Page 1 of 26
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 June 30, 1994
Commission File Number 1-3751
NorAm Energy Corp.
(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 August 10, 1994 - 122,472,082
Exhibit Index Appears on Page 25<PAGE>
Page 2
INDEX
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1994 and 1993
and December 31, 1993 4
Consolidated Statement of Income - Three Months Ended
June 30, 1994 and 1993 and Six Months Ended June 30,
1994 and 1993 5
Statement of Consolidated Cash Flows - Six Months Ended
June 30, 1994 and 1993 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security
Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26 <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.<PAGE>
Page 4
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
ASSETS June 30 December 31 June 30
1994 1993 1993
PROPERTY, PLANT AND EQUIPMENT $ 3,671,366 $ 3,593,861$ 3,453,967
Less Accumulated depreciation 1,387,761 1,327,725 1,275,941
and amortization
2,283,605 2,266,136 2,178,026
INVESTMENTS AND OTHER ASSETS 821,372 856,552 1,021,716
(Note C)
CURRENT ASSETS
Cash and cash equivalents 15,835 14,910 147,180
Accounts and notes receivable 201,174 314,487 175,742
Deferred income taxes 21,618 12,976 13,641
Inventories (Note D) 81,791 153,815 79,129
Gas purchased in advance of 38,802 35,998 18,204
delivery
Other current assets 9,350 16,158 34,780
368,570 548,344 468,676
DEFERRED CHARGES 47,482 56,756 49,875
TOTAL ASSETS $ 3,521,029 $ 3,727,788$ 3,718,293
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Preferred stock $ 130,000 $ 130,000$ 130,000
Common stock 76,503 76,476 76,459
Paid-in capital 867,843 867,641 867,411
Accumulated deficit (338,520) (366,080) (315,835)
Total Stockholders' Equity 735,826 708,037 758,035
Long-term debt, less current 1,604,104 1,629,364 1,698,904
maturities
CURRENT LIABILITIES
Current maturities of long-term 97,400 97,400 80,000
debt
Notes payable - 95,000 -
Gas accounts payable 155,558 267,279 145,461
Other accounts payable 178,809 190,042 213,564
Income taxes payable 15,403 12,912 2,757
Interest payable 45,134 44,677 47,404
General taxes 36,809 50,111 31,726
Customers' deposits 34,604 46,921 34,232
Other current liabilities 98,114 98,881 98,706
661,831 903,223 653,850
OTHER LIABILITIES AND DEFERRED
CREDITS
Accumulated deferred income 258,121 225,243 242,303
taxes<PAGE>
Page 5
Other deferred credits and 261,147 261,921 365,201
noncurrent liabilities
519,268 487,164 607,504
TOTAL LIABILITIES AND $ 3,521,029 $ 3,727,788$ 3,718,293
STOCKHOLDERS' EQUITY
The Notes to Financial Statements are an integral part of this
statement.<PAGE>
Page 6
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in thousands of dollars except per share amounts)
(unaudited)
Three Months Six Months
Ended June 30 Ended June 30
1994 1993 1994 1993
Operating Revenues $535,487 $613,376 $1,627,806 $1,624,452
Operating Expenses
Cost of natural gas purchased, 318,429 395,571 1,065,532 1,062,213
net
Operating, maintenance, cost of 125,314 132,487 255,643 270,332
sales & other
Depreciation and amortization 37,737 38,723 75,485 77,010
Taxes other than income taxes 24,483 27,179 55,551 55,837
505,963 593,960 1,452,211 1,465,392
Operating Income 29,524 19,416 175,595 159,060
Other (Income) and Deductions
Interest expense, net 41,289 43,689 83,702 89,229
Gain from sale of assets - (17,719) - (44,555)
Other, net 1,560 (5,417) 6,241 (9,430)
42,849 20,553 89,943 35,244
Income (Loss) Before Income Taxes (13,325) (1,137) 85,652 123,816
Provision for Income Taxes (6,950) 6,854 36,540 55,102
(Benefit) (Note E)
Income (Loss) Before Extraordinary (6,375) (7,991) 49,112 68,714
Item
Extraordinary loss, less taxes (517) - (517) (3,411)
Net Income (Loss) (6,892) (7,991) 48,595 65,303
Preferred dividend requirement 1,950 1,950 3,900 3,900
Balance Available to Common Stock $(8,842) $(9,941) $44,695 $61,403
Per Share Data:
Before extraordinary item $(0.07) $(0.08) $0.37 $0.53
Extraordinary loss, less taxes 0.00 - 0.00 (0.03)
Earnings per Common Share $(0.07) $(0.08) $0.37 $0.50 <PAGE>
Page 7
Average Common Shares
Outstanding (in thousands) 122,390 122,256 122,380 122,257
Cash Dividends per Common Share $0.07 $0.07 $0.14 $0.14
The Notes to Financial Statements are an integral part of this
statement.<PAGE>
Page 8
NorAm Energy Corp. and Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase(Decrease) in Cash and Cash Equivalents
(in thousands of dollars)
(unaudited)
Six Months
Ended June 30
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 48,595 $ 65,303
Adjustments to reconcile net income to
cash flow:
Depreciation and amortization 75,485 77,010
Deferred income taxes 24,232 54,713
Gain from sale of assets - (44,555)
Extraordinary loss, less taxes 517 3,411
Other (399) (14,904)
Changes in certain assets and
liabilities, net of noncash
transactions and the effects of 66,799 (15,364)
acquisitions and
dispositions (Note F)
Net cash provided by operating 215,229 125,614
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (75,700) (63,100)
Sale of distribution properties - 93,413
Sale of LIG, net of related - 169,950
expenditures
Sale of assets 12,315 -
Other, net (4,816) (27,736)
Net cash provided by (used in) (68,201) 172,527
investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of (25,777) (125,611)
long-term debt
Decrease in overdrafts (4,291) (30,559)
Other interim debt repayments (95,000) -
Common and preferred stock dividends (21,035) (21,016)
Net cash used in financing (146,103) (177,186)
activities
Net increase in cash 925 120,955
Cash and cash equivalents - 14,910 26,225
beginning of period
Cash and cash equivalents - $ 15,835 $ 147,180
end of period
The Notes to Financial Statements are an integral part of this
statement.<PAGE>
Page 9
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.
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:
June 30 December 31 June 30
1994 1993 1993
(millions of dollars)
Goodwill $ 502.4 $ 509.5 $ 516.6
Gas purchased in advance of 54.8 79.7 163.4
delivery
Notes receivable 8.6 8.7 60.3
Pipeline assets held for 91.0 91.0 125.0
sale (Note L)
Other 164.6 167.7 156.4
$ 821.4 $ 856.6 $ 1,021.7
The decrease in "Gas purchased in advance of delivery" and
"Notes receivable" from June 30, 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:
June 30 December 31 June 30
1994 1993 1993
(millions of dollars)
Gas in underground $ 43.0 $ 116.7 $ 40.3
storage
Materials and 38.5 36.8 38.2
supplies<PAGE>
Page 10
Other 0.3 0.3 0.6
$ 81.8 $ 153.8 $ 79.1
The increase in "Gas in underground storage" at December 31,
1993 in comparison to June 30, 1994 and 1993 is largely a
normal seasonal fluctuation, although the December 31, 1993
balance included approximately $51.2 million of gas
attributable to the operations of Mississippi River
Transmission Corporation ("MRT"). As further described in
the Company's 1993 Report on Form 10-K, this gas was sold to
MRT's customers during 1994 and was replaced with customer-
owned gas in accordance with the provisions of FERC Order
636.
E. "Provision for Income Taxes(Benefit)" as presented in the
accompanying Consolidated Statement of Income includes the
following:
Three Months Six Months
Ended June 30 Ended June 30
1994 1993 1994 1993
(millions of dollars)
Federal
Current $ (11.5) $ (19.9) $ 12.2 $ 2.0
Deferred 10.8 26.7 23.6 47.6
Investment (0.1) (0.2) (0.3) (0.4)
tax credit
State
Current (5.0) (5.9) 0.4 (1.2)
Deferred (1.2) 6.2 0.6 7.1
$ (7.0) $ 6.9 $ 36.5 $ 55.1
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:
Six Months
Ended June 30
1994 1993
(millions of dollars)
Accounts and notes $ 113.3 $ 91.6
receivable
Inventories 72.4 24.2
Other current assets 8.5 47.5
Gas accounts payable (111.7) (92.3)
Other accounts payable (7.0) (23.0)
Income taxes payable 2.5 (22.7)
Interest payable 0.5 (2.9)
General taxes payable (13.3) (14.2)
Customers' deposits (12.3) (10.1)
Other current liabilities 0.8 11.5
Settlement of gas contract 13.1 (25.0)
disputes
$ 66.8 $ (15.4)
All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash
equivalents.Followingis selected supplemental cash flow information:<PAGE>
Item 1. Financial Statements (continued) Page 11
Notes to Consolidated Financial Statements (continued)
Six Months
Ended June 30
1994 1993
(millions of
dollars)
Cash interest
payments, net of $ 81.2 $ 90.1
capitalized
interest
Net cash income tax
payments $ 9.8 $ 13.1
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. 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 $76.0 million, $226.4 million
and $124.2 million, respectively, at June 30, 1994,
December 31, 1993 and June 30, 1993, which amounts have been
deducted from "Accounts and notes receivable" in the
accompanying Consolidated Balance Sheet. During the six
months ended June 30, 1994 and 1993, the Company experienced
cash outflows of $150.4 million and $88.4 million,
respectively, under the program reflecting, in part, the
Company's normal seasonal reduction in participation. In
accordance with authoritative accounting guidelines, cash
flows related to these sales of accounts receivable are
included in the accompanying Statement of Consolidated Cash
Flows under the category "Cash flows from operating
activities".
I. 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,
resulting in gross cash proceeds of approximately $93.4
million (during the first quarter), and cash expenditures of
approximately $38.3 million (during the third quarter).
J. 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. for $191 million in cash less
related expenditures of approximately $21.1 million, in a
transaction which did not qualify for "discontinued
operations" accounting treatment. For the three months
ended June 30, 1993, LIG's operating revenues and operating
income were $81.4 million and $2.8 million, respectively.
For the six months ended June 30, 1993, LIG's operating<PAGE>
Item 1. Financial Statements (continued) Page 12
Notes to Consolidated Financial Statements (continued)
revenues and operating income were $151.1 million and $5.6
million, respectively.
K. 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.
L. 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. The amount
advanced to the Company in contemplation of the completion
of this sale transaction has been recorded as a liability
and the assets subject to the transaction have been
segregated as "Pipeline assets held for sale" and included
with "Investments and other assets" in the accompanying
Consolidated Balance Sheet, see Note C.
M. In May 1994, the FERC voted to allow the spin-down of the
Company's gathering systems into a deregulated subsidiary.
A final order will be effective when the FERC is satisfied
that the Company has met certain open-access conditions and
made minor compliance-type filings to ensure that no
customer is denied an opportunity to receive gathering
services after the spin-down. The FERC also required that
the Company offer to provide service to all customers on
reasonable terms and conditions before implementing the
change. The Company currently expects that the conditions
will be satisfied and the order will become final later this
year.
N. In July 1994, the Company amended its registration statement
filed with the Securities and Exchange Commission in March
1994, to convert it to a Rule 415 or "shelf" offering (the
"Shelf"). The Shelf will allow the Company to issue up to
14.95 million shares of additional common stock for a period
of up to two years from the effective date. The net
proceeds from shares issued pursuant to the Shelf are
expected to be used for general corporate purposes.
The Company expects that shortly it will file a registration
statement (the "Statement") with the Securities and Exchange
Commission which will allow the issuance of up to 5 million
shares of the Company's common stock in conjunction with a
direct stock purchase program and updated dividend
reinvestment program over a two year period beginning with
the effective date of the Statement. The net proceeds from
shares issued pursuant to the Statement are expected to be
used for general corporate purposes.<PAGE>
Item 1. Financial Statements (continued) Page 13
Notes to Consolidated Financial Statements (continued)
O. 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.
P. 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. The Company, 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<PAGE>
Item 1. Financial Statements (continued) Page 14
Notes to Consolidated Financial Statements (continued)
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. The Company, 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. In a hearing held on May 19, 1994, the Court heard
arguments on this motion. The Court did not rule on the
motion, but took the matter under advisement for decision at
a later date. 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>
Page 15
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 reflect the change
from sales to transportation in the Company's interstate pipeline
business which has resulted from the implementation of FERC Order
636 and, in addition, 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. and
voted on several other matters, see "Submission of Matters to a
Vote of Security Holders" elsewhere herein.
Proposed Equity Offerings
In July 1994, the Company amended its registration statement
filed with the Securities and Exchange Commission in March 1994,
to convert it to a Rule 415 or "shelf" offering (the "Shelf").
The Shelf will allow the Company to issue up to 14.95 million
shares of additional common stock for a period of up to two years
from the effective date. The net proceeds from shares issued
pursuant to the Shelf are expected to be used for general
corporate purposes.
The Company expects that shortly it will file a registration
statement (the "Statement") with the Securities and Exchange
Commission which will allow the issuance of up to 5 million
shares of the Company's common stock in conjunction with a direct
stock purchase program and updated dividend reinvestment program<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 16
Condition and Results of Operations
(continued)
Recent Developments (continued)
over a two year period beginning with the effective date of the
Statement. The net proceeds from shares issued pursuant to the
Statement are expected to be used for general corporate purposes.
Spin-down of Gathering
In May 1994, the FERC authorized, subject to certain
conditions, the spin-down of the Company's gathering systems into
a non-regulated subsidiary, see the discussion under "Natural Gas
Pipeline" for the six months ended June 30, 1994 and 1993 under
"Material Changes in the Results of Operations" elsewhere herein.
Dividend Declaration
On July 13, 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 September 15, 1994 to
owners of record on August 22, 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:
(1) COMPARISON OF THE SECOND QUARTER OF 1994 TO THE SECOND
QUARTER OF 1993
Quarter Ended
June 30
1994 1993 Increase(Decrease)
Operating (millions of dollars) $ %
Income(Loss)
Pipeline $ 24.1 $ 13.6 $ 10.5 77.2
(excluding LIG)
Distribution 7.6 9.1 (1.5) (16.5)
Corporate and (2.2) (6.0) 3.8 63.3
Other
Sub Total 29.5 16.7 12.8 76.6
LIG - 2.8 (2.8) N/A
Consolidated $ 29.5 $ 19.5 $ 10.0 51.3<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 17
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
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
due, in part, to the switch from sales to transportation which
has the effect of removing the cost of gas from revenues and
expenses. At December 31, 1992, the Company discontinued the
application of Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation",
("SFAS71") to NGT, see the discussion under "Natural Gas
Pipeline" for the six months ended June 30, 1994 and 1993
elsewhere herein. The Company engages in hedging activities with
respect to certain of its natural gas transactions, see the
discussion under "Natural Gas Pipeline" for the six months ended
June 30, 1994 and 1993 elsewhere herein.
In May 1994, the FERC voted to approve the spin-down of the
Company's gathering systems into a deregulated subsidiary, see
the discussion under "Natural Gas Pipeline" for the six months
ended June 30, 1994 and 1993 elsewhere herein.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 18
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 June 30, 1993, LIG's operating
revenues, operating income and total throughput were $81.4
million, $2.8 million and 50.8 million MMBtu, respectively.
Quarter Ended
June 30
1994 1993 Increase(Decrease)
FINANCIAL RESULTS (millions of dollars) $ %
Gas sales revenue
Sales to Distribution $ 28.9 $ 37.6 $ (8.7) (23.1)
Industrial sales and 136.1 146.4 (10.3) (7.0)
other
Total gas sales 165.0 184.0 (19.0) (10.3)
revenue
Transportation revenue
Affiliated 24.7 1.8 22.9 1,272.2
Unaffiliated 37.6 20.3 17.3 85.2
Total transportation 62.3 22.1 40.2 181.9
revenue
Total operating 227.3 206.1 21.2 10.3
revenue
Purchased gas cost
Affiliated 0.9 0.2 0.7 350.0
Unaffiliated 150.1 139.2 10.9 7.8
Operations and 23.9 21.9 2.0 9.1
maintenance expense
Depreciation and 10.8 11.0 (0.2) (1.8)
amortization
Other operating expenses, 17.5 20.2 (2.7) (13.4)
net
Operating income $ 24.1 $ 13.6 $ 10.5 77.2
OPERATING STATISTICS (million MMBtu)
Sales to Distribution 14.1 6.9 7.2 104.3
Industrial sales and 36.2 23.2 13.0 56.0
other
Total sales 50.3 30.1 20.2 67.1
Transportation for 14.6 13.2 1.4 10.6
Distribution
Transportation for others 182.8 176.2 6.6 3.7
Total transportation 197.4 189.4 8.0 4.2
Less: Order 636 (14.6) - (14.6) N/A
elimination(1)
Total throughput 233.1 219.5 13.6 6.2
(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. After FERC Order 636 implementation,
when Pipeline acts as a merchant, the sales transaction is<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 19
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
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.
NGT and MRT began offering restructured services pursuant to
Order 636 in September and November 1993, respectively. This
restructuring of services required the Pipeline to offer
unbundled storage, transportation and gathering services which
were previously included in the total sales rate. As customers
choose to purchase unbundled services which do not include the
purchase of gas, the effect is to shift operating revenues from
sales revenue to transportation revenue and to reduce total
revenue because the cost of gas is no longer included. This
shift, somewhat offset by increased sales to Distribution by the
marketing affiliate, is the primary reason why "Sales to
Distribution" decreased by $8.7 million (23%) while volumetric
sales to Distribution increased by 7.2 million MMBtu (104%).
This shift in services had a similar effect on "Industrial sales
and other" which decreased by $10.3 million while related sales
volumes increased by 56%. Another factor contributing to this
volume increase was increased third-party sales by the marketing
affiliate.
Purchased gas cost increased by 8% primarily in support of
the increase in sales by the marketing affiliate. Operation and
maintenance expense increased by $2.0 million primarily due to
increased third-party transportation cost experienced by the
marketing affiliate due to increased off-system sales. "Other
operating expenses, net" decreased by $2.7 million primarily due
to a non-recurring $2.0 million accrual for severance cost
recorded in June 1993. The remainder of the decrease is
attributable to lower general and administrative expenses
reflecting lower allocations from Corporate due to the cumulative
effect of the recalculation of certain allocation factors.
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 Page 20
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
Quarter Ended
June 30
1994 1993 Increase(Decrease)
FINANCIAL RESULTS (millions of dollars) $ %
Natural gas sales $ 349.6 $ 354.3 $ (4.7) (1.3)
Transportation 4.1 4.7 (0.6) (12.8)
Other revenue 5.9 5.8 0.1 1.7
Total operating revenue 359.6 364.8 (5.2) (1.4)
Purchased gas cost
Unaffiliated 191.7 188.6 3.1 1.6
Affiliated 28.9 40.6 (11.7) (28.8)
O&M, G&A and cost of sales 89.8 85.0 4.8 5.6
Depreciation and 21.6 20.1 1.5 7.5
amortization
Other operating expenses 20.0 21.4 (1.4) (6.5)
Operating income $ 7.6 $ 9.1 $ (1.5) (16.5)
OPERATING STATISTICS (billions of cubic feet)
Residential sales 25.1 28.4 (3.3) (11.6)
Commercial sales 19.6 20.8 (1.2) (5.8)
Industrial sales 32.1 25.6 6.5 25.4
Sales for resale 4.6 1.9 2.7 142.1
Transportation 15.8 17.3 (1.5) (8.7)
Total throughput 97.2 94.0 3.2 3.4
DEGREE Normal 1994 1993
DAYS
ALG 145 167 232
Entex 50 47 72
Minnegasco 778 751 936
Distribution operating income decreased from $9.1 million in
the second quarter of 1993 to $7.6 million in the second quarter
of 1994, a decrease of $1.5 million, reflecting a decrease in
both operating revenues and operating expenses.
Operating revenues decreased from $364.8 million in the
second quarter of 1993 to $359.6 million in the second quarter of
1994 due primarily to warmer 1994 weather in the service areas of
all three distribution units. As a result, total weather-
sensitive residential and commercial sales volumes decreased 4.5
Bcf from the second quarter of 1993 to the second quarter of
1994. However, principally due to the continued improvement in
the economic conditions in Entex's service area, the industrial
sales volume increased 6.5 Bcf (25.4%), and the lower-margin
sales for resale increased by 2.7 Bcf.
Total purchased gas cost decreased $8.6 million in the
second quarter of 1994 due to the decreased sales volume as
discussed above and a decrease in the average cost of purchased
gas. Operating expenses, exclusive of purchased gas cost,<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 21
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
increased by $4.9 million (3.9%) over the second quarter of 1993
principally due to (1) increased "O&M, G&A and cost of sales"
reflecting (i) increased G&A costs for salaries and benefits and
(ii) increased O&M expense related to increased throughput and
(2) increased depreciation and amortization expense due to
increased investment.
CORPORATE AND OTHER
The $3.8 million decrease in the operating loss from the
second quarter of 1993 to the second quarter of 1994 was
principally due to 1993 expense for certain intercompany billings
which were not contractually permitted to be recorded at their
full face value by the receiving business unit, which expense did
not occur in 1994.
CONSOLIDATED
The consolidated net loss declined from $8.0 million in the
second quarter of 1993 to a loss of $6.9 million in the
corresponding quarter of 1994, an improvement of $1.1 million,
while (as discussed above) operating income increased by $10.1
million during the same period. The principal reasons for this
increased net expense below the operating income line were as
follows:
* The inclusion in 1993 results of a $17.7
million pre-tax gain from the sale of LIG.
* The decrease of $7.0 million in "Other, net"
for 1994, principally due to the 1994 impact
of decreased interest income and appliance
service revenue.
* The inclusion in 1994 results of a $0.5
million after-tax loss due to premiums on the
early retirement of debt.
These unfavorable impacts were partially offset by:
* The decrease of $2.4 million in second
quarter 1994 interest expense, principally
due to a reduced level of total debt.
* The decrease of $13.8 million in the 1994
provision for income taxes, reflecting an
increase in the loss before income taxes.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 22
Condition and Results of Operations
(continued)
(2) COMPARISON OF THE FIRST SIX MONTHS OF 1994 TO THE FIRST SIX MONTHS
OF 1993
Material Changes in the Results of Operations (continued)
Six Months
Ended June 30
1994 1993 Increase(Decrease)
Operating (millions of dollars) $ %
Income(Loss)
Pipeline $ 59.0 $ 45.3 $ 13.7 30.2
(excluding LIG)
Distribution 119.0 119.6 (0.6) (0.5)
Corporate and (2.4) (11.4) 9.0 78.9
Other
Sub Total 175.6 153.5 22.1 14.4
LIG - 5.6 (5.6) N/A
Consolidated $ 175.6 $ 159.1 $ 16.5 10.4
NATURAL GAS PIPELINE
As discussed in the Company's Reports on Form 10-K for the
years ended December 31, 1993 and 1992, the Company historically
has applied the provisions of SFAS71 to all of its rate regulated
businesses. With respect to the Company's NGT subsidiary,
however, the Company concluded that, effective as of December 31,
1992, continued application of SFAS71 was no longer appropriate.
The Company based its conclusion on its analysis of NGT's
regulatory and economic environment and the extent to which such
environment would allow NGT to collect its cost-based rates. The
Company had begun its analysis when it became apparent that
changes in NGT's regulatory environment, largely due to the
actions of the FERC, were subjecting NGT to increasing
competitive pressures, resulting in significant underrecovery of
NGT's cost-based revenue requirements. The Company determined
that it was unlikely that it could take steps through the
regulatory process or otherwise which would cause NGT to return
to a situation in which the Company could conclude that
collection of NGT's cost-based rates was probable.
Accordingly, at December 31, 1992, the Company ceased to
apply the provisions of SFAS71 to NGT'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" ("SFAS101"). The methodology for this
accounting change is contained within SFAS101 and, simply stated,
requires the removal from NGT's balance sheet of the impact of
the effects of the actions of regulators. More specifically, the
Company (1) identified and wrote-off those NGT assets which would
not be recognized as assets by non-regulated enterprises,
principally amounts associated with take-or-pay settlement costs
and deferred pursuant to FERC Order 528 ($237.9 million), (2)
wrote down certain current assets based on "lower of cost or
market" rules applicable to nonregulated enterprises ($27.0
million), (3) accrued for expected costs in excess of current
market value for certain gas purchase contracts for which
recovery could no longer be assumed through regulatory mechanisms
($19.9 million) and (4) wrote down certain of its gathering
assets pursuant to impairment guidelines applicable to
enterprises in general ($29.7 million). This pre-tax charge,<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 23
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
which totalled $314.5 million ($195.0 million after-tax), is
shown in the Company's Statement of Consolidated Income for 1992
under the caption "Extraordinary items, less taxes". This charge
had no effect on NGT's ability to include the underlying costs in
its regulated rates or on its ability to collect such rates from
its customers.
The Company concluded that its Distribution divisions
continued to qualify for the application of SFAS71 because their
exposure to competition has had minimal effect and is limited by
the nature of their business, and because their regulatory
climate has changed only modestly from its historical structure.
Similarly, the Company concluded that continued application of
SFAS71 to its MRT interstate pipeline subsidiary was appropriate
because, unlike NGT, MRT's "long-line" configuration and customer
base have sheltered it to a large degree from the negative
impacts which regulatory change and related increased competition
have had and continue to have on NGT.
In May 1994, the FERC voted to allow the spin-down of the
Company's gathering systems into a deregulated subsidiary. A
final order will be effective when the FERC is satisfied that the
Company has met certain open-access conditions and made minor
compliance-type filings to ensure that no customer is denied an
opportunity to receive gathering services after the spin-down.
FERC also required that the Company offer to provide service to
all customers on reasonable terms and conditions before
implementing the change. The Company currently expects that the
conditions will be satisfied and the order will become final
later this year.
As discussed in the Company's 1993 Report on Form 10-K, the
Company enters into futures transactions, swaps and purchases
options in order to mitigate the risk associated with market
fluctuations in the price of natural gas and related
transportation.
With respect to the options purchased by the Company, none
of which were outstanding during the first six months of 1993,
the notional amount outstanding increased from approximately
$56.6 million at December 31, 1993 to approximately $58.1 million
at June 30, 1994, with this increase occurring during the first
quarter of the year. Due to the fact that these options are
subject to hedge accounting, and the fact that there were neither
maturities nor terminations during 1994, there was no effect on
income from these options during 1994.
With respect to the Company's swap program which is designed
to mitigate 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,
there were no material balances or activity during 1993. During
the three months and six months ended June 30, 1994, there were
$1.1 million and $2.8 million, respectively, of additions to the
December 31, 1993 outstanding notional amount of $1.2 million.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 24
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
During the three months and six months ended June 30, 1994, there
were no material maturities or terminations, nor was there any
material effect on income. The unrealized gain associated with
these swaps was $0.7 million and $0.1 million at June 30, 1994
and 1993, respectively.
With respect to the swaps associated with the Company's
fixed price sales commitments, none of which were outstanding
during the first six months of 1993, the notional amount of $94.1
million at December 31, 1993 declined to $92 million and $87.7
million at March 31, 1994 and June 30, 1994, respectively. These
changes principally resulted from maturities of approximately
$4.3 million during each of the first two quarters of 1994. The
effect of these swaps on earnings was to increase pre-tax income
by $0.2 million and $0.4 million, respectively, for the three
months and six months ended June 30, 1994. The unrealized gain
associated with these swaps was $0.6 million at June 30, 1994.
As further discussed in the Company's 1993 Report on Form
10-K, on September 1, 1993 and November 1, 1993, respectively,
NGT and 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 due, in part, to the switch from sales to
transportation which has the effect of removing the cost of gas
from revenues and expenses.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 25
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 six months ended June 30, 1993, LIG's
operating revenues, operating income and total throughput were
$151.1 million, $5.6 million and 103.4 million MMBtu,
respectively.
Six Months
Ended June 30
1994 1993 Increase(Decrease)
FINANCIAL RESULTS (millions of dollars) $ %
Gas sales revenue
Sales to Distribution $ 90.1 $ 156.2 $ (66.1) (42.3)
Industrial sales and 349.9 312.1 37.8 12.1
other
Total gas sales 440.0 468.3 (28.3) (6.0)
revenue
Transportation revenue
Affiliated 53.1 7.2 45.9 637.5
Unaffiliated 74.7 45.1 29.6 65.6
Total transportation 127.8 52.3 75.5 144.4
revenue
Total operating 567.8 520.6 47.2 9.1
revenue
Purchased gas cost
Affiliated 3.5 1.1 2.4 218.2
Unaffiliated 400.9 364.6 36.3 10.0
Operations and 47.7 51.6 (3.9) (7.6)
maintenance expense
Depreciation and 21.5 21.5 - -
amortization
Other operating expenses, 35.2 36.5 (1.3) (3.6)
net
Operating income $ 59.0 $ 45.3 $ 13.7 30.2
OPERATING STATISTICS (million MMBtu)
Sales to Distribution 39.3 48.3 (9.0) (18.6)
Industrial sales and 69.1 57.6 11.5 20.0
other
Total sales 108.4 105.9 2.5 2.4
Transportation for 59.8 32.5 27.3 84.0
Distribution
Transportation for others 410.2 344.6 65.6 19.0
Total transportation 470.0 377.1 92.9 24.6
Less: Order 636 (33.3) - (33.3) N/A
elimination(1)
Total throughput 545.1 483.0 62.1 12.9
(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. After FERC Order 636 implementation,<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 26
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
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.
"Sales to Distribution" decreased by $66.1 million (42%)
primarily due to the implementation of services to Distribution
in 1994 under FERC Order 636 which tends to shift the revenue
associated with gathering, storage and transportation services
out of sales revenue, as further described in the discussion for
the three months ended June 30, 1994 and 1993 elsewhere herein.
Industrial and other sales increased by $37.8 million (12%)
primarily due to a 44% increase in sales volume by the marketing
affiliate, partially offset by lower sales volumes by the
regulated business units and the shift of certain components of
sales revenues due to the unbundling requirements of FERC Order
636.
Purchased gas cost increased by $38.7 million (11%)
primarily in support of increased sales by the marketing
affiliate, partially offset by lower sales by the regulated
business units as mentioned previously. The increase in
affiliated purchase gas cost is attributable to higher purchases
by the marketing affiliate from Distribution. Operation and
maintenance expense for 1994 was 8% below 1993 primarily due to
lower third-party transportation cost experienced by MRT due to
the shift from sales to transportation service under FERC Order
636. "Other operating expenses, net" decreased by $1.3 million
primarily due to a non-recurring $2.0 million accrual in 1993 for
severance cost and an adjustment in the second quarter of 1994
for reduced allocations from Corporate due to changes in certain
allocation factors.
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 Page 27
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
Six Months
Ended June 30
1994 1993 Increase(Decrease)
FINANCIAL RESULTS (millions of dollars) $ %
Natural gas sales $ 1,174.8 $ 1,085.1 $ 89.7 8.3
Transportation 9.9 10.9 (1.0) (9.2)
Other revenue 13.3 12.6 0.7 5.6
Total operating revenue 1,198.0 1,108.6 89.4 8.1
Purchased gas cost
Unaffiliated 627.2 536.7 90.5 16.9
Affiliated 175.2 192.0 (16.8) (8.8)
O&M, G&A and cost of sales 187.2 175.4 11.8 6.7
Depreciation and 43.1 40.5 2.6 6.4
amortization
Other operating expenses 46.3 44.4 1.9 4.3
Operating income $ 119.0 $ 119.6 $ (0.6) (0.5)
OPERATING STATISTICS (billions of cubic feet)
Residential sales 114.9 114.5 0.4 0.3
Commercial sales 70.0 72.0 (2.0) (2.8)
Industrial sales 65.1 52.4 12.7 24.2
Sales for resale 8.7 4.4 4.3 97.7
Transportation 34.9 39.9 (5.0) (12.5)
Total throughput 293.6 283.2 10.4 3.7
DEGREE Normal 1994 1993
DAYS
ALG 1,877 1,837 1,990
Entex 935 933 898
Minnegasco 4,651 4,987 4,822
Distribution operating income decreased slightly from $119.6
million in the first six months of 1993 to $119.0 million in the
first six months of 1994, reflecting increases in operating
revenues that were more than offset by corresponding increases in
operating expenses.
Operating revenues increased from $1,108.6 million in the
first six months of 1993 to $1,198.0 million in the first six
months of 1994 due primarily to (1) increased industrial sales,
principally at Entex, (2) colder 1994 weather in the service
areas of Minnegasco and Entex 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 1994 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. Industrial sales volume increased 12.7 Bcf (24.2%), due<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 28
Condition and Results of Operations
(continued)
Material Changes in the Results of Operations (continued)
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 six months of 1993 to the first six
months 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 $16.3 million (6.3%) in 1994 over the first six
months of 1993 principally due to (1) increased "O&M, G&A and
cost of sales" due to (i) increased G&A cost for salaries and
benefits and (ii) increased O&M expense due to 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 $9.0 million decrease in the operating loss from the
first six months of 1993 to the first six months of 1994 was
principally due to (1) increased 1993 expense resulting from
amounts accrued under certain employee benefit plans, (2) 1993
accruals for certain intercompany billings which were not
contractually permitted to be recorded at their full face value
by the receiving business unit and (3) a decrease in 1994 expense
related to the Company's Long-Term Incentive Plan (recently
replaced by the Incentive Equity Plan, see "Submission of Matters
to a Vote of Security Holders" elsewhere herein).
CONSOLIDATED
Net income decreased from $65.3 million in the first six
months of 1993 to $48.6 million in the corresponding period of
1994, a decrease of $16.7 million, while (as discussed above)
operating income increased by $16.5 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 $44.5
million of pre-tax gains from the sale of
assets.
* The decrease of $15.7 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 $5.5 million in 1994 interest
expense, principally due to a reduced level
of total debt.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 29
Condition and Results of Operations
(continued)
* The decrease of $18.6 million in the 1994
provision for income taxes, reflecting a
reduced level of income before income taxes.
* The decrease of $2.9 million in 1994 for the
after-tax loss due to premiums on the early
retirement of debt.
Liquidity and Capital Resources
The table below illustrates the sources of the Company's
invested capital during the last five years and at June 30, 1994.
June 30 December 31
INVESTED 1994 1993 1992 1991 1990 1989
CAPITAL
(millions of dollars)
Long-Term Debt $1,604.1 $1,629.4 $1,783.1 $1,551.5 $1,450.2 $1,162.3
Total Equity 735.8 708.0 712.9 948.0 1,115.4 546.1
Total 2,339.9 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 $2,437.3 $2,529.8 $2,616.0 $3,272.1 $3,278.0 $2,310.7
Capital
Long-Term Debt
as a Percent of
Total 68.6% 69.7% 71.4% 62.1% 56.5% 68.0%
Capitalization
Equity as a
Percent
of Total 31.4% 30.3% 28.6% 37.9% 43.5% 32.0%
Capitalization
Total Debt as a
Percent of
Total 69.8% 72.0% 72.7% 71.0% 66.0% 76.4%
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. The significantly higher "Cash
and cash equivalents" balance at June 30, 1993 in comparison to
December 31, 1993 and June 30, 1994 is principally due to the
June 30, 1993 receipt of the proceeds from the sale of LIG, a
substantial portion of which were not applied until the following
day, see Note J of the accompanying Notes to Consolidated
Financial Statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 30
Condition and Results of Operations
(continued)
Liquidity and Capital Resources (continued)
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 $125.6 million in the first six months
1993 to $215.2 million in the first six months of 1994. This
increase of $89.6 million was principally attributable to:
* Increased 1994 cash provided from the sale of
inventories, principally gas in underground
storage.
* The 1994 cash inflows from settlement of gas
contract disputes, which settlements had
resulted in a net outflow in 1993.
* Increased cash provided by accounts
receivable collections during 1994,
reflecting the relatively higher December 31,
1993 accounts receivable balance in
comparison to the December 31, 1992 balance.
* Decreased 1994 cash used for accounts
payable, principally due to the relatively
higher June 30, 1993 accounts payable
balance.
* 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 June 30,
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 31
Condition and Results of Operations
(continued)
Liquidity and Capital Resources (continued)
Six Months
Ended June 30
1994 and 1993
(millions of dollars)
Use (Source)
Settlement of gas contract disputes $ (13.1) $ 25.0
Capital expenditures 75.7 63.1
Common and preferred dividends 21.0 21.0
Debt retirement 120.8 125.6
Change in receivables sold 150.4 212.6*
Increase in overdrafts 4.3 30.6
Selected External Uses of Cash 359.1 477.9
Less:
Proceeds from sale of 12.3 263.4
properties/assets
Change in cash balance (0.9) 3.2*
Cash Generated from Other Sources,
Principally Internal $ 347.7 $ 211.3
* Adjusted for the reduction in the
receivable sales program which occurred on
July 1, 1993.
Net Cash Flows from Investing Activities
The Company's capital expenditures for continuing operations
by business unit for the six months ended June 30, 1994 and 1993
were as follows:
Six Months
Ended June 30
1994 1993 Increase(Decrease)
(millions of dollars) $ %
Pipeline $ 22.5 $ 13.6 $ 8.9 65.4
(excluding LIG)
Distribution 52.4 47.4 5.0 10.5
Other 0.8 0.2 0.6 300.0
Sub Total 75.7 61.2 14.5 23.7
LIG - 1.9 (1.9) N/A
Consolidated $ 75.7 $ 63.1 $ 12.6 20.0
Capital expenditures increased from $63.1 million in the
first six months of 1993 to $75.7 million in the first six months
of 1994, an increase of $12.6 million, reflecting increased
spending in both Pipeline and Distribution. The increased
spending in Pipeline was largely due to expenditures associated
with the Company's program to increase throughput at its
facilities near Perryville, Louisiana, while the increased
Distribution expenditures reflect customer growth and replacement
of existing facilities. The Company's capital expenditures for
1994 are currently budgeted at approximately $200 million.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 32
Condition and Results of Operations
(continued)
Liquidity and Capital Resources (continued)
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. 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 June 30, 1994 or July 31, 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 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. The Company had no swaps in
effect at December 31, 1992 and, during the first six months of
1993, the Company added $375 million notional amount of swaps, of
which $125 million was added during the second quarter. There
has been no change in the makeup or notional amount of these
swaps since December 31, 1993 and, as of June 30, 1994, $275
million notional amount of these swaps were outstanding,
terminating at various dates through February 1997. None of
these swaps are "leveraged" and, therefore, they do not represent
exposure in excess of that suggested by the notional amount and
reported interest rates. At June 30, 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 5.0%, 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
the Credit Facility. <PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 33
Condition and Results of Operations
(continued)
Liquidity and Capital Resources (continued)
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. The effect of these swaps
was to decrease the Company's interest expense by $0.8 million
and $1.4 million for the three months and six months ended June
30, 1994, respectively, and by $1.4 million and $1.8 million for
the three months and six months ended June 30, 1993,
respectively. 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. The
deferred gain associated with interest rate swaps terminated
prior to their expiration was approximately $3.8 million at June
30, 1994. This gain is expected to be amortized as follows: the
remainder of 1994 - $1.2 million; 1995 - $1.7 million; 1996 -
$0.7 million; all remaining periods - $0.2 million. At June 30,
1994, the unrealized loss (mark-to-market value) associated with
these arrangements was approximately $13.7 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 $310.8 million and $42.8 million, respectively, at
June 30, 1994.
Commitments
The Company had capital commitments of less than $30 million
at June 30, 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 Note L of the accompanying Notes to Consolidated
Financial Statements.
Letters of Credit. At June 30, 1994, the Company was
obligated for $23.3 million under letters of credit which are
incidental to its ordinary business operations.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 34
Condition and Results of Operations
(continued)
Liquidity and Capital Resources (continued)
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 interest rate swaps, see "Net Cash
Flows from Financing Activities" elsewhere herein. As discussed
in the Company's 1993 Report on Form 10-K, the Company has off-
balance-sheet risk as a result of its natural gas hedging
activities, see "Natural Gas Pipeline" under "Material Changes in
the Results of Operations" for the six months ended June 30, 1994
and 1993 elsewhere herein. As discussed in the Company's 1993
Report on Form 10-K, the Company's receivable sales program also
carries off-balance-sheet risk.
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.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 35
Condition and Results of Operations
(continued)
Liquidity and Capital Resources (continued)
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>
Page 36
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. The Company,
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. The Company, 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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders Page 37
(continued)
million in punitive damages. On November 1, 1993, the Company
filed a motion to dismiss the claim. In a hearing held on May
19, 1994, the Court heard arguments on this motion. The Court
did not rule on the motion, but took the matter under advisement
for decision at a later date. 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
(a) Date of the meeting - May 10, 1994
(b) Type of meeting - Annual Stockholders' Meeting
(c) Description of matters voted upon:
(1) Proposal to amend the Certificate of Incorporation
to change the name of the Company to NorAm Energy Corp.
Affirmative Votes - 94,064,481
Negative Votes - 7,611,602
(2) Proposal to adopt an Incentive Equity Plan to
replace the Company's Long-Term Incentive Plan
Affirmative Votes - 90,369,227
Negative Votes - 10,914,995
(3) Proposal to implement an employee stock purchase
plan
Affirmative Votes - 96,069,476
Negative Votes - 5,523,384
(4) Proposal to provide restricted stock for
nonemployee directors
Affirmative Votes - 88,656,708
Negative Votes - 12,515,377
(5) Proposal to require prior stockholder approval of
agreements providing for the payment of executive
compensation in the event of a change in control of the
Company
Affirmative Votes - 31,538,599
Negative Votes - 40,131,726<PAGE>
Page 38
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None<PAGE>
Page 39
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.
(Registrant)
By: Jack W. Ellis II
Jack W. Ellis II
Vice President & Controller
Dated August 15, 1994 <PAGE>
