Page 1 of 21
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1994
Commission File Number 1-3751
NorAm Energy Corp.
(Formerly Arkla, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 72-0120530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
NorAm Energy Corp.
1600 Smith Street
Houston, Texas 77002
(Address of principal executive offices)
(713) 654-5699
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
Outstanding Common Stock, $.625 Par Value
at May 11, 1994 - 122,378,250
Exhibit Index Appears on Page 20
<PAGE>
Page 2
INDEX
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1994 and 1993
and December 31, 1993 4
Consolidated Statement of Income - Three Months Ended
March 31, 1994 and 1993 5
Statement of Consolidated Cash Flows - Three Months
Ended March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21 <PAGE>
Page 3
Part I. Financial Information
The consolidated financial statements of the Company
included herein have been prepared, without audit, pursuant to
the rules and regulations of the Securities and Exchange
Commission. Certain information and notes normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Report
on Form 10-K for the year ended December 31, 1993.
As described elsewhere herein, on May 10, 1994, the
Company's stockholders approved an amendment to the Company's
Restated Certificate of Incorporation for the purpose of changing
the Company's name from Arkla, Inc. to NorAm Energy Corp.
Although this name change was not effective as of the date of the
accompanying financial statements, the Company's NYSE ticker
symbol has been changed and the Company's external communications
now use the new name and, therefore, the Company's new name has
been used to minimize confusion. Certain of the Company's
subsidiaries made corresponding name changes and these changes
also have been reflected herein. <PAGE>
Page 4
NorAm Energy Corp. and Subsidiaries
(Formerly Arkla, Inc. and Subsidiaries)
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
ASSETS March 31 December 31 March 31
1994 1993 1993
PROPERTY, PLANT AND EQUIPMENT $ 3,630,942 $ 3,593,861 $ 3,620,967
Less Accumulated depreciation and 1,362,854 1,327,725 1,282,853
amortization
2,268,088 2,266,136 2,338,114
INVESTMENTS AND OTHER ASSETS 828,890 856,552 1,077,441
CURRENT ASSETS
Cash and cash equivalents 14,382 14,910 18,875
Accounts and notes receivable 381,424 314,487 332,379
Deferred income taxes 23,252 12,976 10,383
Inventories 59,501 153,815 48,264
Gas purchased in advance of delivery 29,002 35,998 18,204
Other current assets 5,358 16,158 32,603
512,919 548,344 460,708
DEFERRED CHARGES 53,324 56,756 44,864
TOTAL ASSETS $ 3,663,221 $ 3,727,788 $ 3,921,127
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Preferred stock $ 130,000 $ 130,000 $ 130,000
Common stock 76,481 76,476 76,411
Paid-in capital 867,704 867,641 866,632
Accumulated deficit (321,109) (366,080) (297,335)
Total Stockholders' Equity 753,076 708,037 775,708
Long-term debt, less current 1,622,564 1,629,364 1,698,904
maturities
CURRENT LIABILITIES
Current maturities of long-term debt 97,400 97,400 121,971
Notes payable - 95,000 -
Gas accounts payable 167,974 267,279 219,432
Other accounts payable 242,669 190,042 213,368
Income taxes payable 32,167 12,912 35,819
Interest payable 40,143 44,677 40,396
General taxes 49,574 50,111 47,351
Customers' deposits 35,421 46,921 35,600
Other current liabilities 106,626 98,881 114,897
771,974 903,223 828,834
OTHER LIABILITIES AND DEFERRED CREDITS
Accumulated deferred income taxes 250,069 225,243 228,819
Other deferred credits and 265,538 261,921 388,862
noncurrent liabilities
515,607 487,164 617,681 <PAGE>
Page 5
TOTAL LIABILITIES AND STOCKHOLDERS' $ 3,663,221 $ 3,727,788 $ 3,921,127
EQUITY
The Notes to Financial Statements are an integral part of this statement. <PAGE>
Page 6
NorAm Energy Corp. and Subsidiaries
(Formerly Arkla, Inc. and Subsidiaries)
CONSOLIDATED STATEMENT OF INCOME
(in thousands of dollars except per share amounts)
(unaudited)
Three Months
Ended March 31
1994 1993
Operating Revenues $ 1,092,319 $ 1,011,076
Operating Expenses
Cost of natural gas purchased, net747,103 666,642
Operating, maintenance, cost of 130,329 137,845
sales & other
Depreciation and amortization 37,748 38,287
Taxes other than income taxes 31,068 28,658
946,248 871,432
Operating Income 146,071 139,644
Other (Income) and Deductions
Interest expense, net 42,413 45,540
Gain from sale of assets - (26,836)
Other, net 4,681 (4,013)
47,094 14,691
Income Before Income Taxes 98,977 124,953
Provision for Income Taxes (Note E) 43,490 48,248
Income before Extraordinary Item 55,487 76,705
Extraordinary loss, less taxes - (3,411)
Net Income 55,487 73,294
Preferred dividend requirement 1,950 1,950
Balance Available to Common Stock $ 53,537 $ 71,344
Per Share Data:
Before extraordinary item $ 0.44 $ 0.61
Extraordinary loss, less taxes - (0.03)
Earnings per Common Share $ 0.44 $ 0.58
Average Common Shares
Outstanding (in thousands) 122,370 122,258
Cash Dividends per Common Share $ 0.07 $ 0.07
<PAGE>
Page 7
The Notes to Financial Statements are an integral part of this statement. <PAGE>
Page 8
NorAm Energy Corp. and Subsidiaries
(Formerly, Arkla, Inc. and Subsidiaries)
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase(Decrease) in Cash and Cash Equivalents
(in thousands of dollars)
(unaudited)
Three Months
Ended March 31
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,487 $ 73,294
Adjustments to reconcile net income to
cash flow:
Depreciation and amortization 37,748 38,287
Deferred income taxes 14,580 21,892
Gain from sale of assets - (26,836)
Extraordinary loss, less taxes - 3,411
Other (352) (12,051)
Changes in certain assets and
liabilities, net of noncash
transactions and the effects of
acquisitions and
dispositions (Note F) 4,566 (86,288)
Net cash provided by operating 112,029 11,709
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (29,400) (25,400)
Sale of distribution properties - 93,413
Sale of assets 12,315 -
Other, net 6,299 (670)
Net cash provided by (used in) (10,786) 67,343
investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of (6,800) (85,611)
long-term debt
Increase in overdrafts 10,545 9,717
Other interim debt repayments (95,000) -
Common and preferred stock dividends (10,516) (10,508)
Net cash used in financing (101,771) (86,402)
activities
Net decrease in cash (528) (7,350)
Cash and cash equivalents - 14,910 26,225
beginning of period
Cash and cash equivalents - $ 14,382 $ 18,875
end of period <PAGE>
Page 9
The Notes to Financial Statements are an integral part of this statement. <PAGE>
Page 10
Item 1. Financial Statements (continued)
Notes to Consolidated Financial Statements
A. In the opinion of Management, all adjustments (consisting solely of
normal recurring accruals, except as explicitly described herein)
necessary for a fair presentation of results of operations for the
periods presented have been included in the accompanying Consolidated
Financial Statements. Because of the seasonal nature of the Company's
operations, among other factors, the results of operations for the
periods presented are not necessarily indicative of the results which
will be achieved for an entire year. In the accompanying Consolidated
Financial Statements, certain prior period amounts have been
reclassified to conform to current presentation. At the Company's
annual meeting of stockholders on May 10, 1994, the Company's
stockholders approved a proposal to change the Company's name from
Arkla, Inc. to NorAm Energy Corp., and certain of the Company's
subsidiaries made corresponding name changes. As used herein, "the
Company" refers to NorAm Energy Corp. and its consolidated
subsidiaries.
B. 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 and related services delivered
but unbilled at the end of each accounting period.
C. "Investments and other assets" as presented on the accompanying
Consolidated Balance Sheet includes the following:
March 31 December 31 March 31
1994 1993 1993
(millions of dollars)
Goodwill $ 506.0 $ 509.5 $ 568.2
Gas purchased in advance of 56.9 79.7 168.2
delivery
Notes receivable 8.6 8.7 60.1
Pipeline assets held for 91.0 91.0 125.0
sale (Note M)
Other 166.4 167.7 155.9
$ 828.9 $ 856.6 $ 1,077.4
The balance in goodwill decreased from March 31, 1993 to December 31,
1993 due to the approximately $47.8 million of goodwill associated
with Louisiana Intrastate Gas Corporation and Subsidiaries which was
sold June 30, 1993. The decrease in "Gas purchased in advance of
delivery" and "Notes receivable" from March 31, 1993 to December 31,
1993 is principally due to balances which are no longer outstanding as
a result of a comprehensive settlement with certain subsidiaries of
Samson Investment Company, as further discussed in the Company's 1993
Report on Form 10-K.
D. "Inventories" as presented on the accompanying Consolidated Balance
Sheet includes the following:
Page 11
March 31 December 31 March 31
1994 1993 1993
(millions of dollars)
Gas in underground $ 23.3 $ 116.7 $ 8.5
storage
Materials and 35.7 36.8 39.3
supplies
Other 0.5 0.3 0.5
$ 59.5 $ 153.8 $ 48.3
The increase in "Gas in underground storage" at December 31, 1993 in
comparison to March 31, 1994 and 1993 is largely a normal seasonal
fluctuation, although the March 31, 1994 and the December 31, 1993
balances include approximately $9.9 million and $51.2 million,
respectively, of gas attributable to the operations of Mississippi
River Transmission Corporation ("MRT"). This gas is being sold to
MRT's customers during the first part of 1994 and is being replaced
with customer-owned gas in accordance with the provisions of FERC
Order 636.
E. "Provision for income taxes" as presented in the accompanying
Consolidated Statement of Income includes the following:
Three Months
Ended March 31
1994 1992
(millions of
dollars)
Federal
Current $ 23.7 $ 21.9
Deferred 12.8 21.0
Investment (0.2) (0.2)
tax credit
State
Current 5.4 4.6
Deferred 1.8 0.9
$ 43.5 $ 48.2
F. The caption "Changes in certain assets and liabilities, net of noncash
transactions and the effects of acquisitions and dispositions" as
presented on the accompanying Statement of Consolidated Cash Flows
includes the following:
Three Months
Ended March 31
1994 1993
(millions of dollars)
Accounts and notes $ (66.9)$ (59.5)
receivable
Inventories 94.3 55.8
Other current assets 12.0 45.5
Gas accounts payable (99.3) (54.5)
Other accounts payable 42.1 (63.5)
Income taxes payable 19.2 12.8
Interest payable (4.5) (10.0)
General taxes payable (0.5) 0.4
Customers' deposits (11.5) (8.7)
Other current liabilities 8.8 26.7
Settlement of gas contract 10.9 (31.3)
disputes
$ 4.6 $ (86.3)
Item 1. Financial Statements (continued) Page 12
Notes to Consolidated Financial Statements (continued)
All highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents. Following
is selected supplemental cash flow information:
Three Months
Ended March 31
1994 1993
(millions of
dollars)
Cash interest
payments, net of $ 46.5 $ 54.4
capitalized
interest
Net cash income tax
payments $ 9.2 $ 10.9
G. Earnings per common share is computed using the weighted average
number of shares of common stock outstanding during each period and is
based on earnings after deducting preferred stock dividend
requirements.
H. In March 1994, the Company announced its intention to offer for sale
to the public approximately $100 million of its common stock. The
Company has filed a registration statement with the Securities and
Exchange Commission (which registration statement is currently under
review), and expects that the net proceeds from the offering will be
used to retire a portion of the Company's long-term debt.
I. Under a March 1994 agreement (the "Agreement"), the Company sells an
undivided interest (currently limited to a maximum of $235 million) in
a designated pool of accounts receivable with limited recourse. The
Company has retained servicing responsibility under the program, for
which it is paid a fee which does not differ materially from a normal
servicing fee. Total receivables sold under the Agreement but not yet
collected were approximately $118.7 million, $226.4 million and $140.0
million, respectively, at March 31, 1994, December 31, 1993 and March
31, 1993, which amounts have been deducted from "Accounts and notes
receivable" in the accompanying Consolidated Balance Sheet. In
accordance with authoritative accounting guidelines, proceeds from
these sales of accounts receivable are included in the accompanying
Statement of Consolidated Cash Flows under the category "Cash flows
from operating activities".
J. As further discussed in the Company's 1993 Report on Form 10-K, during
1993, the Company engaged in several transactions involving its
distribution properties.
K. As further discussed in the Company's 1993 Report on Form 10-K, in
June 1993, the Company completed the sale of Louisiana Intrastate Gas
Corporation ("LIG") to a subsidiary of Equitable Resources, Inc., in a
transaction which did not qualify for "discontinued operations"
accounting treatment. For the three months ended March 31, 1993,
LIG's operating revenues and operating income were $69.7 million and
$2.8 million, respectively.
<PAGE>
Item 1. Financial Statements (continued) Page 13
Notes to Consolidated Financial Statements (continued)
L. As further discussed in the Company's 1993 Report on Form 10-K, on
September 1, 1993 and November 1, 1993, respectively, NorAm Gas
Transmission Company ("NGT", formerly Arkla Energy Resources Company)
and MRT implemented restructured services pursuant to FERC Order 636.
M. In March 1994, the FERC issued an order approving the sale of an
ownership interest in 250 MMcf/day of capacity in certain of the
Company's natural gas transmission facilities to ANR Pipeline Company
("ANR"), which proposed sale is further discussed in the Company's
1993 Report on Form 10-K. However, the FERC attached certain
conditions to the approval which are not acceptable to the Company and
ANR, and both parties have filed for rehearing. All amounts advanced
to the Company in contemplation of the completion of this sale
transaction have been recorded as a liability and the assets subject
to the transaction have been segregated as "assets held for sale" and
included with "Investments and other assets" in the accompanying
Consolidated Balance Sheet, see Note C.
N. As further discussed in the Company's 1993 Report on Form 10-K, the
Company, due in part to its acquisition of Minnegasco in November
1990, is in the process of identifying and providing for remediation
of various sites where gas was manufactured from the late 1800's to
approximately 1960. The Company has provided an accrual (undiscounted
and without regard to potential third-party recoveries) for expected
costs of remediation (which largely are expected to be recovered
through the regulatory process) based on the latest available
information.
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 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.
While the nature of environmental contingencies makes complete
evaluation impractical, the Company is currently aware of no other
environmental matter which could reasonably be expected to have a
material impact on its results of operations or financial position.
O. 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, <PAGE>
Item 1. Financial Statements (continued) Page 14
Notes to Consolidated Financial Statements (continued)
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 filed various motions in
response to the second amended complaint. In a hearing held on May
12, 1994, the Court heard arguments on these motions. The Court
declined to rule with respect to substantially all the motions,
deciding instead to take the arguments and written briefs of the
parties under advisement and rule on the motions at a later date.
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 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, but has
set a hearing date for this motion on May 19, 1994. 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Significant Trends (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's principal operations are in natural gas distribution
("Distribution") and natural gas transmission, including gathering and
storage ("Pipeline" or "Natural Gas Pipeline"). 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 a fully diluted interest of approximately 15.6%. As
further described in the Company's 1993 Report on Form 10-K, during 1993,
the Company sold Louisiana Intrastate Gas Corporation and engaged in
several transactions with respect to its distribution properties.
Significant Trends
The Company's results of operations in recent years have shown a trend
of increased operating revenues with less than proportionate increases in
operating income, largely due to the declining margins in certain portions
of the Company's interstate pipeline business, although recent results show
an improvement over the historical trend, see the discussion for "Natural
Gas Pipeline" under "Material Changes in the Results of Operations"
elsewhere herein.
Recent Developments
Name Change
At the Company's annual stockholders' meeting on May 10, 1994, the
Company's stockholders approved a proposal to change the Company's name
from Arkla, Inc. to NorAm Energy Corp., see "Outcome of Annual
Stockholders' Meeting Votes" following.
Proposed Equity Offering
In March 1994, the Company announced its intention to offer for sale
to the public approximately $100 million of its common stock. The Company
has filed a registration statement with the Securities and Exchange
Commission (which registration statement is currently under review), and
expects that the net proceeds from the offering will be used to retire a
portion of the Company's long-term debt.
Sale of Pipeline Facilities
In March 1994, the FERC issued an order approving the sale of an
ownership interest in 250 MMcf/day of capacity in certain of the Company's
natural gas transmission facilities to ANR Pipeline Company ("ANR"), which
proposed sale is further discussed in the Company's 1993 Report on Form 10-
K. However, the FERC attached certain conditions to the approval which are
not acceptable to the Company and ANR, and both parties have filed for
rehearing. All amounts advanced to the Company in contemplation of the
completion of this sale transaction have been recorded as a liability and
the assets subject to the transaction have been segregated as "assets held
for sale" and included with "Investments and other assets" in the <PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Significant Trends (continued)
accompanying Consolidated Balance Sheet, see Note C of the Notes to
Consolidated Financial Statements elsewhere herein.
Outcome of Annual Stockholders' Meeting Votes
At the Company's annual stockholders' meeting held on May 10, 1994,
the Company's stockholders voted on five proposals (in addition to the
election of directors) as discussed following, in each case accepting the
recommendation of the Company's Board of Directors:
* The Company's stockholders approved a proposal to amend
the Company's Restated Certificate of Incorporation for
the purpose of changing the Company's name as described
preceding.
* The Company's stockholders approved a proposal to adopt
an Incentive Equity Plan to replace the Company's Long-
Term Incentive Plan.
* The Company's stockholders approved a proposal to
implement an employee stock purchase plan.
* The Company's stockholders approved a proposal to
provide restricted stock for nonemployee directors.
* The Company's stockholders rejected a proposal which
would have required prior stockholder approval of
agreements providing for the payment of executive
compensation in the event of a change in control of the
Company.
These proposals are described in detail in the Company's 1993 Proxy
Statement.
Dividend Declaration
On May 10, 1994, the Company's Board of Directors declared dividends
of $0.07 per share on common stock and $0.75 per share on preferred stock,
Series A, both payable June 15, 1994 to owners of record on May 23, 1994.
Material Changes in the Results of Operations
The Company's results of operations are seasonal due to seasonal
fluctuations in the demand for and, to a lesser extent, the price of
natural gas and, accordingly, the results of operations for interim periods
are not necessarily indicative of the results to be expected for an entire
year. As reported in the Company's 1993 Report on Form 10-K, however, the
Company's regulated businesses have obtained rate design changes which have
lessened the seasonality of the Company's results of operations and further
such changes are anticipated. In addition to the demand for and price of
natural gas, the Company's results of operations are significantly affected
by regulatory actions, competition and, below the operating income line, by
the level of its borrowings and interest rates thereon. Following are
detailed discussions of material changes in the results of operations by
business unit:
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
COMPARISON OF THE FIRST QUARTER OF 1994 TO THE FIRST QUARTER OF 1993
Quarter Ended
March 31
1994 1993 Increase(Decrease)
Operating (millions of dollars) $ %
Income(Loss)
Pipeline $ 34.9 $ 31.7 $ 3.2 10.1
(excluding LIG)
Distribution 111.4 110.5 0.9 0.8
Corporate and (0.2) (5.4) 5.2 96.3
Other
Sub Total 146.1 136.8 9.3 6.8
LIG - 2.8 (2.8) N/A
Consolidated $ 146.1 $ 139.6 $ 6.5 4.7
NATURAL GAS PIPELINE
As further discussed in the Company's 1993 Report on Form 10-K, on
September 1, 1993 and November 1, 1993, respectively, NorAm Gas
Transmission Company ("NGT", formerly Arkla Energy Resources Company) and
Mississippi River Transmission Corporation ("MRT") implemented restructured
services pursuant to FERC Order 636. As a result of this restructuring of
services, certain financial line items and statistical data are not
comparable when periods before and after Order 636 implementation are
compared.
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 NGT into a wholly-owned subsidiary to be called Arkla Gathering
Services Company, Inc. ("new company"). The new company, if authorized by
the FERC, will own and operate approximately 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 company would not generally be subject to
traditional cost-of-service rate regulation. <PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
The following results and related discussion exclude the results of
operations of LIG which was sold effective June 30, 1993, as more fully
described in the Company's 1993 Report on Form 10-K. For the quarter ended
March 31, 1993, LIG's operating revenues, operating income and total
throughput were $69.7 million, $2.8 million and 52.7 million MMBtu,
respectively.
Quarter Ended
March 31
1994 1993 Increase(Decrease)
FINANCIAL RESULTS (millions of dollars) $ %
Gas sales revenue
Sales to Distribution $ 41.3 $ 118.6 $ (77.3) (65.2)
Industrial sales and 233.7 165.7 68.0 41.0
other
Total gas sales 275.0 284.3 (9.3) (3.3)
revenue
Transportation revenue
Affiliated 25.2 5.4 19.8 366.7
Unaffiliated 40.3 24.8 15.5 62.5
Total transportation 65.5 30.2 35.3 116.9
revenue
Total operating 340.5 314.5 26.0 8.3
revenue
Purchased gas cost
Affiliated 2.6 0.9 1.7 188.9
Unaffiliated 250.8 225.4 25.4 11.3
Operations and 23.8 29.7 (5.9) (19.9)
maintenance expense
Depreciation and 10.7 10.5 0.2 1.9
amortization
Other operating expenses, 17.7 16.3 1.4 8.6
net
Operating income $ 34.9 $ 31.7 $ 3.2 10.1
OPERATING STATISTICS (million MMBtu)
Sales to Distribution 25.2 41.4 (16.2) (39.1)
Industrial sales and 32.9 34.4 (1.5) (4.4)
other
Total sales 58.1 75.8 (17.7) (23.4)
Transportation for 45.2 19.3 25.9 134.2
Distribution
Transportation for others 227.4 168.4 59.0 35.0
Total transportation 272.6 187.7 84.9 45.2
Less: Order 636 (18.7) - (18.7) N/A
elimination(1)
Total throughput 312.0 263.5 48.5 18.4
(1) Prior to the September 1, 1993 implementation of unbundled
services pursuant to FERC Order 636, Pipeline's sales rate covered all
related services, including transportation to the customer's facility.
After September 1, 1993, when Pipeline acts as a merchant, the sales
transaction is independent of (and may not include) the transportation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
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.
NGT and MRT began offering restructured services pursuant to Order 636
in September and November, 1993, respectively. MRT, in particular,
obtained rate design changes pursuant to Order 636 whiich will result in
its earnings being less sensitive to changes in volume, effectively
shifting earnings from the colder months to the warmer months in comparison
to its prior rates. The restructuring of services caused Pipeline's
transportation services to make up a larger portion of the overall
operating margin than in prior years, particularly with respect to sales
and transportation services with Distribution. Principally due to this
service restructuring, revenue from sales to Distribution decreased by 65%,
while affiliated transportation revenues increased by $19.8 million or
367%. It should be noted that revenue from sales to Distribution includes
the cost of the natural gas commodity while transportation revenue does
not. Thus, a switch from sales to transportation has the effect of
significantly decreasing total revenues, although not necessarily total
margin due to the corresponding decrease in the cost of gas purchased. A
41% increase in industrial and other sales was largely attributable to
increased third-party sales by the marketing affiliate and significantly
higher 1994 spot gas prices which serve to increase the gas cost component
of the total sales rate. Unaffiliated transportation revenues increased by
63% due to the effect of the aforementioned shift from sales to
transportation service resulting from implementation of Order 636, as well
as rate increases obtained by the regulated portion of Pipeline's business.
Unaffiliated purchased gas cost increased by 11% primarily due to
significantly higher Mid-continent spot gas prices which averaged 17%
higher than the first quarter of 1993, and a 56% increase in purchase
volumes supporting increased sales by the marketing affiliate. These
effects more than offset the decline in purchased gas cost due to the shift
from sales service to transportation service as discussed preceding.
Operation and maintenance expense was 20% below the first quarter of 1993
due to lower transportation fees paid to third-party pipelines under Order
636. Other operating expenses were 9% above 1993 primarily due to lower
1993 postretirement benefit cost, principally reflecting a timing
difference in the recognition of increased costs pursuant to SFAS106 during
1993.
DISTRIBUTION
As further discussed in the Company's 1993 Report on Form 10-K, during
1993, the Company engaged in several transactions with respect to its
distribution properties. <PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
Quarter Ended
March 31
1994 1993 Increase(Decrease)
FINANCIAL RESULTS (millions of dollars) $ %
Natural gas sales $ 825.2 $ 730.8 $ 94.4 12.9
Transportation 5.8 6.2 (0.4) (6.5)
Other revenue 7.4 6.8 0.6 8.8
Total operating revenue 838.4 743.8 94.6 12.7
Purchased gas cost
Unaffiliated 435.5 348.1 87.4 25.1
Affiliated 146.3 151.4 (5.1) (3.4)
Operations and maintenance 97.4 90.4 7.0 7.7
expense
Depreciation and 21.5 20.4 1.1 5.4
amortization
Other operating expenses 26.3 23.0 3.3 14.3
Operating income $ 111.4 $ 110.5 $ 0.9 0.8
OPERATING STATISTICS (billions of cubic feet)
Residential sales 89.8 86.1 3.7 4.3
Commercial sales 50.4 51.2 (0.8) (1.6)
Industrial sales 33.0 26.8 6.2 23.1
Sales for resale 4.1 2.5 1.6 64.0
Transportation 19.1 22.6 (3.5) (15.5)
Total throughput 196.4 189.2 7.2 3.8
DEGREE DAYS Normal 1994 1993
ALG 1,732 1,670 1,758
Entex 885 886 826
Minnegasco 3,873 4,236 3,911
Distribution operating income increased slightly from $110.5 million
in the first quarter of 1993 to $111.4 million in the first quarter of
1994, an increase of $0.9 million, reflecting both increased operating
revenues and increased operating expenses.
Operating revenues increased from $743.8 million in the first quarter
of 1993 to $838.4 million in the first quarter of 1994 due primarily to (1)
colder 1994 weather in the service areas of Minnegasco and Entex, (2)
increased industrial sales and (3) rate increases obtained by ALG and
Minnegasco. As a result of rate design changes which had the effect of
assigning more of Minnegasco's revenue requirements to the minimum bill
portion of its overall service rates, Minnegasco benefitted less from the
colder first quarter weather than would have been the case under the
previous rate design. However, these rate design changes will also have
the effect of increasing Minnegasco's earnings in the warmer months of the
year. Total weather-sensitive residential and commercial sales volumes
increased 2.9 Bcf from the first quarter of 1993 to the first quarter of
1994, largely due to the colder 1994 weather. Industrial sales volume <PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
increased 6.2 Bcf (23.1%), due primarily to continued improvement in the
economic conditions in Entex's service area.
While purchased gas cost increased as a percent of natural gas sales
from the first quarter of 1993 to the first quarter of 1994 largely due to
the increased average unit cost of gas, the gross margin on sales improved
modestly, increasing approximately in proportion to the increase in total
sales volume. Operating expenses, exclusive of purchased gas cost,
increased by $11.4 million (8.5%) over the first quarter of 1993
principally due to (1) increased operations and maintenance expense
reflecting increased throughput, (2) increased depreciation and
amortization expense due to increased investment and (3) increased other
operating expenses reflecting, in part, a difference in the method of
allocating certain franchise taxes to interim periods.
CORPORATE AND OTHER
The $5.2 million decrease in the operating loss from the first quarter
of 1993 to the first quarter of 1994 was principally due to increased 1993
expense resulting from amounts accrued under certain employee benefit plans
and a decrease in 1994 expense related to the Company's Long-Term Incentive
Plan, see "Outcome of Annual Stockholders' Meeting Votes" elsewhere herein.
CONSOLIDATED
Net income decreased from $73.3 million in the first quarter of 1993
to $55.5 million in the corresponding quarter of 1994, a decrease of $17.8
million, while (as discussed above) operating income increased by $6.5
million during the same period. The principal reasons for this increased
net expense below the operating line were as follows:
* The inclusion in 1993 results of a $26.8 million pre-
tax gain from the sale of the Nebraska distribution
properties.
* The decrease of $8.7 million in "Other, net" for 1994,
principally due to the 1994 impact of decreased
interest income and appliance service revenue together
with an increase in certain regulatory reserves, and a
gain from the sale of certain other assets in 1993.
These unfavorable impacts were partially offset by:
* The decrease of $3.1 million in first quarter 1994
interest expense, reflecting a reduced level of total
debt.
* The decrease of $4.7 million in the 1994 provision for
income taxes, reflecting a reduced level of income
before income taxes.
* The inclusion in 1993 results of a $3.4 million after-
tax loss due to premiums on the early retirement of
debt.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Liquidity and Capital Resources
The table below illustrates the sources of the Company's invested
capital during the last five years and at March 31, 1994.
March 31 December 31
INVESTED 1994 1993 1992 1991 1990 1989
CAPITAL
(millions of dollars)
Long-Term Debt $ 1,622.6 $ 1,629.4 $ 1,783.1 $ 1,551.5 $ 1,450.2 $ 1,162.3
Total Equity 753.1 708.0 712.9 948.0 1,115.4 546.1
Total 2,375.7 2,337.4 2,496.0 2,499.5 2,565.6 1,708.4
Capitalization
Short-Term Debt 97.4 192.4 120.0 772.6 712.4 602.3
Total Invested $ 2,473.1 $ 2,529.8 $ 2,616.0 $ 3,272.1 $ 3,278.0 $ 2,310.7
Capital
Long-Term Debt
as a
Percent of 68.3% 69.7% 71.4% 62.1% 56.5% 68.0%
Total
Capitalization
Equity as a
Percent
of Total 31.7% 30.3% 28.6% 37.9% 43.5% 32.0%
Capitalization
Total Debt as a
Percent of 69.5% 72.0% 72.7% 71.0% 66.0% 76.4%
Total
Invested
Capital
CASH FLOW ANALYSIS
The Company's cash flows, like its results of operations, are seasonal
and, therefore, the cash flows experienced during an interim period are not
necessarily indicative of the results to be expected for an entire year.
Net Cash Flows from Operating Activities
"Net cash provided by operating activities" as shown in the
accompanying Statement of Consolidated Cash Flows ("Cash Flow Statement")
increased from $11.7 million in the first quarter of 1993 to $112.0 million
in the first quarter of 1994. This increase of $100.3 million was
principally attributable to:
* Decreased 1994 cash used for accounts payable,
principally due to the relatively lower December 31,
1993 accounts payable balance.
* The 1994 cash inflows from settlement of gas contract
disputes, which settlements had resulted in a net
outflow in 1993.
* Increased 1994 cash provided from sale of inventories,
principally gas in underground storage.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Liquidity and Capital Resources (continued)
* Increased 1994 earnings before non-cash charges and
credits.
These favorable impacts were partially offset by:
* Increased 1994 cash used for gas accounts payable
reflecting the decreased level of gas purchased but not
yet paid for as of March 31, 1994.
* Increased 1994 cash used for miscellaneous working
capital items.
* Decreased 1994 cash collections of deferred gas costs
reflecting, in part, the transition by NGT and MRT to
the provision of services pursuant to FERC's Order 636.
The accompanying Cash Flow Statement has been prepared in accordance
with authoritative accounting guidelines which require the segregation of
cash flows into specific categories. Management believes that other
groupings of cash flows may also be useful and that the following
information (which amounts are consistent with the Cash Flow Statement)
will assist in understanding the Company's sources and uses of cash during
the periods presented. This information should not be viewed as a
substitute for the Cash Flow Statement nor should the totals or subtotals
presented be considered surrogates for totals or subtotals appearing on the
Cash Flow Statement.
Three Months
Ended March 31
1994 1993
(millions of dollars)
Use (Source)
Settlement of gas contract disputes $ (10.9) $ 31.3
Capital expenditures 29.4 25.4
Common and preferred dividends 10.5 10.5
Debt retirement 101.8 85.6
Change in receivables sold 107.7 72.6
Increase in overdrafts (10.5) (9.7)
Selected External Uses of Cash 228.0 215.7
Less:
Proceeds from sale of (12.3) (93.4)
properties/assets
Change in cash balance 0.5 7.3
Cash Generated from Other Sources,$ 216.2 $ 129.6
Principally Internal <PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Liquidity and Capital Resources (continued)
Net Cash Flows from Investing Activities
The Company's capital expenditures for continuing operations by
business unit for the three months ended March 31, 1994 and 1993 were as
follows:
Three Months
Ended March 31
1994 1993 Increase(Decrease)
(millions of dollars) $ %
Pipeline $ 8.0 $ 5.7 $ 2.3 40.4
(excluding LIG)
Distribution 21.1 18.9 2.2 11.6
Other 0.3 0.1 0.2 200.0
Sub Total 29.4 24.7 4.7 19.0
LIG - 0.7 (0.7) N/A
Consolidated $ 29.4 $ 25.4 $ 4.0 15.7
Capital expenditures increased from $25.4 million in the first quarter
of 1993 to $29.4 million in the first quarter of 1994, an increase of $4.0
million, principally due to increased spending in Pipeline and
Distribution, largely for normal replacement activities. The Company's
capital expenditures for 1994 are currently budgeted at approximately $200
million.
Net Cash Flows from Financing Activities
The Company has a revolving credit facility ("Credit Facility") which
makes a total commitment of $400 million available to the Company through
June 30, 1995 and is collateralized by the stock of MRT and NGT.
Borrowings under the Credit 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 to each bank
annually, currently 1/2% and subject to decrease based on the Company's
debt rating, and is required to pay an incremental rate of 1.5% on
outstanding borrowings in excess of $200 million. The Company had no
borrowings under this facility at March 31, 1994 or April 30, 1994 and,
therefore, had $400 million of remaining capacity, which is expected to be
adequate to cover the Company's current and projected needs for short-term
financing.
Largely as a result of the application of the proceeds received from
the Company's recent divestitures, the Company has significantly reduced
its level of total debt and specifically 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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Liquidity and Capital Resources (continued)
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. As of
March 31, 1994, the Company had entered into $275 million notional amount
of these swaps terminating at various dates through February 1997, none of
which are "leveraged" and, therefore, they do not represent exposure in
excess of that suggested by the notional amount and reported interest
rates. At March 31, 1994, the Company's obligation under these
arrangements, which is calculated using 6-12 month floating LIBOR, was
based on a weighted average interest rate of approximately 4.9%, while the
counterparties' obligations were based on a weighted average fixed rate of
approximately 5.1%. The Company's performance under these swaps is secured
by the stock of MRT and NGT, and the Company is permitted to increase the
amount outstanding under such secured arrangements to a total of $350
million, a limitation imposed by the terms of its Credit Facility.
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. At March 31, 1994, the
unrealized loss associated with these arrangements was approximately $9.9
million and the unamortized gains associated with prior such arrangements
was approximately $4.4 million.
The Credit Facility contains a provision which requires the Company to
maintain a specific 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 Credit 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 $288.5
million and $60.0 million, respectively, at March 31, 1994.
Commitments
The Company had capital commitments of less than $10 million at March
31, 1994, which are expected to be funded through cash provided by
operations and/or incremental borrowings. As described in the Company's
1993 Annual Report on Form 10-K, the Company is committed, under certain
gas purchase claim settlements, to make additional payments and has
commitments under certain of its leasing arrangements.
CONTINGENCIES
Pending Sale Transaction. As discussed in the Company's 1993 Report
on Form 10-K, the Company has refunded $34 million to a third-party in
conjunction with a proposed transaction related to capacity in Line AC and
may be required to refund additional amounts, see "Sale of Pipeline
Facilities" elsewhere herein.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Liquidity and Capital Resources (continued)
Letters of Credit. At March 31, 1994, the Company was obligated for
$5.5 million under a letter of credit related to its sale of AEC and $23.3
million under other letters of credit which are incidental to its ordinary
business operations.
Indemnity Provisions. As discussed in the Company's 1993 Report on
Form 10-K, the Company has obligations under the indemnification provisions
of certain sale agreements.
Sale of Receivables. As discussed in the Company's 1993 Report on
Form 10-K, certain of the Company's receivables are collateral for
receivables which have been sold.
Credit Risk and Off-Balance-Sheet Risk. As discussed in the Company's
1993 Report on Form 10-K, the Company has off-balance-sheet risk as a
result of its hedging activities.
Gas Purchase Claims. As discussed in the Company's 1993 Report on
Form 10-K, the Company continues to be a party to claims involving its gas
purchase contracts, for which the Company has provided an accrual it
believes to be adequate although, given the nature of these claims and
potential claims, the Company can provide no assurance that additional
charges will not ultimately result.
Environmental. As more fully described in the Company's 1993 Report
on Form 10-K, the Company is currently working with the Minnesota Pollution
Control Agency regarding the remediation of several sites on which gas was
manufactured from the late 1800's to approximately 1960. The Company has
made an accrual for its estimate of the costs of remediation (undiscounted
and without regard to potential third-party recoveries) and, based upon
discussions to date and prior decisions by regulators in the relevant
jurisdictions, the Company continues to believe that it will be allowed
substantial recovery of these costs through its regulated 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 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 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.
While the nature of environmental contingencies makes complete
evaluation impractical, the Company is currently aware of no other
environmental matter which could reasonably be expected to have a material
impact on its results of operations or financial position.
Litigation. The Company is party to litigation which arises in the
normal course of business. See "Legal Proceedings" elsewhere herein. <PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Part II. Other Information
Item 1. 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
filed various motions in response to the second amended complaint. In a
hearing held on May 12, 1994, the Court heard arguments on these motions.
The Court declined to rule with respect to substantially all the motions,
deciding instead to take the arguments and written briefs of the parties
under advisement and rule on the motions at a later date. 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 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, but has set a hearing date for this motion on May 19, 1994. 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")
Item 1. Legal Proceedings (continued) Page 28
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
Page 29
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the
Registrant has duly caused this report to be
signed on its behalf by the undersigned
thereunto duly authorized.
NorAm Energy Corp.
(formerly, Arkla, Inc.)
(Registrant)
By: Jack W. Ellis II
Jack W. Ellis II
Vice President & Controller
Dated May 16, 1994
<PAGE>
