the Company's interest is approximately $35.2 million. It is
currently the Company's intention to dispose of its investment in the combined
enterprise over the next several years at times to be determined principally
by economic factors in the markets available for sale or exchange of such
interests. In July 1992, the Company sold the stock of Johnson for total
consideration of approximately $40 million, receiving cash proceeds of
approximately $15 million at closing and retaining an investment currently
valued at approximately $5 million.
In addition to the EnScan and Johnson transactions described above,
during recent years, the Company has disposed of substantially all of its
non-gas related businesses, including, in late 1992 the sale of the principal
assets of Arkla Products Company, which was originally sold as a part of the
1984 sale of Arkla Industries and conducted operations for the Company in the
gas grill manufacturing business after it was reacquired by the Company due to
Preway Inc.'s default on certain revenue bonds for which the Company was
secondarily liable. Prior to its merger with the Company in 1988, Entex
similarly disposed of substantially all of its non-gas related assets through
the sale in 1986 of certain of the assets of Allied Materials Corporation, and
the sale in 1987 of the stock of University Savings Association, Entex
Petroleum, Inc., and Big Chief Drilling Company, and certain of the Entex coal
properties, with its remaining non-gas subsidiary, Datotek, disposed of by the
Company in 1990. For a further discussion of certain of these matters, see
Note 8 of Notes to Consolidated Financial Statements included in the Company's
1993 Annual Report to Stockholders incorporated herein by reference.
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<PAGE> 17
EMPLOYEES.
The Company employs approximately 6,907 persons and has retirement
plans for the majority of its employees and maintains contributory group life,
medical, dental and disability insurance plans for its employees, as well as
certain other benefit plans for its retirees.
ITEM 2. PROPERTIES.
The Company is of the opinion that it has generally satisfactory title
to the properties owned and used in its businesses, subject to the liens for
current taxes, liens incident to minor encumbrances, and easements and
restrictions which do not materially detract from the value of such property or
the interests therein or the use of such properties in its businesses.
ITEM 3. LEGAL PROCEEDINGS.
On October 15, 1992, the Resolution Trust Corporation ("RTC") filed
suit in United States District Court for the Southern District of Texas,
Houston Division, against the Company for alleged harm resulting from the 1989
failure of University Savings Association ("USA"), a thrift institution in
Houston, Texas. The RTC claims that the Company is liable as a
successor-in-interest to Entex, Inc. which merged with the Company in 1988,
after Entex's sale of USA in 1987. The suit alleges that certain former
officers and directors of USA are responsible for a breach of contract,
breaches of fiduciary duties, negligence and gross negligence in conducting
USA's business affairs. The RTC also alleges that Entex, which owned
University until 1987, was responsible for some of that alleged wrongdoing, as
well as for having allegedly misrepresented facts to state and federal
regulators in connection with the sale of USA to certain USA officers and
directors in 1987. Compensatory damages of at least $535 million were
originally alleged in the case. Arkla, Entex and the defendant directors filed
answers denying the material allegations of the suit and interposing certain
defenses. On June 3, 1993, the court dismissed a number of claims discussed
above, though it allowed the RTC to file an amended complaint with respect to
some of the dismissed claims. On July 9, 1993, the Court entered an order
denying a motion filed by the RTC to reconsider the Court's order dated June 3,
1993. On August 12, 1993, in response to the Court order allowing the RTC to
replead certain claims, the RTC filed its second amended complaint in which
compensatory damages of at least $520 million are alleged. Arkla, Entex and
the defendant directors have filed various motions in response to the second
amended complaint. Based on a review of the amended complaint and on a review
of the materials in Entex's possession related to USA, the Company believes it
has meritorious defenses to the RTC claims and intends to vigorously pursue
such defenses in this suit. Discovery in the case is continuing, but the
Company is not yet able to determine the effect, if any, on the results of
operations or financial position of the Company which will result from
resolution of this matter.
On August 6, 1993, the Company, its former exploration and production
subsidiary ("E&P") and Arkoma Production Company ("Arkoma"), a subsidiary of
E&P, were named as defendants in a lawsuit (the "State Claim") filed in the
Circuit Court of Independence County, Arkansas. This complaint alleges that
the Company, E&P and Arkoma, acted to defraud ratepayers in a series of
transactions arising out of a 1982 agreement between the Company and Arkoma.
On behalf of a
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<PAGE> 18
purported class composed of the Company's ratepayers, plaintiffs have alleged
that the Company, E&P and Arkoma are responsible for common law fraud and
violation of an Arkansas law regarding gas companies, and are seeking a total
of $100 million in actual damages and $300 million in punitive damages. On
November 1, 1993, the Company filed a motion to dismiss the claim. The court
has not ruled on this motion. The underlying facts forming the basis of the
allegations in the State Claim also formed the basis of allegations in a
lawsuit (the "Federal Claim") filed in September 1990 in the United States
District Court for the Eastern District of Arkansas, by the same plaintiffs.
In August 1992, the Court entered an order granting the Company's motion to
dismiss the Federal Claim, and the order was affirmed by the United States
Court of Appeals, Eighth Circuit in April 1993. This dismissal did not bar the
plaintiffs from filing the State Claim in a state court based on allegations of
violation of state law. Since the State Claim is based on essentially
the same underlying factual basis as the Federal Claim, the Company believes
the State Claim is without merit, intends to vigorously defend this lawsuit and
does not believe that the outcome will have a material adverse effect on the
financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
REGULATION S-K, ITEM 401(B). EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the
"executive officers" of the Company (as defined by the Securities and Exchange
Commission) as of March 10, 1994:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING
NAME AGE PAST 5 YEARS
---- --- ------------
<S> <C> <C>
T. Milton Honea 61 President of the Company, 10/93 to
present,
Chairman of the Board and Chief
Executive Officer of the Company,
12/92 to present,
Vice Chairman of the Board, 7/92 to
12/92,
Executive Vice President of the
Company, 10/91 to 7/92,
President and Chief Operating Officer-
Arkansas Louisiana Gas Company
Michael B. Bracy 52 Executive Vice President and Principal
Financial Officer of the Company,
10/91 to present,
Chief Executive Officer, Arkla
Pipeline Group and Executive Vice
President of the Company, 89-91
President - Arkla Pipeline Group and
Executive Vice President of the
Company, 88-89 Executive Vice
President, Finance & Administration of
the Company
</TABLE>
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<PAGE> 19
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE DURING
---- ---
PAST 5 YEARS
------------
<S> <C> <C>
Hubert Gentry, Jr. 62 Senior Vice President and General
Counsel of the Company, 8/90 to
present
Secretary of the Company, 7/92 to
present
Executive Vice President and General
Counsel - Entex
William H. Kelly 54 Senior Vice President Planning and
Treasurer of the Company, 2/94 to
present,
Senior Vice President Planning and
Investor Relations of the Company,
10/91 to 2/94,
Senior Vice President and Chief
Financial Officer of the Company,
Senior Vice President, Planning and
Budgeting of the Company
Vice President, Finance - Arkla Energy
Resources
Rick L. Spurlock 48 Senior Vice President, Human Resources
and Administrative Services of the
Company, 12/90 to present
Vice President, Corporate Human
Resources of the Company
Vice President, Human Resources -
Arkla Energy Resources/Arkla
Exploration Company
Jack W. Ellis, II 40 Vice President and Controller of the
Company, 12/89 to present
Controller of the Company
Assistant Comptroller of the Company
</TABLE>
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<PAGE> 20
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE DURING
---- --- PAST 5 YEARS
------------
<S> <C> <C>
Michael H. Means 45 President and Chief Operating
Officer, Arkansas Louisiana Gas
Company, 10/91 to present, Vice
President Arkansas Division, Arkansas
Louisiana Gas Company
Howard E. Bell 60 President and Chief Operating Officer-
Entex, 8/88 to present
Executive Vice President, Distribution
Operations - Entex
Michael T. Hunter 43 President and Chief Operating Officer
of Mississippi River Transmission
Corporation and Executive Vice
President, Arkla Pipeline Group, 12/89
to present
President Mississippi River
Transmission Corporation, 5/88 to
12/89
President and Chief Operating Officer
Arkla Energy Resources
Gary N. Petersen 41 President and Chief Operating Officer
of Minnegasco 9/91 to present,
Executive Vice President and Chief
Operating Officer of Minnegasco,
Senior Vice President of DEI and
Executive Vice President and Chief
Operating Officer of Minnegasco, Inc.,
Vice President, Gas Supply and
Regulatory Administration - Minnegasco
William A. Kellstrom 52 President of Arkla Energy Marketing
Company, 9/92 to present, President of
Tenaska Marketing Ventures
</TABLE>
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<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required hereunder applicable to market, number of
security holders and dividend history is shown on page 43 of the 1993 Annual
Report to Stockholders, which information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data required hereunder is included on page
26 of the 1993 Annual Report to Stockholders, which data is incorporated herein
by reference. For information, if any, concerning accounting changes, business
combinations or dispositions of business operations that materially affect the
comparability of the information reflected in selected financial data, see
Notes to Consolidated Financial Statements on pages 48 through 64 of the
1993 Annual Report to Stockholders, which information is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The required information is included on pages 26 through 43 of the
1993 Annual Report to Stockholders, which pages are incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and
auditor's reports are set forth on pages 44 through 65 of the 1993 Annual
Report to Stockholders, which pages are incorporated herein by reference.
Statement of Consolidated Income for the years ended December 31,
1993, 1992, and 1991.
Consolidated Balance Sheet as of December 31, 1993 and 1992.
Statement of Consolidated Stockholders' Equity for the years ended
December 31, 1993, 1992 and 1991.
Statement of Consolidated Cash Flows for the years ended December 31,
1993, 1992 and 1991.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
The required supplementary data concerning quarterly results of
operations is set forth on page 66 of the 1993 Annual Report to Stockholders,
which page is incorporated herein by reference.
-20-
<PAGE> 22
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information appearing under the caption "Election of Directors And
Beneficial Ownership of Common Stock For Officers and Directors" set forth in
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (the "1934 Act") is incorporated
herein by reference. See also "Regulation S-K, Item 401(b)" appearing in Part
I of this Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Executive Compensation"
set forth in the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 10, 1994, to be filed pursuant to Regulation 14A
under the 1934 Act is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the following captions set forth in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on May 10, 1994 to be filed pursuant to Regulation 14A under the
1934 Act is incorporated herein by reference: "Voting" and "Election of
Directors And Beneficial Ownership of Common Stock For Officers and Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Compensation Committee
Interlocks and Insider Participation", "Executive Compensation" and "Certain
Transactions with Management" set forth in the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 10, 1994 to
be filed pursuant to Regulation 14A under the 1934 Act is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
Included under Item 8 are the following financial statements:
-21-
<PAGE> 23
Statement of Consolidated Income for the years ended December 31, 1993, 1992
and 1991.
Consolidated Balance Sheet as of December 31, 1993 and 1992.
Statement of Consolidated Stockholders' Equity for the years ended December 31,
1993, 1992 and 1991.
Statement of Consolidated Cash Flows for the years ended December 31, 1993,
1992 and 1991.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
(A)(2) FINANCIAL STATEMENT SCHEDULES Page
----
Report of Independent Accountants 26
Schedule V - Property, Plant and Equipment 27
Schedule VI - Accumulated Depreciation,
Depletion and Amortization of
Property, Plant and Equipment 28
Schedule VIII - Valuation and Qualifying
Accounts 29
Schedule IX - Short Term Borrowings 30
Schedule X - Supplementary Income Statement
Information 31
All other schedules for which provision is made in applicable
regulations of the Securities and Exchange Commission have been omitted because
the information is disclosed in the Financial Statements or because such
schedules are not required or are not applicable.
-22-
<PAGE> 24
(A)(3) EXHIBITS
* (Asterisk indicates exhibits incorporated by reference herein).
Pursuant to Item 601(b)(4)(iii), the Company agrees to furnish to the
Commission upon request a copy of any instrument with respect to long-term debt
not exceeding 10 percent of the total assets of the Company and its
subsidiaries on a consolidated basis.
*3.1 Restated Certificate of Arkla, Inc., dated December 1, 1990,
incorporated herein by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year 1990.
3.2 By-Laws of Arkla, Inc., dated March 10, 1993.
*4.1 Indenture, dated as of December 1, 1986, between the Company
and Citibank, N.A., as Trustee, incorporated herein by
reference to Exhibit 4.14 to the Company's Annual Report on
Form 10-K for the year 1986.
*4.2 Indenture, dated as of March 1, 1987, between the Company and
The Chase Manhattan Bank, N.A., as Trustee, authorizing 6%
Convertible Subordinated Debentures Due 2012, incorporated
herein by reference to Exhibit 4.20 to the Company's
Registration Statement on Form S-3 (Registration No.
33-14586).
*4.3 Indenture, dated as of April 15, 1990, between the Company and
Citibank, N.A., as Trustee, incorporated herein by reference
to Exhibit 4.1 of the Company's Registration Statement on Form
S-3 filed on May 1, 1990 (Registration No. 33-23375)
*10.1 Copy of Deferred Compensation Agreement incorporated herein by
reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year 1988.
*10.2 Copy of Deferred Stock Appreciation Agreement incorporated
herein by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year 1988.
*10.3 Executive Supplemental Medical Plan (Page 13 of Proxy
Statement, Annual Meeting of Stockholders, May 12, 1987, and
incorporated herein by reference).
*10.4 1982 Nonqualified Stock Option Plan with Appreciation Rights
(Form S-8, Registration No. 2-84830, dated July 1, 1983, and
incorporated herein by reference).
*10.5 Nonqualified Executive Disability Income Plan incorporated
herein by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year 1988.
*10.6 Nonqualified Unfunded Executive Supplemental Income Retirement
Plan incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year 1988.
*10.7 Unfunded Nonqualified Retirement Income Plan incorporated
herein by reference to Exhibit 10.10 to the Company's Form
10-K for the year 1985.
*10.8 Annual Incentive Award Plan incorporated herein by reference
as maintained in the files of the Commission, File No. 1-3751.
-23-
<PAGE> 25
*10.9 Long-Term Incentive Compensation Plan (Form S-8, Registration
No. 33-10806, dated December 12, 1986, and incorporated herein
by reference).
*10.10 Service Agreement, by and between Mississippi River
Transmission Corporation and Laclede Gas Company, dated August
22, 1989 incorporated herein by reference to Exhibit 10.20 to
the Company's Annual Report on Form 10-K for the year 1989.
*10.11 Agreement and Plan of Merger, dated as of July 30, 1990,
between Arkla, Inc., Diversified Energies, Inc. and
Minnegasco, Inc., incorporated by reference to Exhibit A to
the Company's Registration Statement on Form S-4 (Reg. No.
33-27428)
*10.12 Employment Agreement, dated September, 1989, between the
Company and Jimmy L. Terrill, incorporated herein by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the year 1989.
*10.13 Employment Agreement, dated July 11, 1990, between Arkla, Inc.
and Michael B. Bracy, incorporated herein by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K for
the year 1990.
10.14 Employment Agreement, dated September 4, 1992, between Arkla,
Inc. and William A. Kellstrom.
10.15 Employment Agreement, dated February 3, 1993 between Arkla,
Inc. and Howard E. Bell.
*10.16 Employment Agreement, dated January 20, 1993, between Arkla,
Inc. and Daniel L. Dienstbier, incorporated herein by
reference to Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the year 1992.
10.17 Amendment to Employment Agreement, dated July 20, 1993,
between Arkla, Inc. and Daniel L. Dienstbier.
12 Computation of Ratio of Earnings to Fixed Charges.
13 The portions of the Annual Report to Stockholders for the
year ended December 31, 1993 incorporated by reference into
this Form 10-K.
21 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand.
24 Powers of Attorney from each Director of Arkla, Inc. whose
signature is affixed to this Form 10-K.
-24-
<PAGE> 26
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD
COVERED BY THIS REPORT
None
-25-
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Arkla, Inc.
Our report on the consolidated financial statements of Arkla, Inc. and
Subsidiaries has been incorporated by reference in this Form 10-K from page 65
of the 1993 Annual Report to Stockholders of Arkla, Inc. In connection with our
audits of such financial statements, we have also audited the related financial
statement scheduled listed in the index on page 22 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPER & LYBRAND
Houston, Texas
March 24, 1994
26
<PAGE> 28
ARKLA, INC. AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
(in thousands of dollars)
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A B C D E F
-------------- ------------- ----------- ------------ ------------ ------------
Balance Other Balance
Beginning Changes End of
Classification of Period Additions Retirements Add (Deduct) Period
-------------- ------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1993
Natural Gas Pipeline $ 2,020,859 $ 32,186 $ (32,558) $ (190,173) (1) $ 1,830,314
Natural Gas Distribution 1,799,125 112,911 (22,458) (39,015) (2) 1,850,563
Corporate & Other 37,167 1,098 (224) 1,377 39,418
------------- ----------- ------------ ------------ ------------
Consolidated $ 3,857,151 $ 146,195 $ (55,240) $ (227,811) $ 3,720,295
============= =========== ============ ============ ============
1992
Natural Gas Pipeline $ 2,096,378 $ 26,645 $ (59,151) $ (43,013) (3) $ 2,020,859
Natural Gas Distribution 1,785,236 106,158 (81,714) (10,555) 1,799,125
Radio Communications 25,518 0 0 (25,518) (4) 0
Corporate & Other 55,824 2,087 (6,457) (14,287) (5) 37,167
------------- ----------- ------------ ------------ ------------
Consolidated $ 3,962,956 $ 134,890 $ (147,322) $ (93,373) $ 3,857,151
============= =========== ============ ============ ============
1991
Natural Gas Pipeline $ 1,976,624 $ 133,175 $ (31,958) $ 18,537 $ 2,096,378
Natural Gas Distribution 1,694,783 119,421 (23,847) (5,121) 1,785,236
Radio Communications 24,998 3,039 (3,309) 790 25,518
Corporate & Other 59,691 2,438 (392) (5,913) 55,824
------------- ----------- ------------ ------------ ------------
Consolidated $ 3,756,096 $ 258,073 $ (59,506) $ 8,293 $ 3,962,956
============= =========== ============ ============ ============
</TABLE>
(1) Principally due to the sale of Louisiana Intrastate Gas Corporation.
(2) Principally due to the sale of Nebraska & South Dakota distribution
properties.
(3) Principally due to the discontinuance of SFAS 71 for Arkla Energy
Resources.
(4) To reflect the sale of Radio Communications.
(5) Principally due to the sale of Arkla Products.
-27-
<PAGE> 29
ARKLA, INC. AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
(in thousands of dollars)
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A B C D E F
-------------- ------------- ----------- ------------ ------------ ------------
Additions
Balance Charged to Other Balance
Beginning Costs & Changes End of
Classification of Period Expenses Retirements Add (Deduct) Period
-------------- ------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1993
Natural Gas Pipeline $ 672,978 $ 53,447 $ (24,959) $ (31,018) (1) $ 670,448
Natural Gas Distribution 637,823 85,382 (22,439) (32,823) (2) 667,943
Corporate & Other 22,461 1,457 (222) 1,072 24,768
------------- ----------- ------------ ------------ ------------
Consolidated $ 1,333,262 $ 140,286 $ (47,620) $ (62,769) $ 1,363,159
============= =========== ============ ============ ============
1992
Natural Gas Pipeline $ 647,946 $ 60,106 $ (48,933) $ 13,859 (3) $ 672,978
Natural Gas Distribution 617,775 81,828 (81,476) 19,696 (3) 637,823
Radio Communications 3,795 0 0 (3,795) (4) 0
Corporate & Other 25,292 4,201 (4,583) (2,449) 22,461
------------- ----------- ------------ ------------ ------------
Consolidated $ 1,294,808 $ 146,135 $ (134,992) $ 27,311 $ 1,333,262
============= =========== ============ ============ ============
1991
Natural Gas Pipeline $ 617,167 $ 55,370 $ (25,077) $ 486 $ 647,946
Natural Gas Distribution 569,324 78,507 (23,780) (6,276) 617,775
Radio Communications (279) 6,170 (2,789) 693 3,795
Corporate & Other 21,965 4,427 (342) (758) 25,292
------------- ----------- ------------ ------------ ------------
Consolidated $ 1,208,177 $ 144,474 $ (51,988) $ (5,855) $ 1,294,808
============= =========== ============ ============ ============
</TABLE>
(1) Principally due to the sale of Louisiana Intrastate Gas Corporation.
(2) Principally due to the sale of Nebraska & South Dakota distribution
properties.
(3) Principally due to the sale and leaseback of assets.
(4) To reflect the sale of Radio Communications.
-28-
<PAGE> 30
ARKLA, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands of dollars)
<TABLE>
<CAPTION>
Column Column Column Column Column
A B C D E
----------- --------- ----------------------- ---------- ----------
Additions
-----------------------
Balance Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserves which are deducted in the
balance sheet from assets to
which they apply:
(a) Allowance for Doubtful Accounts
Receivable
Year ended December 31, 1993 $ 12,003 $ 10,393 $ 744 $ 11,844 $ 11,296
Year ended December 31, 1992 $ 9,265 $ 12,658 $ 1,510 $ 11,430 $ 12,003
Year ended December 31, 1991 $ 10,123 $ 8,027 $ 1,689 $ 10,574 $ 9,265
(b) Deferred Tax Asset Valuation Allowance
Year ended December 31, 1993 $ 9,997 $ 26 $ - $ $ 10,023
Year ended December 31, 1992 $ 18,429 $ 3 $ - $ 8,435(2) $ 9,997
Year ended December 31, 1991(1) $ 10,513 $ 7,916 $ - $ $ 18,429
</TABLE>
(1) Beginning balance restated to conform to current year presentation.
(2) Valuation allowance associated with state net operating loss carryforward
benefits ("NOL's") of Arkla Exploration Company which was sold in 1992.
-29-
<PAGE> 31
ARKLA, INC. AND SUBSIDIARIES
SCHEDULE IX -- SHORT-TERM BORROWINGS
(in thousands of dollars)
<TABLE>
<CAPTION>
Column Column Column Column Column Column
A B C D E F
--------------------- ------------ -------- -------------- --------------- -------------
Maximum Average Weighted
Weighted Amount Amount Average
Balance Average Outstanding Outstanding Interest Rate
Category of Aggregate At End of Interest During During During
Short-Term Borrowings Period Rate the Period the Period(1) the Period(2)
--------------------- ------------ -------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Year 1993
Notes payable to banks (3, 4) $ 95,000 4.65% $ 100,000 $ 28,368 5.32%
Note payable to gas
supplier $ 20,400 6% $ 20,400 $ - -
Year 1992
Notes payable to banks (3, 4) $ - - $ 585,000 $ 377,592 5.28%
Payable to holders of
commercial paper (4) $ - - $ 478,778 $ 96,892 4.91%
Year 1991
Notes payable to banks (4) $ 191,476 5.60% $ 270,476 $ 140,102 6.32%
Payable to holders of
commercial paper (4) $ 457,200 5.44% $ 492,200 $ 398,529 6.66%
</TABLE>
(1) Average amount outstanding during the period is computed by dividing the
total daily outstanding balance by 365.
(2) Average interest rate for the year is computed by dividing the actual
short-term interest expense by the average short-term debt.
(3) Prior to the creation of the new facility described below, under the
terms of a credit agreement with a major money center bank, as agent, and
various other commercial banks, a $670 million commitment had been available
to the Company on a revolving basis to April 30, 1993. The borrowings under
this facility bore interest at a rate mutually agreed upon by the Company
and the banks, and could be paid and reborrowed in whole or in part. A
commitment fee of 1/2% per year was paid on the unused portion of the
facility. There were no borrowings under this facility at December 31, 1992.
In late March, 1993, the Company established a revolving credit facility
which is expected to be the Company's principal source of short-term
liquidity. The new facility makes a total commitment of $400 million
available to the Company through June 30, 1995. Borrowings under the new
facility will bear interest at various rates at the option of the Company.
These rates vary with current domestic or Eurodollar money market rates and
are subject to adjustment based on the rating of the Company's senior
securities by the major rating agencies (debt ratings). In addition, the
Company will pay a facility fee to each bank each year, currently 1/2% on
the total commitment and subject to decrease based on the Company's debt
rating and each bank's level of participation and will pay an incremental
rate of 1.5% on outstanding borrowings in excess of $200 million.
(4) All rates represent the effective rate to the Company.
-30-
<PAGE> 32
ARKLA, INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
(in thousands of dollars)
<TABLE>
<CAPTION>
Column Column
A B
------------------------------------------ ----------------------------------------
Charged to Costs and Expenses
Year Ended December 31
----------------------------------------
Item 1993 1992 1991
------------------------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
1. Maintenance and Repairs $ 69,743 $ 64,773 $ 70,444
3. Taxes, other than payroll and
income taxes:
Real estate and personal property 42,794 46,186 41,846
Other corporate 51,667 46,258 47,559
</TABLE>
-31-
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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.
ARKLA, INC.
(Registrant)
By /s/ T. Milton Honea
(T. Milton Honea)
Chairman of the Board, President
and Chief Executive Officer
By /s/ Michael B. Bracy
(Michael B. Bracy)
Executive Vice President
(Principal Financial Officer)
By /s/ Jack W. Ellis, II
(Jack W. Ellis, II)
Vice President and
Corporate Controller
(Principal Accounting Officer)
Date: March 28, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ T. MILTON HONEA Director March 28, 1994
(T. Milton Honea)
/s/ MICHAEL B. BRACY* Director
(Michael B. Bracy)
/s/ JOE E. CHENOWETH* Director
(Joe E. Chenoweth)
/s/ O. HOLCOMBE CROSSWELL* Director
(O. Holcombe Crosswell)
/s/ WALTER A. DeROECK* Director
(Walter A. DeRoeck)
-32-
<PAGE> 34
/s/ DONALD H. FLANDERS* Director
(Donald H. Flanders)
/s/ JAMES O. FOGLEMAN* Director
(James O. Fogleman)
/s/ JOHN P. GOVER* Director
(John P. Gover)
/s/ ROBERT C. HANNA* Director
(Robert C. Hanna)
/s/ MYRA JONES* Director
(Myra Jones)
/s/ SIDNEY MONCRIEF* Director
(Sidney Moncrief)
/s/ LARRY C. WALLACE* Director
(Larry C. Wallace)
/s/ D. W. WEIR, SR.* Director
(D. W. Weir, Sr.)
*By /s/ T. Milton Honea March 28, 1994
(T. Milton Honea)
Attorney-in-Fact)
-33-
<PAGE> 35
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
COMMISSION FILE NUMBER 1-3751
ARKLA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
EMPLOYER IDENTIFICATION
(I.R.S. NO. 72-0120530)
1600 SMITH, 11TH FLOOR, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(713) 654-5100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
EXHIBITS
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGES
- ------ ----------------------- -----
<S> <C> <C>
*3.1 Restated Certificate of Arkla, Inc., dated
as of December 1, 1990, incorporated herein
by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year 1990.
3.2 By-Laws of Arkla, Inc., dated March 10, 1993.
*4.1 Indenture, dated as of December 1, 1986,
between the Company and Citibank, N.A.,
as Trustee, incorporated herein by
reference to Exhibit 4.14 to the Company's
Annual Report on Form 10-K for the
year 1986.
*4.2 Indenture, dated as of March 1, 1987,
between the Company and The Chase
Manhattan Bank, N.A., as Trustee,
authorizing 6% Convertible Subordinated
Debentures Due 2012, incorporated herein
by reference to Exhibit 4.20 to the
Company's Registration Statement on
Form S-3 (Registration No. 33-14586).
*4.3 Indenture, dated as of April 15, 1990,
between the Company and Citibank, N.A.,
as Trustee, incorporated herein by
reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3 filed
on May 1, 1990 (Registration No. 33-23375).
*10.1 Copy of Deferred Compensation Agreement in
incorporated herein by reference to Exhibit
10.2 to the Company's Annual Report on Form
10-K for the year 1988.
*10.2 Copy of Deferred Stock Appreciation Agreement
incorporated herein by reference to Exhibit
10.3 to the Company's Annual Report on Form
10-K.
*10.3 Executive Supplemental Medical Plan (Page 13 of
Proxy Statement, Annual Meeting of Stockholders,
May 12, 1987, and incorporated herein by reference).
*10.4 1982 Nonqualified Stock Option Plan with Appreciation
Rights (Form S-8, Registration No. 2-84830, dated
July 1, 1983, and incorporated herein by reference).
</TABLE>
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGES
- ------ ----------------------- -----
<S> <C> <C>
*10.5 Nonqualified Executive Disability Income Plan
incorporated herein by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for
the year 1988.
*10.6 Nonqualified Unfunded Executive Supplemental Income
Retirement Plan Incorporated herein by reference
to the Company's Annual Report on Form 10-K for
the year 1988.
*10.7 Unfunded NonQualified Retirement Income Plan
incorporated herein by reference to Exhibit 10.10
to the Company's Form 10-K for the year 1985.
*10.8 Annual Incentive Award Plan Incorporated herein by
reference as maintained in the files of the
Commission, File No. 1-3751.
*10.9 Long-Term Incentive Compensation Plan (Form S-8,
Registration No. 33-10806, dated December 12,
1986, and incorporated hereby by reference).
*10.10 Service Agreement, by and between Mississippi River
Transmission Corporation and Laclede Gas Company,
dated August 22, 1989 incorporated herein by
reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year 1989.
*10.11 Agreement and Plan of Merger, dated as of July 30,
1990, between Arkla, Inc., Diversified Energies,
Inc. and Minnegasco, Inc., incorporated by reference
to Exhibit A to the Company's Registration Statement
on Form S-4 (Reg. No. 33-27428).
*10.12 Employment Agreement, dated September, 1989, between
the Company and Jimmy L. Terrill, incorporated
herein by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for
the year 1989.
*10.13 Employment Agreement, dated July 11, 1990, between
the Company and Michael B. Bracy, incorporated
herein by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the
year 1990.
</TABLE>
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGES
- ------ ----------------------- -----
<S> <C> <C>
10.14 Employment Agreement, dated September 4, 1992,
between Arkla, Inc. and William A. Kellstrom.
10.15 Employment Agreement, dated February 3, 1993
between Arkla, Inc. and Howard E. Bell.
*10.16 Employment Agreement, dated January 20, 1993,
between Arkla, Inc. and Daniel L. Dienstbier,
incorporated herein by reference to Exhibit
10.19 to the Company's Annual Report on
Form 10-K for the year 1992.
10.17 Amendment to Employment Agreement, dated
July 20, 1993, between Arkla, Inc. and
Daniel L. Dienstbier.
12 Computation of Ratio of Earnings to
Fixed Charges.
13 The portions of the Annual Report to
Stockholders for the year ended
December 31, 1993 incorporated by
reference into this Form 10-K.
21 Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand
24 Powers of Attorney from each Director
of Arkla, Inc. whose signature is
affixed to this Form 10-K.
</TABLE>
<PAGE> 1
EXHIBIT 3.2
<PAGE> 2
BY-LAWS
OF
ARKLA, INC.
(As amended through March 10, 1993)
ARTICLE I
LOCATION OF OFFICES
SECTION 1. The principal office of the Company within the State of
Delaware shall be located at 1209 Orange Street, in the City of Wilmington,
County of New Castle. The Company may also have offices or agencies at such
other place or places either within or without the State of Delaware as the
Board of Directors may from time to time determine or as the business of the
Company may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of stockholders entitled to vote shall be
held at the office of the Company in a city and state designated by the Board
of Directors, on the second Tuesday in May of each year, but if such day be a
legal holiday in the state, then on the next succeeding business day not a
legal holiday, at such hour as may be named in the notice or waiver of notice
of such meeting. At the annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before the annual meeting, business must be (i) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (ii) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (iii) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Company. To be timely, a stockholder's notice must be delivered to or mailed
and received at the office of the Secretary, not less than fifty (50) days nor
more than sixty (60) days prior to the meeting; provided, however, that in the
event that less than fifty (50) days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
tenth (10th) day following the date on which such notice of the date of the
annual meeting was mailed or such public disclosure was made. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting: (a) a brief description of the
business desired to be brought
<PAGE> 3
before the annual meeting, (b) the name and address, as they appear on the
Company's books, of the stockholder proposing such business, (c) the class and
number of shares of the Company which are beneficially owned by the
stockholder, (d) a representation that the stockholder intends to appear in
person or by proxy at the meeting to bring the proposed business before the
meeting; and (e) any material interest of the stockholder in such business.
Notwithstanding anything in these By-Laws to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedure set
forth in this section. The presiding officer of an annual meeting shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this section, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
SECTION 2. Special meetings of stockholders, other than those required by
statute, may be called at any time by the Chairman of the Board, a Vice
Chairman of the Board, the President, the Executive Committee or a majority of
the directors, but such special meetings may not be called by any other person
or persons; and such special meetings may be held at any place within or
without the State of Delaware.
SECTION 3. Except as otherwise provided by statute or in these By-Laws,
notice of each such meeting of stockholders shall be given not less than ten
(10) nor more than sixty (60) days before the day on which the meeting is to be
held to each stockholder of record entitled to vote at such meeting by
delivering a written or printed notice thereof to him personally, or by mailing
such notice in a postage prepaid envelope addressed to him at his post office
or other address as it appears on the books of the Company. Every such notice
shall state the time and place and purpose or purposes of the meeting. Except
where expressly required by law, no publication of notice of a meeting of
stockholders shall be required. Notice of any adjourned meeting of
stockholders shall not be required to be given, except when expressly required
by law.
SECTION 4. At every meeting of the stockholders, the holders of a
majority of the voting power of the shares entitled to vote, and in the case of
a class vote a majority of the shares of the class entitled to vote as a class,
represented in person or by proxy, shall constitute a quorum. If, for any
reason, such quorum shall not be represented at any meeting, the meeting may be
adjourned from time to time by the stockholders represented at such meeting.
At any adjourned meeting at which the requisite amount of shares shall be
present in person or by proxy, any business may be transacted which might have
been transacted at the meeting as originally called.
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SECTION 5. At every meeting of the stockholders, each stockholder shall
be entitled to one vote for each share of Common Stock, and four votes for each
share of Preference Stock, standing in his name on the books of the Company on
the date fixed pursuant to Section 3 of Article VI of these By-Laws as the
record date for determining the stockholders entitled to vote at such meeting,
provided, however, that in elections of directors there shall be cumulative
voting so that each such stockholder, in person or by proxy, shall have as many
votes as shall equal the voting power of the number of shares of such stock
standing in his name as set forth above multiplied by the number of directors
to be elected, and such stockholder may cast all such votes for a single
director or may distribute them among the number to be voted for, or for any
two or more of them, as he may see fit.
At every meeting of stockholders, each stockholder entitled to vote
thereat shall be entitled to vote in person or by proxy appointed by an
instrument in writing, subscribed by such stockholder or by his attorney
thereunto duly authorized in writing and delivered to the secretary of the
meeting; provided, however, that no proxy shall be voted on after (3) years
from its date unless said proxy provides for a longer period. Except as
otherwise required by law, the Certificate of Incorporation or these By-Laws,
all matters which properly come before any meeting of stockholders shall be
decided by the vote of the holders of a majority of the shares entitled to be
voted thereat, a quorum being present.
Voting shall be by ballot for the election of directors and whenever
expressly required by law or whenever any qualified voter shall demand that any
vote be by ballot.
It shall be the duty of the Secretary or other officer who shall have
charge of the stock ledger of the Company to prepare and make, at least ten
(10) days before every election of directors, a complete list of the
stockholders entitled to vote thereat, arranged in alphabetical order. For
said ten (10) days such list shall be open to the examination of any
stockholder at the place where said election is to be held, and shall be
produced and kept at the time and place of the election during the whole time
thereof, and subject to the inspection of any stockholder who may be present.
The original or a duplicate stock ledger shall be the only evidence as to who
are the stockholders entitled to examine such list or the books of the Company,
or to vote in person or by proxy at such election.
Prior to any meeting of stockholders, but subsequent to the time of
closing the transfer books or the time fixed as a record date for determining
stockholders entitled to vote at such meeting, as the case may be, any proxy
may submit his powers of attorney to the Secretary, or to the Treasurer for
examination. The certificate of the Secretary or Treasurer as to the
regularity of such powers of attorney, and as to the number of shares held by
the
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<PAGE> 5
persons who severally and respectively executed such powers of attorney shall
be received as prima facie evidence of the number of shares represented by the
holders of such powers of attorney.
SECTION 6. At every meeting of stockholders, the Chairman of the Board, a
Vice Chairman of the Board or the President, or in their absence one of the
Vice-Presidents, shall call the meeting to order and shall act as Chairman of
the meeting. The Board of Directors may appoint any stockholder to act as
Chairman of any meeting in the absence of the Chairman of the Board, all Vice
Chairmen of the Board and the President and all of the Vice-Presidents.
The Secretary of the Company shall act as secretary of each meeting of the
stockholders; but in the absence of the Secretary at any meeting of the
stockholders, the Chairman of such meeting may appoint an Assistant Secretary
or, if none is present, some other person to act as Secretary of the meeting.
SECTION 7. The number of directors of the Company shall be as set forth
from time to time by resolution of the Board of Directors, such directors shall
be elected at each annual meeting of stockholders, and shall hold office for
one year or until their successors are elected and qualified. At all elections
of directors, the persons receiving the highest number of votes cast as
provided in Section 5 of Article II of these By-Laws shall be elected as
Directors.
SECTION 8. At every meeting of the stockholders the polls shall be opened
and closed, the proxies and ballots shall be received and be taken in charge,
and all questions touching the qualification of voters and the validity of
proxies, and the acceptance or rejection of votes shall be decided by two
inspectors. Such inspectors shall be appointed by the Board of Directors
before or at the meeting, or if no such appointment shall have been made, then
by the Chairman of the meeting. If for any reason either of the inspectors
previously appointed shall fail to attend or refuse or be unable to serve,
inspectors in place of those so failing to attend, or refusing or unable to
attend, shall be appointed in like manner.
SECTION 9. Notice of any annual meeting or special meeting of
stockholders may be waived in writing by, and will be waived by the attendance
thereat in person or by proxy of, any stockholder. Any stockholder so waiving
shall be bound by the proceedings of any such meeting in all respects as if due
notice of such meeting had been given.
SECTION 10. Subject to the rights of holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, nominations for the election of Directors may be made by the Board
of Directors or a committee
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<PAGE> 6
appointed by the Board of Directors pursuant to these By-Laws or by any
stockholder entitled to vote in the election of directors generally; provided,
however, that any stockholder entitled to vote in the election of directors
generally may nominate one or more persons for election as directors at a
meeting only if timely notice in writing of such stockholder's intent to make
such nomination or nominations has been given to the Secretary of the Company.
To be timely, a stockholder's notice must be delivered to or mailed and
received at the office of the Secretary, not later than (i) with respect to an
election to be held at an annual meeting of stockholders of the Company, ninety
(90) days prior to the anniversary date of the immediately preceding annual
meeting of stockholders of the Company, and (ii) with respect to an election to
be held at a special meeting of stockholders of the Company for the election of
directors, the close of business on the tenth (10th) day following the date on
which notice of such meeting is first given to stockholders of the Company. A
stockholder's notice to the Secretary shall set forth: (a) the name and
address, as they appear on the Company's books, of the stockholder who intends
to make the nomination; (b) the name and address of the person or persons to be
nominated; (c) a representation that the stockholder is a holder of record of
stock of the Company entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person or persons specified
in the notice; (d) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (e) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission; and (f) the consent of each nominee to serve as a director of the
Company if so elected. The Chairman of the meeting may refuse to acknowledge
the nomination of any person not made in compliance with the provisions set
forth in this section.
ARTICLE III
DIRECTORS
SECTION 1. The Board of Directors shall have all the powers of the
corporation, and all the management of its business, unless otherwise provided
for by law. They shall appoint and remove all officers, agents and employees
of the Company, except as hereinafter stated; prescribe their duties, fix their
compensation, except as hereinafter stated, and require, when deemed advisable,
security for their faithful service. They may make rules and regulations not
inconsistent with law and these By-Laws for the guidance of the Company's
officers and agents. They shall make a report and render an account to the
annual meeting of the stockholders showing, in detail, the condition of the
property and the financial affairs of
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<PAGE> 7
the Company, and generally possess all the powers and perform all the duties
usually exercised by or imposed upon directors or trustees of similar
corporations.
SECTION 2. Regular meetings of the board shall be held at such times and
places within or without the State of Delaware, as the board may determine. In
the event that the date fixed for any meeting shall be a legal holiday, the
same shall be held at the appointed hour on the next succeeding business day.
Special meetings may be called by the Chairman of the Board, a Vice
Chairman of the Board, the President, any Executive Vice President, the
Secretary or the Executive Committee. Special meetings shall be called by any
officer upon the request in writing of a majority of the directors. Special
meetings shall be held at such time and place within or without the State of
Delaware as are specified in the call.
SECTION 3. Forty-eight hours' notice of the time and place of each
special meeting shall be given to each director personally or at his residence
or usual place of business by letter, telegram or telephone. Any director may
waive notice in writing or by telegram either before or after the meeting.
SECTION 4. A majority of the directors in office shall constitute a
quorum for the transaction of business, but less than a quorum may adjourn from
time to time and from place to place. All questions shall be decided by the
vote of a majority of directors present. Any action may be authorized or
approved by a majority of the directors, in any appropriate manner, even though
they shall not be actually present at a meeting. The directors shall act only
as a board and the individual directors shall have no power as such.
The yeas and nays shall be taken and recorded on demand of any director
present unless the board orders otherwise; provided, each director shall always
have the right to have his own vote recorded.
SECTION 5. Vacancies in the Board of Directors occurring by death,
resignation, failure to accept the office, inability to discharge the duties
thereof, or otherwise, before the expiration of a term, and newly created
directorships may in each case be filled by a majority of the directors then in
office, though less than a quorum, and the director so chosen shall hold office
for the remainder of the term of the person whose vacancy he shall be chosen to
fill.
SECTION 6. An annual meeting of the Board of Directors shall be held as
soon as practicable after each annual election of directors, unless otherwise
determined by the board, for the purpose of organization, the election of
officers and for the
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<PAGE> 8
transaction of such other business as may be required by statute or by these
By-Laws, or as may be determined by such board.
SECTION 7. All committees shall be appointed by the Board of Directors.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
SECTION 8. No contract or other transactions between the Company and any
other corporation, person, firm or association and no act of the Company shall
in any way be affected or invalidated by the fact that any director of the
Company is pecuniarily or otherwise interested in such contract or transaction
or is a director, member or officer of such other corporation, firm or
association; any director, individually, or any firm of which any director may
be a member, may be a party to, or may be pecuniarily or otherwise interested
in, any contract or transaction of the Company, provided that the fact that he
or such firm is so interested shall be disclosed or shall have been known to
the Board of Directors or a majority thereof; and any director interested in
such other corporation, firm or association, or who is interested in such
contract or transaction, may be counted in determining the existence of a
quorum at any meeting of the Board of Directors of the Company at which such
contract or transaction may be authorized and may vote thereat to authorize any
such contract or transaction with like force and effect as if he were not such
director, member or officer of such other corporation, firm or association, or
not so interested.
SECTION 9. In addition to reimbursement for his reasonable expenses
incurred in attending meetings or otherwise in connection with his attention to
the affairs of the Company, each director as such, and as a member of any
committee of the board, shall be entitled to receive such remuneration as may
be fixed from time to time by resolution of the Board of Directors in the form
of fees for attendance at meetings of the board, committees thereof and of
payment at the rate of a fixed sum per month; provided, however, that no
director who receives a salary as an officer or employee of the Company or any
subsidiary thereof shall receive remuneration as a member of any committee of
the board, and none as a director.
SECTION 10. The Company shall indemnify any present or former officer or
director of the Company, any present or former officer or director of any
enterprise serving during such period as the enterprise is or was an affiliate,
division or subsidiary of the Company, and any person who is or was serving at
the request of the
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<PAGE> 9
Company as an officer or director of another corporation, partnership, joint
venture, trust or other enterprise, to the full extent permitted by, and in
accordance with the procedure set forth in, Section 145 of the General
Corporation Law of Delaware now or hereafter in force (or any successor
provision of the law of Delaware), including the payment of expenses before the
final disposition of a proceeding; and the Company may indemnify other
employees, agents, and representatives of the Company or its affiliates,
subsidiaries or divisions to the same extent. The Company may indemnify any
former officer, director, employee, agent or representative of any constituent
corporation (as that term is described in Section 145(h) of the Delaware
General Corporation Law) of the Company, any officer or director of any
enterprise who was serving during such period as the enterprise was an
affiliate, division or subsidiary of such constituent corporation, and any
person who was serving at the request of the constituent corporation as an
officer or director of another corporation, partnership, joint venture, trust
or other enterprise, to the full extent permitted by, and in accordance with
the procedure set forth in, Section 145 of the General Corporation Law of
Delaware now or hereafter in force (or any successor provision of the law of
Delaware), including the payment of expenses before the final disposition of a
proceeding. Any right of indemnification herein provided shall inure to each
indemnified person, whether or not such person was acting in the capacity of
which the indemnity relates at the time costs or expenses subject to the
indemnity are imposed or incurred, and regardless of whether the claim asserted
against him is based on matters which antedate the adoption of this By-law.
The indemnification provided by this section shall not limit the Company from
providing any other indemnification permitted by law nor shall it be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to
a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
For purposes of this section, references to "other enterprises" and references
to "serving at the request of the Company" shall include the respective matters
referred to in Section 145(i) of the Delaware General Corporation Law now or
hereafter in force (or any successor provision of the law of Delaware).
ARTICLE IV
OFFICERS
SECTION 1. The officers of the Corporation shall consist of a Chairman of
the Board, one or more Vice Chairmen of the Board and a President, each of whom
shall be a director, one or more Vice
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<PAGE> 10
Presidents, a Secretary, a Treasurer and a Controller, who need not be
directors, and such officers as may be elected or appointed by the Board or the
Executive Committee. The same person may hold any two of such offices
simultaneously. If the offices of Secretary and Treasurer are held by the same
person, that person may also hold the additional office of Vice President.
SECTION 2. Officers of the Company may be elected from time to time by
the Board of Directors, and each of the said officers, unless removed from
office, shall hold office until the next annual meeting of the directors and
until his successor is chosen and qualified.
SECTION 3. Every officer, agent or employee of the Company shall be
subject to removal by a majority vote of the directors with or without cause at
any time.
SECTION 4. The Chairman of the Board, the Vice Chairman of the Board and
the President shall have such powers and duties as may be prescribed from time
to time by the Board of Directors. The Chairman of the Board, in his absence
the Vice Chairman of the Board and the President shall have the executive
management of the Company, each in the areas appointed to him by the Board of
Directors. The Chairman, in his absence the Vice Chairman of the Board, and in
the absence of both, the President, shall preside at all meetings of the Board
of Directors and of the stockholders. Such officers, in the duties appointed
to them, shall see that all orders and resolutions of the Board of Directors
and Executive Committee are carried into effect. They, or either of them, may
execute all contracts, deeds, certificates, bonds or other obligations in the
name of the Company and sign certificates of stock and records or certificates
required by law to be executed in the name of the Company by its chief officer.
They and each of them shall perform such other duties as may from time to
time be prescribed by the Board of Directors or Executive Committee.
SECTION 5. Each Vice-President shall have such authority and perform such
duties as may at any time be delegated to him by the Board of Directors or the
Executive Committee or the President, and in the absence of the President, the
duties and powers of his office shall be performed and exercised by the
Vice-Presidents.
The power of the Vice-Presidents to sign and execute, on behalf of the
Company, contracts, deeds, bonds or other obligations and stock certificates,
shall be coordinate with the like powers of the President, and any contract so
authorized, or any bond or stock certificate signed by any Vice-President in
lieu of the President, shall be as valid and binding as if signed by the
latter.
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<PAGE> 11
SECTION 6. The Secretary or an Assistant Secretary shall attend such
meetings of the Board of Directors, Executive Committee and stockholders as
shall be required and shall record or cause to be recorded the minutes of all
meetings in books provided for that purpose. He shall attend to the giving and
serving of all notices of the Company, together with such lists of the
stockholders as may be required by law. He shall be the custodian of all
papers brought before the board or Executive Committee for action or ordered on
file; also of all written contracts and deeds, insurance policies, leases,
records and evidences of title to real estate and other property (except money
and securities) owned, held or controlled by the Company. He shall have the
custody of the corporate seal, and shall affix and attest the same when
authorized by the Chairman of the Board, a Vice Chairman of the Board, the
President, a Vice-President, the Board of Directors or a committee thereof. He
shall prepare and make out, at least ten days before every stockholder's
meeting and before the payment of any dividend, a full, true and correct list
in alphabetical order of the names of all the persons in whose name or names
any stock shall stand on the books of the Company on the record date fixed by
or pursuant to Section 3 of Article VI hereof, previous to such meeting or the
payment of such dividend and enter opposite each name the number of shares held
by each. He shall certify such list for use at such meeting or in case of
dividend payments for the use of the Treasurer. He shall perform such other
duties as may be assigned to him by the Board of Directors, the Executive
Committee, the Chairman of the Board, a Vice Chairman of the Board, or the
President. The Board of Directors or Executive Committee may appoint one or
more Assistant Secretaries who shall have such powers and perform such duties
as the board or Executive Committee may direct, and shall perform all the
duties of the Secretary in his absence.
SECTION 7. The Treasurer shall cause to be made full and accurate entries
of all receipts and disbursements in the books of the Company, and he shall
deposit all moneys and other valuable effects in the name and to the credit of
the Company in such depositories as may be designated by the Board of Directors
or Executive Committee. He shall have authority to receive and give receipts
for all moneys due and payable to the Company from any source whatsoever and to
give full discharge for the same, and to endorse for deposit on behalf of the
Company all checks, drafts, notes, warrants, orders and other papers requiring
endorsement. He shall disburse the money of the Company under the direction of
the Board of Directors or Executive Committee. He may, in the discretion of
the directors, be required to give a bond in any amount satisfactory to the
board for the faithful performance of the duties of his office and for the
restoration to the Company in case of his death, resignation or removal from
office, of all books, papers, vouchers, money or other property of whatever
kind in his possession belonging to the Company. He shall perform such other
duties as may be conferred upon him by the Board of Directors
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<PAGE> 12
or Executive Committee. The Board of Directors or Executive Committee may
appoint one or more Assistant Treasurers who shall have such powers and perform
such duties as the board or Executive Committee may direct.
SECTION 8. The Controller shall be the principal officer in charge of the
accounts of the Company. He shall have charge, under the Board of Directors,
the Executive Committee, the Chairman of the Board, a Vice Chairman of the
Board and the President, of all books and accounts relating to revenues and
expenditures.
ARTICLE V
EXECUTIVE COMMITTEE
SECTION 1. There may be an Executive Committee which shall consist of not
less than five members of the Board of Directors. The members of such
committee shall be appointed by the Board of Directors annually at the first
meeting of the board after the actual election of directors.
SECTION 2. Vacancies occurring in the Executive Committee by death,
resignation, inability or refusal to act, or otherwise, shall be filled by the
Board of Directors at any regular or special meeting of the board.
SECTION 3. The Executive Committee shall appoint one of its number
chairman who shall preside at its meetings and hold office during the pleasure
of the committee. The Executive Committee shall also have the power to appoint
such sub-committees as it may deem necessary.
SECTION 4. The Executive Committee shall have the power to adopt rules
and regulations for the calling and holding of its meetings and for the
transaction of business at such meetings as shall not be inconsistent with the
law or these By-Laws; and until otherwise ordered by the committee, its
meetings shall be held on the call of the chairman of the committee or on the
call of any two members thereof.
SECTION 5. The Executive Committee shall possess and may exercise and
perform each and all of the powers and duties of the Board of Directors when
the Board of Directors shall not be in session (including the powers to (1)
cause the seal of the corporation to be affixed to all papers that may require
it; (2) declare dividends; and (3) approve a certificate of ownership in a
Section 253 short form merger of a 90 percent owned subsidiary), except as said
powers and duties shall be limited by the Board.
The Executive Committee or the Board of Directors in its discretion may
submit any contract or act for approval or ratification
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at any annual meeting of the stockholders, or at any meeting of the
stockholders called for the purpose of considering any such act or contract,
and any contract or act that shall be approved or ratified by the vote of the
holders of a majority of the outstanding stock of the Company which is
represented in person or by proxy at such meeting (provided that a lawful
quorum of stockholders be there represented in person or by proxy) shall be as
valid and as binding upon the Company and upon all the stockholders as though
it had been approved or ratified by every stockholder of the Company.
SECTION 6. A majority of the members of the Executive Committee shall
constitute a quorum for the regular transaction of business. In every case,
affirmative vote of a majority of all the members of the Executive Committee
shall be necessary to any action taken by the Executive Committee.
SECTION 7. The Executive Committee shall, whenever it may be necessary,
prescribe the duties of officers and employees of the Company whose duties are
not defined by the By-Laws or the Board of Directors.
ARTICLE VI
STOCK
SECTION 1. Certificates for shares of stock of the Company shall be in
such form as shall be approved by the Board of Directors. All certificates of
each class of the stock of the Company shall be numbered and shall be signed
by, or in the name of the Company by, the Chairman of the Board, a Vice
Chairman of the Board, the President or a Vice-President and the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Company; provided, however, that, where such certificate is signed by a
transfer agent, or an assistant transfer agent, or by a transfer clerk acting
on behalf of the Company and a registrar, the signature of any such Chairman of
the Board, Vice Chairman of the Board, President, Vice-President, Treasurer,
Assistant Treasurer, Secretary or Assistant Secretary may be facsimile. The
seal of the Company shall be affixed to all certificates or a facsimile
impressed or affixed or reproduced or otherwise thereon. In case any officer
or officers who shall have signed, or whose facsimile signature or signatures
shall have been used on, any such certificate or certificates shall cease to be
such officer or officers of the Company, whether because of death, resignation
or otherwise, before such certificate or certificates shall have been delivered
by the Company, such certificate or certificates may nevertheless be adopted by
the Company and may be issued and delivered as though the person or persons who
signed such certificate or certificates, or whose facsimile signature or
signatures shall have been used thereon, had not ceased to be such officer or
officers of the Company.
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The name of the person, firm, corporation or association owning shares
represented by certificates of stock of the Company, with the number of shares
and the date of issue, shall be entered in the books of the Company. All
certificates surrendered to the Company shall be cancelled and each certificate
cancelled shall be preserved. No new certificate shall be issued until the
former certificate for the same number of shares shall have been surrendered
and cancelled, provided, however, that a new certificate may be issued in place
of any certificate alleged to be lost, destroyed or mutilated and the Board of
Directors, in its discretion may require the filing with the Company of a bond
sufficient to indemnify the Company against any expense, loss, damage or
liability caused by the issuance of such new certificate. The Board of
Directors may, by general resolution and in anticipation of loss, destruction
and mutilation, specify, for the guidance of the proper officers and agents of
the Company, the conditions upon which lost, destroyed or mutilated
certificates of any stock or other securities of the Company shall be replaced
or reissued.
SECTION 2. Transfer of shares of the stock of the Company shall be made
only upon the books of the Company by the holder thereof, in person or by
attorney duly authorized, and upon the surrender of the certificate or
certificates for a like number of shares properly endorsed. The Board of
Directors or Executive Committee may appoint transfer clerks to act on behalf
of the Company and transfer agents and stock registrars in various cities and
may require that all stock certificates bear the signature of any such transfer
clerk, transfer agent or stock registrar.
SECTION 3. The Board of Directors may, by resolution, direct that the
stock transfer books of the Company be closed for a period not exceeding the
maximum number of days permitted by the laws of the State of Delaware preceding
the date of any meeting of stockholders or the date for the payment of any
dividend, or the date for the allotment of rights, or the date when any change
or conversion or exchange of stock shall go into effect or in connection with
obtaining the consent of stockholders for any purpose; provided, however, that
in lieu of the closing of the stock transfer books as aforesaid, the Board of
Directors may fix in advance a date, not exceeding the maximum number of days
permitted by the laws of the State of Delaware, preceding the date of any
meeting of stockholders, or the date for the payment of any dividend, or the
date for the allotment of rights, or the date when any change or conversion or
exchange of stock shall go into effect, or a date in connection with obtaining
such consent, as a record date for the determination of the stockholders
entitled to notice of, and to vote at, any such meeting and any adjournment
thereof or entitled to receive payment of any such dividend, or to any such
allotment of rights, or to exercise the rights in respect of any change,
conversion or exchange of the stock, or to give such consent and in each such
case such stockholders and only such stockholders as shall be stockholders of
record at the close of
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<PAGE> 15
business on the date so fixed shall be entitled to notice of, and to vote at,
such meeting or any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights,
or to give such consent, as the case may be, notwithstanding any transfer of
any stock on the books of the Company after any such record date fixed as
aforesaid.
Unless and until otherwise provided by resolution of the Board of
Directors, the stock transfer books of the Company shall not be closed for any
period for the payment of dividends or for or in connection with any meeting of
stockholders.
Unless and until otherwise provided by resolution of the Board of
Directors, the record date for the determination of stockholders entitled to
notice of, and to vote at, each annual meeting of stockholders, shall be the
March 15th next preceding each such annual meeting, and only such stockholders
as shall be stockholders of record at the close of business on said record
date, shall be entitled to notice of, and to vote at, such annual meeting. If
in any year March 15th shall fall on Sunday, or on a day that is a legal
holiday in either of the State of Delaware or the State of New York, the record
date aforesaid in such year shall be on the next succeeding business day not a
Sunday or such legal holiday. The Board of Directors shall have power to
change such record date from time to time as permitted by the laws of the State
of Delaware.
SECTION 4. While the transfer books are closed no transfer shall be made
so as to change the persons entitled to receive dividends or vote at any
meeting; but this shall not prevent the issue on the application of any
stockholder of certificates of smaller denominations in lieu of larger ones,
and vice versa, provided the amount of shares standing in such stockholder's
name shall not thereby be increased or diminished.
SECTION 5. The Board of Directors may at any time adopt such additional
and further rules and regulations (not inconsistent with laws or these By-Laws)
relating to the issue, transfer and safety of stock certificates as they may
deem advisable.
ARTICLE VII
CHECKS, NOTES AND DRAFTS
SECTION 1. All checks, notes, drafts, trade acceptances, warrants or
orders for the payment of money, shall be signed and countersigned by such
persons as the Board of Directors or Executive Committee may from time to time
designate for such purpose.
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<PAGE> 16
ARTICLE VIII
SEAL
SECTION 1. The seal of the Company shall be in the form of a circle and
shall bear the name of the Company and the year of its incorporation.
ARTICLE IX
DIVIDENDS
SECTION 1. The Board of Directors may declare dividends from the surplus
or net profits of the Company over and above the amount which from time to time
may be fixed by the board as the amount to be reserved as working capital.
ARTICLE X
WORKING CAPITAL
SECTION 1. Before paying any dividends or making any distribution of the
proceeds, there may be set aside out of the net profits of the Company such
sums as the board shall from time to time think proper as a reserve fund to
meet contingencies, or for repairing and maintaining any property of the
Company, or for such other purposes the directors may consider to be in the
interests of the Company.
ARTICLE XI
WAIVER OF NOTICE
SECTION 1. Whenever, under the provisions of these By-Laws or of any
statute or law, the stockholders or directors are authorized to hold any
meeting or to take any action after notice or after the lapse of any prescribed
period of time, such meeting may be held and such action may be taken without
notice, and without lapse of time, upon a written waiver thereof signed by
every person entitled to notice; and any consent or action of or by
stockholders or directors that may be required at any meeting by these By-Laws
or by law or by statute, may be given or taken in or by a writing signed by the
stockholders or directors required to give such consent or take such action.
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<PAGE> 17
ARTICLE XII
AMENDMENTS
SECTION 1. These By-Laws may be altered, amended or repealed in whole or
in part by the Board of Directors or by the stockholders at any annual meeting
or any special meeting if notice thereof is included in the notice of such
special meeting.
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<PAGE> 1
EXHIBIT 10.14
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 4th day
of September, 1992, between Arkla, Inc., a Delaware corporation (the
"Company"), and William A. Kellstrom, an individual currently residing at 3316
South 101 Street, Omaha, Nebraska 68124 ("Employee").
WHEREAS, the Company wishes to employ Employee, and Employee wishes to
accept employment by the Company, under the terms and conditions set forth in
this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. Employment. (a) The Company employs Employee and Employee
accepts employment as President of Arkla Energy Marketing Company, a Delaware
corporation, which is wholly owned by the Company. Employee will report to the
President and Chief Operating Officer of the Company and will perform the
duties that are customarily incident to his position and such other executive
duties as may from time to time be assigned to him by the President and Chief
Operating Officer of the Company. Employee's principal office will be in
Houston, Texas (or such other location as Employee and the President and Chief
Operating Officer of the Company agree), and Employee will from time to time
travel on a temporary basis to other offices of the Company and its
subsidiaries to the extent necessary to perform his duties under this
Agreement.
(b) If Employee is elected or appointed an officer or
director of any subsidiary of the Company, employee will be entitled to fees
customarily paid to employee directors of such corporations but otherwise will
serve in such capacities without further compensation; provided, however, in no
event shall any such capacities include the performance of duties which are
other than those customarily performed by executive officers or directors of
large publicly traded companies; and further provided, in no event shall any
such capacities or duties involve any subsidiaries whose entire financial
structure and profit or loss is not substantially and materially, and at all
times, a part of the Company's for the purpose of determining the Company's
earnings.
(c) During the term of his employment, Employee will
devote his full time, attention and energies to the business of the Company and
will not, without the prior written consent of the President and Chief
Operating Officer of the Company or his designee, be engaged (whether or not
during normal business hours) in any other business or professional activity,
whether or not such activities are pursued for gain, profit or other pecuniary
advantage. Notwithstanding the foregoing, Employee will not be prevented from
(i) engaging in any civic or charitable activity for which Employee receives no
compensation or other pecuniary
<PAGE> 3
advantage; (ii) investing his personal assets in businesses which do not
compete with the Company or any Affiliate (as defined in paragraph 8) provided
that such investment will not require any services (other than services as a
director) on the part of Employee in the operation of the affairs of the
businesses in which investments are made and provided further that Employee's
participation in such businesses is solely that of an investor or director;
(iii) purchasing securities in any corporation whose securities are regularly
traded, provided that such purchases will not result in Employee owning
beneficially at any time five percent or more of the equity securities of any
corporation engaged in a business competitive with that of the Company or any
Affiliate; or (iv) participating in any other activity approved in advance by
the President and Chief Operating Officer of the Company or his designee.
2. Term of Employment. Employee's employment pursuant to this
Agreement will be effective as of September 14, 1992, and will continue through
September 30, 1995, subject to earlier termination as provided in paragraph 5
or paragraph 6.
3. Salary and Compensation. (a) The Company shall pay to Employee
during the term of his employment an annual base salary of not less than
$275,000. The Company shall pay such salary to Employee in accordance with its
customary payroll practices applicable to other executive officers.
(b) Within 10 days after the execution of this Agreement,
the Company shall also pay to Employee a bonus of $50,000 in a single lump sum
payment.
(c) Within 30 days of the date of this Agreement, the
Company shall grant to Employee 75,000 stock appreciation rights (SARs")
pursuant to the Arkla, Inc. Long Term Incentive Compensation Plan ("LTIP"), all
of which shall be fully vested on the date of the grant. In the event that the
grant of the SARs causes Employee to incur any income tax liability, the
Company will pay to Employee an amount in cash, on or before April 15, 1993,
calculated to permit employee to retain the gross value (determined as of the
date of grant) of the grant of the SARs after payment of all income taxes
incurred by Employee by reason of such grant and the payment of such cash
amount. Subject to the restrictions of the LTIP, and except as provided in
paragraph 5 or paragraph 6, the SARs shall be exercisable by Employee, in whole
or in part, by written notice to the Secretary of the Company at any time
during the period beginning on the third day and ending on the twelfth day
following the release to the public of the Company's quarterly or annual
earnings (the "Exercise Period"). In no event will the SAR's be exercisable
after the expiration of the Exercise Period with respect to the release of the
Company's earnings for the period ending September 30, 1997. Upon exercise of
the SARs, the Company shall pay to Employee an amount, not to exceed $500,000
in
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<PAGE> 4
the aggregate, equal to the difference between the Average Stock Price (as
hereinafter defined) and the exercise price of the SARs and the Company will
not make any additional payments to Employee with respect to the income tax
liability he incurs as a result of the exercise of the SARs. The exercise
price of the SARs will be $11.00 per SAR with respect to the first 35,000 SARs
exercised and $13.00 per SAR with respect to the remaining 40,000 SARs
exercised. For purposes of this subparagraph (c), the term "Average Stock
Price" means the average of the closing prices of the Company's common stock as
reported in the NYSE composite transactions for the 60 trading days immediately
preceding the date on which the SARs are exercised, provided, however, that if
the Company's common stock is not then listed on the NYSE, the closing prices
of the Company's common stock on the principal exchange on which the common
stock is listed, or in the over-the-counter market, if the common stock is not
then listed on any exchange, will be used in determining the Average Stock
Price. If the Company's common stock is not then readily tradeable in any
market, the Average Stock Price will be determined in good faith by the Board
of Director of the Company. Appropriate adjustments will be made by the Board
of Directors of the Company in good faith to the price of the Company's common
stock or to the exercise price of the SARs to reflect any stock splits,
reclassification, stock dividends, recapitalizations, spinoffs, dispositions or
other similar transactions that have a significant effect on the market value
of the Company's common stock.
(d) Employee shall be entitled to all health, disability
and life insurance benefits, pension and Section 401(k) plan benefits and other
employee benefits and perquisites generally provided to executive officers of
the Company on the same basis as such benefits and perquisites are provided to
such executive officers. Employee shall be entitled to four weeks paid
vacation during each 12-month period of his employment. Any unused vacation
for any 12-month period will lapse and will not accumulate.
(e) The Company shall reimburse Employee for all
reasonable expenses paid or incurred by Employee in performing his duties
hereunder in accordance with the Company's standard expense reporting and
reimbursement policies.
(f) Employee shall be eligible for participating in the
Arkla, Inc. Long Term Incentive Plan (the LTIP), the Annual Incentive Award
Plan and all other incentive compensation plans which the Company may adopt
from time to time, on the same basis as other executive officers of the
Company, but subject to the following.
Employee shall participate in the LTIP, Cycles IV and V, as
follows: Cycle IV (91-93) - the Grant is 2350; and Cycle V (92-94) - the Grant
is 2500. Employee shall participate in the LTIP Cycles VI and thereafter, at
full participation.
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<PAGE> 5
Employee shall participate in the Annual Incentive Award Plan
so as to be eligible for an annual target bonus of 30% of annual base salary.
For 1993, Employee shall receive a guaranteed bonus of 30% of his then annual
base salary, which sum shall be due and payable on or before December 31, 1993.
Notwithstanding the preceding sentence, Employee shall have the full right to
participate in the Plan for a greater 1993 bonus, which additional bonus (in
excess of the guaranteed amount) shall be due and payable according to the
terms of the Plan.
(g) The Company will pay all expenses incurred by
Employee and as provided in the ARKLA Procedures Manual, Human Resources,
Relocation Policy Guide and the Expanded Relocation Allowance thereto, which
were in effect as of April 1, 1989 and which have been provided to Employee.
The Company agrees to purchase Employee's then current
residence in the vicinity of Houston, Texas, upon Employee's written request,
furnished upon his termination of employment. The Company shall complete the
purchase within 30 days after receipt of such written request, in accordance
with the Third Party Home Purchase benefit described under the Optional
Relocation Allowance in said ARKLA's Relocation Policy Guide, previously
referenced, at a purchase price equal to the greater of (i) the appraised value
of the residence using a qualified appraiser selected by the Company or (ii)
Employee's purchase or construction costs, including the documented costs or
real property improvements that are incurred by Employee and are reasonably
expected to increase the resale value of the residence as determined in good
faith by the President and Chief Operating Officer of the Company.
4. Indemnification and Insurance. The Company shall indemnify
Employee with respect to matters relating to his services as an officer and
director of the Company and any of its subsidiaries to the extent set forth in
the Company's By-Laws and in accordance with the terms of any other expansive
indemnification which is generally applicable to executive officers of the
Company or any Affiliate (as defined in paragraph 8) that may be provided by
the Company from time to time. The foregoing indemnity is contractual and
shall survive the termination of the Employee's employment and any adverse
amendment to or repeal of the By-Laws. The Company shall also cover Employee
under a policy of officers' and directors' liability insurance providing
coverage that is comparable to that provided now or hereafter to any other
executive officer or director of the Company.
5. Change in Control of the Company. (a) If a Change in Control
of the Company (as hereinafter defined) occurs, Employee may, upon written
notice to the Company, voluntarily terminate his employment. Within 30 days of
receiving Employee's written notice of termination of employment, the Company
shall pay to Employee, in a lump sum, his unpaid then annual base salary for
the period
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<PAGE> 6
through September 30, 1995. In addition, Employee may exercise any remaining
SARs during the Exercise Period in which the date of his termination of
employment occurs, or if his termination of employment does not fall within an
Exercise Period, during the next following Exercise period, after which all
unexercised SARs will terminate and cease to be exercisable. Provided,
however, in the event such exercise of the SARs is restricted by the LTIP,
then, in that event, Employee may exercise all remaining SARs during the next
following Exercise Period, after which all unexercised SARs will terminate and
cease to be exercisable.
(b) As used in this Agreement, the term "Change in
Control of the Company" has the same meaning as the term "Change in Control"
set forth in Section 1(g) of the Trust Agreements entered into as of August 8,
1989, between the Company and Boatman's Trust Company, a Missouri corporation,
as trustee. This definition and meaning is contractual and will survive any
amendment or restatement of the definition or meaning, as well as the
termination of any of said Trust Agreements.
6. Termination of Employment. If Employee's employment is
voluntarily or involuntarily terminated for any reason before September 30,
1995, Employee will not be entitled to any further compensation or benefits
under this Agreement except as set forth in paragraph 4 and in paragraph 5 or
this paragraph 6, whichever applies.
(b) If the Company terminates Employees's employment for
Cause (as hereinafter defined), the Company shall pay to Employee his then
annual base salary through the date of termination. In addition, Employee may
exercise the SARs granted to him under paragraph 3(c) during the Exercise
Period in which the date of his termination of employment occurs, or if his
termination of employment does not fall within an Exercise Period, during the
next following Exercise Period, after which all unexercised SARs will terminate
and cease to be exercisable. Provided, however, in the event such exercise of
the SARs is restricted by the LTIP, then, in that event, Employee may exercise
all remaining SARs during the next following Exercise Period, after which all
unexercised SARs will terminate and cease to be exercisable. Notwithstanding
the preceding provisions of this subparagraph (b), if Employee's employment is
terminated for Cause, prior to September 14, 1993, and prior to a "change in
control" of the Company within the meaning of Section 7.3 of the LTIP, the SARs
granted to him under paragraph 3(c) shall remain outstanding for a period of
one year beginning on the date of his termination of employment, after which
all unexercised SARs will terminate and cease to be exercisable. For purpose
of this paragraph 6, "Cause" means (A) any act of personal dishonesty on the
part of Employee that is intended to result in his substantial personal
enrichment at the expense, and to the detriment, of the Company, (B) Employee's
wrongful disclosure of Confidential Information (as defined in paragraph 8)
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<PAGE> 7
which is materially injurious to the business of the Company or any Affiliate,
(C) the conviction of the Employee of a felony, but only after all appeals have
been exhausted, or (D) the willful refusal to discharge the duties of his
position.
(c) If Employee voluntarily resigns his employment before
a Change in Control of the Company occurs, the Company shall pay to Employee
his then annual base salary through the date of termination. In addition,
Employee may exercise the SARs granted to him under paragraph 3(c) during the
Exercise Period in which the date of his termination of employment occurs, or
if his termination of employment does not fall within an Exercise Period,
during the next following Exercise Period, after which all unexercised SARs
will terminate and cease to be exercisable. Provided, however, in the event
such exercise of the SARs is restricted by the LTIP, then, in that event,
Employee may exercise all remaining SARs during the next following Exercise
Period, after which all unexercised SARs will terminate and cease to be
exercisable. Notwithstanding the preceding provisions of this subparagraph
(c), if Employee voluntarily resigns his employment prior to September 14,
1993, and prior to a "change in control" of the Company within the meaning of
Section 7.3 of the LTIP, the SARs granted to him under paragraph 3(c) shall
remain outstanding for a period of one year beginning on the date of his
termination of employment, after which all unexercised SARs will terminate and
cease to be exercisable.
(d) If the Company terminates the Employee's employment
without Cause, or if Employee terminates employment because of the Company's
breach of any provision of this Agreement, which breach is not cured within 30
days of receiving written notice thereof from Employee, the Company shall pay
to Employee all of the salary, compensation and benefits provided in paragraph
3 of this Agreement, including his then annual base salary being paid at the
time of his termination, commencing at the time of his termination and
continuing thereafter as provided in paragraph 3 as if Employee's employment
had not terminated.
For the purposes of this subparagraph (d), the Company, in one
case, shall be deemed to have breached this Agreement by making a substantial
and material reduction in the nature or scope of Employee's then duties and/or
responsibilities which is inconsistent with Employee's status with the Company
immediately prior to notification to Employee of such reduction.
In the event Employee may hereafter have an executive position
with Arkla Energy Resources Company, a division of the Company ("AER"), and in
the event AER then enters into a joint venture involving a sale of 50% or more
of AER's assets with another or other whereby the venture parties provide for
the management and operation of the venture, and in the event that AER will not
have the overall management and control of the venture
-6-
<PAGE> 8
operations, then, in that event, the Company shall also be deemed to have so
breached this Agreement, unless Employee accepts another position with either
the Company of joint venture.
The foregoing example cases of the Company's breach of this
Agreement shall not be deemed to be inclusive of all such possible breaches of
this Agreement.
(e) In the event Employee's employment is terminated by
reason of his death, the Company shall pay to Employee's estate his then annual
base salary through the date of death plus an amount equal to the amount which
would be payable if all unexercised SARs had been exercised on the date of
Employee's death. For this purpose, the Average Stock Price under paragraph
3(c) will be determined with reference to the 60 trading days ending on the
date of Employee's death. Thereafter, the SARs will terminate and cease to be
exercisable.
7. No Mitigation Obligation. The Company acknowledges that it
will be difficult and may be impossible (i) for Employee to find reasonable
comparable employment following termination of his employment and (ii) to
measure the amount of damages which Employee may suffer as a result of
termination of his employment. Accordingly, all amounts paid to Employee under
this Agreement following his termination of employment are acknowledged by the
Company to be reasonable and to be liquidated damages, and Employee will not be
required to mitigate the amount of such payments by seeking other employment or
otherwise, nor will any profits, income, earnings or other benefits from any
source whatsoever create any mitigation, offset, reduction or any other
obligation on the part of Employee under this Agreement.
8. Non-Disclosure. (a) Employee recognizes and acknowledges that
in the course of his employment and as a result of the position of trust he
holds under this Agreement he has obtained private or confidential information
and proprietary data relating to the Company and its Affiliates, including
without limitation financial information, customer lists, patent information
and other data which are valuable assets and property rights of the Company and
its Affiliates. All of such private or confidential information and
proprietary data is referred to herein as "Confidential Information"; provided,
however, that Confidential Information will not include any information known
generally to the public (other than as a result of unauthorized disclosure by
Employee) or obtained by Employee from sources outside the Company.
(b) Employee agrees that he will not, during the term of
his employment pursuant to this Agreement or any time thereafter, either
directly or indirectly, disclose or use Confidential Information acquired
during his employment with the Company or any affiliate, except with the prior
written consent of the President and Chief Operating Officer of the Company.
-7-
<PAGE> 9
(c) As used in this Agreement, the term "Affiliate" means
any direct or indirect subsidiary of the Company; any other entity in which the
Company or any of its direct or indirect subsidiaries owns more than 50% of the
outstanding equity interests; any officer, director or employee of the Company
or of any of the foregoing entities; and any former officer, director or
employee of the Company or of any of the foregoing entities.
9. Non-Competition. Employees agrees that he will not, for a
period of one year after the termination of his employment, in Employee's
individual capacity or on behalf of another (i) hire or offer to hire any of
the officers, employees or agents of the Company or any Affiliate, (ii)
persuade or attempt to persuade in any manner any officer, employee or agent of
the Company or any Affiliate to discontinue any relationship with the Company
or any Affiliate, or (iii) divert or attempt to divert any customer or supplier
of the Company or any Affiliate.
10. Assistance with Litigation. For a period of one year after
the end of the last period for which Employee will have received any
compensation under this Agreement, Employee will furnish such information and
proper assistance as may be reasonably necessary in connection with any
litigation in which the Company or any Affiliate is then or may become
involved. The Company shall pay compensation to employee for all his time
therein expended, prorated, based upon his then salary which had been paid to
him at the time of his termination of his employment under paragraph 6 of this
Agreement. Further, the Company shall reimburse Employee for all expenses
incurred by Employee in furnishing such information and assistance, as provided
under paragraph 3(e) of this Agreement when he was actively employed, provided
such expenses are approved in advance by the President and Chief Operating
Officer of the Company or his designee.
11. No Set-Off Rights. There will be no right of set-off or
counterclaim, in respect of any claim, debt or obligation against any payment
to Employee provided for in this Agreement.
12. Source of Payments. (a) All payments provided in this
Agreement will be paid in cash from the general funds of the Company, unless
payment of such is otherwise provided. Employee's status with respect to
amounts owed under this Agreement will be that of a general creditor of the
Company unless such provision is otherwise made, and Employee will have no
right, title or interest whatsoever in or to any investment which the Company
may make to aid the Company in meeting its obligations hereunder. Nothing
contained in this Agreement, and no action taken pursuant to this provision,
will create or be construed to create a trust of any kind or a fiduciary
relationship between the Company and Employee or any other person, unless
specifically provided.
(b) Notwithstanding the provisions of paragraph 12(a),
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<PAGE> 10
the Board of Directors of the Company may establish a trust or trusts out of
which benefits provided under this Agreement may be paid.
13. Employment Tax Withholding. The Company may withhold from the
compensation or benefits payable under this Agreement all income or other
employment taxes that will be required pursuant to any law or governmental
regulation or ruling.
14. Assignment. Neither Employee, his spouse, nor their estates
will have any right to anticipate, encumber or dispose of any payment under
this Agreement, which payments and the rights to such payments are expressly
declared nonassignable and nontransferable, except as otherwise specifically
provided in this Agreement.
15. Binding Effect. This Agreement shall inure to the benefit of
and be binding upon the Company, its Affiliates, successors and assigns,
including, without limitation, any person, partnership, company or corporation
(i) which may acquire all or substantially all of the Company's assets or
business or (ii) with or into which the Company may be liquidated,
consolidated, merged or otherwise combined, and shall inure to the benefit of
and be binding upon Employee, his heirs, distributees, and personal
representatives. If payments become payable to Employee's surviving spouse or
other assigns and such person will thereafter die, such payment will revert to
Employee's estate.
16. Severability. If any provision of this Agreement is held to
be invalid, illegal, or unenforceable, in whole or part, such invalidity will
not affect any otherwise valid provision, and all other provisions will remain
in full force and effect.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, and all of which
together will constitute one document.
18. Titles. The titles and headings preceding the text of the
paragraphs and subparagraphs of this Agreement have been inserted solely for
convenience of reference and do not constitute a part of this Agreement or
affect its meaning, interpretation or effect.
19. Waiver. The failure of either party to insist in any one or
more instances upon performance of any terms or conditions of this Agreement
will not be construed as a waiver of future performance of any such term,
covenant, or condition and the obligations of either party with respect to such
term, covenant or condition will continue in full force and effect.
20. Notices. All notices required or permitted to be given under
this Agreement will be given in writing and will be deemed
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<PAGE> 11
sufficiently given if delivered by hand or mailed by registered mail, return
receipt requested, to Employee's address set forth at the beginning of this
Agreement and to the Company at 525 Milam Street, Shreveport, Louisiana 71101,
to the attention of the President and Chief Operating Officer. Either party
may, by giving notice to the other party in accordance with this paragraph,
change the address at which it is to receive notices hereunder.
21. Entire Agreement; Modification. This Agreement supersedes all
previous agreements, negotiations, or communications between Employee and the
Company and contains the complete and exclusive expression of the understanding
between the parties. This Agreement cannot be amended, modified, or
supplemented in any respect except by a subsequent written agreement entered
into by both parties.
22. Governing Law. This Agreement will be construed and enforced
in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
ARKLA, INC.
By /s/ DANIEL L. DIENSTBIER
Daniel L. Dienstbier
President and Chief
Operating Officer
EMPLOYEE
/s/ WILLIAM A. KELLSTROM
William A. Kellstrom
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<PAGE> 1
EXHIBIT 10.15
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the
3rd day of February, 1993, between Arkla, Inc., a Delaware corporation (the
"Company"), and Howard E. Bell, an individual ("Employee"), whose permanent
mailing address is 5906 Paradise Court, Houston, Texas 77069.
W I T N E S S E T H:
WHEREAS, Employee has been serving as the Chairman, President
and Chief Operating Officer of the Company's Entex Division; and
WHEREAS, the Company wishes to continue Employee's employment,
and Employee wishes to accept continued employment by the Company, on the terms
and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the parties agree as follows:
1. Employment. (a) The Company continues to employ
Employee and Employee accepts continued employment as President and Chief
Operating Officer of the Company's Entex Division ("Executive Employment").
Employee will perform the duties that are customarily incident to such position
and such other duties as may from time to time be assigned to him by the
Chairman and Chief Executive Officer of the Company or his designee. One of
Employee's principal duties will be to assist the Chairman and Chief Executive
Officer in identifying Employee's successor as
<PAGE> 3
President and Chief Operating Officer of the Entex Division and in planning and
implementing an orderly transition in leadership of the Entex Division upon
Employee's retirement from the Company. If Employee is elected or appointed a
director of the Company or an officer or director of any subsidiary of the
Company, Employee will be entitled to fees customarily paid to employee
directors of such corporations but otherwise will serve in such capacities
without further compensation.
(b) During the term of his Executive Employment
(as set forth in paragraph 2), Employee will devote his full time, attention
and energies to the business of the Company's Entex Division and will not,
without the prior written consent of the Chairman and Chief Executive Officer
of the Company or his designee, be engaged (whether or not during normal
business hours) in any other business or professional activity, whether or not
such activities are pursued for gain, profit or other pecuniary advantage.
Notwithstanding the foregoing, Employee will not be prevented from (i) engaging
in any civic or charitable activity for which Employee receives no compensation
or other pecuniary advantage; (ii) investing his personal assets in businesses
which do not compete with the Company or any Affiliate (as defined in paragraph
5) provided that such investment will not require any services (other than
services as a director) on the part of Employee in the operation of the
affairs of the businesses in which investments are made and provided further
that Employee's participation in such businesses is solely that of an investor
or director; (iii) purchasing
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<PAGE> 4
securities in any corporation whose securities are regularly traded, provided
that such purchases will not result in Employee owning beneficially at any time
five percent or more of the equity securities of any corporation engaged in a
business competitive with that of the Company or any Affiliate; or (iv)
participating in any other activity approved in advance in writing by the
Chairman and Chief Executive Officer of the Company or his designee.
2. Term of Executive Employment. Employee's Executive
Employment pursuant to this Agreement will be effective as of January 1, 1993,
and will continue through December 31, 1994, at which time Employee will retire
from employment with the Company, unless his employment is terminated earlier
pursuant to paragraph 4.
3. Salary and Compensation. (a) Except as otherwise
provided in this paragraph 3(a), the Company will pay to Employee during the
term of his Executive Employment pursuant to this Agreement a salary at least
equal to his annual base salary as of the date of this Agreement. The Company
will pay such salary to Employee in accordance with its customary payroll
practices applicable to other executive officers. Employee will also be
eligible to participate in the Annual Incentive Award Program, the Arkla, Inc.
Long Term Incentive Compensation Plan, as long as the Company continues to
maintain such plans, or in any similar incentive plans for executive officers
which the Company may adopt from time to time.
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<PAGE> 5
(b) Employee will be entitled to all health,
disability and life insurance benefits, pension benefits and other employee
benefits and perquisites generally provided to executive officers of the
Company on the same basis as such benefits and perquisites are provided to such
executive officers.
(c) The Company will reimburse Employee for all
reasonable expenses paid or incurred by Employee in performing his duties
hereunder in accordance with the Company's standard expense reporting and
reimbursement policies.
4. Termination of Employment. (a) Employee will not be
entitled to any compensation or benefits from the Company after the date of the
termination of his Executive Employment pursuant to this Agreement, except as
specifically provided under this paragraph 4 or under the terms of any employee
benefit plan in which Employee participates.
(b) Employee will be entitled to the severance
compensation set forth in paragraphs (A) through (E) below if (i) he retires
from the Company effective January 1, 1995, (ii) the Company terminates his
Executive Employment for any reason other than Cause prior to December 31,
1994, or (iii) Employee voluntarily terminates his Executive Employment prior
to December 31, 1994, with prior consent of the Chairman and Chief Executive
Officer of the Company.
(A) If Employee's Executive Employment
is terminated prior to December 31, 1994, an amount equal to the
balance of the Employee's salary under paragraph 3(a)
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<PAGE> 6
that he would have received had he actually remained employed by the
Company through December 31, 1994.
(B) An amount equal to 150% of his
annual base salary under paragraph 3(a) as in effect on his
termination date.
(C) An amount equal to the amount of
employer matching contributions that would have been allocated to
Employee's accounts under the qualified thrift plan of the Company in
which Employee participates and under the Company's Restoration of
Accounts Plan determined as if the payments in subparagraphs (A) and
(B) above were included in his compensation for purposes of such plans
in the calendar year in which Employee terminates employment.
(D) An amount equal to the monthly
premium charged under the Company's retiree medical plan and an amount
equal to the COBRA premium charged under the Company's group dental
plan for the same level of dental coverage received by Employee
immediately prior to his termination of employment, both for a period
of 18 months.
(E) A bonus in an amount determined by
the Board of Directors for similarly situated officers of the Company
at the meeting of the Board held in March of the year following the
year in which Employee terminates employment, prorated for the number
of whole calendar months Employee worked in the year of termination.
The amount of severance compensation provided pursuant to subparagraphs (A)
through (D) above will be paid to Employee in a
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<PAGE> 7
single lump sum payment within ten days following his termination of
employment. The severance compensation provided pursuant to subparagraph (E)
above will be paid to Employee in a single lump sum payment within ten days
after the Board has determined the amount of such payment.
(c) If Employee's Executive Employment is
terminated under the circumstances set forth in paragraph 4(b), Employee will
make himself available during the 18-month period following termination of
employment for selected assignments relating to employee relations, discussions
with various governmental agencies concerning the Company's businesses,
consultation with the Chairman and Chief Executive Officer of the Company or
his designee regarding strategic planning and assistance with any litigation
involving the Company or any Affiliate.
(d) If Employee's Executive Employment is
terminated prior to December 31, 1994, by reason of a disability that
qualifies him for benefits under the Company's long term disability program,
the Company will continue to pay to Employee his monthly base salary under
paragraph 3(a) as in effect on his termination date during the period beginning
on the date Employee is unable to perform services for the Company and ending
on the last day of the eligibility waiting period for long term disability
benefits. After long term disability benefits begin, the Company will pay to
Employee through December 31, 1994, a monthly amount equal to the difference
between Employee's monthly base salary under paragraph 3(a) as in effect on his
termination
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<PAGE> 8
date and the long term disability benefits (calculated on a monthly basis) to
which Employee is entitled to receive from the Company's disability program,
Social Security and workers' compensation, if applicable. Employee will also
be entitled to the benefits set forth in subparagraphs (B) through (E) of
paragraph 4(b) above. The benefits set forth in subparagraphs (B) through (D)
will be paid to Employee on January 10, 1995, and the benefit set forth in
subparagraph (E) will be paid to Employee within ten days after the Board of
Directors of the Company has determined the amount of such benefit.
(e) If Employee's Executive Employment is
terminated (i) by the Company for Cause, (ii) by Employee voluntarily without
the prior written consent of the Chairman and Chief Executive Officer of the
Company, or (iii) by reason of the Employee's death, Employee (or his estate)
will be entitled to receive his annual base salary pro rated to the date of
termination, any earned but unused vacation and any other benefits to which the
Employee or his spouse or his estate may be entitled under the employee benefit
plans of the Company or its Affiliates.
(f) For purposes of this Agreement, "Cause"
means: (i) Employee's intentional failure to perform any covenant, condition
or obligation required to be performed by him pursuant to any provision of this
Agreement; (ii) Employee's intentional act of fraud, embezzlement or theft in
the course of his employment or intentional misconduct which is materially
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<PAGE> 9
injurious to the business or reputation of the Company or any Affiliate; (iii)
Employee's intentional damage to the property of the Company or any Affiliate
or his intentional wrongful disclosure of Confidential Information (as defined
in paragraph 5) which is materially injurious to the business or reputation of
the Company or any Affiliate; or (iv) Employee's willful refusal to perform any
of his duties under this Agreement. For purposes of this Agreement, no act or
failure to act on the part of Employee will be deemed "intentional" if it was
due primarily to an error in judgment or negligence, but will be deemed
"intentional" only if done or omitted to be done by Employee not in good faith
and without reasonable belief that his action or omission was in the best
interest of the Company or any Affiliate.
5. Non-Disclosure. (a) Employee recognizes and
acknowledges that in the course of his employment and as a result of the
position of trust he holds under this Agreement he has obtained private or
confidential information and proprietary data relating to the Company and its
Affiliates, including without limitation financial information, customer lists,
patent information and other data which are valuable assets and property rights
of the Company and its Affiliates. All of such private or confidential
information and proprietary data is referred to herein as "Confidential
Information;" provided, however, that Confidential Information will not include
any information known generally to the public (other than as a result of
unauthorized disclosure by Employee).
-8-
<PAGE> 10
(b) Employee agrees that he will not, during the
term of his Executive Employment pursuant to this Agreement or at any time
thereafter, either directly or indirectly, disclose or use Confidential
Information acquired during his employment with the Company or any Affiliate,
except with the prior written consent of the Chairman and Chief Executive
Officer of the Company.
(c) As used in this Agreement, the term
"Affiliate" means any direct or indirect subsidiary of the Company; any other
entity in which the Company or any of its direct or indirect subsidiaries owns
more than 50% of the outstanding equity interests; any officer, director or
employee of the Company or of any of the foregoing entities; and any former
officer, director or employee of the Company or of any of the foregoing
entities.
6. Non-Competition. Employee agrees that he will not,
for a period of one year after the termination of this Agreement, in Employee's
individual capacity or on behalf of another (i) hire or offer to hire any of
the officers, employees or agents of the Company or any Affiliate, (ii)
persuade or attempt to persuade in any manner any officer, employee or agent of
the Company or any Affiliate to discontinue any relationship with the Company
or any Affiliate, or (iii) solicit or divert or attempt to divert any customer
or supplier of the Company or any Affiliate.
7. No Set-off Rights. There will be no right of set-off
or counterclaim in respect of any claim, debt or
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<PAGE> 11
obligation against any payment to Employee provided for in this Agreement.
8. Source of Payments. (a) All payments provided in
this Agreement will be paid in cash from the general funds of the Company.
Employee's status with respect to amounts owed under this Agreement will be
that of a general unsecured creditor of the Company, and Employee will have no
right, title, or interest whatsoever in or to any investments which the Company
may make to aid the Company in meeting its obligations hereunder. Nothing
contained in this Agreement, and no action taken pursuant to this provision,
will create or be construed to create a trust of any kind or a fiduciary
relationship between the Company and Employee or any other person.
(b) Notwithstanding the provisions of paragraph 8(a),
the Board of Directors of the Company may establish a trust or trusts out of
which benefits provided under this Agreement may be paid.
9. Employment Tax Withholding. The Company will
withhold from any compensation or benefits payable under this Agreement all
income or other employment taxes that are required to be withheld pursuant to
any law or governmental regulation or ruling.
10. Assignment. Neither Employee, his spouse, nor their
estates will have any right to anticipate, encumber or dispose of any payment
under this Agreement, which payments and the rights to such payments are
expressly declared nonassignable
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<PAGE> 12
and nontransferable, except as otherwise specifically provided in this
Agreement.
11. Binding Effect. This Agreement will inure to the
benefit of and be binding upon the Company, its Affiliates, successors and
assigns, including, without limitation, any person, partnership, company or
corporation which may acquire substantially all of the Company's assets or
business or with or into which the Company may be liquidated, consolidated,
merged or otherwise combined, and will inure to the benefit of and be binding
upon Employee, his heirs, distributees, and personal representatives. If
payments become payable to Employee's surviving spouse or other assigns and
such person will thereafter die, such payment will revert to Employee's estate.
12. Severability. If any provision of this Agreement is
held to be invalid, illegal, or unenforceable, in whole or part, such
invalidity will not affect any otherwise valid provision, and all other valid
provisions will remain in full force and effect.
13. Survival of Certain Provisions. Notwithstanding
anything herein to the contrary, the obligations of Employee and the Company
under paragraphs 4 through 6, inclusive, to the extent applicable, will remain
operative and in full force and effect following the termination of Employee's
employment pursuant to this Agreement.
14. Counterparts. This Agreement may be executed in two
or more counterparts, each of which will be deemed an original, and all of
which together will constitute one document.
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<PAGE> 13
15. Titles. The titles and headings preceding the text
of the paragraphs and subparagraphs of this Agreement have been inserted solely
for convenience of reference and do not constitute a part of this Agreement or
affect its meaning, interpretation or effect.
16. Waiver. The failure of either party to insist in any
one or more instances upon performance of any terms or conditions of this
Agreement will not be construed as a waiver or future performance of any such
term, covenant, or condition and the obligations of either party with respect
to such term, covenant or condition will continue in full force and effect.
17. Notices. All notices required or permitted to be
given under this Agreement will be given in writing and will be deemed
sufficiently given if delivered by hand or mailed by registered mail, return
receipt requested, to Employee's address set forth at the beginning of this
Agreement and to the Company's principal executive offices. Either party may,
by giving notice to the other party in accordance with this paragraph, change
the address at which it is to receive notices hereunder.
18. Entire Agreement; Modification. This Agreement
supersedes all previous agreements, negotiations, or communications between
Employee and the Company and contains the complete and exclusive expression of
the understanding between the parties. This Agreement cannot be amended,
modified, or supplemented in any respect except by a subsequent written
agreement entered into by both parties.
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<PAGE> 14
19. GOVERNING LAW. THIS AGREEMENT WILL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first above written.
ARKLA, INC.
By /s/ T. Milton Honea
T. Milton Honea, Chairman and
Chief Executive Officer
EMPLOYEE
/s/ Howard E. Bell
Howard E. Bell
-13-
<PAGE> 1
EXHIBIT 10.17
<PAGE> 2
AMENDMENT
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT (the "Amendment") is made as of the 20th day of July,
1993, by and between Arkla, Inc., a Delaware corporation (the "Company"), and
Daniel L. Dienstbier ("Dienstbier"), with reference to the following facts:
A. Dienstbier and the Company entered into an Employment
Agreement dated January 20, 1993 (the "Employment Agreement"). Under the terms
of the Employment Agreement, Dienstbier may voluntarily resign from employment
with the Company and receive certain compensation and other benefits through
June 30, 1994.
B. On July 15, 1993, Dienstbier notified the Board of Directors
of the Company that he wishes to exercise his right under the Employment
Agreement to voluntarily terminate employment with the Company.
C. Dienstbier and the Company are entering into this Amendment to
secure Dienstbier's services through September 30, 1993, and to insure an
orderly transition in the reassignment of Dienstbier's duties and
responsibilities.
NOW, THEREFORE, Dienstbier and the Company agree as follows:
1. Upon the execution of this Amendment by Dienstbier and the
Company, the Company will pay Dienstbier the amount of $750,000.00, less taxes
required to be withheld by applicable law. This amount represents the sum of
the annual base salary, minimum annual award and completion bonus to which
Dienstbier is entitled under paragraph 7(c)(ii) of the Employment Agreement.
In addition, upon execution of this Agreement, the Company will instruct its
transfer agent to issue in Dienstbier's name a certificate for 15,000 shares of
common stock of the Company and will pay him the amount of $52,500.00 as a tax
gross-up payment in satisfaction of the Company's obligation to issue shares of
common stock under paragraph 7(c)(ii)(C) of the Employment Agreement. The
amounts described in this paragraph, when paid, and the shares of common stock,
when issued, may not be recovered by the Company for any reason.
2. In consideration for Dienstbier's services through September
30, 1993, the Company will continue his monthly base salary through that date
in accordance with the provisions of paragraph 3(a) of the Employment Agreement
and will also pay him the additional amounts set forth in this paragraph. On
October 1, 1993, the Company will pay to Dienstbier the sum of $137,500.00,
less taxes required to be withheld by applicable
<PAGE> 3
law. This amount represents the sum of a minimum annual award plus the
additional completion bonus that Dienstbier would have earned through June 30,
1994, without a repositioning of the Arkla Pipeline Group, in each case
prorated for the three-month period ending September 30, 1993. In addition, on
October 1, 1993, the Company will cause to be issued to Dienstbier an
additional 2,500 shares of its common stock (which represents the prorated
portion of the additional 10,000 shares that Dienstbier would have earned
through June 30, 1994, without a repositioning of the Arkla Pipeline Group),
plus a tax gross-up payment determined in the same manner as the tax gross-up
payment under paragraph 1 above but based on the value of the Company's common
stock on September 30, 1993. In the event of Dienstbier's death before October
1, 1993, the Company (i) will pay to Dienstbier's estate any monthly salary
earned and unpaid at the time of his death and (ii) will be obligated to pay to
his estate only a prorata portion of the $137,500.00 described in this
paragraph and to issue to his estate only a prorata portion of the 2,500 shares
of common stock, such prorata portions to be determined by dividing the number
of days after June 30, 1993, through the date of his death by the total number
of days in the three-month period ending September 30, 1993.
3. The Company acknowledges and confirms that the stock
appreciation rights ("SARs") granted to Dienstbier under paragraph 3(d) of the
Employment Agreement will remain outstanding and exercisable in accordance with
their terms through the close of business on September 30, 1994, after which
all unexercised SARs will terminate and cease to be exercisable. In the event
of Dienstbier's death on or before September 30, 1994, the Company will pay to
his estate an amount equal to the amount which would be payable if all
unexercised SARs had been exercised on the date of his death. For this
purpose, the Average Stock Price under paragraph 3(d) of the Employment
Agreement will be determined with reference to the 60 trading days ending on
the date of his death. The foregoing provisions of this paragraph will
supersede any conflicting provisions of paragraph 3(d) of the Employment
Agreement relating to the SARs.
4. Effective as of July 1, 1993, the Employment Agreement is
amended as follows:
(a) Paragraph 2 is amended in its entirety to read as
follows:
"2. Term of Employment. Employee's employment pursuant
to this Agreement will terminate on September 30, 1993."
(b) Paragraph 3(b), relating to the payment of an annual
award, paragraph 3(c), relating to the issuance of shares
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<PAGE> 4
of common stock of the Company, paragraphs 3(e), (f) and (g), relating to the
payment of a completion bonus based on the repositioning of the Arkla Pipeline
Group, and paragraph 3(l), relating to a possible supplemental retirement
income arrangement, are hereby deleted from the Employment Agreement.
(c) Paragraph 6, relating to a change in control of the
Company, is hereby deleted from the Employment Agreement.
(d) Paragraph 7, relating to compensation and benefits
following termination of employment, is hereby deleted from the Employment
Agreement.
5. In all other respects, the provisions of the Employment
Agreement will remain in effect in accordance with their terms.
IN WITNESS WHEREOF, the Company and Dienstbier have executed this
Amendment as of the date first written above.
ARKLA, INC.
By /s/ T. Milton Honea
T. Milton Honea, Chairman and
Chief Executive Officer
/s/ Daniel L. Dienstbier
Daniel L. Dienstbier
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<PAGE> 1
EXHIBIT 12
<PAGE> 2
EXHIBIT 12
ARKLA, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands of dollars)
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income from continuing operations
as set forth in Consolidated
Statement of Income $ 39,935 $ 6,227 $ 16,515 $ 100,826 $ (31,622)
Add back:
Provision for income taxes 46,481 12,516 18,418 52,643 (72,092)
Less:
Non-utility interest capitalized 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
86,416 18,743 34,933 153,469 (103,714)
---------- ---------- ---------- ---------- ----------
Fixed charges (from continuing
operations):
Interest 169,857 182,453 174,044 150,593 132,446
Amortization of debt discount
and expense 3,421 4,450 3,290 2,191 1,502
Portion of rents considered to
represent an interest factor 10,402 7,704 6,514 5,534 5,627
---------- ---------- ---------- ---------- ----------
Total fixed charges 183,680 194,607 183,848 158,318 139,575
---------- ---------- ---------- ---------- ----------
Earnings $ 270,096 $ 213,350 $ 218,781 $ 311,787 $ 35,861
---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges 1.47 1.10 1.19 1.97 0.26*
---------- ---------- ---------- ---------- ----------
</TABLE>
* Earnings were inadequate to cover fixed charges in 1989 by approximately
$103.7 million principally due to non-recurring non-cash charges.
<PAGE> 1
EXHIBIT 13
<PAGE> 2
FINANCIAL CONTENTS
<TABLE>
<S> <C>
Selected Financial Data 26
Management Analysis
Proposed Name Change 26
Organization and Accounting Policies 26
Strategic Action Plan 27
Proposed Equity Offering 27
Sale of Arkla Exploration Company 27
Sale of Louisiana Intrastate Gas Corporation 27
Acquisition of Diversified Energies, Inc 27
Contract Termination Charge 27
Significant Trends 27
Material Changes in the Results of Continuing Operations
General 28
Operating Income by Business Unit 28
Natural Gas Distribution 28
Natural Gas Pipeline 30
Corporate and Other 33
Consolidated 33
Discontinued Operations 34
Liquidity and Capital Resources
Invested Capital 35
Cash Flow Analysis 35
Commitments and Contingencies 39
Accounting Changes 42
Benefit Plan Assumptions 43
Ratio of Earnings to Fixed Charges 43
Debt Retirement Schedule 43
Common Stock Prices and Dividends 43
Financial Statements & Schedules
Statement of Consolidated Income 44
Consolidated Balance Sheet 45
Statement of Consolidated Stockholders' Equity 46
Statement of Consolidated Cash Flows 47
Notes to Consolidated Financial Statements 48
Report of Independent Accountants 65
Management's Responsibility for Financial Statements 65
Quarterly Information 66
</TABLE>
<PAGE> 3
Selected Financial Data1
The following data should be read in conjunction with the Company's
consolidated financial statements and accompanying notes and "Management
Analysis" found elsewhere herein.
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________
(millions of dollars, except per share amounts) 1993 1992 1991 1990 1989
_________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Operating revenues $2,949.6 $2,743.8 $2,724.4 $2,350.0 $2,222.8
_________________________________________________________________________________________________________
Income (loss) from continuing operations $ 39.9 $ 6.2 $ 16.5 $ 100.8 $ (31.6)
_________________________________________________________________________________________________________
Income (loss) from continuing operations
per common share $ 0.26 $ (0.01) $ 0.08 $ 1.04 $ (0.46)
_________________________________________________________________________________________________________
Total assets $3,727.8 $4,059.0 $4,806.9 $4,785.6 $3,457.0
_________________________________________________________________________________________________________
Long-term obligations $1,629.4 $1,783.1 $1,551.5 $1,450.2 $1,162.3
_________________________________________________________________________________________________________
Dividends per common share $ 0.28 $ 0.48 $ 1.08 $ 1.08 $ 1.08
_________________________________________________________________________________________________________
</TABLE>
1 The results of operations of Minnegasco are included subsequent to its
acquisition in December 1990. The results of operations of Louisiana Intrastate
Gas Corporation are included from its acquisition in July, 1989 to its sale at
June 30, 1993, see "Sale of Louisiana Intrastate Gas Corporation" elsewhere
herein. Results of operations for 1993 and 1989 include the impact of
significant non-recurring charges, see "Contract Termination Charge" and "Gas
Supply Contract Matters" under "Management Analysis" elsewhere herein.
Management Analysis
Proposed Name Change
The Company has announced its intention to change its name from Arkla, Inc. to
NorAm Energy Corp., subject to approval by the Company's stockholders at the
annual meeting to be held in May, 1994. Certain of the Company's subsidiaries
also are expected to make corresponding name changes.
Organization and Accounting Policies
The Company's principal activities are in the natural gas industry, with
operations in natural gas distribution (Distribution) and natural gas
transmission, including marketing, gathering and storage (Pipeline or Natural
Gas Pipeline). The Company previously conducted operations in the exploration
and production (E&P) and radio communications businesses, which have been
discontinued as further described under "Discontinued Operations" elsewhere
herein and in Note 8 of Notes to Consolidated Financial Statements. E&P had a
minority public ownership of approximately 18% until early 1992, see
"Discontinued Operations" elsewhere herein. The Company's legal structure
consists of a number of divisions and subsidiaries, all of which are wholly
owned except for Itron, Inc., of which the Company owns common stock
representing ownership of approximately 18.5%, see "Discontinued Operations"
elsewhere herein.
As with other similarly situated firms, the Company's natural gas
distribution and interstate natural gas pipeline businesses are subject to
various forms of rate regulation which (1) are intended to allow the Company to
recover its prudently incurred costs, including a reasonable return on
stockholder investment and (2) create economic impacts which historically have
been reflected in the Company' s financial statements in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). The Company discontinued the
application of SFAS 71 to its Arkla Energy Resources subsidiary (AER Co.)
effective as of December 31, 1992, see "Natural Gas Pipeline" under "Material
Changes in the Results of Operations" elsewhere herein.
The Company changed its method of accounting for income taxes,
postemployment benefits and postretirement benefits as of
<PAGE> 4
January 1, 1991, 1992 and 1993, respectively, see "Accounting Changes"
elsewhere herein.
The reader is directed to Note 1 of Notes to Consolidated Financial
Statements for a discussion of the Company's other significant accounting
policies.
Strategic Action Plan
The Company has implemented a strategic action plan designed to narrow the
focus of its operations and increase long-term stockholder value. In this
regard, the Company has (1) significantly reduced its ongoing costs through
staff reductions and other cost control measures, (2) sold its E&P operations,
(3) sold its intrastate pipeline business as conducted by Louisiana Intrastate
Gas Corporation and Subsidiaries, (4) completed or is in the process of
completing the sale and exchange of several of its distribution properties and
(5) disposed of certain other non-core businesses.
During 1993, the Company also evaluated strategic alternatives with
respect to its interstate pipeline business, ranging from contractual alliances
to the sale of all or a portion of such business. In July 1993, the Company
announced that, based on its evaluation, the Company's Management and Board of
Directors had concluded that it is in the best interests of Arkla's
stockholders for the Company to retain full ownership and operating control of
its interstate pipeline business.
Additional information concerning the implementation of specific
components of this strategic action plan can be found under various headings
elsewhere herein.
Proposed Equity Offering
On March 15, 1994, the Company announced its intention to offer for sale to the
public approximately $100 million of its common stock. The Company currently
plans to file a registration statement with the Securities and Exchange
Commission prior to March 31, 1994 and expects that the net proceeds from the
offering will be used to retire a portion of the Company's long-term debt, see
"Net Cash Flow from Financing Activities" elsewhere herein.
Sale of Arkla Exploration Company
On December 31, 1992, the Company completed the sale of Arkla Exploration
Company to Seagull Energy Corporation. This sale terminated the Company's
activities in the exploration and production business and, accordingly, the
Company's Consolidated Financial Statements and related data were restated to
reflect E&P's operating results, cash flows and net assets as "discontinued
operations," see "Discontinued Operations" elsewhere herein and Note 8 of Notes
to Consolidated Financial Statements.
Sale of Louisiana Intrastate Gas Corporation
On June 30, 1993, the Company completed the sale of its intrastate pipeline
business as conducted by Louisiana Intrastate Gas Corporation and Subsidiaries
(LIG) to a subsidiary of Equitable Resources, Inc. for $191 million in cash,
see "Natural Gas Pipeline" under "Material Changes in the Results of
Operations" elsewhere herein and Note 9 of Notes to Consolidated Financial
Statements.
Acquisition of Diversified Energies, Inc.
In November 1990, the Company acquired Diversified Energies, Inc. (DEI) in a
transaction accounted for as a purchase. The merger was effective for
accounting purposes on December 1, 1990, and, accordingly, DEI's transactions
and balances (except for the results of operations of Dyco Petroleum
Corporation which was sold in 1991) are included herein and in the Company's
consolidated financial statements beginning with the month of December 1990.
Prior to its acquisition by the Company, DEI was a holding company
headquartered in Minneapolis, Minnesota, primarily engaged in natural gas
distribution, gas and oil exploration and production and radio communications.
For additional information on these matters, see "Discontinued Operations"
elsewhere herein and Notes 8 and 9 of Notes to Consolidated Financial
Statements.
Contract Termination Charge
Effective December 31, 1993, the Company completed a comprehensive settlement
agreement with certain subsidiaries of Samson Investment Company pursuant to
which a number of outstanding contractual arrangements between the parties were
terminated or substantially modified, see "Natural Gas Pipeline" under
"Material Changes in the Results of Operations" elsewhere herein.
Significant Trends
In recent years, the Company's results of operations have shown a trend of
increasing interest expense. While this increase was due, in part, to the
growth the Company had experienced, it also was reflective of the significant
gap which had existed between the Company's internally generated cash and the
level of its capital spending, gas purchase contract settlement expenditures
and dividend payments. The Company has taken steps which reduced its interest
expense during 1993 and are expected to further reduce its interest expense in
the future, see "Cash Flow Analysis" elsewhere herein.
The Company's results of operations also have shown a trend of
increasing operating revenues without a corresponding trend of increased
operating income, largely due to the declining margins in certain portions of
the Company's interstate pipeline business, although results for 1993 show
significant improvement over the historical trend, see "Natural Gas Pipeline"
under "Material Changes in the Results of Operations" elsewhere herein.
<PAGE> 5
Material Changes in the Results of Continuing
Operations
General
The Company's results of operations are seasonal due to fluctuations in the
demand for and price of natural gas, although, as further discussed elsewhere
herein, the Company has obtained rate design changes in its regulated
businesses which generally have reduced the sensitivity of the Company's
earnings to seasonal weather patterns and further such changes are anticipated.
As previously described, the Company's principal operations are in
Pipeline and Distribution. The Company's pipeline businesses have experienced a
prolonged period of regulatory change in which they were required to (1)
restructure and reprice their services and (2) drastically reduce and
restructure their portfolio of gas purchase contracts. In response to item (2),
the Company, particularly through its AER Co. subsidiary, was required to
expend significant amounts of money, a substantial portion of which it was not
allowed to or was unable to recover through its service rates, resulting in
decreased earnings and an increased level of debt. This regulatory change also
has increasingly subjected certain portions of these businesses to competitive
market forces, thus limiting their ability to reach historical levels of return
on investment. The Company's distribution businesses have faced increased
competition in certain types of service and are being required to assume
certain functions previously provided by their pipeline suppliers but, in
general, have not faced the dramatic declines in profitability experienced by
certain interstate pipeline businesses, including AER Co. Indeed, the Company's
distribution units generally have shown a trend of increasing profitability.
Therefore, the Company's ability to improve its overall profitability
will depend, to a large extent, on its success in meeting the objectives of (1)
increasing the profitability of Pipeline through improved rate design,
aggressive marketing of its services and continued reduction of its overall
costs (thus increasing its competitiveness), (2) maintaining the profitability
of Distribution through timely and well designed rate filings, increasing its
customer base through aggressive marketing and controlling its costs in order
to remain competitive and offset regulatory lag, (3) developing and expanding
the Company's unregulated natural gas marketing business through the
acquisition of new markets and the provision of services at a unit cost which
will allow it to compete effectively with the industry leaders in this business
and (4) reducing the Company's overall leverage and related interest expense,
thus increasing the Company's flexibility to pursue future opportunities for
attractive investment.
The Company intends to vigorously pursue the objectives discussed
above, although certain factors which are key to reaching these objectives are
largely beyond the Company's control. Growth in Distribution is, to a
significant extent, dependent on economic conditions in its service areas and
on the cost and efficiency of competing fuels and technologies. The rate
initiatives planned by all of the Company's regulated businesses are subject to
the authority of various regulatory bodies and, therefore, cannot be assured as
to timing or ultimate success. With respect to interest expense, the Company
has a large amount of fixed-rate long-term debt, a substantial portion of which
cannot be efficiently replaced with lower cost debt in the near term due to
restrictions in the terms of each such series of debt, as well as restrictions
placed on the Company by certain of its other financial arrangements. In
addition, the Company's interest expense is subject to change based on the
movement of market interest rates to the extent that it has floating rate
borrowings under its revolving credit facility, continues to utilize its
accounts receivable sales program or has otherwise subjected itself to interest
rate risk.
With respect to lowering its overall level of debt, the level of
success will largely be a function of the Company's ability to generate cash
internally, through issuance of equity or otherwise. The internal generation of
cash will depend to a significant extent on the Company's success in meeting
its other objectives as described previously. The Company's ability to issue
equity for the purpose of reducing debt and the desirability of doing so are
dependent on, among other factors, the market for the Company's equity and for
equities in general and on the Company's ability to efficiently utilize the
cash proceeds, see "Proposed Equity Offering" elsewhere herein.
Following are discussions of the results of operations for the
Company's businesses, including further discussion of the impact of the above
factors on each such business and the progress being made in reaching the
objectives discussed above. Certain prior year amounts have been reclassified
to conform to current presentation.
Operating Income (Loss) by Business Unit
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
__________________________________________________________________
(millions of dollars) 1993 1992 1991
__________________________________________________________________
<S> <C> <C> <C>
Natural gas distribution $174.8 $168.0 $159.1
Natural gas pipeline 78.2 15.7 28.0
Corporate and other (17.4) (20.2) (10.3)
- ------------------------------------------------------------------
Subtotal 235.6 163.5 176.8
LIG 5.6 25.1 32.1
Contract termination charge (34.2) _ _
- ------------------------------------------------------------------
Consolidated $207.0 $188.6 $208.9
- ------------------------------------------------------------------
</TABLE>
Natural Gas Distribution
The Company's natural gas distribution business is conducted by the Arkansas
Louisiana Gas Company, Entex and Minnegasco divisions of Arkla, Inc. Entex,
Inc. merged with Arkla, Inc. in February 1988 in a
<PAGE> 6
transaction accounted for as a pooling of interests, while Minnegasco
(formerly the subsidiary of DEI which conducted its natural gas distribution
business) became part of Arkla, Inc. effective with the December 1990
acquisition of DEI, see "Acquisition of Diversified Energies, Inc."
elsewhere herein and Notes 8 and 9 of Notes to Consolidated Financial
Statements. Minnegasco's principal operations historically have been
in Minnesota, Nebraska and, to a lesser extent, South Dakota, although the
Company has divested itself of all of Minnegasco's non-Minnesota operations as
described following.
In December 1992, Minnegasco and Midwest Gas (Midwest) entered into a
definitive agreement which resulted in the acquisition by Minnegasco of
Midwest's Minnesota distribution business (serving 41 communities with
approximately 82,000 customers) in exchange for Minnegasco's South Dakota
distribution properties (serving 18 communities with approximately 45,000
customers) plus $38 million in cash, which transaction was completed in August
1993.
In February 1993, Minnegasco completed the sale of its Nebraska
distribution business to Peoples Natural Gas of Omaha, Nebraska (a division of
UtiliCorp United) for $75.3 million in cash, see Note 9 of Notes to
Consolidated Financial Statements. This system serves approximately 124,000
customers in 63 eastern Nebraska communities.
In addition, the Company has executed a definitive agreement pursuant
to which it expects to sell its Kansas distribution properties (together with
certain related pipeline assets) for approximately $25 million in cash, which
sale is expected to close during 1994 and will terminate the Company's
distribution and transmission operations in Kansas.
The above sale/exchange transactions, when fully consummated, will
result in a modest reduction in the total number of distribution customers but,
inclusive of the interest savings due to the application of the net cash
proceeds to the reduction of debt and the administrative savings associated
with a more concentrated geographic profile and reduced number of regulatory
jurisdictions, together with the fact that the retained properties are expected
to experience growth in excess of that which was expected from the divested
properties, are not currently expected to result in a material and continuing
decrease in earnings compared to historical Distribution levels.
Financial Results
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(millions of dollars) 1993 1992 1991
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural gas sales $ 2,032.7 $ 1,787.4 $ 1,724.0
Transportation revenue 21.6 26.4 26.4
Other revenue 22.6 21.4 21.2
- -----------------------------------------------------------------------------------
Total operating
revenues 2,076.9 1,835.2 1,771.6
- -----------------------------------------------------------------------------------
Purchased gas cost
Affiliated 315.0 285.3 316.8
Unaffiliated 1,062.4 883.3 808.8
Operations and maintenance 358.0 341.8 336.4
Depreciation and amortization 82.2 75.2 71.8
Other operating expenses 84.5 81.6 78.7
- -----------------------------------------------------------------------------------
Operating income $ 174.8 $ 168.0 $ 159.1
- -----------------------------------------------------------------------------------
Average invested capital $ 910.7 $ 864.1 $ 837.0
- -----------------------------------------------------------------------------------
</TABLE>
Operating Statistics
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(billions of cubic feet) 1993 1992 1991
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential sales 193.6 185.7 187.1
Commercial sales 126.7 123.9 124.2
Industrial sales 111.7 99.5 77.9
Sales for resale 10.2 3.6 12.8
Transportation 75.8 79.0 72.1
- -----------------------------------------------------------------------------------
Total throughput 518.0 491.7 474.1
- -----------------------------------------------------------------------------------
ALG actual degree days 3,314 2,762 2,735
- -----------------------------------------------------------------------------------
ALG normal degree days 3,063 3,081 3,063
- -----------------------------------------------------------------------------------
Entex actual degree days 1,632 1,404 1,497
- -----------------------------------------------------------------------------------
Entex normal degree days 1,582 1,592 1,584
- -----------------------------------------------------------------------------------
Minnegasco actual degree days 8,057 7,141 7,442
- -----------------------------------------------------------------------------------
Minnegasco normal degree days 7,929 7,718 7,718
- -----------------------------------------------------------------------------------
Avg. number of customers 2,648,496 2,709,877 2,675,502
- -----------------------------------------------------------------------------------
Number of employees 5,586 5,824 6,140
- -----------------------------------------------------------------------------------
Average sales price ($/Mcf)
Residential $ 5.77 $ 5.38 $ 5.28
- -----------------------------------------------------------------------------------
Commercial $ 4.65 $ 4.24 $ 4.20
- -----------------------------------------------------------------------------------
Industrial $ 2.71 $ 2.49 $ 2.47
- -----------------------------------------------------------------------------------
Annual revenues per
residential customer $ 460.49 $ 402.13 $ 403.82
- -----------------------------------------------------------------------------------
Annual residential use
per customer - Mcf 79.82 74.79 76.50
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 7
Discussion of Operating Results
1993 vs. 1992
Distribution operating income for 1993 was $174.8 million, an increase of 4.0%
over the $168.0 million earned in 1992. This $6.8 million increase reflects
both increased operating revenues and increased operating expenses as discussed
following.
Operating revenues increased from $1,835.2 million in 1992 to $2,076.9
million in 1993 due primarily to (1) colder weather in 1993, (2) increased
industrial sales, (3) an increased average unit cost of gas (which is a
component of the sales rate) and (4) rate increases obtained by ALG and
Minnegasco. Partially offsetting these favorable effects was the revenue
reduction due to Minnegasco's February sale of its Nebraska distribution
properties. Weather-sensitive residential and commercial sales volumes
increased by 7.9 Bcf and 2.8 Bcf, respectively, due largely to the colder 1993
weather. The continued improvement in economic conditions in Entex's service
area was primarily responsible for the 12.2 Bcf increase in industrial sales
volume.
While purchased gas cost in 1993 increased by approximately 17.9% to
$1,377.4 million from $1,168.6 million in 1992 (largely due to an increase in
the average cost of purchased gas), the gross margin (natural gas sales minus
purchased gas cost) increased approximately in proportion to the increased
sales volume. Operating expenses, exclusive of purchased gas cost, increased by
$26.1 million (5.2% ) over 1992 principally due to (1) increased 1993
operations and maintenance expense reflecting increased throughput, (2)
increased 1993 depreciation and amortization expense due to increased
investment and, to a lesser extent, increases in depreciation rates pursuant to
regulatory orders and (3) non-recurring favorable adjustments to certain
benefit costs in 1992.
1992 vs. 1991
Operating income for 1992 was $168.0 million, an increase of $8.9
million (5.6%) over the $159.1 million earned in 1991. This increase, which
reflects both increased revenues and increased expenses, is largely due to rate
relief received in several jurisdictions and to increased throughput as
described following.
Total throughput increased from 474.1 Bcf in 1991 to 491.7 Bcf in 1992,
an increase of 17.6 Bcf or 3.7%. Of this increase, approximately 6.9 Bcf was
increased transportation volume, principally at Entex. The increase of 10.7 Bcf
in 1992 sales volume was principally due to 22 Bcf of increased industrial
sales at Entex, reflecting improved economic conditions in Entex's Gulf Coast
service area, partially offset by a decrease in Entex's sales for resale which
carry significantly lower margins.
Total purchased gas cost, while increasing from $1,125.6 million in
1991 to $1,168.6 million in 1992, remained at approximately 65.3% of natural
gas sales revenues, and the gross margin increased approximately in proportion
to the increase in sales volume. Operating expenses exclusive of purchased gas
cost increased from $486.9 million in 1991 to $498.6 million in 1992, an
increase of $11.7 million or 2.4%, principally due to (1) increased operations
and maintenance expense reflecting increased throughput and (2) increased
depreciation and amortization expense and taxes other than income, both
principally due to increased investment.
Natural Gas Pipeline
The Company's natural gas pipeline business (Pipeline) historically has been
conducted by the Arkla Energy Resources division of Arkla, Inc. (AER),
Mississippi River Transmission Corporation (MRT), Louisiana Intrastate Gas
Corporation and Subsidiaries (LIG) and Arkla Energy Marketing Company (AEM, the
Company's principal natural gas supply aggregator and marketer).
On June 30, 1993, the Company completed the sale of LIG to a subsidiary
of Equitable Resources, Inc. (Equitable) for $191 million in cash and agreed to
indemnify Equitable against certain exposures, for which the Company has
established reserves equal to expected claims under the indemnity. In order to
focus on ongoing operations, the following Pipeline data have been restated to
exclude LIG's results of operations for all periods presented, although this
disposition did not qualify for presentation as "discontinued operations" in
the Company's consolidated financial statements. LIG's operating income was
$5.6 million for the six months ended June 30, 1993 and $25.1 million and $32.1
million for 1992 and 1991, respectively, and its total throughput was 103.4
million MMBtu for the six months ended June 30, 1993 and 244.1 million MMBtu
and 240.2 million MMBtu for 1992 and 1991, respectively.
In March 1993, the Company transferred assets, liabilities and service
obligations of AER to a newly-formed first-tier subsidiary of Arkla, Inc.,
Arkla Energy Resources Company (AER Co.), pursuant to an order from the Federal
Energy Regulatory Commission (FERC) approving the transfer. This transfer
resulted in FERC jurisdiction over certain of AER Co.'s transactions with
affiliates of Arkla, Inc., which historically were subject to state regulatory
oversight.
In October 1993, the Company made a filing with the FERC which, if
approved, would allow the Company to transfer the natural gas gathering assets
of AER Co. into a wholly-owned subsidiary to be called Arkla Gathering Services
Company (new company). The new company, if authorized by the FERC, will own and
operate 3,500 miles of gathering pipelines which collect gas from more than 200
separate systems in major producing fields in Arkansas, Oklahoma, Louisiana and
Texas. While the scope of the FERC's jurisdiction over the new company is
unclear, the Company believes that the new
<PAGE> 8
company would not generally be subject to traditional cost-of-service rate
regulation.
The Company has an agreement with ANR Pipeline Company pursuant to
which the Company expects to sell an ownership interest in 250 MMcf/day of
capacity in existing pipeline facilities (principally Line AC), see "Sale of
Pipeline Facilities" elsewhere herein.
While the economic and regulatory environment in which distribution
companies operate has changed only modestly in recent years, the interstate
pipeline industry has seen significantly greater change. Most recently, FERC
Order 636 has largely completed the unbundling and deregulation of natural gas
commodity sales markets, requiring interstate pipelines to partially
restructure and reprice their services. In addition to requiring unbundling of
pipeline gas sales from services such as gathering, transportation and storage,
FERC Order 636 expresses a preference for a "straight fixed variable" rate
structure which affords pipelines the opportunity (subject to competitive
pressures) to recover their fixed costs (including return on investment)
through the demand component of their rates, thus decreasing the sensitivity of
revenues to changes in the level of throughput. Services pursuant to the
provisions of FERC Order 636 were implemented by AER Co. in September 1993 and
by MRT in November 1993.
As discussed elsewhere herein, the Company has historically applied the
provisions of SFAS 71 to all of its rate regulated businesses. Effective as of
December 31, 1992, however, the Company concluded that while its distribution
businesses and its Mississippi River Transmission interstate pipeline
subsidiary continued to meet the applicability criteria contained in SFAS 71,
AER Co. could no longer demonstrate a current and projected ability to
consistently collect its maximum cost-based rates that is in accordance with
the form of regulation contemplated by SFAS 71. Accordingly, the Company ceased
to apply the provisions of SFAS 71 to AER Co.'s transactions and balances,
which accounting change was implemented pursuant to Statement of Financial
Accounting Standards No. 101, "Regulated Enterprises - Accounting for the
Discontinuance of Application of FASB Statement No. 71." The net impact of this
change was an after-tax charge to 1992 earnings of approximately $195 million,
shown in the Company's Statement of Consolidated Income as "Extraordinary item,
less taxes." This charge had no effect on AER Co.'s ability to include the
underlying costs in its regulated rates or on its ability to collect such rates
from its customers.
Effective as of December 31, 1993, the Company completed a
comprehensive settlement agreement (the Settlement) with certain subsidiaries
of Samson Investment Company (Samson), pursuant to which a number of
outstanding contractual arrangements between the parties were terminated or
substantially modified, resulting in a pre-tax charge to earnings of
approximately $34 million, included in the Company' s Statement of Consolidated
Income under the caption "Contract termination charge."
This charge resulted principally from the early termination of an
agreement under which the Company was obligated to pay a reservation fee for
the right to purchase certain quantities of gas at market prices through
January 1999, and was recorded net of certain amounts previously reserved for
gas supply costs expected to be unrecoverable. This arrangement was expected to
prove economically disadvantageous over its term, principally as a result of
changes in the Company's gas supply needs and in the natural gas industry
brought about by the advent of FERC Order 636. The Settlement also resulted in
the offset and cancellation of certain other contractual arrangements between
the parties, including long-term obligations, notes receivable and gas
purchased in advanced of delivery.
Consideration for the Settlement included an exchange of cash (the net
effect of which was immaterial), the delivery to Samson by the Company of a
note for $34 million, which note is an unsecured obligation of the Company
bearing interest at 6% and payable in equal installments of principal and
interest through May 31, 1995, and the receipt by the Company of the right to 6
Bcf of gas (approximately 2.5 Bcf of which was delivered during January and
February of 1994) from Samson without additional charge over the period ending
with March 15, 1995.
The net cash flow from the Settlement is expected to be approximately
neutral for 1994 and additive to cash flow for the years 1995-1999. The impact
on the Company's future earnings for the periods covered by the previous
arrangements is expected to be positive. These favorable impacts will be
reduced to the extent that the Company is required to pay reservation fees or
similar charges to other suppliers to replace the availability of gas
previously provided under these arrangements.
To minimize the risk from market fluctuations in the price of natural
gas, the Company (generally through AEM) enters into futures transactions,
swaps and purchases options in order to hedge certain commitments to buy and
sell natural gas. Some of these financial instruments carry off-balance-sheet
risk, see "Commitments and Contingencies" elsewhere herein. Changes in the
market value of the various financial instruments utilized as hedges are
deferred and recognized in conjunction with the gain or loss on the hedged
transactions.
<PAGE> 9
Pipeline (Excluding LIG)
Financial Results
<TABLE>
<CAPTION>
____________________________________________________________________________________
(millions of dollars) 1993 1992 1991
____________________________________________________________________________________
<S> <C> <C> <C>
Gas sales revenue
Sales to Distribution $ 265.4 $ 238.0 $ 274.0
Sales for resale and other 608.8 514.9 616.9
____________________________________________________________________________________
Total gas sales revenue 874.2 752.9 890.9
____________________________________________________________________________________
Transportation revenue
Affiliated 46.1 17.9 13.7
Unaffiliated 92.6 84.1 93.0
____________________________________________________________________________________
Total transportation
revenue 138.7 102.0 106.7
____________________________________________________________________________________
Total operating revenue 1,012.9 854.9 997.6
____________________________________________________________________________________
Purchased gas cost
Affiliated 5.0 41.5 111.8
Unaffiliated 690.1 543.5 597.5
Operations and maintenance 123.2 138.6 154.9
Depreciation and amortization 43.2 44.2 42.5
Other operating expenses 73.2 71.4 62.9
____________________________________________________________________________________
Operating income1 $ 78.2 $ 15.7 $ 28.0
____________________________________________________________________________________
Average invested capital $1,018.4 $1,266.6 $1,270.1
____________________________________________________________________________________
</TABLE>
1 In 1993, before the pre-tax Contract Termination Charge of $34.2 million.
<TABLE>
<CAPTION>
Operating Statistics
____________________________________________________________________________________
(million MMBtu) 1993 1992 1991
____________________________________________________________________________________
<S> <C> <C> <C>
Sales to Distribution 71.2 73.5 91.9
Sales for resale and other 103.6 76.5 137.2
____________________________________________________________________________________
Total sales 174.8 150.0 229.1
____________________________________________________________________________________
Transportation
Distribution 85.7 53.7 50.5
Other 694.4 698.8 579.3
____________________________________________________________________________________
Total transportation 780.1 752.5 629.8
Less: Order 636
elimination1 (24.2) _ _
____________________________________________________________________________________
Total throughput 930.7 902.5 858.9
____________________________________________________________________________________
Average interstate pipeline
transportation margin
($/MMBtu) $0.209 $0.184 $0.194
____________________________________________________________________________________
Average pipeline sales
margin ($/MMBtu) $0.856 $0.922 $0.747
____________________________________________________________________________________
</TABLE>
1 Prior to the implementation of unbundled services pursuant to FERC Order 636,
Pipeline's sales rate covered all related services, including transportation to
the customer's facility. Under FERC Order 636, when Pipeline acts as a
merchant, the sales transaction is independent of (and may not include) the
transportation of the volume sold. Therefore, when the sold volumes are also
transported by Pipeline, the throughput statistics will include the same
physical volumes in both the sales and transportation categories, requiring an
elimination to prevent the overstatement of actual total throughput.
Discussion of Operating Results
1993 vs. 1992
Operating income for 1993 was $78.2 million (before the pre-tax "Contract
termination charge" of $34.2 million), a $62.5 million increase over 1992,
reflecting both increased operating revenues and increased operating expenses.
This significant improvement is attributable to several factors including (1)
increased sales and transportation volumes, (2) rate increases obtained by AER
Co. and MRT, (3) more favorable 1993 weather (approximately 23% cooler than
1992) and (4) accounting adjustments included in 1992 results as discussed
following.
Revenues from sales to Distribution increased by $27.4 million (11.5%)
in 1993 while sales volumes decreased by 2.3 million MMBtu (3.1%). This unusual
relationship is attributable to the one-time sale by AER Co. of approximately
$28.5 million of gas in storage inventories to a distribution affiliate in
accordance with the provisions of FERC Order 636. Effective with Order 636
implementation, AER Co. now offers unbundled storage services, retaining only a
relatively small amount of storage gas (approximately 5 Bcf) for system
operational purposes. This sale represented a sale of inventory in place, thus
resulting in no additional Pipeline throughput.
"Sales for resale and other" increased by $93.9 million (18.2%) in 1993
with approximately 78% of the increase attributable to increased 1993 AEM sales
revenues. Average AEM sales rates increased by approximately $0.29/MMBtu in
1993 primarily due to a corresponding increase of $0.34/MMBtu in Mid-continent
spot gas prices which served to increase the gas cost component of the total
sales rate. The remainder of the increase in Pipeline sales revenues is
attributable to a 27.1 million MMBtu (35.4%) increase in sales volumes, rate
increases obtained by the regulated business units during the year and the
effect of restructured services in the last quarter of 1993.
Transportation revenues increased by $36.7 million in 1993 primarily
due to a 13.7% increase in the average interstate pipeline transportation rate
and, to a lesser degree, a 3.7% increase in transportation volumes. The
increase in the transportation rate reflects rate increases obtained in 1993
and the effect of higher demand charges due to restructured services under FERC
Order 636. Additionally, 1992 transportation revenues included an $8.1 million
charge to amortize amounts deferred for recovery pursuant to FERC Order 528,
which amortization did not recur in 1993 due to the discontinuance of the
application of SFAS 71 to AER Co.
Purchased gas cost from affiliates in 1993 decreased by $36.5 million
or 88.0% due to the sale of Arkla's E&P affiliate in December 1992. Third party
gas purchases increased by $146.6 million or 27.0% due to a 16.5% increase in
sales volumes and the previously mentioned impact of increased spot gas prices.
<PAGE> 10
Operation and maintenance expenses for 1993 decreased by 11.1% in
comparison to 1992, with approximately 42.2% of the decrease attributable to
lower transportation cost paid to third-party pipelines and 30.5% of the
decrease attributable to a non-recurring write-off of certain non-collectible
accounts during 1992. The remainder of the decrease is attributable to (1)
lower labor cost due to manpower reductions since 1992, (2) lower supplies and
expenses resulting from the continuing focus on cost reduction and (3) reduced
amortization of certain costs which were deferred to coincide with rate
recovery.
Depreciation and amortization decreased by 2.3% in 1993 primarily due
to the write-down of certain gathering assets in conjunction with the
discontinued application of SFAS 71 to AER Co. at year-end 1992.
Other operating expenses increased by 2.5% in 1993 as a result of
increased regulatory and legal expenses and cost allocations from Corporate.
The increased legal and regulatory expenses are largely attributable to several
significant events during the year including (1) the spindown of AER to create
AER Co., (2) a filing with the FERC for spindown of the gathering function to a
separate corporation, (3) implementation of restructured services under FERC
Order 636 and (4) various other regulatory and legal matters.
1992 vs. 1991
Operating income decreased $12.3 million, or 43.9%, from 1991 to 1992,
reflecting (1) continued competitive market pressures in interstate markets,
(2) increased costs of gas supply in AEM not completely offset by its sales
rates, (3) decreased capitalization of expenses, (4) certain accounting
adjustments as discussed below and (5) costs related to various employee
severance programs.
Revenue from sales to Distribution decreased by $36.0 million (13.1%)
from 1991 to 1992, due primarily to the expiration in late 1991 of a contract
with a third-party pipeline which provided a portion of Distribution's gas
supply. "Sales for resale and other" were 16.5% below 1991, with approximately
42.2% of the decrease due to continued shifts from sales to transportation at
MRT, which became an open access transporter in 1990. The effect of this
decrease is partially offset by reduced purchased gas cost in 1992 due to
decreased MRT system supply purchases. The remainder of the decrease in "Sales
for resale and other" is primarily attributable to decreased sales by AEM, the
effect of which on operating income is mitigated by decreased purchased gas
cost.
Purchased gas cost decreased in 1992 in comparison to 1991 due to the
reduction in sales discussed above and the cancellation, effective January 1,
1992, of AEM's gas purchase contract with E&P. However, the unit cost of gas
for Pipeline increased 24.8% over 1991. This increase was largely due to
increased cost of gas purchased on the spot market by AEM (Mid-Continent index
prices averaged $1.65/ MMBtu in 1992 vs. $1.36/MMBtu in 1991).
Transportation revenue for 1992 decreased 4.4% in comparison to 1991,
in spite of a 19.5% increase in transportation volume. Part of this decrease is
due to a 5.2% decrease in the average interstate pipeline transportation
margin, reflecting the increased competition in Pipeline's service areas. Also,
transportation revenues in 1992 include an $8.1 million charge to amortize
amounts deferred for recovery pursuant to FERC Order 528, which amortization
did not recur due to the discontinued application of SFAS 71 to AER Co. at
December 31, 1992.
Operations and maintenance expense for 1992 decreased by 10.5% in
comparison to 1991. Approximately half of the decrease relates to decreased
transportation expense paid to third-parties, most of which relates to the
expiration in late 1991 of the contract referred to above with a third-party
pipeline. The remaining decrease relates to (1) various cost-control
initiatives undertaken by Pipeline to increase efficiency including, in part,
the employee severance programs mentioned following and (2) MRT's deferral of
certain amounts such that amortization will coincide with recovery in rates.
Other operating expenses increased 13.5% from 1991 to 1992, with 57.6%
of the increase attributable to the cost of employee severance programs
instituted to reduce the work force and increase productivity. Increased costs
allocated from Corporate account for 10.6% of the increase.
Corporate and Other
The $2.8 million decrease in the operating loss from 1992 to 1993 is
principally due to the inclusion, in 1992 results, of accruals for certain
severance and related benefits.
The increased operating loss in 1992 as compared to 1991 is principally
due to additional 1992 expense for employee severance and related benefits,
including accruals provided pursuant to the adoption of SFAS 112 as discussed
under "Accounting Changes" elsewhere herein.
Pursuant to a settlement with the Arkansas Public Service Commission in
June 1991, the Company was required to issue credits of $8.25 million to
certain of its customers over a 12-month period and pay certain related costs.
Expense of $15 million associated with this settlement is included in the
Company's Statement of Consolidated Income under the caption "Regulatory
settlement."
Consolidated
Consolidated net income for 1993 was approximately $36.1 million, an
improvement of approximately $264.6 million over 1992 while, as discussed
above, operating income increased by approximately $18.4
<PAGE> 11
million during the same period. The principal reasons for this $246.2 million
of increased income below the operating income line were as follows, each of
which is discussed elsewhere herein:
- - The inclusion in 1992 results of the $195 million after-tax loss due to the
discontinued application of SFAS 71 to AER Co.
- - The inclusion in 1992 results of the $4.9 million loss due to the cumulative
effect of adopting SFAS 112.
- - The inclusion in 1992 results of a $34.8 million loss attributable to
discontinued operations.
- - The increase of $36.5 million in 1993 other income, principally due to gains
from sales of property, see Note 1 of Notes to Consolidated Financial
Statements.
- - The decrease of $12.8 million in 1993 interest expense.
These favorable impacts were partially offset by:
- - The increase of $34.0 million in the 1993 provision for income taxes,
principally due to the increase in income from continuing operations before
income taxes.
- - The inclusion in 1993 results of a $3.8 million after-tax loss due to premiums
on the early retirement of debt.
The net loss of $228.5 million for 1992 represented an increased loss
of $173.7 million in comparison to 1991 while, as discussed above, operating
income decreased by $20.2 million during the same period. The principal reasons
for this $153.5 million of increased loss below the operating income line were
as follows, each of which is discussed elsewhere herein:
- - The 1992 extraordinary loss of $195 million, representing the effect of
discontinuing the application of SFAS 71 to AER Co.
- - The increase of $27.9 million in the loss from discontinued operations for
1992.
- - Increased 1992 interest expense due to increased borrowings and decreased
capitalized interest.
These negative impacts were partially offset by:
- - The 1991 loss of $64.4 million attributable to the cumulative effect of
accounting changes ($59.5 million more than in 1992) resulting from the
implementation of SFAS 109, "Accounting for Income Taxes."
- - Increased 1991 income tax expense reflecting the higher level of income from
continuing operations before income taxes.
Discontinued Operations
Exploration and Production
In early 1992, the Company reacquired the 6,000,000 publicly-held shares of
Arkla Exploration Company (E&P) representing minority ownership of
approximately 18% through an exchange offer and merger, resulting in (1) the
issuance of approximately 5.7 million shares of the Company's common stock and
(2) a return to 100% ownership of E&P by the Company. This minority interest
had been outstanding as a result of an initial public offering of E&P's common
stock in 1989.
On December 31, 1992, the Company completed the sale of E&P to Seagull
Energy Corporation for approximately $397 million in cash (including $7.3
million removed from E&P prior to closing), the substantial portion of which
was used to reduce the Company's short-term borrowings.
This sale terminated the Company's activities in the exploration and
production business and, accordingly, the Company's Consolidated Financial
Statements (and related financial data) were restated to reflect E&P's
operating results, cash flows and net assets as "discontinued operations," see
Note 8 of Notes to Consolidated Financial Statements.
In conjunction with the sale, the Company (1) agreed to indemnify
Seagull against certain exposures (for which the Company has established
reserves equal to anticipated claims under the indemnity), (2) was required to
provide letters of credit in conjunction with certain forward sales of gas (see
"Commitments and Contingencies" elsewhere herein) and (3) retained a volumetric
production payment representing the right to receive the cash proceeds from the
sale of approximately 1.2 million barrels of oil over three years.
Approximately 0.5 million barrels remained to be delivered at December 31,
1993, in which the Company has a book investment of approximately $13/barrel.
The Company has purchased a "floor" sales price of $17/barrel for this
production payment, based upon which the fair value of the oil to be delivered
was approximately $9.0 million at December 31, 1993.
Radio Communications
In conjunction with the purchase of DEI in November 1990, the Company acquired
a business unit that conducted operations in radio communications (Radio), see
"Acquisition of Diversified Energies, Inc." elsewhere herein and Notes 8 and 9
of Notes to Consolidated Financial Statements. Radio's operations were
conducted by E. F. Johnson Company (Johnson) and EnScan, Inc. (EnScan). Johnson
designs, manufactures and markets radio products and systems, electronic
components and specialty products. EnScan develops and markets energy
measurement products and systems.
In early 1992, EnScan merged with Itron, Inc. (Itron) of Spokane,
Washington, of which, after Itron's 1993 issuance of additional common stock in
an initial public offering, the Company now owns a common stock interest
representing ownership of approximately 18.5% (recorded at approximately $34
million) of the combined enterprise, which is managed by Itron. Based on recent
price quotations on the NASDAQ, the market value of the Company's interest is
approximately $35.2 million.
<PAGE> 12
As a result of the reduction in the Company's ownership below 20%, in
conjunction with the fact that the Company has no direct control over Itron's
operations, the Company changed its method of accounting for its investment in
Itron from the equity method to the cost method as of December 31, 1993. It is
currently the Company's intention to dispose of its investment in the combined
enterprise over the next several years, at times to be determined principally
by economic factors in the markets available for sale or exchange of such
interests.
In July 1992, the Company sold the stock of Johnson for total
consideration of approximately $40 million, receiving cash proceeds of
approximately $15 million at closing and retaining an investment currently
valued at approximately $5 million.
University Savings Association
University Savings Association (USA) was a wholly-owned subsidiary of Entex,
Inc. until its sale to a private group in May 1987, prior to the Company's
February 1988 merger with Entex in a pooling of interests transaction. In early
1992, the Resolution Trust Corporation instituted actions against several
former officers and directors of USA and has filed a suit against the Company,
for which the Company has recorded an estimate of legal fees it expects to
incur in defense of this matter, see Notes 3 and 8 of Notes to Consolidated
Financial Statements and "Commitments and Contingencies" elsewhere herein.
Arkla Products
In 1984, as a part of a larger transaction, the Company sold its gas grill
manufacturing business to Preway, Inc. (Preway). As a result of Preway's
subsequent default on certain industrial revenue bonds which were
collateralized by the gas grill manufacturing assets and for which the Company
had remained secondarily liable, the Company reacquired the gas grill business
and conducted operations in its Arkla Products subsidiary as it sought to
dispose of this business. In late 1992, the Company sold the principal assets
and recorded a loss on disposition, see Note 8 of Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
The following table illustrates the sources of the Company's capital during the
past five years.
Invested Capital
- -------------------------------------------------------------------------------
[CAPTION]
- -------------------------------------------------------------------------------
<TABLE>
(millions of dollars) December 31,
1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term debt, less current maturities $1,629.4 $1,783.1 $1,551.5 $1,450.2 $1,162.3
Total equity 708.0 712.9 948.0 1,115.4 546.1
- ---------------------------------------------------------------------------------------------------
Total capitalization 2,337.4 2,496.0 2,499.5 2,565.6 1,708.4
Short-term debt, including current maturities 192.4 120.0 772.6 712.4 602.3
- ---------------------------------------------------------------------------------------------------
Total invested capital $2,529.8 $2,616.0 $3,272.1 $3,278.0 $2,310.7
- ---------------------------------------------------------------------------------------------------
Long-term debt as a percent of total
capitalization 69.7% 71.4% 62.1% 56.5% 68.0%
Equity as a percent of total capitalization 30.3% 28.6% 37.9% 43.5% 32.0%
Total debt as a percent of total invested capital 72.0% 72.7% 71.0% 66.0% 76.4%
</TABLE>
Cash Flow Analysis
As indicated in the accompanying Statement of Consolidated Cash Flows, the
Company's cash expenditures for investing activities (exclusive of purchases
and sales of assets and amounts related to discontinued operations) were
approximately equal to its internally generated cash in 1993, while the cash
used for those investing activities exceeded internally generated cash by $58.8
million in 1992. In recent years, cash outflows had increased for capital
expenditures and settlements of gas supply contract disputes and, because these
expenditures generally were not of a nature which generates a significant
return on investment in the near term, a cash shortfall had resulted. In
addition, the Company had maintained its common dividend of $1.08/share during
a period in which earnings were significantly below that level. This cash
shortfall principally has been funded through incremental borrowings with a
resultant increase in debt as a percent of total invested capital and an
associated increase in interest expense.
As discussed under "Capital Expenditures - Continuing Operations," "Gas
Supply Contract Matters" and "Net Cash Flow from Financing Activities"
elsewhere herein, (1) capital spending decreased significantly after 1991 and
is expected to remain at less than historical peak levels, (2) the Company's
gas contract disputes have largely been settled and (3) the Company's total
annual expenditures for dividends have been significantly reduced. In addition,
the
<PAGE> 13
Company has generated significant amounts of cash through asset sales, see
"Strategic Action Plan," "Discontinued Operations" and "Natural Gas
Distribution" and "Natural Gas Pipeline" under "Material Changes in the Results
of Operations" elsewhere herein.
Net Cash Flow from Financing Activities
The Company historically has met its needs for short-term borrowings through
its revolving credit facility with a major money center bank as agent and
various other commercial banks and/or through the issuance of commercial paper,
although it no longer has access to the commercial paper market as described
following. The Company's previous revolving credit facility made a $670 million
commitment available to the Company until April 30, 1993. Borrowings under this
agreement bore interest at a negotiated rate or, at the option of the Company,
at one of several rates which were reflective of then-current domestic or
Eurodollar money market interest rates. A commitment fee of 1/2% per annum was
paid on the unused portion of this facility. The Company's commercial paper was
issued through established commercial paper dealers pursuant to Section
(3)(a)(3) of the Securities Act of 1933, was an unsecured obligation of the
Company and generally matured in 60 days or less.
In March 1993, the Company established a new revolving credit facility
(new facility) which replaced the revolving credit facility as described
preceding. Reflecting the Company's significantly reduced requirement for
short-term financing of this type, the new facility makes a total commitment of
$400 million available to the Company through June 30, 1995. While similar to
the Company's previous facility in most respects, the new facility is
collateralized by the stock of MRT and AER Co. Borrowings under the new
facility bear interest at various rates at the option of the Company. These
rates vary with current domestic or Eurodollar money market rates and are
subject to adjustment based on the rating of the Company's senior securities by
the major rating agencies (debt rating). In addition, the Company pays a
facility fee on the total commitment to each bank annually, currently 1/2% and
subject to decrease based on the Company's debt rating, and will pay an
incremental rate of 1.5% on outstanding borrowings in excess of $200 million.
The Company had $95 million and $30 million of borrowings under the new
facility at December 31, 1993 and March 7, 1994, respectively, and therefore
had $370 million of remaining capacity at March 7, 1994, which capacity is
expected to be adequate to cover the Company's current and projected needs for
short-term financing.
The new facility contains a provision which requires the Company to
maintain a minimum level of total stockholders' equity, initially set at $675
million at December 31, 1992, and increased annually thereafter by (1) 50% of
positive consolidated net income and (2) 75% of the proceeds from any
incremental equity offering. The new facility also places a limitation of
$2,055 million on total debt, decreasing to $2 billion by January 1995. Certain
of the Company's other financial arrangements contain similar provisions. Based
on these restrictions, the Company had incremental debt capacity and
incremental dividend capacity of $183.2 million and $15.0 million,
respectively, at December 31, 1993. At January 31, 1994, the Company's
incremental dividend capacity had increased to $41.5 million.
The new facility also contains a provision which limits the Company's
ability to reaquire, retire or otherwise prepay its long-term debt prior to its
maturity to a total of $100 million, of which approximately $88 million has
been reaquired to date. In order to utilize the proceeds from the Company's
recently announced equity offering (see "Proposed Equity Offering" elsewhere
herein) to retire long-term debt prior to its maturity, the Company will be
required to amend the new facility. The Company expects that this amendment
will be completed prior to the effective date of the registration statement
associated with the proposed offering.
During 1992, the ratings on the Company's senior debt and commercial
paper were lowered by various rating agencies, generally to one level below
investment grade. These rating changes have prevented the Company from issuing
commercial paper and have affected the markets for the Company's long-term debt
securities through increased interest rates, but the Company has not
experienced and does not expect any lasting material adverse effect on its
ability to raise capital in long-term markets.
The Company's long-term debt financing is obtained through the issuance
of debentures and notes. The issuance of additional mortgage bonds is precluded
by the Company's unsecured indenture dated as of December 1, 1986 with
Citibank, N.A. The Company expects that as its long-term debt matures, it will
be able to fund the debt retirement through additional borrowings and/or from
cash provided by operations.
Largely as a result of the application of the proceeds from the Company's
recent divestitures, the Company has significantly reduced its level of total
debt and, in particular, has reduced its short-term borrowings (its only
significant floating-rate debt) to very low levels. In order to manage its debt
portfolio such that a reasonable portion is subject to changes in market
interest rates and take advantage of available spreads between 2-3 year
fixed-rate and 6-12 month floating-rate debt instruments, the Company has
entered into a number of transactions generally described as "interest rate
swaps."
The terms of these arrangements vary but, in general, specify that the
Company will pay an amount of interest on the notional amount
<PAGE> 14
of the swap which varies with LIBOR while the other party (a commercial bank)
pays a fixed rate. At December 31, 1993, the Company had entered into $275
million notional amount of these swaps terminating at various dates through
February 1997, and had closed out similar arrangements entered into earlier
in 1993. At December 31, 1993, the Company had approximately $5.0 million of
deferred gains associated with these terminated swaps which are being
amortized through June, 1997. Based on their market value at December 31,
1993, the remaining swaps represented an unrecognized loss of approximately
$2.6 million.
The Company's performance under these swaps is collateralized by the
stock of MRT and AER Co., and the Company is permitted to increase the amount
outstanding under such arrangements to a total of $350 million, a limitation
imposed by the terms of its revolving credit facility.
Off-balance-sheet credit risk exists to the extent of the possibility
that the counterparties to these swaps might fail to perform. The Company has
limited these transactions to arrangements with commercial banks that are
participants in the Company's revolving credit facility. The Company routinely
reviews the financial strength of these banks (utilizing independent
monitoring services and otherwise) and believes that the probability of
default by any counterparty to these swaps is minimal.
In accordance with authoritative accounting guidelines, the economic
value which transfers between the parties to these swaps is treated as an
adjustment to the effective interest rate on the Company's underlying debt
securities. When positions are closed prior to the expiration of the stated
term, any gain or loss on termination is amortized over the remaining period in
the original term of the swap.
On September 30, 1992, the Company entered into an Equipment Funding
Agreement with a group of four financial institutions to provide funding of up
to $64.9 million for the majority of its fleet of vehicles (including major
work equipment) and certain of its aircraft. The Company received $53.2 million
for funding of its existing assets in these categories and these same
institutions provided funding for approximately $11 million of new vehicles and
major work equipment purchased through September 30, 1993. For accounting
purposes, these assets were sold and then leased under operating lease
guidelines provided in Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The initial non-cancellable term of the lease varies
from one to five years depending on the type of asset.
As a part of its ongoing program to reduce its overall cost of debt,
the Company reacquired approximately $88.3 million principal amount of its
long-term debt during 1993. This debt carried a weighted average interest rate
of approximately 9.8% and was reacquired for a total net premium of
approximately $5.5 million (approximately $3.8 million after-tax), reported in
the Company's Statement of Consolidated Income under the caption,
"Extraordinary items, less taxes." The Company will continue to evaluate its
debt portfolio and may elect (subject to availability of funds, limitations
contained in its revolving credit facility and constraints imposed by the terms
of the individual series of debt securities) to refund/refinance additional
debt as economic factors indicate, see "Proposed Equity Offering" elsewhere
herein.
In December 1993, the Company refunded $34 million in conjunction with
the revision of an agreement for the sale of certain pipeline facilities, see
"Sale of Pipeline Facilities" elsewhere herein. During 1992, the Company
returned $20 million which had been advanced by another party in conjunction
with a proposed transaction related to capacity in Line AC, which transaction
was not consummated.
During 1993, the Company paid common dividends of $0.07/share each
quarter, resulting in total cash expenditures of $34.2 million and preferred
dividends of $0.75/share each quarter, resulting in total cash expenditures of
$7.8 million. The Company paid common stock dividends of $0.27/share during the
first quarter of 1992 and $0.07/share during the remaining three quarters,
resulting in a cash expenditure of $58.7 million. Additionally, the Company
paid a 1992 dividend of $3.00/share (a total of $7.8 million) on its preferred
stock, the same as in prior years.
On February 9, 1994, the Company declared dividends of $0.07/share on
common stock and $0.75/share on preferred stock payable March 15 to holders of
record on February 22, 1994.
Net Cash Flow from Operating Activities
As indicated in the accompanying Statement of Consolidated Cash Flows, the net
cash flow from operating activities increased from $107.1 million in 1992 to
$172.6 million in 1993. This $65.5 million (61.2%) increase is principally
attributable to the following:
- - The 1993 cash inflows from settlement of gas contract disputes, which
settlements had resulted in a net outflow in 1992.
- - Increased 1993 cash collections of deferred gas costs due, in part, to
Pipeline's implementation of restructured services pursuant to FERC Order 636.
- - Decreased 1993 cash used for reduction of gas accounts payable.
- - Decreased 1993 cash used for miscellaneous working capital items.
These favorable impacts were partially offset by:
- - Decreased 1993 cash provided from sale of inventories principally due to the
relatively higher December 31, 1993 balance of gas in
<PAGE> 15
underground storage, including a significant amount of gas sold to MRT's
customers in early 1994, see Note 1 of Notes to Consolidated Financial
Statements.
- - Increased 1993 cash income tax payments.
As indicated in the accompanying Statement of Consolidated Cash Flows,
the net cash flow from operating activities decreased from $265.2 million in
1991 to $107.1 million in 1992, a decrease of $158.1 million or 59.6%. This
decrease was principally attributable to the following:
- - Decreased 1992 cash collections from accounts receivable, principally due to
the relatively lower December 31, 1991 accounts receivable balance.
- - Increased 1992 cash used for the payment of rate refunds.
- - Reduced 1992 cash income tax refunds.
- - Decreased 1992 cash collections of deferred gas costs.
These unfavorable impacts were partially offset by:
- - Decreased 1992 cash used for gas accounts payable, principally due to the
relatively lower December 31, 1991 gas accounts payable balance.
- - Increased 1992 cash provided by the sale of inventories, principally gas in
underground storage.
- - Decreased 1992 cash payments made in settlement of gas
contract disputes.
Sale of Accounts Receivable
In June 1990, the Company entered into an agreement to sell an undivided
percentage ownership interest in a designated pool of accounts receivable on a
revolving basis, with limited recourse and subject to a floating interest rate
provision. This agreement, after amendment in early 1994, allows for the sale
of accounts receivable up to a maximum of $235 million and expires not later
than February 1995. At December 31, 1993, the Company had $226.4 million of
receivables sold and uncollected under the program. These receivables were
collateralized by approximately $29.0 million of the Company's remaining
receivables, which collateral represents the maximum exposure to the Company
should all receivables prove ultimately uncollectible.
Net Cash Flow from Investing Activities
Capital Expenditures - Continuing Operations1
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(Planned)
(millions of dollars) 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Natural gas distribution $112.6 $112.9 $106.2 $119.4 $ 76.6 $ 67.3
Natural gas pipeline 85.2 30.3 21.5 129.2 258.9 123.2
Corporate and other 1.8 1.1 2.1 2.4 4.2 4.4
- ------------------------------------------------------------------------------------
Subtotal 199.6 144.3 129.8 251.0 339.7 194.9
LIG _ 1.9 5.1 4.0 4.8 1.7
- ------------------------------------------------------------------------------------
Total $199.6 $146.2 $134.9 $255.0 $344.5 $196.6
- ------------------------------------------------------------------------------------
</TABLE>
1 Includes the capital expenditures of Minnegasco subsequent to its acquisition
by Arkla, Inc. in December 1990, and the capital expenditures of LIG from its
acquisition in July 1989 to its sale in June 1993.
The Company's capital expenditures increased from $134.9 million in
1992 to $146.2 million in 1993, an increase of $11.3 million (8.4%) principally
due to increased spending in Pipeline and Distribution. The increased spending
in both business units was primarily due to an increased level of replacement
of existing facilities. The Company's capital expenditures for 1994 are
budgeted to be approximately $53.4 million higher than in 1993, principally due
to the planned expenditure of approximately $39 million to upgrade certain
facilities in order to increase deliverability to other interstate pipelines at
interconnects near Perryville, Louisiana, which upgrades are intended to
facilitate the creation of a natural gas marketing "hub." The Company expects
that it will be able to fund its 1994 capital spending through internally
generated cash and, if necessary, incremental borrowing.
The Company's capital expenditures decreased from $255.0 million in
1991 to $134.9 million in 1992, a decrease of $120.1 million, or 47.1%. This
decrease was reflective of the Company's overall program to reduce cash
expenditures and was principally due to decreased 1992 Pipeline expenditures
for the second phase of Line AC and a software development project, both of
which were substantially completed in 1991.
In 1993, 1992 and 1991 the Company generated significant amounts of
cash through sales of property, see Notes 8, 9 and 12 of Notes to Consolidated
Financial Statements and various headings elsewhere herein.
<PAGE> 16
Commitments and Contingencies
At December 31, 1993, the Company had capital commitments of less than $15
million which are expected to be funded through cash provided by operations
and/or incremental borrowings. The Company's other planned capital projects are
discretionary in nature, with no substantial capital commitment made in advance
of the actual expenditures.
The Company has commitments under certain of its leasing arrangements,
see Note 3 of Notes to Consolidated Financial Statements.
Pending Sale Transaction
The Company received $125 million from another party pending completion of a
transaction related to capacity on Line AC, of which approximately $34 million
was returned in December 1993 due to changes in the underlying agreement and,
under certain circumstances, the Company may be required to return additional
amounts, see "Sale of Pipeline Facilities" elsewhere herein.
Letters of Credit
At December 31, 1993 the Company was obligated under a letter of credit for
approximately $5.5 million which guarantees Seagull's performance under certain
forward gas sale transactions, see "Discontinued Operations" elsewhere herein.
At December 31, 1993, the Company also was obligated under letters of credit
totalling approximately $18.3 million which are incidental to its ordinary
business operations.
Indemnity Provisions
The Company has obligations under indemnification provisions of certain sale
agreements, see "Sale of Arkla Exploration Company" and "Sale of Louisiana
Intrastate Gas Corporation" elsewhere herein.
Sale of Receivables
Certain of the Company's receivables are collateral for receivables which have
been sold, see "Sale of Accounts Receivables" elsewhere herein.
Gas Purchase Claims
The Company is a party to certain claims involving, and has certain commitments
under, its gas supply arrangements, see "Gas Supply Contract Matters" elsewhere
herein.
Credit Risk and Off-Balance-Sheet Risk
The Company operates principally in the transmission and distribution phases of
the natural gas industry with sales to resellers such as pipeline companies and
local distribution companies as well as to end-users such as commercial
businesses, industrial concerns and residential consumers. While certain of
these customers are affected by periodic downturns in the economy in general or
in their specific segment of the natural gas industry, the Company believes
that its level of credit-related losses due to such economic fluctuations has
been adequately reserved for and will remain relatively stable in the
long-term.
The Company has entered into a number of interest rate swaps which
carry off-balance-sheet market and credit risk, see "Net Cash Flows from
Financing Activities" elsewhere herein.
In addition to its other gas supply arrangements (see "Gas Supply
Contract Matters" elsewhere herein), the Company routinely enters into
contracts which commit it to either buy or sell gas in the future at prices
which may differ from prevailing market prices at the time such transactions
are consummated, or deliver gas at a point other than the expected receipt
point for the volumes to be purchased. In order to mitigate the risk from
market fluctuations in the price of natural gas and related transportation
during the terms of these commitments, the Company enters into futures
transactions, swaps and purchases options. The swaps include both (1)
transactions in which one party agrees to pay a fixed price per MMBtu of gas
while the other party agrees to pay a price based on a published index and (2)
transactions in which the parties agree to pay based on different indices.
In conjunction with agreements existing at December 31, 1993 which
commit the Company to deliver approximately 80.0 Bcf of gas at fixed prices
ratably through April 1999, the Company has entered into swaps and purchased
options intended to mitigate the risk associated with changes in the market
price of gas during the term of these agreements. These swaps have effectively
fixed the acquisition cost for approximately 16.4 Bcf of gas to be delivered
through December 1995 and set a "base purchase price" for approximately 24.7
Bcf of gas to be delivered from January 1996 to April 1999. Based on December
31, 1993 prices, the notional amount of these swaps (as measured by the market
value of the underlying quantities of gas) was approximately $94.1 million and
the unrealized loss associated with these swaps was approximately $1.8 million.
The Company also has purchased options (with a notional amount of $56.6 million
based on the December 31, 1993 market value of the underlying quantities of
gas) covering the 24.7 Bcf of gas, which options serve to limit the
year-to-year escalation in the base purchase price effected through the swaps,
and has entered into fixed price purchase agreements covering the remainder of
approximately 38.9 Bcf of gas to be delivered in satisfaction of these
commitments.
With respect to agreements existing at December 31, 1993 under which
the Company is committed to deliver approximately 55.8 Bcf of gas through 1995
at market prices (generally based on published indices), the Company has
entered into swaps intended to mitigate the risk associated with changes in the
differential between the market sales price at the agreed upon delivery points
and the market
<PAGE> 17
purchase price at the anticipated receipt points. This differential
essentially represents the market value of the intervening
transportation (a notional amount of $1.2 million at December 31, 1993) and,
based on December 31, 1993 prices, the unrealized loss associated with these
swaps was approximately $0.7 million.
While, as yet, the Company has experienced no significant losses due to
the credit risk associated with these arrangements, the Company has
off-balance-sheet risk to the extent that the counterparties to these
transactions may fail to perform as required by the terms of each such
instrument. In order to minimize this risk, the Company enters into such
transactions solely with firms of acceptable financial strength, in most cases
limiting such transactions to counterparties whose debt securities are rated
"A" or better by recognized rating agencies. For long-term arrangements, the
Company periodically reviews the financial condition of such firms in addition
to monitoring the effectiveness of these financial instruments in achieving the
Company's objectives. Should the counterparties to these arrangements fail to
perform, the Company would seek to compel performance at law or otherwise, or
to obtain compensatory damages in lieu thereof, but the Company might be forced
to acquire alternative hedging arrangements or be required to honor the
underlying commitment at then-current market prices. In such event, the Company
might incur additional loss to the extent of amounts, if any, already paid to
the counterparties.
In view of its criteria for selecting counterparties, its process of
monitoring the financial strength of these counterparties and its experience to
date in successfully completing these transactions, the Company believes that
the risk of incurring a significant loss due to the nonperformance of
counterparties to these transactions is minimal.
Litigation
On October 15, 1992, the Resolution Trust Corporation (RTC) filed suit in
United States District Court for the Southern District of Texas, Houston
Division, against the Company for alleged harm resulting from the 1989 failure
of University Savings Association (USA), a thrift institution in Houston,
Texas. The RTC claims that Arkla, Inc. is liable as a successor-in-interest to
Entex, Inc. which merged with Arkla, Inc. in 1988, after Entex's sale of USA in
1987. The suit alleges that certain former officers and directors of USA are
responsible for a breach of contract, breaches of fiduciary duties, negligence
and gross negligence in conducting USA's business affairs. The RTC also alleges
that Entex, which owned USA until 1987, was responsible for some of that
alleged wrongdoing, as well as for having allegedly misrepresented facts to
state and federal regulators in connection with the sale of USA to certain USA
officers and directors in 1987. Compensatory damages of at least $535 million
were originally alleged in the case. Arkla, Entex and the defendant directors
filed answers denying the material allegations of the suit and interposing
certain defenses. On June 3, 1993, the Court dismissed a number of claims
discussed above, though it allowed the RTC to file an amended complaint with
respect to some of the dismissed claims. On July 9, 1993, the Court entered an
order denying a motion filed by the RTC to reconsider the Court's order dated
June 3, 1993. On August 12, 1993, in response to the Court order allowing the
RTC to replead certain claims, the RTC filed its second amended complaint in
which compensatory damages of at least $520 million are alleged. Arkla, Entex
and the defendant directors have filed various motions in response to the
second amended complaint. Based on a review of the amended complaint and on a
review of the materials in Entex's possession related to USA, the Company
believes it has meritorious defenses to the RTC claims and intends to
vigorously pursue such defenses in this suit. Discovery in the case is
continuing, but the Company is not yet able to determine the effect, if any, on
the results of operations or financial position of the Company, which will
result from resolution of this matter.
On August 6, 1993, the Company, its former subsidiary, Arkla
Exploration Company and Arkoma Production Company (Arkoma), a subsidiary of
E&P, were named as defendants in a lawsuit (the State Claim) filed in the
Circuit Court of Independence County, Arkansas. This complaint alleges that the
Company, E&P and Arkoma, acted to defraud ratepayers in a series of
transactions arising out of a 1982 agreement between the Company and Arkoma. On
behalf of a purported class composed of the Company's ratepayers, plaintiffs
have alleged that the Company, E&P and Arkoma are responsible for common law
fraud and violation of an Arkansas law regarding gas companies, and are seeking
a total of $100 million in actual damages and $300 million in punitive damages.
On November 1, 1993, the Company filed a motion to dismiss the claim. The Court
has not ruled on this motion. The underlying facts forming the basis of the
allegations in the State Claim also formed the basis for allegations in a
lawsuit (the Federal Claim) filed in September 1990 in the United States
District Court for the Eastern District of Arkansas, by the same plaintiffs. In
August 1992, the Court entered an order granting the Company's motion to
dismiss the Federal Claim, and the order was affirmed by the United States
Court of Appeals, Eighth Circuit in April 1993. This dismissal did not bar the
plaintiffs from filing the State Claim in a state court based on allegations of
violation of state law. Since the State Claim is based on essentially the same
underlying factual basis as the Federal Claim, the Company believes the State
Claim is without merit, intends to vigorously defend this lawsuit and does not
believe that the outcome will have a material adverse effect on the financial
position or results of operations of the Company.
<PAGE> 18
The Company is a party to litigation (other than that specifically
noted) which arises in the normal course of business. Management regularly
analyzes current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. Management believes
that the effect on the Company's results of operations and financial position,
if any, from the disposition of these matters will not be material.
Gas Supply Contract Matters
During the 1980s, the Company resolved a number of claims made by suppliers
under gas purchase contracts through various forms of settlement, including
buy-out/buy-downs and payments for gas in advance of its delivery and, in the
third quarter of 1989, recorded a pre-tax Special Charge of $269 million
related to these claims. The remaining prepayments for gas made in conjunction
with these settlements are carried at their estimated net realizable value
(which approximates fair value) and, to the extent that the Company is unable
to realize at least this amount through sale of the gas as delivered over the
life of these agreements, its earnings will be adversely affected, although
such impact is not expected to be material in any individual year. While the
Company has settled the vast majority of such claims, the Company is committed
to make additional payments under certain settlements, expects that other such
claims may be asserted and that amounts may be expended in settlement of such
claims. The Company currently expects that the amount of such settlements, if
any, in excess of existing reserves will not be material in any year.
In addition to the prepayments for gas discussed above, the Company is
a party to a number of agreements which require it to either purchase or sell
gas in the future at prices which may differ from prevailing market prices at
the time such transactions are consummated or require it to deliver gas at a
point other than the expected receipt point for the volumes to be purchased.
The Company operates an ongoing risk management program designed to remove or
limit the Company's market risk from its obligations under these gas
purchase/sale commitments, see "Commitments and Contingencies" elsewhere
herein. To the extent that the Company expects that these commitments will
result in losses over the contract term, the Company has established reserves
equal to such expected losses.
Effective as of December 31, 1993, the Company completed a
comprehensive settlement agreement with certain subsidiaries of Samson
Investment Company, see "Natural Gas Pipeline" under "Material Changes in the
Results of Operations" elsewhere herein.
Sale of Pipeline Facilities
On August 5, 1993, the Company announced the execution of a revised agreement
(the Revised Agreement) with ANR Pipeline Company (ANR) pursuant to which the
Company expects to complete the sale of an ownership interest in 250 MMcf/day
of capacity in existing natural gas transmission facilities, principally Line
AC. The Revised Agreement replaces a March 1989 agreement between the two
companies whereby the Company had agreed to sell capacity in Line AC and other
gathering and transmission facilities to ANR for $125 million, which amount was
received by the Company in cash. Pursuant to the Revised Agreement and subject
to receipt of all required regulatory approvals, the Company is expected to
transfer capacity interests to ANR at their book value of approximately $90
million, reduced from its original amount principally as a result of (1) the
exclusion of gathering properties and (2) depreciation taken by the Company on
the facilities subject to the Revised Agreement. The $34 million representing
the reduction in the total value of the transaction was previously received by
the Company, recorded as a liability and refunded in cash to ANR in December
1993. Approval of the Revised Agreement is currently pending before the FERC
and the Federal Trade Commission.
Should the transaction not be approved or be approved with conditions
unacceptable to the Company and ANR, and the various parties prove unsuccessful
in revising the arrangement to create an acceptable sale transaction, the
Revised Agreement requires that the Company and ANR operate under separate
agreements pursuant to which the Company would provide transportation services
to ANR over a 15-year period commencing in 1996. The level of transportation
under such agreements would decrease over their term with a corresponding
refund of the previously received $90 million. The Company's consideration for
such transportation services (which, in the Company's opinion and taken in the
aggregate, is a reasonable approximation of the market value of such services)
would be provided by the Company's interest-free use of the previously-advanced
money until to its return to ANR. In such circumstance, the cash refund to ANR
in any single year would not be significant to the Company's overall cash
requirements.
Environmental Matters
With the acquisition of DEI in November 1990, the Company acquired Minnegasco,
a natural gas distribution company headquartered in Minneapolis, Minnesota,
which owns or is otherwise associated with a number of sites where manufactured
gas plants (MGPs) were previously operated.
From the late 1800s to 1960, Minnegasco and its predecessors
manufactured gas at a site in Minnesota, located in Minneapolis near
<PAGE> 19
the Mississippi River (the Minneapolis Site), which site is on Minnesota's
Permanent List of Environmental Priorities. Minnegasco is working with the
Minnesota Pollution Control Agency to implement an appropriate response action.
At this time, however, the specific method and extent of required remediation
are not known.
There are six other former MPG sites in Minnesota in the service
territory in which Minnegasco operated at December 31, 1993. Of these six
sites, Minnegasco believes that three were neither owned nor operated by
Minnegasco, two were owned at one time by Minnegasco but were operated by
others and are currently owned by others, and one is presently owned by
Minnegasco but was operated by others. In addition, there are seven former MGP
sites in Nebraska and two in South Dakota in the service territory in which
Minnegasco operated at December 31, 1992, but as a part of the sale of the
Nebraska operations, the buyer has assumed liability for five Nebraska sites.
Minnegasco had previously disposed of the other two Nebraska sites. The South
Dakota sites were not operated by Minnegasco or its predecessors. Minnegasco
believes it is not liable for remediation of the Nebraska and South Dakota
sites.
At December 31, 1993, Minnegasco has deferred $1.3 million related to
the Minneapolis Site and has estimated a range of $23 million to $89 million
for the possible remediation of the Minnesota sites. The low end of the range
was determined using only those sites presently owned or known to have been
operated by Minnegasco, assuming Minnegasco's proposed remediation methods. The
upper estimate of the range was determined using all Minnesota sites, whether
or not owned or operated by Minnegasco, and using alternative, more costly
remediation methods. The cost estimates for the Minneapolis Site are based on
studies made of that site. The remediation cost for other sites is based on
industry average costs for remediation of sites of similar size. The actual
remediation costs will be dependent upon the number of sites remediated, the
participation by other potentially responsible parties, if any, and the
remediation methods used.
At December 31, 1993, the Company has an accrual of $26.8 million to
cover the probable costs of remediation. In connection with its 1992 rate case,
Minnegasco was allowed to recover through rates over five years, without
carrying costs, the deferred costs at December 31, 1992, and was allowed $3.1
million annually to cover on-going clean-up costs. The Company currently
expects that its cash expenditures for these costs on an annual basis will not
materially exceed its recovery through the ratemaking process. In accordance
with SFAS 71, a regulatory asset has been recorded equal to the amount accrued.
The Company is pursuing recovery of costs from its insurers and other
potentially responsible parties.
In addition to the Minnesota MGP sites described above, the Company's
distribution divisions are investigating the possibility that the Company or
predecessor companies may be or may have been associated with other MPG sites
in the service territories of the distribution divisions. At the present time,
the Company is aware of some plant sites in addition to the Minnesota sites and
is investigating certain other locations. While the Company's evaluation of
these other MGP sites is in its preliminary stages, it is likely that some
compliance costs will be identified and become subject to reasonable
quantification. To the extent that such potential costs are quantified, as with
the Minnesota remediation costs for MGP described herein, the Company expects
to provide an appropriate accrual and seek recovery for such remediation costs
through all appropriate means, including regulatory relief.
In addition, the Company, as well as other similarly situated firms in
the industry, is investigating the possibility that it may elect or be required
to perform remediation of various sites where meters containing mercury were
disposed of improperly, or where mercury from such meters may have leaked or
been disposed of improperly. While the Company's evaluation of this issue is in
its preliminary stages, it is likely that compliance costs will be identified
and become subject to reasonable quantification.
To the extent that potential environmental compliance costs are
quantified within a range, the Company establishes reserves equal to the most
likely level of costs within the range and adjusts such accruals as better
information becomes available. If justified by circumstances within the
Company's businesses still subject to SFAS71, corresponding regulatory assets
are set up in anticipation of recovery through the ratemaking process.
While the nature of environmental contingencies makes complete
evaluation impracticable, the Company currently is aware of no other
environmental matter which could reasonably be expected to have a material
impact on its results of operations or financial position.
Accounting Changes
Postretirement Benefits (SFAS 106)
The Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions," (SFAS
106) as of January 1, 1993. While the costs of postretirement benefits (such as
retiree health care benefits) historically have been expensed by the Company on
a pay-as-you-go basis, SFAS 106 requires accrual of such benefits during years
of service in which they are "earned," see Note 6 of Notes to Consolidated
Financial Statements.
<PAGE> 20
Income Taxes (SFAS 109)
Effective as of January 1, 1991, the Company adopted the "asset and liability"
method of accounting for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The cumulative
effect of this change is included in 1991 earnings under the caption
"Cumulative effect of changes in accounting principles," see Note 2 of Notes to
Consolidated Financial Statements.
Postemployment Benefits (SFAS 112)
In 1992, the Company adopted Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (SFAS 112), which
requires the accrual of postemployment benefits payable to former or inactive
employees after employment but before retirement. The cumulative effect of
adoption as of January 1, 1992 was an after-tax charge of approximately $4.9
million which was recorded in the first quarter of 1992 and is reported in the
Company's Statement of Consolidated Income under the caption "Cumulative effect
of changes in accounting principles."
Benefit Plan Assumptions
The accounting for certain of the Company's benefit plans (particularly pension
and retiree medical) is largely driven by assumptions concerning future costs
and market conditions. The Company periodically reviews these assumptions in
conjunction with its consulting actuaries and recently has changed several such
assumptions in response to changed expectations regarding these future elements
of cost and expects that other changes may be made. Specifically, the Company
has reduced its expected long-term return on pension fund assets to 10% as of
January 1, 1994 and is considering whether a further reduction is warranted.
While the Company has not yet decided whether to make a further reduction or
what the exact magnitude of such a reduction would be, the Company estimates
that the effect of a one percent decrease in this assumption would be to
increase the Company's periodic pension cost by approximately $3.7 million
annually, before taking into account any mitigating regulatory effect.
Ratio of Earnings To Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.47 1.10 1.19 1.97 _ 1
- ---------------------------------------------------------------------------------
</TABLE>
1 Earnings were inadequate to cover fixed charges in 1989 by approximately $104
million, principally due to non-recurring non-cash charges. See "Gas Supply
Contract Matters" elsewhere herein.
Debt Retirement Schedule
The debt retirement schedule at December 31, 1993 is as follows (millions of
dollars):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1994 1995 1996 1997 1998 Beyond 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$97.4 $164.6 $118.8 $427.0 $76.0 $843.0
</TABLE>
Common Stock Prices and Dividends
The common stock of the Company is listed for trading on the New York Stock
Exchange under the symbol "ALG." At December 31, 1993, there were 39,285 common
stockholders of record. Following is selected data concerning the Company's
common stock price and cash dividends paid:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Common Cash Dividends
1993 Stock Price Per Share
- ---------------------------------------------------------------------------------
Quarter High Low Common Preferred
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st $ 9 $7 3/8 $0.07 $0.75
2nd $10 5/8 $8 3/4 $0.07 $0.75
3rd $10 1/8 $8 1/8 $0.07 $0.75
4th $ 8 7/8 $7 3/8 $0.07 $0.75
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Common Cash Dividends
1992 Stock Price Per Share
- ---------------------------------------------------------------------------------
Quarter High Low Common Preferred
- ---------------------------------------------------------------------------------
1st $12 3/8 $9 $0.27 $0.75
2nd $ 9 3/4 $6 7/8 $0.07 $0.75
3rd $11 1/2 $9 $0.07 $0.75
4th $10 3/4 $7 1/2 $0.07 $0.75
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Common Cash Dividends
Stock Price Per Share
- ----------------------------------------------------------------------------------
High Low Common Preferred
- ----------------------------------------------------------------------------------
1991 $20 1/4 $ 9 3/4 $1.08 $3.00
1990 $27 1/4 $18 5/8 $1.08 $3.00
1989 $27 3/4 $20 $1.08 $3.00
</TABLE>
Under the provisions of the Company's revolving credit facility, the Company's
total debt capacity is limited and it is required to maintain a minimum level of
stockholders' equity, which requirements effectively serve to limit the
Company's ability to pay dividends, see "Net Cash Flow from Financing
Activities" included in "Management Analysis" elsewhere herein.
<PAGE> 21
Statement of Consolidated Income ARKLA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(thousands of dollars, except per share amounts) Year Ended December 31,
1993 1992 1991
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Natural gas sales $2,759,718 $2,517,954 $2,495,572
Gas transportation 108,424 119,518 139,940
Chemical and petroleum products 41,220 79,717 73,513
Other 40,203 26,640 15,393
-----------------------------------------------------------------------------------
2,949,565 2,743,829 2,724,418
- -----------------------------------------------------------------------------------
Operating Expenses
Cost of natural gas purchased, net 1,900,852 1,758,419 1,730,428
Operation, maintenance, cost of sales
and other 551,894 545,272 525,552
Depreciation and amortization 150,955 150,741 145,732
Taxes other than income taxes 104,636 100,773 98,850
Contract termination charge (Note 11) 34,230 - -
Regulatory settlement (Note 7) _ - 15,000
- -----------------------------------------------------------------------------------
2,742,567 2,555,205 2,515,562
- -----------------------------------------------------------------------------------
Operating Income 206,998 188,624 208,856
- -----------------------------------------------------------------------------------
Other (Income) and Deductions
Interest expense, net 172,407 185,228 169,801
Other, net (51,825) (15,347) 4,122
- -----------------------------------------------------------------------------------
120,582 169,881 173,923
- -----------------------------------------------------------------------------------
Income From Continuing Operations
Before Income Taxes 86,416 18,743 34,933
Provision for Income Taxes 46,481 12,516 18,418
- -----------------------------------------------------------------------------------
Income From Continuing Operations 39,935 6,227 16,515
Loss from discontinued operations,
less taxes (Note 8) _ (34,797) (6,945)
- -----------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Items
and Cumulative Effect of Changes in
Accounting Principles 39,935 (28,570) 9,570
Extraordinary items, less taxes
(Notes 10 and 12) (3,848) (195,003) _
- -----------------------------------------------------------------------------------
Income (Loss) Before Cumulative
Effect of Changes in Accounting Principles 36,087 (223,573) 9,570
Cumulative effect of changes in accounting
principles (Notes 2 and 6) _ (4,920) (64,377)
- -----------------------------------------------------------------------------------
Net Income (Loss) 36,087 (228,493) (54,807)
Preferred dividend requirement 7,800 7,800 7,800
- -----------------------------------------------------------------------------------
Earnings (Loss) Available to Common Stock $ 28,287 $ (236,293) $ (62,607)
- -----------------------------------------------------------------------------------
Earnings (Loss) Per Common Share
Continuing operations1 $ 0.26 $ (0.01) $ 0.08
Discontinued operations, less taxes _ (0.29) (0.06)
Extraordinary items, less taxes (0.03) (1.60) _
Cumulative effect of changes in
accounting principles _ (0.04) (0.56)
- -----------------------------------------------------------------------------------
Earnings (Loss) Per Common Share $ 0.23 $ (1.94) $ (0.54)
- -----------------------------------------------------------------------------------
Weighted average common shares outstanding
(in thousands) 122,305 121,820 115,981
- -----------------------------------------------------------------------------------
</TABLE>
1 Earnings (loss) per common share from continuing operations is computed after
reduction for the preferred dividend requirement.
The Notes to Consolidated Financial Statements are an integral part of this
statement.
<PAGE> 22
ARKLA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(thousands of dollars) December 31,
1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Property, Plant and Equipment $3,720,295 $3,857,151
Less: Accumulated depreciation and amortization 1,363,159 1,333,262
- --------------------------------------------------------------------------------------
2,357,136 2,523,889
Investments and Other Assets 765,552 951,913
Current Assets
Cash and temporary cash investments 14,910 26,225
Accounts and notes receivable, principally
customer 314,487 292,943
Deferred income taxes 12,976 10,656
Inventories 153,815 97,668
Deferred gas costs (9,390) 10,033
Gas purchased in advance of delivery 35,998 28,214
Other current assets 25,548 62,650
- --------------------------------------------------------------------------------------
548,344 528,389
- --------------------------------------------------------------------------------------
Deferred Charges 56,756 54,826
- --------------------------------------------------------------------------------------
Total Assets $3,727,788 $4,059,017
- --------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Stockholders' Equity
Preferred stock $ 130,000 $ 130,000
Common stock ($.625 par) authorized
150,000,000; 122,361,578 and 122,258,367
shares issued and outstanding at
December 31, 1993 and 1992, respectively 76,476 76,411
Paid-in capital 867,641 866,635
Accumulated deficit (366,080) (360,121)
- --------------------------------------------------------------------------------------
Total stockholders' equity 708,037 712,925
- --------------------------------------------------------------------------------------
Long-term Debt, Less Current Maturities 1,629,364 1,783,074
Current Liabilities
Current maturities of long-term debt 97,400 120,000
Notes payable to banks 95,000 _
Gas accounts payable 267,279 277,158
Other accounts payable 190,042 267,137
Income taxes payable 12,912 23,060
Interest payable 44,677 50,365
General taxes 50,111 49,797
Customers' deposits 46,921 44,306
Other current liabilities 98,881 116,021
- --------------------------------------------------------------------------------------
903,223 947,844
- --------------------------------------------------------------------------------------
Other Liabilities and Deferred Credits
Accumulated deferred income taxes 225,243 204,547
Other deferred credits and non-current
liabilities 261,921 410,627
- --------------------------------------------------------------------------------------
487,164 615,174
- --------------------------------------------------------------------------------------
Commitments and Contingencies (Note 3)
- --------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $3,727,788 $4,059,017
- --------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
<PAGE> 23
ARKLA INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(thousands of dollars) Year Ended December 31,
1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital Stock
Preferred, $3.00 Convertible
exchangeable preferred
stock, Series A ($50.00
liquidation preference),
cumulative, non-voting;
authorized 10,000,000
shares1
- -----------------------------------------------------------------------------------------------------------
Issued and outstanding 2,600,000 $130,000 2,600,000 $130,000 2,600,000 $130,000
- -----------------------------------------------------------------------------------------------------------
Common, $.625 par, authorized
150,000,000 shares
Balance at beginning of year 122,258,367 76,411 116,488,089 72,805 115,136,859 71,961
Issuance of stock to
reacquire E&P minority
interest (Note 8) - - 5,699,967 3,562 _ _
Issuance of stock in
Hunter acquisition (Note 9) 125,000 78 - - 975,000 609
Other issuance (reduction) (21,789) (13) 70,311 44 376,230 235
- -----------------------------------------------------------------------------------------------------------
Balance at end of year 122,361,578 76,476 122,258,367 76,411 116,488,089 72,805
- -----------------------------------------------------------------------------------------------------------
Paid-In Capital
Balance at beginning of year 866,635 810,351 790,774
Issuance of stock to reacquire
E&P minority interest
(Note 8) _ 56,203 _
Issuance of stock in
Hunter acquisition (Note 9) 1,156 _ 17,038
Other issuance (reduction) (150) 81 2,539
- -----------------------------------------------------------------------------------------------------------
Balance at end of year 867,641 866,635 810,351
- -----------------------------------------------------------------------------------------------------------
Retained Earnings (Deficit)
Balance at beginning of year (360,121) (65,132) 122,697
Net income (loss) 36,087 (228,493) (54,807)
Cash dividends
Preferred stock - $3.00 per
share (7,800) (7,800) (7,800)
Common stock - $0.28 per
share in 1993, $0.48 per
share in 1992 and $1.08
per share in 1991 (34,246) (58,696) (125,222)
- -----------------------------------------------------------------------------------------------------------
Balance at end of year (366,080) (360,121) (65,132)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $708,037 $712,925 $948,024
- -----------------------------------------------------------------------------------------------------------
</TABLE>
1 The Series A preferred stock is convertible into common stock in the ratio of
approximately 1.7467 shares of common stock for each share of Series A
preferred stock, equivalent to a conversion price of $28 5/8 for each common
share, which conversion price is subject to adjustment should certain events
occur.
The Notes to Consolidated Financial Statements are an integral part of this
statement.
<PAGE> 24
ARKLA INC. AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
__________________________________________________________________________________________
(thousands of dollars) Year Ended December 31,
1993 1992 1991
__________________________________________________________________________________________
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 36,087 $(228,493) $ (54,807)
Adjustments to reconcile net income
(loss) to cash flow:
Depreciation and amortization 150,955 150,741 145,732
Deferred income taxes 29,692 85,920 384
Contract termination charge
(Note 11) 34,230 _ _
Gains from sales of property (41,619) _ _
Regulatory settlement (Note 7) _ _ 15,000
Discontinued operations _ 34,797 6,945
Extraordinary items, less taxes
(Notes 10 and 12) 3,848 195,003 _
Cumulative effect of changes
in accounting principles _ 4,920 64,377
Utilization of tax loss
carryforwards (11,787) (23,316) _
Other (22,013) (9,408) (13,102)
Changes in certain assets and
liabilities, net of non-cash
transactions and the effects of
acquisitions and dispositions
(Note 1) (6,830) (103,111) 100,694
__________________________________________________________________________________________
Net cash provided by
operating activities 172,563 107,053 265,223
__________________________________________________________________________________________
Cash Flows From Investing Activities
Capital expenditures (146,195) (134,890) (255,034)
Sale/exchange of distribution
properties, net 55,090 _ _
Sale of LIG, net of related
expenditures 169,950 _ _
Dyco working capital infusion,
net of related tax benefits _ _ (14,999)
Cash proceeds from sale of E&P _ 389,957 _
Proceeds from sale and leaseback
of assets _ 53,175 _
Cash proceeds from sale of E. F.
Johnson and Arkla Products _ 21,220 -
Net investing activities of
discontinued operations _ 64,322 (4,932)
Other, net (25,804) (31,012) 14,281
__________________________________________________________________________________________
Net cash provided by (used in)
investing activities 53,041 362,772 (260,684)
__________________________________________________________________________________________
Cash Flows From Financing Activities
Issuance of 9 7/8% notes due 1997 _ 225,000 _
Issuance of 8 7/8% notes due 1999 _ 200,000 _
Common and preferred stock dividends (42,046) (66,496) (133,022)
Retirements and reacquisitions
of long-term debt (212,188) (192,689) (76,223)
Other interim borrowings
(repayments) 95,000 (648,677) (45,148)
Issuance of medium-term notes,
due through 2000 _ _ 283,000
Return of advances received under
contingent sales agreements (34,000) (20,000) _
Increase (decrease) in overdrafts (43,685) 21,483 (38,041)
__________________________________________________________________________________________
Net cash used in financing
activities (236,919) (481,379) (9,434)
__________________________________________________________________________________________
Net decrease in cash (11,315) (11,554) (4,895)
__________________________________________________________________________________________
Cash and cash equivalents -
beginning of year 26,225 37,779 42,674
__________________________________________________________________________________________
Cash and cash equivalents -
end of year $ 14,910 $ 26,225 $ 37,779
__________________________________________________________________________________________
</TABLE>
For supplemental cash flow information, see Note 1.
<PAGE> 25
The Notes to Consolidated Financial Statements are an integral part of this
statement.
Notes to Consolidated Financial statements
Note 1
Accounting Policies and Components of
Certain Financial Statement Line Items
Proposed Name Change
The Company has announced its intention to change the name of the Company from
Arkla, Inc. to NorAm Energy Corp., subject to approval by the Company's
stockholders at the annual meeting to be held in May 1994. Certain of the
Company's subsidiaries also are expected to make corresponding name changes.
Principles of Consolidation
The consolidated financial statements include the accounts of Arkla, Inc. and
its subsidiaries, all of which are wholly owned, except for Itron, Inc., in
which the Company owns a common stock interest. All significant affiliated
transactions and balances for the Company's continuing businesses have been
eliminated. As used herein, "the Company" refers to Arkla, Inc. and its
subsidiaries.
In November 1990, the Company acquired Diversified Energies, Inc. (DEI)
in a transaction accounted for as a purchase, see Notes 8 and 9.
On February 2, 1988, Entex, Inc. (Entex), a gas distribution and
intrastate transmission company with operations in Texas, Louisiana and
Mississippi, merged with and into Arkla, Inc. in an exchange of stock accounted
for as a pooling of interests, see Note 9.
On December 31, 1992, the Company completed the sale of Arkla
Exploration Company (E&P) to Seagull Energy Corporation. This sale terminated
the Company's activities in the exploration and production business and,
accordingly, the accompanying Consolidated Financial Statements and these Notes
were restated to reflect E&P's operating results, cash flows and net assets as
"discontinued operations" for all periods presented, see Note 8.
On June 30, 1993, the Company completed the sale of its intrastate
pipeline business as conducted by Louisiana Intrastate Gas Corporation and
Subsidiaries (LIG) to a subsidiary of Equitable Resources, Inc., see Note 9.
The Company has engaged in several transactions with respect to its
distribution properties, see Note 9. In the accompanying consolidated
financial statements, certain prior year amounts have been reclassified to
conform to current presentation.
Rate Regulation
The Company's rate-regulated divisions/subsidiaries bill customers on a monthly
cycle billing basis. Revenues are recorded on an accrual basis, including an
estimate for gas delivered but unbilled at the end of each accounting period.
Methods of allocating costs to accounting periods in the portion of the
Company's business subject to federal, state or local rate regulation may
differ from methods generally applied by non-regulated companies. However, when
accounting allocations prescribed by regulatory authorities are used for
rate-making, the resultant accounting follows the concept of matching costs
with related revenues. All of the Company's rate regulated businesses
historically have followed the accounting guidance contained in Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). The Company discontinued application of SFAS 71
to its Arkla Energy Resources interstate pipeline effective with year-end 1992
reporting, see Note 10.
Changes in Accounting Policies
The Company changed its method of accounting for income taxes, postemployment
benefits and postretirement benefits effective as of January 1, 1991, 1992 and
1993, respectively, see Notes 2 and 6.
Statement of Consolidated Cash Flows
The accompanying Statement of Consolidated Cash Flows reflects the assumption
that all highly liquid investments (whose carrying value approximates their
fair value) purchased with original maturities of three months or less are cash
equivalents. Cash flows resulting from the Company's risk management (hedging)
activities are classified in the accompanying Statement of Consolidated Cash
Flows in the same category as the item being hedged.
In June 1991, the Company acquired The Hunter Company in a non-cash
transaction through the issuance of the Company's common stock and issued
additional shares in 1993, see Note 9. In early 1992, the Company reacquired
the publicly-held minority ownership of E&P through the issuance of the
Company's common stock, see Note 8. The Company's exchange of its South Dakota
distribution properties for certain other properties in Minnesota included both
cash and non-cash components, see Note 9. The Company's 1991 sale of Dyco and
the Company's 1992 sale of E. F. Johnson included both cash and non-cash
components, see Note 9. In February 1992, the Company exchanged its investment
in EnScan for an equity investment in Itron, Inc. in a non-cash transaction,
see Note 8. Effective as of December 31, 1993, the Company issued a $34 million
note to a subsidiary of Samson Investment Company in conjunction with a
comprehensive settlement agreement, see Note 11.
<PAGE> 26
The caption "Changes in certain asset and liabilities, net of non-cash
transactions and the effects of acquisitions and dispositions" as shown in the
accompanying Statement of Consolidated Cash Flows includes the following:
Increase (Decrease) in Cash and Cash Equivalents
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(thousands of dollars) Year Ended December 31,
1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts and notes receivable $(55,273) $ (42,685) $ 83,942
Inventories (49,300) 16,419 (6,098)
Deferred gas costs 31,549 (810) 22,412
Other current assets 41,730 (5,580) 1,466
Gas accounts payable 26,382 5,553 (30,697)
Other accounts payable (34,069) 9,139 17,256
Income taxes payable (768) (38,556) 17,176
Interest payable (5,688) 6,619 15,945
General taxes 4,625 3,122 3,006
Customers' deposits 2,615 (1,397) (6,444)
Other current liabilities 12,567 (39,235) 14,530
Settlement of gas contract disputes 18,800 (15,700) (31,800)
- -------------------------------------------------------------------------------
$ (6,830) $(103,111) $100,694
- -------------------------------------------------------------------------------
</TABLE>
Supplemental Cash Flow Information
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(thousands of dollars) Year Ended December 31,
1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash interest payments, net
of capitalized interest $174,964 $188,303 $166,946
- -------------------------------------------------------------------------------
Cash income tax
payments (refunds), net $ 22,494 $(16,962) $(30,049)
- -------------------------------------------------------------------------------
</TABLE>
Property, Plant and Equipment
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(millions of dollars) December 31, Depreciation
1993 1992 Range
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural gas pipeline $1,830.3 $2,020.9 2.1%-10.0%
Natural gas distribution 1,850.6 1,799.1 1.3%-20.0%
Other 39.4 37.2 5.0%-20.0%
- -------------------------------------------------------------------------------
$3,720.3 $3,857.2
- -------------------------------------------------------------------------------
</TABLE>
Property, plant and equipment, in general, is carried at cost and
amortized on a straight-line basis over its estimated useful life. Additions to
and betterments of utility property are charged to property accounts at cost,
while the costs of maintenance, repairs and minor replacements are charged to
expense as incurred. Upon normal retirement of units of utility property, plant
and equipment, the cost of such property, together with cost of removal less
salvage, is charged to accumulated depreciation. Costs of individually
significant internally developed and purchased computer software systems are
capitalized and amortized over their expected useful life.
Investments and Other Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(thousands of dollars) December 31,
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $509,498 $572,114
Gas purchased in advance of delivery 79,667 155,022
Notes receivable 8,659 65,394
Other 167,728 159,383
- -------------------------------------------------------------------------------
$765,552 $951,913
- -------------------------------------------------------------------------------
</TABLE>
Goodwill is amortized on a straight-line basis over 40 years;
approximately $14.8 million, $15.4 million and $13.9 million were amortized
during 1993, 1992 and 1991, respectively. Accumulated amortization of goodwill
was $60.8 million and $46.0 million at December 31, 1993 and 1992,
respectively. In 1993, the Company's goodwill balance was reduced by
approximately $47.8 million due to the sale of LIG, see Note 9. The decreases
in "Notes receivable" and "Gas purchased in advance of delivery" are
principally due to balances which are no longer outstanding as a result of a
settlement with certain subsidiaries of Samson Investment Company, see Note 11.
The Company periodically compares the carrying value of its goodwill to
the anticipated future operating income from the businesses whose acquisition
gave rise to the goodwill and, as yet, no impairment is indicated or expected.
Inventories
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(thousands of dollars) December 31,
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Gas in underground storage $116,665 $56,355
Materials and supplies 36,757 39,775
Manufactured products 36 889
Other 357 649
- -------------------------------------------------------------------------------
$153,815 $97,668
- -------------------------------------------------------------------------------
</TABLE>
Inventories other than manufactured products principally follow the
average cost method. Manufactured products follow the first-in, first-out
method and all inventories held for resale are valued at the lower of cost or
market.
Gas in underground storage at December 31, 1993 includes approximately
$51.2 million of gas attributable to the operations of Mississippi River
Transmission Corporation (MRT). The majority of this gas was sold to MRT's
customers during early 1994 and will be
<PAGE> 27
replaced with customer-owned gas in accordance with the provisions of
Federal Energy Regulatory Commission Order 636, with MRT retaining only the
quantity of gas necessary for system operational purposes.
Segment Information
The Company operates predominantly in a single segment -- the natural gas
segment, which accounts for in excess of 90% of the Company's total revenues,
income or loss and identifiable assets.
Allowance for Doubtful Accounts
"Accounts and notes receivable, principally customer" as presented on the
accompanying Consolidated Balance Sheet are net of an allowance for doubtful
accounts of $11.3 million and $12.0 million at December 31, 1993 and 1992,
respectively.
Interest Expense, Net
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(thousands of dollars) Year Ended December 31,
1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $173,278 $186,903 $177,334
Allowance for borrowed funds
used during construction (871) (1,675) (7,533)
- -------------------------------------------------------------------------------
$172,407 $185,228 $169,801
- -------------------------------------------------------------------------------
</TABLE>
Interest expense includes, where applicable, amortization of debt
issuance cost and amortization of gains and losses on interest rate hedging
transactions related to the Company's debt financing activities, see Note 12.
Allocation of Interest to Discontinued Operations
The reported results of operations for the Company's discontinued businesses
include an allocation of interest expense which has been calculated by
computing the ratio of the discontinued businesses' net assets to consolidated
net assets, and multiplying this ratio by consolidated interest expense, after
reduction for any interest expense associated with debt directly attributable
to each such discontinued business.
Other, Net - Statement of Consolidated Income
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(thousands of dollars) Year Ended December 31,
(income) expense 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $(11,613) $(10,905) $(14,093)
Sales of property:
Nebraska distribution
properties (23,900) _ _
LIG (17,719) _ _
Other (1,141) (203) 3,289
Loss on sale of
accounts receivable 8,132 10,063 12,736
Gain on termination
of partnership _ (4,139) _
Appliance repair service (1,109) (4,333) (2,948)
Income from equity
basis investment _ (3,454) _
Miscellaneous (4,475) (2,376) 5,138
- -------------------------------------------------------------------------------
$(51,825) $(15,347) $4,122
- -------------------------------------------------------------------------------
</TABLE>
Accounts Payable
Certain of the Company's cash balances reflect credit balances to the extent
that checks written have not yet been presented for payment. Such balances
included in accounts payable were approximately $55.7 million and $99.4 million
at December 31, 1993 and 1992, respectively.
Earnings Per Share
Earnings per common share is based on net income less preferred dividend
requirements, using the weighted average number of the Company's common shares
outstanding during each period. Fully diluted earnings per share is not
presented because the relevant options and convertible securities are either
immaterial, anti-dilutive or both.
Sale of Accounts Receivable
As described in Note 12, the Company has entered into an agreement under which
it sells an undivided interest in a designated pool of accounts receivable on a
revolving basis, with limited recourse and subject to a floating interest rate
provision. The Company has retained servicing responsibility under this
agreement, for which it is paid a fee. At December 31, 1993 and 1992, there
were $226.4 million and $212.6 million, respectively, of receivables sold under
the program and uncollected. These receivables were collateralized by
approximately $29.0 million and $42.6 million, respectively, of the Company's
remaining receivables, which collateral represents the maximum exposure to the
Company should all receivables sold prove ultimately uncollectible.
<PAGE> 28
Disclosure About Fair Value of Financial Instruments
The Company has included information concerning fair value of financial
instruments in those cases where estimation is practicable. In cases where
quoted market prices are not available, estimated fair value amounts have been
determined by the Company using quoted market prices of similar securities when
available, or other estimation techniques.
Accounting for Price Risk Management Activities
To minimize the risk from market fluctuations in the price of natural gas and
related transportation, the Company enters into futures transactions, swaps and
purchases options in order to hedge certain commitments to buy and sell natural
gas, some of which carry off-balance-sheet risk, see Note 3. Changes in the
market value of the various financial instruments utilized as hedges are
deferred and recognized in conjunction with the gain or loss on the hedged
transactions.
Note 2
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which requires a change from the "deferred" method of accounting for
income taxes to the "asset and liability" method. The Company adopted SFAS 109
as of January 1, 1991, and the cumulative effect of this change in accounting
for income taxes was $64.4 million, reported separately in the accompanying
Statement of Consolidated Income.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted into
law, one effect of which was to increase the federal corporate income tax rate
from 34% to 35%, retroactive to January 1, 1993. The Company has recorded its
1993 tax liability using this increased rate and has remeasured its deferred
tax assets and liabilities. Principally due to the regulated nature of the
majority of the Company's businesses, the impact of this change on income tax
expense was not significant.
"Provision for Income Taxes" in the accompanying Statement of
Consolidated Income includes the following:
<TABLE>
<CAPTION>
(thousands of dollars) Year Ended December 31,
- --------------------------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $15,773 $(64,658) $16,887
Deferred 26,332 73,229 (5,307)
Investment tax credit (2,023) (804) (819)
- --------------------------------------------------------------------------------------
State
Current 3,039 (7,942) 1,966
Deferred 3,360 12,691 5,691
- ----------------------------------------------------------------------------------------
$46,481 $ 12,516 $18,418
- -----------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities at December 31, 1993 and
1992, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(thousands of dollars) December 31,
1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Employee benefit accruals $ 22,087 $ 18,506
Inventory revaluation and
capitalization 6,691 13,739
Gas purchase contract accruals 77,158 109,153
Regulatory obligations 26,156 26,255
Indemnifications and other reserves 30,186 30,902
Deferred state income taxes 11,494 8,211
Miscellaneous 26,260 27,117
Operating and capital loss
carryforwards 28,855 49,646
Unrefunded operating loss carryback 566 9,077
Alternative minimum tax and general
business credit carryforwards 57,524 56,066
Valuation allowance (10,023) (9,997)
- ----------------------------------------------------------------------------
Total deferred tax assets 276,954 338,675
- ---------------------------------------------------------------------------
Deferred Tax Liabilities
Property, plant and equipment,
principally due to depreciation
methods and lives 441,647 482,337
Deferred gas costs 16,059 14,689
Employee benefit accruals 12,781 9,844
Miscellaneous 18,734 25,696
- --------------------------------------------------------------------------
Total deferred tax liabilities 489,221 532,566
- --------------------------------------------------------------------------
Net deferred tax liabilities $212,267 $193,891
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 29
The valuation allowance for deferred tax assets as of January 1, 1992
was $18.4 million. The net change in the total valuation allowance for the year
ended December 31, 1992 was a decrease of $8.4 million. This decrease was
attributable to valuation allowances for E&P, which business was sold in 1992.
At December 31, 1993, the Company had approximately $383.1 million of
state net operating loss carryforwards available to offset future state taxable
income through the year 2007 and approximately $2.6 million of federal net
operating loss carryforwards to offset future federal taxable income through
the year 2006. The Company also has $0.9 million of charitable contributions
that are available to be utilized pending the outcome of IRS audits for the
years 1989 through 1991. These contributions cannot be utilized beyond 1991. In
addition, the Company has approximately $5.1 million of general business credit
carryforwards that expire between 1998-2006, and approximately $52.4 million of
alternative minimum tax credits which are available to reduce future federal
income taxes payable, if any, over an indefinite period (although not below the
tentative minimum tax otherwise due in any year).
The Company and its subsidiaries file a consolidated U.S. Federal
income tax return. Such returns have been audited and settled through the year
1986. Investment tax credits are generally deferred and amortized over the
lives of the related assets.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(thousands of dollars) Year Ended December 31,
1993 1992 1991
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35% 34% 34%
- -----------------------------------------------------------------------------------------
Computed "expected" federal
income tax $30,246 $ 6,373 $11,877
Increase (decrease) in tax
resulting from:
State income taxes, net of
federal income tax benefit 4,159 3,134 5,054
Investment tax credit (2,023) (804) (819)
Stock basis difference in
sale of subsidiary 8,093 _ _
Adjustments to prior
year accruals 4,299 _ _
Other, principally goodwill
amortization 5,292 4,889 4,629
Effect of 1% increase in
statutory federal
income tax rate (2,267) _ _
Other, net (1,318) (1,076) (2,323)
- ----------------------------------------------------------------------------------------------
Provision for income taxes $46,481 $12,516 $18,418
- ----------------------------------------------------------------------------------------------
</TABLE>
Note 3
Commitments and Contingencies
Lease Commitments
Total rental expense for all leases was $36.5 million, $27.8 million and $23.7
million in 1993, 1992 and 1991, respectively. At December 31, 1993, the minimum
rental commitments under non-cancelable operating leases, principally
consisting of rental agreements for building space, data processing equipment
and vehicles (including major work equipment) were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(thousands of dollars)
- -----------------------------------------------------------------------------------------
<S> <C>
1994 $33,906
1995 14,778
1996 12,243
1997 10,378
1998 8,493
1999 and beyond 32,327
- ------------------------------------------------------------------------------------------
Subtotal 112,125
Less subleases (1,992)
- -------------------------------------------------------------------------------------------
Net $110,133
- --------------------------------------------------------------------------------------------
</TABLE>
Lease payments related to assets transferred under the Company's
sale/leaseback arrangements (see Note 12) are included for only their primary
(non-cancelable) term. Subsequent to the primary term, the Company could
terminate its obligations under these arrangements by electing to purchase the
relevant assets for an amount approximating fair market value.
Pending Sale Transaction
The Company received $125 million from another party pending completion of a
transaction related to capacity on Line AC, of which approximately $34 million
was returned in December 1993 due to changes in the underlying agreement and,
under certain circumstances, the Company may be required to return additional
amounts, see Note 13.
Letters of Credit
At December 31, 1993, the Company was obligated under a letter of credit for
approximately $5.5 million which guarantees Seagull's performance under certain
forward gas sales contracts, see Note 8. At December 31, 1993, the Company also
is obligated under letters of credit totalling approximately $18.3 million
which are incidental to its ordinary business operations.
Indemnity Provisions
The Company has obligations under indemnification provisions of certain sale
agreements, see Notes 8 and 9.
<PAGE> 30
Sale of Receivables
Certain of the Company's receivables are collateral for receivables which have
been sold, see Note 1.
Gas Purchase Claims
The Company is a party to certain claims involving, and has certain commitments
under, its gas purchase contracts, see Note 11.
Credit Risk and Off-Balance-Sheet Risk
The Company operates principally in the transmission and distribution phases of
the natural gas industry with sales to resellers such as pipeline companies and
local distribution companies as well as to end-users such as commercial
businesses, industrial concerns and residential consumers. While certain of
these customers are affected by periodic downturns in the economy in general or
in their specific segment of the natural gas industry, the Company believes
that its level of credit-related losses due to such economic fluctuations has
been adequately reserved for and will remain relatively stable in the
long-term.
The Company has entered into a number of interest rate swaps which
carry off-balance-sheet market and credit risk, see Note 12.
In addition to its other gas supply arrangements (see "Gas Supply
Contract Matters" elsewhere herein), the Company routinely enters into
contracts which commit it to either buy or sell gas in the future at prices
which may differ from prevailing market prices at the time such transactions
are consummated, or deliver gas at a point other than the expected receipt
point for the volumes to be purchased. In order to mitigate the risk from
market fluctuations in the price of natural gas and related transportation
during the terms of these commitments, the Company enters into futures
transactions, swaps and purchases options. The swaps include both (1)
transactions in which one party agrees to pay a fixed price per MMBtu of gas
while the other party agrees to pay a price based on a published index and (2)
transactions in which the parties agree to pay based on different indices.
In conjunction with agreements existing at December 31, 1993 which
commit the Company to deliver approximately 80.0 Bcf of gas at fixed prices
ratably through April 1999, the Company has entered into swaps and purchased
options intended to mitigate the risk associated with changes in the market
price of gas during the term of these agreements. These swaps have effectively
fixed the acquisition cost for approximately 16.4 Bcf of gas to be delivered
through December 1995 and set a "base purchase price" for approximately 24.7
Bcf of gas to be delivered from January 1996 to April 1999. Based on December
31, 1993 prices, the notional amount of these swaps (as measured by the market
value of the underlying quantities of gas) was approximately $94.1 million and
the unrealized loss associated with these swaps was approximately $1.8 million.
The Company also has purchased options (with a notional amount of $56.6 million
based on the December 31, 1993 market value of the underlying quantities of
gas) covering the 24.7 Bcf of gas, which options serve to limit the
year-to-year escalation in the base purchase price effected through the swaps,
and has entered into fixed price purchase agreements covering the remainder of
approximately 38.9 Bcf of gas to be delivered in satisfaction of these
commitments.
With respect to agreements existing at December 31, 1993 under which
the Company is committed to deliver approximately 55.8 Bcf of gas through 1995
at market prices (generally based on published indices), the Company has
entered into swaps intended to mitigate the risk associated with changes in the
differential between the market sales price at the agreed upon delivery points
and the market purchase price at the anticipated receipt points. This
differential essentially represents the market value of the intervening
transportation (a notional amount of approximately $1.2 million at December 31,
1993) and, based on December 31, 1993 prices, the unrealized loss associated
with these swaps was approximately $0.7 million.
While, as yet, the Company has experienced no significant losses due to
the credit risk associated with these arrangements, the Company has
off-balance-sheet risk to the extent that the counterparties to these
transactions may fail to perform as required by the terms of each such
instrument. In order to minimize this risk, the Company enters into such
transactions solely with firms of acceptable financial strength, in most cases
limiting such transactions to counterparties whose debt securities are rated
"A" or better by recognized rating agencies. For long-term arrangements, the
Company periodically reviews the financial condition of such firms in addition
to monitoring the effectiveness of these financial instruments in achieving the
Company's objectives. Should the counterparties to these arrangements fail to
perform, the Company would seek to compel performance at law or otherwise, or
to obtain compensatory damages in lieu thereof, but the Company might be forced
to acquire alternative hedging arrangements or be required to honor the
underlying commitment at then-current market prices. In such event, the Company
might incur additional loss to the extent of amounts, if any, already paid to
the counterparties.
In view of its criteria for selecting counterparties, its process of
monitoring the financial strength of these counterparties and its experience to
date in successfully completing these transactions, the Company believes that
the risk of incurring a significant loss due to the nonperformance of
counterparties to these transactions is minimal.
<PAGE> 31
Litigation
On October 15, 1992, the Resolution Trust Corporation (RTC) filed suit in
United States District Court for the Southern District of Texas, Houston
Division, against the Company for alleged harm resulting from the 1989 failure
of University Savings Association (USA), a thrift institution in Houston,
Texas. The RTC claims that Arkla, Inc. is liable as a successor-in-interest to
Entex, Inc. which merged with Arkla, Inc. in 1988, after Entex's sale of USA in
1987. The suit alleges that certain former officers and directors of USA are
responsible for a breach of contract, breaches of fiduciary duties, negligence
and gross negligence in conducting USA's business affairs. The RTC also alleges
that Entex, which owned USA until 1987, was responsible for some of that
alleged wrongdoing, as well as for having allegedly misrepresented facts to
state and federal regulators in connection with the sale of USA to certain USA
officers and directors in 1987. Compensatory damages of at least $535 million
were originally alleged in the case. Arkla, Entex and the defendant directors
filed answers denying the material allegations of the suit and interposing
certain defenses. On June 3, 1993, the Court dismissed a number of claims
discussed above, though it allowed the RTC to file an amended complaint with
respect to some of the dismissed claims. On July 9, 1993, the Court entered an
order denying a motion filed by the RTC to reconsider the Court's order dated
June 3, 1993. On August 12, 1993, in response to the Court order allowing the
RTC to replead certain claims, the RTC filed its second amended complaint in
which compensatory damages of at least $520 million are alleged. Arkla, Entex
and the defendant directors have filed various motions in response to the
second amended complaint. Based on a review of the amended complaint and on a
review of the materials in Entex's possession related to USA, the Company
believes it has meritorious defenses to the RTC claims and intends to
vigorously pursue such defenses in this suit. Discovery in the case is
continuing, but the Company is not yet able to determine the effect, if any, on
the results of operations or financial position of the Company, which will
result from resolution of this matter.
On August 6, 1993, the Company, its former subsidiary, Arkla
Exploration Company and Arkoma Production Company (Arkoma), a subsidiary of
E&P, were named as defendants in a lawsuit (the State Claim) filed in the
Circuit Court of Independence County, Arkansas. This complaint alleges that the
Company, E&P and Arkoma, acted to defraud ratepayers in a series of
transactions arising out of a 1982 agreement between the Company and Arkoma. On
behalf of a purported class composed of the Company's ratepayers, plaintiffs
have alleged that the Company, E&P and Arkoma are responsible for common law
fraud and violation of an Arkansas law regarding gas companies, and are seeking
a total of $100 million in actual damages and $300 million in punitive damages.
On November 1, 1993, the Company filed a motion to dismiss the claim. The Court
has not ruled on this motion. The underlying facts forming the basis of the
allegations in the State Claim also formed the basis for allegations in a
lawsuit (the Federal Claim) filed in September 1990 in the United States
District Court for the Eastern District of Arkansas, by the same plaintiffs. In
August 1992, the Court entered an order granting the Company's motion to
dismiss the Federal Claim, and the order was affirmed by the United States
Court of Appeals, Eighth Circuit in April 1993. This dismissal did not bar the
plaintiffs from filing the State Claim in a state court based on allegations of
violation of state law. Since the State Claim is based on essentially the same
underlying factual basis as the Federal Claim, the Company believes the State
Claim is without merit, intends to vigorously defend this lawsuit and does not
believe that the outcome will have a material adverse effect on the financial
position or results of operations of the Company.
The Company is a party to litigation (other than that specifically
noted) which arises in the normal course of business. Management regularly
analyzes current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. Management believes
that the effect on the Company's results of operations and financial position,
if any, from the disposition of these matters will not be material.
Environmental Matters
With the acquisition of DEI in November 1990, the Company acquired Minnegasco,
a natural gas distribution company headquartered in Minneapolis, Minnesota,
which owns or is otherwise associated with a number of sites where manufactured
gas plants (MGPs) were previously operated.
From the late 1800s to 1960, Minnegasco and its predecessors
manufactured gas at a site in Minnesota, located in Minneapolis near the
Mississippi River (the Minneapolis Site), which site is on Minnesota's
Permanent List of Environmental Priorities. Minnegasco is working with the
Minnesota Pollution Control Agency to implement an appropriate response action.
At this time, however, the specific method and extent of required remediation
are not known.
There are six other former MPG sites in Minnesota in the service
territory in which Minnegasco operated at December 31, 1993. Of these six
sites, Minnegasco believes that three were neither owned nor operated by
Minnegasco, two were owned at one time by Minnegasco but were operated by
others and are currently owned by others, and one is presently owned by
Minnegasco but was operated by others. In addition, there are seven former MGP
sites in Nebraska and two in South Dakota in the service territory in which
Minnegasco operated at December 31, 1992, but as a part of the sale of the
<PAGE> 32
Nebraska operations, the buyer has assumed liability for five Nebraska sites.
Minnegasco had previously disposed of the other two Nebraska sites. The South
Dakota sites were not operated by Minnegasco or its predecessors. Minnegasco
believes it is not liable for remediation of the Nebraska and South Dakota
sites.
At December 31, 1993, Minnegasco has deferred $1.3 million related to
the Minneapolis Site and has estimated a range of $23 million to $89 million
for the possible remediation of the Minnesota sites. The low end of the range
was determined using only those sites presently owned or known to have been
operated by Minnegasco, assuming Minnegasco's proposed remediation methods. The
upper estimate of the range was determined using all Minnesota sites, whether
or not owned or operated by Minnegasco, and using alternative, more costly
remediation methods. The cost estimates for the Minneapolis Site are based on
studies made of that site. The remediation cost for other sites is based on
industry average costs for remediation of sites of similar size. The actual
remediation costs will be dependent upon the number of sites remediated, the
participation by other potentially responsible parties, if any, and the
remediation methods used.
At December 31, 1993, the Company has an accrual of $26.8 million to
cover the probable costs of remediation. In connection with its 1992 rate case,
Minnegasco was allowed to recover through rates over five years, without
carrying costs, the deferred costs at December 31, 1992, and was allowed $3.1
million annually to cover on-going clean-up costs. In accordance with SFAS 71,
a regulatory asset has been recorded equal to the amount accrued. The Company
is pursuing recovery of costs from its insurers and other potentially
responsible parties.
In addition to the Minnesota MGP sites described above, the Company's
distribution divisions are investigating the possibility that the Company or
predecessor companies may be or may have been associated with other MPG sites
in the service territories of the distribution divisions. At the present time,
the Company is aware of some plant sites in addition to the Minnesota sites and
is investigating certain other locations. While the Company's evaluation of
these other MGP sites is in its preliminary stages, it is likely that some
compliance costs will be identified and become subject to reasonable
quantification. To the extent that such potential costs are quantified, as with
the Minnesota remediation costs for MGP described herein, the Company expects
to provide an appropriate accrual and seek recovery for such remediation costs
through all appropriate means, including regulatory relief.
In addition, the Company, as well as other similarly situated firms in
the industry, is investigating the possibility that it may elect or be required
to perform remediation of various sites where meters containing mercury were
disposed of improperly, or where mercury from such meters may have leaked or
been improperly disposed of. While the Company's evaluation of this issue is in
its preliminary stages, it is likely that compliance costs will be identified
and become subject to reasonable quantification.
To the extent that potential environmental compliance costs are
quantified within a range, the Company establishes reserves equal to the most
likely level of costs within the range and adjusts such accruals as better
information becomes available. If justified by circumstances within the
Company's businesses still subject to SFAS 71, corresponding regulatory assets
are set up in anticipation of recovery through the ratemaking process.
While the nature of environmental contingencies makes complete
evaluation impracticable, the Company currently is aware of no other
environmental matter which could reasonably be expected to have a material
impact on its results of operations or financial position.
Note 4
Stock Option Plans
In 1983, the Company adopted a Non-qualified Stock Option Plan (the Plan) with
stock appreciation rights applicable to those eligible employees as determined
by the Board of Directors. The Plan included options to purchase 650,000 shares
of the Company's common stock.
At December 31, 1993, 11,000 options at $21.25/share remained
outstanding under the Plan. No options were exercised in 1993, 1992 or 1991,
nor was any charge made to expense. However, 12,500 options at $20.25/share and
100,000 options at $21.25/share were forfeited by Plan participants during
1992. Options granted under the Plan terminate on August 12, 1997.
Prior to its acquisition by the Company, DEI had two plans under which
stock options were outstanding. As a result of the merger, these plans were
converted to plans covering the Company's common stock. At December 31, 1993,
under these plans, 110,614 options (which expire at various dates from 1994 to
1996) and 68,709 options (which expire during the year 2000) were outstanding
at weighted average exercise prices of $15.26/share and $16.56/share,
respectively. No options under these plans were exercised in 1992 or 1993;
however, during 1991, 102,544 options were exercised at a weighted average
price of $15.23/share. Options issued on July 8, 1986 expired on July 7, 1993
and, as a result, 26,693 options were forfeited.
A former executive of the Company holds 125,000 stock appreciation
rights with an exercise price of $11.00/share and 125,000 stock appreciation
rights with an exercise price of $13.00/share, all of which are currently
exercisable and expire on September 30, 1994.
<PAGE> 33
Note 5
Long-Term Incentive Plan
In May of 1986, Arkla's stockholders approved the adoption of a Long-term
Incentive Plan (the LTIP) for selected key employees of the Company. The LTIP
provides for granting restricted stock awards subject to the Company's
achievement of performance related target objectives established by the
Company's Board of Directors, as measured during three-year performance cycles.
The LTIP also provides for the granting of stock options and stock appreciation
rights (SARS). Not more than 1,500,000 shares of the Company's common stock may
be issued under the LTIP, of which not more than 1,000,000 common shares may be
granted pursuant to restricted stock awards.
During 1993, plan participants were granted an additional 215,885
restricted shares and forfeited 56,588 restricted shares. At December 31, 1993,
720,939 restricted shares, 71,250 stock options (at an average exercise price
of $19.03/share) and 375,592 SARS (at an average exercise price of
$12.92/share) had been issued, all of which were outstanding and exercisable.
An additional 208,750 restricted shares had been granted under the plan but
were not yet issued. Expense (credit) of approximately $1.5 million, $1.7
million and ($1.5) million related to the LTIP was recorded during 1993, 1992
and 1991, respectively.
The Company has proposed to replace the LTIP with a plan to be called
the Incentive Equity Plan (the IEP), which proposal will be put to a vote of
stockholders at the 1994 annual meeting. While similar to the LTIP in many
respects including general scope and function, the IEP is expected to provide
greater flexibility in adapting to future changes in law and in formulating an
incentive-based compensation package for key employees.
Note 6
Employee Benefit Plans
The Company and its subsidiaries have three qualified pension plans (the
Qualified Plans) which cover substantially all employees; "the Arkla Plan" -
the plan which covers the Company's employees other than Entex hourly employees
and Minnegasco employees, "the DEI Plan" - the plan which covers Minnegasco
employees and "the Entex Plan" - the plan which covers Entex hourly employees.
The Arkla Plan and the DEI Plan have been combined for actuarial and financial
reporting purposes. Total pension expense (which was a credit in each year) for
the Qualified Plans for 1993, 1992 and 1991 was $(3.8) million, $(7.0) million
and $(1.5) million, respectively.
In addition to the Qualified Plans, the Company maintains certain
non-qualified plans which principally consist of (1) a retirement restoration
plan which allows participants to retain the benefit to which they would have
been entitled under the qualified pension plan except for the federally
mandated limits on such benefits or on the level of salary on which such
benefits may be calculated and ( 2) certain supplemental benefit plans which,
in the past, were entered into with individual employees or with small groups
of employees. Participants in these non-qualified plans are general creditors
of the Company with respect to these benefits, as these plans are not funded by
the Company in advance of the cash payment of benefits. Prior to 1993, these
plans were accounted for in the Company's financial records but were not
included in the pension disclosures which follow due to their relative
immateriality. Expense of approximately $4.8 million associated with these
non-qualified plans was recorded during 1993.
The Qualified Plans provide benefits based on the participant's years
of service and highest average compensation. The funding policy for the
Qualified Plans is to contribute at least the minimum amount required to be
funded as determined by the Company's consulting actuaries. Plan assets are
made up of marketable equity and high-grade fixed income securities.
<PAGE> 34
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(thousands of dollars) 1993 1992
Assets Exceed Accumulated Assets Exceed
Accumulated Benefits Accumulated
Benefits Exceed Assets Benefits
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets available for benefits $366,469 $ _ $381,501
- --------------------------------------------------------------------------------------------
Actuarial present value of
accumulated plan benefits
Vested (assuming
immediate separation) 274,151 12,630 219,355
Non-vested 28,896 175 29,389
- --------------------------------------------------------------------------------------------
Accumulated benefit obligation 303,047 12,805 248,744
Additional amount related to
projected pay increases 64,867 1,296 72,145
- --------------------------------------------------------------------------------------------
Total projected benefit
obligation 367,914 14,101 320,889
- --------------------------------------------------------------------------------------------
Funded status (1,445) (14,101) 60,612
Unrecognized net obligation
at January 1 (16,628) _ (18,744)
Unrecognized net loss
from past experience different
from that assumed and
effects of changes
in actuarial assumptions 75,287 _ 10,752
- --------------------------------------------------------------------------------------------
Pension prepaid asset (liability) $ 57,214 $(14,101) $ 52,620
- --------------------------------------------------------------------------------------------
</TABLE>
The following weighted average rates were used in the above
calculations:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Discount rate 7.25% 9%
Assumed rate of increase in future
compensation 4% 6%
- ------------------------------------------------------------------------------------------
</TABLE>
The components of periodic pension cost (Qualified Plans only) for 1993
were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(thousands of dollars) 1993
- ------------------------------------------------------------------------------------------
<S> <C>
Service cost - benefits earned during the period $ 9,799
Interest cost on projected benefit obligation 26,376
Actual return on plan assets (24,517)
Amortization and deferral (15,431)
- ------------------------------------------------------------------------------------------
Net pension credit $(3,773)
- ------------------------------------------------------------------------------------------
</TABLE>
The expected long-term rate of return on plan assets was 11% for 1992
and 1993. The Company has reduced this rate to 10% for 1994.
The Company has a thrift plan covering substantially all employees
other than hourly employees of the Entex division and former DEI employees.
Under the terms of the plan, employees may contribute up to 12% of total
compensation, which contributions up to 6% are matched by the Company. Employer
contributions to this plan of $5.2 million, $5.9 million and $6.5 million were
expensed during 1993, 1992 and 1991, respectively. Under the provisions of its
employee stock purchase plans, Entex made contributions during 1993, 1992 and
1991 of $3.5 million, $2.9 million and $2.9 million, respectively. The Arkla
thrift plan and the Entex stock purchase plan for salaried employees merged
into a single plan effective in June 1993. The former DEI employees are covered
by various thrift and profit sharing plans, the terms of which vary from plan
to plan. Expense of approximately $1.5 million, $1.6 million and $1.4 million
related to these plans was recorded during 1993, 1992 and 1991, respectively.
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. The Company
currently does not contribute to an external fund to provide for these
benefits. A substantial number of the Company's employees may become eligible
for these benefits if they are participating in such plans when they reach
normal retirement age. In early 1992, the Company changed its retiree medical
plan to a defined contribution plan for all employees who retire after June 30,
1992.
The Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions"
(SFAS 106) as of January 1, 1993. While the costs of postretirement benefits
historically had been expensed by the Company as paid, SFAS 106 requires the
accrual and expensing of such benefits during the years of service in which
they are "earned."
The Company's estimated obligation for these benefits at December 31,
1993 was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(thousands of dollars) December 31,
1993
- ------------------------------------------------------------------------------------------
<S> <C>
Retirees $149,047
Fully eligible plan participants 4,939
Other active plan participants 4,731
- ------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation $158,717
- ------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the accumulated
benefit obligation was 7.25%. The cost of covered health care benefits (for
those participants entitled to a defined benefit as a result of having retired
prior to July 1, 1992) is assumed to increase by 11% per year initially and
then increase at a decreasing rate to an annual and continuing increase of 4.5%
after 12 years. Based on these assumptions, a one percentage point increase in
the assumed health care cost trend rate would increase the annual net periodic
postretirement benefit cost (before any deferral for regulatory reasons) and
the
<PAGE> 35
accumulated benefit obligation at December 31, 1993 by approximately $0.9
million and $18.4 million, respectively.
The periodic cost of these plans expensed during 1993, including
amortization of the transition obligation on a straight-line basis over a
20-year period, is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(thousands of dollars) 1993
- ---------------------------------------------------------------------------------
<S> <C>
Service cost $ 247
Interest cost on accumulated benefit obligation 11,670
Amortization of transition obligation 6,721
- ---------------------------------------------------------------------------------
Net periodic cost $18,638
- ---------------------------------------------------------------------------------
</TABLE>
For the years ended December 31, 1992 and 1991, the Company recognized
postretirement benefit costs as incurred. Accordingly, the amounts recognized
as expense in prior years are not comparable.
The Company's regulated businesses are subject to the jurisdiction of
various regulatory bodies including the Federal Energy Regulatory Commission,
various state public service commissions (and similar or related bodies at the
state level) and local municipalities. These regulatory bodies are in various
stages of establishing policy with respect to the rate treatment of these
postretirement benefit costs. The Company has made rate filings concerning
these costs which are in various stages of progression through the regulatory
process and, in other jurisdictions, the Company has not yet filed rate cases
to seek recovery of the SFAS 106 calculated costs (as opposed to the cash costs
currently included in rates). In light of this regulatory uncertainty and the
guidance provided by authoritative accounting pronouncements concerning the
appropriate accounting treatment for the excess of accrual SFAS 106 costs over
the amount includable in rates prior to final regulatory determination, during
1993 the Company deferred approximately $2.9 million of such costs in certain
jurisdictions pending final regulatory actions. This deferral will be subject
to continuing review and may require adjustment depending on the ultimate
regulatory disposition of these costs.
In 1992, the Company adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits," which
requires the accrual of postemployment benefits payable to former or inactive
employees after employment but before retirement. The cumulative effect of
adoption as of January 1, 1992 was an after-tax charge of approximately $4.9
million which is shown in the accompanying Statement of Consolidated Income
under the caption "Cumulative effect of changes in accounting principles."
The Company has proposed to: (1) institute a stock purchase plan which
is intended to provide an incentive for employees to purchase the Company's
common stock through payroll deduction and (2) institute a restricted stock
plan for non-employee directors which is intended to provide ownership of the
Company's common stock for these directors in order to improve the Company's
ability to attract and retain highly qualified individuals to serve in these
posts. These proposals will be voted upon at the 1994 Annual Stockholder's
Meeting to be held in May, 1994.
Note 7
Regulatory Settlement Expense
Pursuant to a settlement with the Arkansas Public Service Commission in June
1991, the Company was required to issue credits of $8.25 million to certain of
its customers over a 12-month period and pay certain related costs. Expense of
$15 million associated with this settlement is included in the accompanying
Statement of Consolidated Income under the caption "Regulatory settlement."
Note 8
Discontinued Operations
Exploration and Production
In early 1992, the Company reacquired the 6,000,000 publicly-held shares of
Arkla Exploration Company, representing minority ownership of approximately 18%
through an exchange offer and merger, resulting in (1) the issuance of
approximately 5.7 million shares of the Company's common stock and (2) a return
to 100% ownership of E&P by the Company. This minority interest had been
outstanding as a result of an initial public offering of E&P's common stock in
1989.
On December 31, 1992, the Company completed the sale of E&P to Seagull
Energy Corporation (Seagull) for approximately $397 million in cash (including
$7.3 million removed from E&P just prior to closing), the substantial portion
of which proceeds were used to reduce the Company's short-term borrowings. The
Company agreed to indemnify Seagull against certain exposures, for which the
Company has established reserves equal to anticipated claims under the
indemnity.
This sale terminated the Company's activities in the exploration and
production business and, accordingly, E&P's results of operations, cash flows
and net assets were reclassified to discontinued operations for all periods
presented.
In connection with the sale, the Company was required to provide
letters of credit in conjunction with certain forward sales of gas, of which a
single letter of credit for approximately $5.5 million remained outstanding at
December 31, 1993. The Company also retained a volumetric production payment
representing the right to receive the cash proceeds from the sale of 1.2
million barrels of oil over a period of three years. Approximately 0.5 million
barrels remained to be delivered at December 31, 1993, in which the Company has
a book investment of approximately $13/barrel. The Company has purchased a
"floor" sales price of $17/barrel for this
<PAGE> 36
production payment, based upon which the fair value of the oil to be delivered
was approximately $9.0 million at December 31, 1993.
Radio Communications
As a result of the purchase of DEI in November 1990, the Company acquired E. F.
Johnson Company (Johnson) and EnScan, Inc. (Enscan), two firms which operate in
the radio communications business, see Note 9.
In February 1992, the Company exchanged its investment in EnScan for a
common stock interest in Itron Inc. (Itron) of Spokane, Washington which, after
Itron's 1993 initial public offering of its common stock, represents an
ownership interest of approximately 18.5%. Itron manufactures equipment and
provides services similar and complementary to those of EnScan. As a result of
the reduction in the Company's ownership below 20%, in conjunction with the
fact that the Company has no direct control over the operations of the combined
enterprise, the Company changed its method of accounting for its investment in
Itron from the equity method to the cost method as of December 31, 1993 and
plans to dispose of its ownership interest (recorded at approximately $34
million) over the next several years, with the exact timing of such disposition
principally determined by economic factors in the markets available for sale or
exchange of such interests. Based on recent price quotations on the NASDAQ, the
market value of the Company's interest is approximately $35.2 million.
In July 1992, the Company sold the stock of Johnson (the corporation
which had operated the remaining portion of the Company's discontinued radio
communications business) for total consideration of approximately $40 million,
receiving approximately $15 million in cash at closing and retaining an
investment currently valued at approximately $5 million.
University Savings Association
University Savings Association (USA) was a wholly-owned subsidiary of Entex,
Inc. until its sale to a private group in May 1987, prior to its February 1988
merger with the Company in a pooling of interests. In early 1992, the
Resolution Trust Corporation instituted actions against several former officers
and directors of USA and has filed a suit against the Company for which the
Company has recorded an estimate of the legal fees it expects to incur in
defense of this matter, see Note 3.
Arkla Products
In 1984, as a part of a larger transaction, the Company sold its gas grill
manufacturing business to Preway, Inc. (Preway). As a result of Preway's
subsequent default on certain industrial revenue bonds which were
collateralized by the gas grill manufacturing assets and for which the Company
had remained secondarily liable, the Company reacquired the gas grill business
and conducted operations in its Arkla Products subsidiary as it sought to
dispose of this business. In late 1992, the Company sold the principal assets
and recorded a loss on disposition.
"Loss from discontinued operations, less taxes" as presented in the
accompanying Statement of Consolidated Income includes the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(thousands of dollars) Year Ended December 31,
1992 1991
- ---------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues1 $195,935 $292,545
- ---------------------------------------------------------------------------------
Discontinued Operations
Pre-tax income (loss)
E&P $ 6,759 $ 2,612
Radio communications _ (7,018)
Products (1,977) (2,718)
Income tax expense (benefit)
E&P 2,529 3,035
Radio communications _ (2,289)
Products (1,019) (925)
- ---------------------------------------------------------------------------------
3,272 (6,945)
- ---------------------------------------------------------------------------------
Loss on Disposal2
E&P (23,912) _
Products (4,067) _
USA (10,090) _
- ---------------------------------------------------------------------------------
(38,069) _
- ---------------------------------------------------------------------------------
$(34,797) $ (6,945)
- ---------------------------------------------------------------------------------
</TABLE>
1 Operating revenues do not reflect the elimination of
intercompany/interdivisional sales.
2 E&P, Products and USA losses on disposal are net of tax expense (benefit) of
$72.4 million, $(2.4) million and $(5.2) million, respectively.
<PAGE> 37
Note 9
Mergers, Acquisitions and Dispositions
Diversified Energies, Inc.
In November 1990, the Company acquired DEI in a transaction accounted for as a
purchase, which transaction was effective December 1, 1990 for accounting
purposes. Prior to its acquisition by the Company, DEI was a holding company
headquartered in Minneapolis, Minnesota, primarily engaged in natural gas
distribution, gas and oil exploration and production and radio communications.
In accordance with the merger agreement, all of the outstanding shares
of DEI's common stock were converted into Arkla, Inc. common shares in the
ratio of 1.752 Arkla common shares for each DEI common share, resulting in the
issuance of approximately 28.3 million additional shares of Arkla, Inc. common
stock with a market value of approximately $572.2 million. DEI and its natural
gas distribution subsidiary, Minnegasco, were merged into Arkla, Inc., while
its other subsidiaries, including Johnson, EnScan and Dyco, (which conducts gas
and oil exploration and production activities) became subsidiaries of Arkla,
Inc.
In June 1991, the Company completed the sale of the stock of Dyco (the
Sale) to Continental Drilling Company, Inc., a subsidiary of Samson Investment
Company, Inc., receiving various forms of consideration in the Sale, totalling
approximately $130 million.
The Company has sold Johnson and exchanged its ownership of EnScan for
an equity interest in a new entity which includes EnScan, see Note 8.
After adjustment for certain of the above matters and other items which
affected the fair market value of DEI as of the date of acquisition, the excess
of the market value of stock issued over the fair value of assets acquired and
liabilities assumed was approximately $426 million, which amount is included in
the "Goodwill" component of "Investments and Other Assets" as shown in the
accompanying Consolidated Balance Sheet, and is being amortized over a 40-year
period, subject to periodic review for impairment, see Note 1.
Louisiana Intrastate Gas Corporation
In July 1989, the Company acquired Louisiana Intrastate Gas Corporation and
Subsidiaries (LIG) and certain related properties in a purchase transaction for
$50 million in Arkla common stock (2,249,717 Arkla shares were issued). The
Company also assumed approximately $120 million of existing LIG debt which was
subsequently refinanced. On June 30, 1993, the Company completed the sale of
LIG to a subsidiary of Equitable Resources, Inc. (Equitable) for $191 million
in cash, resulting in a an after-tax gain of approximately $3.4 million (net of
tax expense of $14.3 million), and agreed to indemnify Equitable against
certain exposures, for which the Company has established reserves equal to
anticipated claims under the indemnity. Contemporaneously with the sale, the
Company funded LIG's portion of a litigation settlement in the amount of
approximately $21.1 million. This amount had been fully reserved by LIG and has
been netted against the gross sales proceeds in the accompanying Statement of
Consolidated Cash Flows under the caption "Sale of LIG, net of related
expenditures." These net cash proceeds were used principally to reduce the
Company's participation in its receivable sales program (see Notes 1 and 12)
and to reduce the Company's short-term borrowings.
Entex
On February 2, 1988, Entex, Inc., a gas distribution and transmission company
with operations in Texas, Louisiana and Mississippi, merged with and into
Arkla, Inc. in a transaction accounted for as a pooling of interests. The
merger agreement provided for the exchange of 1.15 shares of Arkla common stock
for each outstanding share of Entex common stock, resulting in the issuance of
approximately 26.4 million shares of the Company's common stock.
Arkla Exploration Company
In December 1992, the Company sold the stock of Arkla Exploration Company to
Seagull Energy Corporation, see Note 8.
The Hunter Company
In June 1991, the Company acquired The Hunter Company, a Shreveport-based
company whose principal assets consisted of approximately 16 Bcf of natural gas
reserves, cash and cash equivalents and certain real estate, through an
exchange of stock accounted for as a purchase. The Company ultimately issued a
total of 1.1 million shares of common stock to effect the acquisition. A
majority of the Company's investment in the former Hunter Company assets was
conveyed to Seagull Energy Corporation in conjunction with the sale of E&P.
Distribution Property Transactions
In February 1993, Minnegasco completed the sale of its Nebraska distribution
system to Peoples Natural Gas of Omaha, Nebraska (a division of UtiliCorp
United) for $75.3 million in cash plus an additional payment of $17.8 million
for net working capital transferred, resulting in a pre-tax gain of
approximately $23.9 million, which is included in the accompanying Statement of
Consolidated Income under the caption "Other, net." This system serves
approximately 124,000 customers in 63 eastern Nebraska communities.
On August 31, 1993, the Company completed its previously announced
exchange of natural gas distribution properties with Midwest Gas (Midwest), a
unit of Midwest Resources. Under the terms of the exchange, which was effective
September 1, 1993, the
<PAGE> 38
Company received the Minnesota distribution properties of Midwest
(serving 41 communities with approximately 82,000 customers) in exchange for
Minnegasco's South Dakota properties (serving 18 communities with
approximately 45,000 customers) plus $38 million in cash. The utility
properties exchanged were transferred at historical cost, no gain or loss was
recognized on the transaction and an acquisition adjustment of $14 million was
recorded, for which the Company is seeking recovery.
In addition, the Company has executed a definitive agreement pursuant
to which it expects to sell its Kansas distribution properties (together with
certain related pipeline assets) for approximately $25 million in cash, which
sale will terminate the Company's distribution and transmission operations in
Kansas.
Note 10
Discontinuation of Regulatory Accounting for
Arkla Energy Resources
Effective as of December 31, 1992, the Company concluded that, while its
natural gas distribution businesses and its Mississippi River Transmission
interstate pipeline subsidiary continue to meet the applicability criteria
contained in Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" (SFAS 71), the Company's Arkla
Energy Resources Company interstate pipeline subsidiary (AER Co.) could no
longer demonstrate a level of current and projected ability to consistently
collect its maximum cost-based rates that is consistent with the form of
regulation contemplated by SFAS 71. Accordingly, the Company ceased to apply
the provisions of SFAS 71 to AER Co.'s transactions and balances pursuant to
the guidance contained in Statement of Financial Accounting Standards No. 101,
"Regulated Enterprises - Accounting for the Discontinuance of Application of
FASB Statement No. 71."
The net impact of this change was an after-tax charge to 1992 earnings
of approximately $195 million (net of tax benefit of approximately $119.5
million), shown in the accompanying Statement of Consolidated Income as
"Extraordinary item, less taxes." This charge had no effect on AER Co.'s
ability to include the underlying deferred costs in its regulated rates or on
its ability to collect such rates from its customers.
Note 11
Gas Supply Contract Matters
During the 1980s, the Company resolved a number of claims made by suppliers
under gas purchase contracts through various forms of settlement, including
buy-out/buy-downs and payments for gas in advance of its delivery and, in the
third quarter of 1989, recorded a pre-tax Special Charge of $269 million
related to these claims. The remaining prepayments for gas made in conjunction
with these settlements are carried at their estimated net realizable value
(which approximates fair value) and, to the extent that the Company is unable
to realize at least this amount through sale of the gas as delivered over the
life of these agreements, its earnings will be adversely affected, although
such impact is not expected to be material in any individual year. While the
Company has settled the vast majority of such claims, the Company is committed
to make additional payments under certain settlements, expects that other such
claims may be asserted and that amounts may be expended in settlement of such
claims. The Company currently expects that the amount of such settlements, if
any, in excess of existing accruals will not be material in any year.
In addition to the prepayments for gas discussed above, the Company is
a party to a number of agreements which require it to either purchase or sell
gas in the future at prices which may differ from prevailing market prices at
the time such transactions are consummated or require it to deliver gas at a
point other than the expected receipt point for the volumes to be purchased.
The Company operates an ongoing risk management program designed to remove or
limit the Company's exposure from its obligations under these gas purchase/sale
commitments, see Notes 1 and 3. To the extent that the Company expects that
these commitments will result in losses over the contract term, the Company has
established reserves equal to such expected losses.
Effective as of December 31, 1993, the Company completed a
comprehensive settlement agreement (the Settlement) with certain subsidiaries
of Samson Investment Company (Samson), pursuant to which a number of
outstanding contractual arrangements (including long-term obligations, notes
receivable and gas purchased in advance of delivery) between the parties were
terminated or substantially modified, resulting in a $34.2 million pre-tax
charge to earnings, set forth in the accompanying Statement of Consolidated
Income as "Contract termination charge." Consideration for the Settlement
included an exchange of cash (the net effect of which was immaterial) and the
delivery by the Company to Samson of a note for $34 million, bearing interest
at 6% and payable in equal installments of principal and interest through May
31, 1995.
<PAGE> 39
Note 12
Financing
The debt of the Company is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(thousands of dollars) December 31,
- ---------------------------------------------------------------
1993 1992
- ---------------------------------------------------------------
<S> <C> <C>
Long-term, Including
Current Maturities
Medium-term notes,
Series A and B due
through 2001 $ 500,375 $ 625,500
9.45% Series due 1995 150,000 150,000
8% Series due 1997 150,000 150,000
9.875% Series due 1997 225,000 225,000
8.875% Series due 1999 200,000 200,000
8.90% Series due 2006 147,000 150,000
9.875% Series due 2018 134,385 200,000
10% Series due 2019 185,400 200,000
Note payable to gas supplier 34,000 -
Other 604 2,574
- ---------------------------------------------------------------
$1,726,764 $1,903,074
- ---------------------------------------------------------------
Short-term
Current maturities of
long-term debt $ 77,000 $ 120,000
Notes payable to banks 95,000 -
Note payable to gas supplier 20,400 -
- ---------------------------------------------------------------
$ 192,400 $ 120,000
- ---------------------------------------------------------------
</TABLE>
The aggregate amount of long-term debt maturities for each of the five years
following December 31, 1993 is: 1994 - $97.4 million; 1995 - $164.6 million;
1996 - $118.8 million; 1997 - $427.0 million; 1998 - $76.0 million.
The estimated fair value of the Company's long-term debt was
approximately $1,851.3 million at December 31, 1993. This fair value is based
on quoted market prices or, if not available, on quoted market prices for
similar securities.
Prior to the creation of the new facility as described following, under
the terms of a credit agreement with a major money center bank as agent and
various other commercial banks, a $670 million commitment had been available to
the Company on a revolving basis to April 30, 1993. The borrowings under this
facility bore interest at a rate mutually agreed upon by the Company and the
banks, and could be paid and reborrowed in whole or in part. A commitment fee
of 1/2% per year was paid on the unused portion of the facility.
In March 1993, the Company established a new revolving credit facility
(new facility) which replaced the Company's previous facility and is the
Company's principal source of short-term liquidity. Reflecting the Company's
significantly reduced requirements for short-term financing of this type, the
new facility makes a total commitment of $400 million available to the Company
through June 30, 1995. While similar to the Company's prior facility in most
respects, the new facility is collateralized by the stock of MRT and AER Co.
Borrowings under the new facility bear interest at various rates at the
option of the Company. These rates vary with current domestic or Eurodollar
money market rates and are subject to adjustment based on the rating of the
Company's senior securities by the major rating agencies (debt ratings). In
addition, the Company pays a facility fee on the total commitment to each bank
each year, currently 1/2% and subject to decrease based on the Company's debt
rating and will pay an incremental rate of 1.5% on outstanding borrowings in
excess of $200 million.
During 1993, borrowings under the new facility, in the aggregate,
averaged $28.4 million with a weighted average interest rate of 5.3% and the
maximum outstanding at any point in the year was $120 million. Borrowings under
the new facility were $95 million and $30 million at December 31, 1993 and
March 7, 1994, respectively.
In June 1990, the Company entered into an agreement to sell an
undivided percentage ownership interest in a designated pool of accounts
receivable on a revolving basis, with limited recourse and subject to a
floating interest rate provision. This agreement, after amendment in early
1994, allows for the sale of accounts receivable up to a maximum of $235
million and expires not later than February 1995. At December 31, 1993,
"Accounts and notes receivable, principally customer" as shown in the
accompanying Consolidated Balance Sheet is net of $226.4 million representing
receivables sold. The expense associated with the sale of these receivables is
included in "Other, net" in the accompanying Statement of Consolidated Income,
and there is off-balance-sheet risk associated with this program, see Note 1.
During 1992, the ratings on the Company's senior debt and commercial
paper were lowered by the various rating agencies, generally to a level below
investment grade. These rating changes have prevented the Company from issuing
commercial paper and affected the markets for the Company's long-term debt
securities through increased interest rates.
The Company has entered into a number of transactions generally
described as "interest rate swaps." The terms of these arrangements vary but,
in general, specify that the Company will pay an amount of interest on the
notional amount of the swap which varies with LIBOR while the other party (a
commercial bank) pays a fixed rate. At December 31, 1993, the Company had
entered into $275 million notional amount of these swaps terminating at various
dates through February 1997, and had closed out similar arrangements entered
into earlier in 1993. At December 31, 1993, the Company had approximately $5.0
million of deferred gains associated with these terminated swaps which are
being amortized through June, 1997. Based on their market value at December 31,
1993, the remaining swaps represented
<PAGE> 40
an unrecognized loss of approximately $2.6 million. The Company's performance
under these swaps is collateralized by the stock of MRT and AER Co., and the
Company is permitted to increase the amount outstanding under such arrangements
to a total of $350 million, a limitation imposed by the terms of its revolving
credit facility.
Off-balance-sheet credit risk exists to the extent of the possibility
that the counterparties to these swaps might fail to perform. The Company has
limited these transactions to arrangements with commercial banks that are
participants in the Company's revolving credit facility. The Company routinely
reviews the financial condition of these banks (utilizing independent
monitoring services and otherwise) and believes that the probability of
default by any counterparty to these swaps is minimal.
In accordance with authoritative accounting guidelines, the economic
value which transfers between the parties to these swaps is treated as an
adjustment to the effective interest rate on the Company's underlying debt
securities. When positions are closed prior to the expiration of the stated
term, any gain or loss on termination is amortized over the remaining period in
the original term of the swap.
On September 30, 1992, the Company entered into an Equipment Funding
Agreement with a group of four financial institutions to provide funding of up
to $64.9 million for the majority of its fleet of vehicles (including major
work equipment) and certain of its aircraft. The Company received $53.2 million
for funding of its existing assets in these categories and these same
institutions provided funding for approximately $11 million of new vehicles and
major work equipment purchased through September 30, 1993. For accounting
purposes, these assets were sold and then leased under operating lease
guidelines provided in Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The initial non-cancellable term of the lease varies
from one to five years depending on the type of asset.
During 1992, the Company returned $20 million which had been advanced in
conjunction with a proposed transaction related to capacity in Line AC, which
transaction was not consummated.
As a part of its ongoing program to reduce its overall cost of debt,
during 1993 the Company reacquired approximately $88.3 million principal amount
of its long-term debt. This debt carried a weighted average interest rate of
approximately 9.8% and was reacquired for a total net premium of approximately
$5.5 million (approximately $3.8 million after tax), reported in the
accompanying Statement of Consolidated Income under the caption, "Extraordinary
items, less taxes."
During 1989, the Company defeased approximately $104.7 million
principal amount of First Mortgage Bonds (the Bonds) through the placement of
cash with a trustee, funded through additional short-term borrowings of the
Company. At December 31, 1993, $10.3 million principal amount of the Bonds
remained outstanding.
On March 15, 1994, the Company announced its intention to offer for
sale to the public approximately $100 million of its common stock. The Company
currently plans to file a registration statement with the Securities and
Exchange Commission prior to March 31, 1994 and expects that the net proceeds
from the offering will be used to retire a portion of the Company's long-term
debt, see Note 14.
Note 13
Sale of Pipeline Facilities
On August 5, 1993, the Company announced the execution of a revised agreement
(the Revised Agreement) with ANR Pipeline Company (ANR) pursuant to which the
Company expects to complete the sale of an ownership interest in 250 MMcf/day
of capacity in existing natural gas transmission facilities, principally Line
AC. The Revised Agreement replaces a March 1989 agreement between the two
companies whereby the Company had agreed to sell capacity in Line AC and other
gathering and transmission facilities to ANR for $125 million, which amount was
received by the Company in cash. Pursuant to the Revised Agreement and subject
to receipt of all required regulatory approvals, the Company is expected to
transfer capacity interests to ANR at their book value of approximately $90
million, reduced from its original amount principally as a result of (1) the
exclusion of gathering properties and (2) depreciation taken by the Company on
the facilities subject to the Revised Agreement. The $34 million representing
the reduction in the total value of the transaction was previously received by
the Company, recorded as a liability and refunded in cash to ANR in December
1993. Approval of the Revised Agreement is currently pending before the FERC
and the Federal Trade Commission.
Should the transaction not be approved or be approved with conditions
unacceptable to the Company and ANR, and the various parties prove unsuccessful
in revising the arrangement to create an acceptable sale transaction, the
Revised Agreement requires that the Company and ANR operate under separate
agreements pursuant to which the Company would provide transportation services
to ANR over a 15-year period commencing in 1996. The level of transportation
under such agreements would decrease over their term with a corresponding
refund of the previously received $90 million. The Company's consideration for
such transportation services would be provided by the interest-free use of the
previously-advanced money until its return to ANR.
<PAGE> 41
Note 14
Restrictions on Stockholders' Equity and Debt
Under the provisions of the Company's revolving credit facility as described in
Note 12, and under similar provisions in certain of the Company's other
financial arrangements, the Company's total debt capacity is limited and it is
required to maintain a minimum level of stockholders' equity. The required
minimum level of stockholders' equity was initially set at $675 million at
December 31, 1992, increasing annually thereafter by (1) 50% of positive
consolidated net income and (2) 75% of the proceeds of any incremental equity
offering. The Company's total debt is limited to $2,055 million, decreasing to
$2 billion by January 1995. Based on these restrictions, the Company had
incremental debt issuance and dividend capacity of $183.2 million and $15.0
million, respectively, at December 31, 1993. At January 31, 1994, the
Company's incremental dividend capacity had increased to $41.5 million.
The Company's revolving credit facility also contains a provision which
limits the Company's ability to reacquire, retire or otherwise prepay its
long-term debt prior to its maturity to a total of $100 million, of which
approximately $88 million has been reacquired to date. In order to utilize the
proceeds from the Company's recently announced equity offering to retire
long-term debt prior to its maturity, the Company will be required to amend the
new facility. The Company expects that this amendment will be completed prior
to the effective date of the registration statement associated with the
proposed offering.
<PAGE> 42
Report of Independent Accountants
Board of Directors and Stockholders
Arkla, Inc.
We have audited the accompanying consolidated balance sheet of Arkla, Inc. and
Subsidiaries as of December 31, 1993 and 1992, and the related statements of
consolidated income, consolidated stockholders' equity and consolidated cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Arkla,
Inc. and Subsidiaries as of December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company is
a defendant in a lawsuit filed by the Resolution Trust Corporation for alleged
harm resulting from the 1989 failure of University Savings Association. The
ultimate outcome of the litigation cannot presently be determined. Accordingly,
no provision for any liability that may result has been made in the
accompanying consolidated financial statements.
As discussed in Note 6 to the consolidated financial statements, the
Company changed its methods of accounting for postemployment benefits and
postretirement benefits effective January 1, 1992 and 1993, respectively.
/s/ COOPERS & LYBRAND
Houston, Texas
March 24, 1994
Management's Responsibility for Financial Statements
Management is responsible for the preparation of the Company's financial
statements and associated data in conformity with generally accepted accounting
principles. Some of the amounts are estimates based on judgment of current
conditions and circumstances.
To provide reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition and that accounting records are
reliable for preparing financial statements, management maintains a system of
internal accounting and managerial controls, including review of these controls
by our independent accountants and internal audit department who have free
access to the Audit Committee of the Board of Directors composed of independent
directors.
Management continues to improve its controls in response to changes in
business conditions and to assure ethical business practices. The independent
accountants have been engaged to examine and express an opinion on the
Company's annual consolidated financial statements.
Management believes that the Company's system of internal accounting
and managerial controls, including policies and procedures, provides reasonable
assurance that in all material respects assets are safeguarded and financial
information is reliable. All information in the annual report is consistent
with the financial statements.
<PAGE> 43
Quarterly Information (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(thousands of dollars, except per share amounts) 1993 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $1,011,076 $613,376 $ 457,087 $868,026
- ---------------------------------------------------------------------------------------------------------------
Operating income $ 139,644 $ 19,416 $ 2,083 $ 45,855
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 76,705 $(7,991) $(24,561) $(4,218)
Extraordinary item, less taxes (3,411) _ (56) (381)
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 73,294 $(7,991) $(24,617) $(4,599)
- ---------------------------------------------------------------------------------------------------------------
Per Share Data (2)
Continuing operations $ 0.61 $ (0.08) $ (0.22) $ (0.05)
Extraordinary item, less taxes (0.03) _ 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.58 $ (0.08) $ (0.22) $ (0.05)
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 122,258 122,256 122,346 122,357
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(thousands of dollars, except per share amounts) 1992 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $826,904 $ 520,164 $ 468,623 $ 928,138
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) $117,119 $ 15,152 $ (10,241) $ 66,594
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 25,100 $ (10,404) $(16,950) $ 8,481
Income (loss) from discontinued operations,
less taxes 371 (344) 1,654 (36,478)
Extraordinary item, less taxes _ _ _ (195,003)
Cumulative effect of change in
accounting principle (4,920) _ _ _
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 20,551 $ (10,748) $ (15,296) $(223,000)
- ---------------------------------------------------------------------------------------------------------------
Per Share Data(2)
Continuing operations $ 0.19 $ (0.10) $ (0.15) $ 0.05
Discontinued operations, less taxes 0.00 0.00 0.01 (0.30)
Extraordinary item, less taxes _ _ _ (1.59)
Cumulative effect of change in
accounting principle (0.04) _ _ _
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.15 $ (0.10) $ (0.14) $ (1.84)
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 120,438 122,281 122,275 122,275
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
1 Results for the fourth quarter of 1993 include a pre-tax contract termination
charge of $34.2 million ($20.9 million after tax or $0.17/share), see Note 11.
2 Earnings from continuing operations per common share is based on income from
continuing operations less preferred dividend requirements and all per share
data are computed using the weighted average number of the Company's common
shares outstanding during each period.
<PAGE> 1
EXHIBIT 21
<PAGE> 2
The subsidiaries of Arkla are:
AER - Arkansas Gas Transit Company
Subsidiaries:
Blue Jay Gas Company
Raven Gas Company
Seahawk Gas Company
ALG Gas Supply Company
Subsidiaries:
ALG Gas Supply Company of Arkansas
ALG Gas Supply Company of Kansas
ALG Gas Supply Company of Louisiana
ALG Gas Supply Company of Texas
Allied Material Corporation
Ark Exploration Company
Arkansas Louisiana Finance Corporation
Arkla Chemical Corporation
Arkla Energy Marketing Company
Arkla Energy Resources Company
Arkla Finance Corporation
Arkla Gathering Services Company
Arkla Industries Inc.
Arkla Intratex Transmission Company
Arkla Products Company
Entex Coal Company
Entex Gas Marketing Company
Entex Oil Company
Entex Oil and Gas Company
Industrial Gas Supply Corporation
Intex, Inc.
Louisiana Unit Gas Transmission Company
Minneapolis Energy Center, Inc.
Minnesota Intrastate Pipeline Company
Mississippi River Transmission Corporation
Subsidiary:
MRT Energy Marketing Company
National Furnace Company
Unit Gas Transmission Company
United Gas, Inc.
<PAGE> 1
EXHIBIT 23.1
<PAGE> 2
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Arkla, Inc.
We consent to the incorporation by reference in the registration statement of
Arkla, Inc. (the "Company") on Form S-3 (File Nos. 33-41493 and 33-48750) and
Form S-8 (File Nos. 2-61923, 33-10806, 33-20594, 33-38063, and 33-38064) of our
reports, which include explanatory paragraphs concerning (1) the Company being
named as a defendant in a lawsuit filed by the Resolution Trust Corporation for
which the ultimate outcome of the litigation cannot presently be determined and
(2) the Company's changes in accounting methods for postemployment benefits and
postretirement benefits, dated March 24, 1994, on our audits of the
consolidated financial statements and financial statement schedules of Arkla,
Inc. and Subsidiaries as of December 31, 1993 and 1992, and for the years
ended December 31, 1993, 1992 and 1991, which reports are included in this
Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND
Houston, Texas
March 24, 1994
<PAGE> 1
EXHIBIT 24
<PAGE> 2
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 25th day of March, 1994.
/s/ T. MILTON HONEA
<PAGE> 3
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 4th day of March, 1994.
/s/ MICHAEL B. BRACY
<PAGE> 4
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 9th day of March, 1994.
/s/ JOE E. CHENOWETH
<PAGE> 5
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 1st day of March, 1994.
/s/ O. HOLCOMBE CROSSWELL
<PAGE> 6
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 1st day of March, 1994.
/s/ WALTER A. DeROECK
<PAGE> 7
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 1st day of March, 1994.
/s/ DONALD H. FLANDERS
<PAGE> 8
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 3rd day of March, 1994.
/s/ JAMES H. FOGLEMAN
<PAGE> 9
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 1st day of March, 1994.
/s/ JOHN P. GOVER
<PAGE> 10
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 25th day of March, 1994.
/s/ ROBERT C. HANNA
<PAGE> 11
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 1st day of March, 1994.
/s/ MYRA JONES
<PAGE> 12
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 8th day of March, 1994.
/s/ SIDNEY MONCRIEF
<PAGE> 13
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 2nd day of March, 1994.
/s/ LARRY C. WALLACE
<PAGE> 14
POWER OF ATTORNEY
WHEREAS, ARKLA, INC., a Delaware corporation, (the "Company")
intends to file with the Securities and Exchange Commission its Annual Report
on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for fiscal year ended December 31, 1993 together with any and all exhibits
and other documents having relation to said Annual Report on Form 10-K;
NOW, THEREFORE, the undersigned, in the capacity of Director of the
Company, does hereby appoint, T. MILTON HONEA and MICHAEL B. BRACY, or either
of them, his or her true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to execute in his or her name, place and stead
in the capacity of Director of the Company, said Annual Report on Form 10-K and
all documents necessary or incidental in connection therewith and to file the
same with the Securities and Exchange Commission. Said attorneys-in-fact shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities every act whatsoever necessary or
desirable to be done in the premises as fully and to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
the acts that said attorneys-in-fact may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 1st day of March, 1994.
/s/ D. W. WEIR, SR.
