Page 1 of 24
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, 1995
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) 654-5100
(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 July 18, 1995 - 123,930,825
Exhibit Index Appears on Page 23<PAGE>
Page 2
INDEX
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1995 and 1994
and December 31, 1994 4
Consolidated Statement of Income - Three Months Ended
June 30, 1995 and 1994 and Six Months Ended June 30,
1995 and 1994 5
Statement of Consolidated Cash Flows - Six Months Ended
June 30, 1995 and 1994 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 22
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24<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, 1994.<PAGE>
Page 4
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
ASSETS June 30 December 31 June 30
1995 1994 1994
PROPERTY, PLANT AND EQUIPMENT $3,892,340 $3,836,782 $3,797,800
Less: Accumulated depreciation 1,514,946 1,459,638 1,423,195
and amortization
2,377,394 2,377,144 2,374,605
INVESTMENTS AND OTHER ASSETS 681,870 698,754 730,372
(Note C)
CURRENT ASSETS
Cash and cash equivalents 18,539 17,632 15,835
Accounts and notes receivable 104,041 215,846 201,174
Deferred income taxes 14,465 10,287 21,618
Inventories (Note D) 84,162 112,094 81,791
Gas purchased in advance of 23,404 26,571 29,002
delivery
Other current assets 31,675 29,345 19,150
276,286 411,775 368,570
DEFERRED CHARGES 72,403 73,825 47,482
TOTAL ASSETS $3,407,953 $3,561,498 $3,521,029
LIABILITIES AND STOCKHOLDERS'
EQUITY
Stockholders' equity
Preferred stock $ 130,000 $ 130,000 $ 130,000
Common stock 77,470 76,581 76,503
Paid-in capital 876,436 868,289 867,843
Accumulated deficit (336,309) (360,079) (338,520)
Unrealized gain on Itron 13,211 2,586 -
investment, net of tax
Total Stockholders' Equity 760,808 717,377 735,826
Long-term debt, less current 1,323,674 1,414,374 1,604,104
maturities
CURRENT LIABILITIES
Current maturities of long- 221,000 151,000 77,000
term debt
Notes payable 63,000 110,000 -
Other notes payable - 13,600 20,400
Gas accounts payable 171,238 215,221 155,558
Other accounts payable 110,953 186,720 178,809
Income taxes payable 24,195 4,690 15,403
Interest payable 41,960 42,180 45,134
General taxes 31,818 45,717 36,809
Customers' deposits 35,803 55,729 34,604
Other current liabilities 89,474 71,266 98,114
789,441 896,123 661,831<PAGE>
Page 5
OTHER LIABILITIES AND DEFERRED
CREDITS
Accumulated deferred income 276,770 257,839 258,121
taxes
Other deferred credits and 257,260 275,785 261,147
noncurrent liabilities
534,030 533,624 519,268
TOTAL LIABILITIES AND $3,407,953 $3,561,498 $3,521,029
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
1995 1994 1995 1994
Operating Revenues $565,842 $547,146 $1,453,990 $1,648,015
Operating Expenses
Cost of natural gas 346,713 320,008 887,889 1,067,111
purchased, net
Operating, maintenance, 128,127 135,416 272,448 276,573
cost of sales & other
Depreciation and 38,482 38,094 77,078 76,148
amortization
Taxes other than 25,257 24,509 54,593 55,600
income taxes
538,579 518,027 1,292,008 1,475,432
Operating Income 27,263 29,119 161,982 172,583
Other Deductions
Interest expense, net 37,093 41,289 76,855 83,702
Other, net 1,493 1,155 4,370 3,229
38,586 42,444 81,225 86,931
Income(Loss) Before (11,323) (13,325) 80,757 85,652
Income Taxes
Provision for Income (4,251) (6,950) 35,833 36,540
Taxes(Benefit) (Note E)
Income(Loss) Before (7,072) (6,375) 44,924 49,112
Extraordinary Item
Extraordinary loss, - (517) (52) (517)
less taxes
Net Income(Loss) (7,072) (6,892) 44,872 48,595
Preferred dividend 1,950 1,950 3,900 3,900
requirement
Balance Available to $(9,022) $(8,842) $ 40,972 $ 44,695
Common Stock
Per Share Data:
Before $ (0.07) $ (0.07) $ 0.33 $ 0.37
extraordinary item
Extraordinary loss, - 0.00 0.00 0.00
less taxes
Earnings(Loss) per $ (0.07) $ (0.07) $ 0.33 $ 0.37
Common Share
<PAGE>
Page 7
Average Common
Shares Outstanding 123,735 122,390 123,350 122,380
(in thousands)
Cash Dividends per $ 0.07 $ 0.07 $ 0.14 $ 0.14
Common Share
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
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,872 $ 48,595
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 77,078 76,148
Deferred income taxes 8,910 24,232
Extraordinary loss, less taxes 52 517
Other 1,563 (399)
Changes in certain assets and
liabilities, net of noncash 103,533 66,799
transactions (Note F)
Net cash provided by operating 236,008 215,892
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (72,200) (75,700)
Sale of assets - 12,315
Sale of Itron stock 1,441 -
Other, net (612) (5,479)
Net cash used in investing (71,371) (68,864)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of (34,352) (25,777)
long-term debt
Decrease in overdrafts (16,108) (4,291)
Other interim debt repayments (47,000) (95,000)
Issuance of common stock under
direct stock purchase plan 4,915 -
Return of advance received under
contingent sales agreement (Note I) (50,000) -
Common and preferred stock dividends (21,185) (21,035)
Net cash used in financing (163,730) (146,103)
activities
Net increase in cash and cash 907 925
equivalents
Cash and cash equivalents - 17,632 14,910
beginning of period
Cash and cash equivalents - $ 18,539 $ 15,835
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 in an entire year. The
preparation of financial statements requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates. 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
1995 1994(1) 1994(1)
(millions of dollars)
Goodwill, net $ 488.2 $ 495.3 $ 502.4
Gas purchased in advance of 27.2 43.5 54.8
delivery
Notes receivable 6.4 6.1 8.6
Other 160.1 153.9 164.6
$ 681.9 $ 698.8 $ 730.4
(1) "Investments and other assets" as previously presented
at June 30 and December 31, 1994 included $91 million of
pipeline assets held for sale pursuant to a sale of
interests agreement which has been replaced with a
transportation agreement as described in Note I. These
assets have been reclassified to property, plant and
equipment.
D. "Inventories" as presented on the accompanying Consolidated
Balance Sheet includes the following:<PAGE>
Page 10
June 30 December 31 June 30
1995 1994 1994
(millions of dollars)
Gas in underground $ 49.2 $ 73.8 $ 43.0
storage
Materials and 34.7 38.1 38.5
supplies
Other 0.3 0.2 0.3
$ 84.2 $ 112.1 $ 81.8
The increased gas in underground storage at December 31,
1994 in comparison to June 30, 1995 and 1994 is largely a
normal seasonal fluctuation.
E. "Provision for Income Taxes(Benefit)" as presented on the
accompanying Consolidated Statement of Income includes the
following:
Three Months Six Months
Ended June 30 Ended June 30
1995 1994 1995 1994
(millions of dollars)
Federal
Current $ (9.1) $ (11.5) $ 22.8 $ 12.2
Deferred 5.0 10.8 5.5 23.6
Investment (0.1) (0.1) (0.3) (0.3)
tax credit
State
Current (1.9) (5.0) 4.4 0.4
Deferred 1.8 (1.2) 3.4 0.6
$ (4.3) $ (7.0) $ 35.8 $ 36.5
F. The caption "Changes in certain assets and liabilities, net
of noncash transactions" as presented on the accompanying
Statement of Consolidated Cash Flows includes the following:
Six Months
Ended June 30
1995 1994
(millions of
dollars)
Increase(Decrease) in Cash
and Cash Equivalents
Accounts and notes receivable $ 109.3 $ 113.3
Inventories 27.9 72.4
Other current assets (2.3) 8.5
Gas accounts payable (44.0) (111.7)
Other accounts payable (9.7) (7.0)
Income taxes payable 19.5 2.5
Interest payable (0.2) 0.5
General taxes payable (13.9) (13.3)
Customers' deposits (19.9) (12.3)
Other current liabilities 18.2 0.8
Settlement of gas contract disputes 18.6 13.1
$ 103.5 $ 66.8<PAGE>
Item 1. Financial Statements (continued) Page 11
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:
Six Months
Ended June 30
1995 1994
(millions of
dollars)
Cash interest payments, net of
capitalized interest $ 75.2 $ 81.2
Net cash income tax
payments $ 8.7 $ 9.8
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 $151.9 million, $192.8 million
and $76.0 million, respectively, at June 30, 1995,
December 31, 1994 and June 30, 1994, which amounts have been
deducted from "Accounts and notes receivable" in the
accompanying Consolidated Balance Sheet and, at June 30,
1995, $38.9 million of the Company's remaining receivables
were collateral for receivables which had been sold. During
the six months ended June 30, 1995 and 1994, the Company
experienced cash outflows of $40.9 million and $150.4
million, respectively, under the program. 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 within the
category "Cash flows from operating activities".
I. As discussed in the Company's 1994 Report on Form 10-K, the
Company had contracted to sell an interest in 250 MMcf/day
of capacity in certain of the Company's natural gas
transmission facilities to ANR Pipeline Company ("ANR"),
subject to receipt of acceptable approvals from the Federal
Energy Regulatory Commission (the "FERC"). In early May
1995, the Company announced that the parties had elected to
cease pursuing acceptable FERC approvals and would, instead,
operate pursuant to backup transportation arrangements.
These backup arrangements required the Company to refund $50
million to ANR on June 1, 1995, in exchange for the return
of 120 MMcf/day of capacity previously transferred. The
level of transportation services provided pursuant to the<PAGE>
Item 1. Financial Statements (continued) Page 12
Notes to Consolidated Financial Statements (continued)
backup arrangements will further decrease to 100 MMcf/day on
April 1, 2003, with an additional refund to ANR of $5
million and these arrangements will terminate on June 1,
2005, with a refund of the remaining balance. The amount
advanced to the Company in contemplation of the completion
of this sale transaction had been recorded as a liability
and the assets subject to the transaction had been
segregated as "Pipeline assets held for sale" and included
with "Investments and other assets" on the Company's
Consolidated Balance Sheet. The Company's liability has
been reduced by the $50 million refunded on June 1 and the
assets have been reclassified to property, plant and
equipment, see Note C.
J. On February 1, 1995, the Company transferred the natural gas
gathering assets of NorAm Gas Transmission Company ("NGT")
into a wholly owned subsidiary called NorAm Field Services
Corp. ("NFS"). NFS is not generally subject to cost-of-
service rate regulation and owns and operates 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.
K. In early August 1995, the Company filed a prospectus
supplement with the Securities and Exchange Commission
("SEC") to publicly offer approximately $200 million of
five-year notes. The proceeds from this offering, scheduled
for completion in August, are expected to be used primarily
to retire the Company's currently maturing long-term
indebtedness and, pending such application, to reduce the
Company's bank borrowings and for general corporate
purposes.
L. As more fully described in the Company's 1994 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<PAGE>
Item 1. Financial Statements (continued) Page 13
Notes to Consolidated Financial Statements (continued)
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.
On October 24, 1994, the United States Environmental
Protection Agency advised MRT that it, together with a
number of other parties, had been named a potentially
responsible party under federal law with respect to a
landfill site in West Memphis, Arkansas, see Note M.
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, financial position or cash flows.
M. 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
State Claim. In a hearing held on May 19, 1994, the Court
heard arguments on this motion. On September 20, 1994, the
Court entered an order granting the Company's motion to
dismiss. The plaintiffs have appealed this order granting
the motion to dismiss, and a hearing date for the appeal has
been set for September 25, 1995. 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. The Federal Claim was dismissed in August
1992. Since the State Claim is based on essentially the
same underlying factual basis as the Federal Claim and in
light of the Court's order granting the Company's motion to
dismiss the State Claim, the Company continues to believe
that the State Claim is without merit, intends to vigorously
contest any appeal of the order granting dismissal and does
not believe that the outcome will have a material adverse
effect on the financial position, results of operations or
cash flows of the Company.
On October 24, 1994, the United States Environmental
Protection Agency advised MRT, a wholly-owned subsidiary of
the Company, that MRT along with a number of other companies
have been named under federal law as potentially responsible
parties for a landfill site in West Memphis, Arkansas and<PAGE>
Item 1. Financial Statements (continued) Page 14
Notes to Consolidated Financial Statements (continued)
may be required to share in the cost of remediation of this
site. However, considering the information currently known
about the site and the involvement of MRT, the Company does
not believe that this matter will have a material adverse
effect on the financial position, results of operations or
cash flows of the Company.
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 marketing, gathering and storage ("Trading and
Transportation", formerly referred to as "Pipeline" or "Natural
Gas Pipeline"). The Company's legal structure consists of a
number of divisions and subsidiaries, all of which are wholly
owned. The reader is referred to the Company's 1994 Report on
Form 10-K for a general discussion of the Company's business
operations, acquisitions and dispositions, accounting policies
and significant trends in operating results.
Recent Developments
Debt Offering
In early August 1995, the Company filed a prospectus
supplement with the Securities and Exchange Commission ("SEC") to
publicly offer approximately $200 million of five-year notes.
The proceeds from this offering, scheduled for completion in
August, are expected to be used primarily to retire the Company's
currently maturing long-term indebtedness and, pending such
application, to reduce the Company's bank borrowings and for
general corporate purposes.
Dividend Declaration
On July 12, 1995, 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, 1995 to
owners of record on August 21, 1995.
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 1994 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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 15
Condition and Results of Operations (continued)
Material Changes in the Results of Operations (continued)
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 1995 TO THE SECOND
QUARTER OF 1994
Quarter Ended
June 30 Increase(Decrease)
1995 1994 $ %
Operating Income(Loss) (millions of dollars)
Natural gas distribution $ 9.3 $ 7.2 $ 2.1 29.2
Trading and Transportation 20.7 24.1 (3.4) (14.1)
Corporate and Other (2.7) (2.2) (0.5) (22.7)
Consolidated $ 27.3 $ 29.1 $ (1.8) (6.2)
DISTRIBUTION
The Company's distribution operations are conducted by its
Entex, Minnegasco and Arkla Divisions, collectively referred to
as "Distribution". In September 1994, the Company completed the
sale of its Kansas distribution properties (and certain related
transmission facilities) for approximately $23 million in cash.
This system serves approximately 23,000 customers in 14
communities.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 16
Condition and Results of Operations (continued)
Material Changes in the Results of Operations (continued)
Quarter Ended
June 30 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Natural gas sales $ 356.1 $ 351.9 $ 4.2 1.2
Transportation revenue 3.8 4.1 (0.3) (7.3)
Other revenue 15.3 15.3 - -
Total operating revenues 375.2 371.3 3.9 1.1
Purchased gas cost
Unaffiliated 198.3 193.3 5.0 2.6
Affiliated 22.8 28.9 (6.1) (21.1)
Operations and maintenance 101.1 99.9 1.2 1.2
Depreciation and 22.8 22.0 0.8 3.6
amortization
Other operating expenses 20.9 20.0 0.9 4.5
Operating income $ 9.3 $ 7.2 $ 2.1 29.2
OPERATING STATISTICS (billions of cubic feet)
Residential sales 25.6 25.1 0.5 2.0
Commercial sales 21.0 19.6 1.4 7.1
Industrial sales 39.1 32.1 7.0 21.8
Sales for resale 12.4 4.6 7.8 169.6
Transportation 15.1 15.8 (0.7) (4.4)
Total throughput 113.2 97.2 16.0 16.5
DEGREE DAYS Normal 1995 1994
ALG 144 167 167
Entex 50 35 47
Minnegasco 778 947 751
Distribution operating income increased from $7.2 million in
the second quarter of 1994 to $9.3 million in the second quarter
of 1995, an increase of $2.1 million (29.2%), reflecting a slight
increase in both operating revenues and operating expenses.
Operating revenues increased from $371.3 million in the
second quarter of 1994 to $375.2 million in the second quarter
of 1995 due primarily to increased industrial sales volume,
partially offset by a 17.6% decline in the average cost of
purchased gas from $2.73/Mcf in 1994 to $2.25/Mcf in 1995
(purchased gas cost is a component of the overall sales rate).
Total weather-sensitive residential and commercial sales volume
increased 1.9 Bcf (4.3%) from the second quarter of 1994 largely
due to cooler weather in Minnegasco's service area. Industrial
sales volume increased 7.0 Bcf (21.8%) over the second quarter of
1994 due to the continued growth in demand in Entex's service
area. The lower-margin sales for resale increased 7.8 Bcf
between the two periods.
Total purchased gas cost decreased $1.1 million in the
second quarter of 1995 in comparison to the second quarter of<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)
1994 due to the decrease in the average cost of purchased gas as
discussed above, partially offset by the increased sales volume.
Operating expenses, exclusive of purchased gas cost, increased by
$2.9 million in the second quarter of 1995 in comparison to the
second quarter of 1994 principally due to (1) increased O&M
expense related to increased throughput and (2) increased
depreciation expense due to increased investment.
TRADING AND TRANSPORTATION
The Company's Trading and Transportation operations are
conducted by (1) the Company's two interstate pipeline
subsidiaries; NorAm Gas Transmission Company ("NGT") and
Mississippi River Transmission Corporation ("MRT"), (2) NorAm
Energy Services, Inc. ("NES"), the Company's principal
unregulated natural gas marketing subsidiary, (3) NorAm Field
Services Corp. ("NFS"), the Company's principal natural gas
gatherer and (4) certain subsidiaries and affiliates of these
entities. Collectively, these businesses are referred to as the
"NorAm Trading and Transportation Group" or "Trading and
Transportation".
On February 1, 1995, the Company transferred the natural gas
gathering assets of NGT into NFS. NFS is not generally subject
to cost-of-service rate regulation and owns and operates
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.
In May 1995, the Company determined that it would not
complete the sale of certain pipeline facilities to ANR, see Note
I of Notes to Consolidated Financial Statements.
Trading and Transportation utilizes various derivatives in
the normal course of its business, see the discussion under
Trading and Transportation for the six months ended June 30, 1995
and 1994 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)
Quarter Ended
June 30 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Gas sales revenue
Sales to Distribution $ 30.6 $ 28.9 $ 1.7 5.9
Industrial sales and other 170.1 138.2 31.9 23.1
Total gas sales revenue 200.7 167.1 33.6 20.1
Transportation revenue
Distribution 31.2 24.7 6.5 26.3
Other 26.4 31.6 (5.2) (16.5)
Total transportation revenue 57.6 56.3 1.3 2.3
Total operating revenue 258.3 223.4 34.9 15.6
Purchased gas cost
Affiliated 2.5 0.9 1.6 177.8
Unaffiliated 185.6 151.5 34.1 22.5
Operations and maintenance 20.9 18.5 2.4 13.0
expense
Depreciation and amortization 10.7 10.8 (0.1) (0.9)
Other operating expenses, net 17.9 17.6 0.3 1.7
Operating income $ 20.7 $ 24.1 $ (3.4) (14.1)
OPERATING STATISTICS (million MMBtu)
Sales to Distribution 14.6 14.1 0.5 3.5
Sales for resale and other 83.6 36.2 47.4 130.9
Total sales 98.2 50.3 47.9 95.2
Transportation
Distribution 16.6 14.6 2.0 13.7
Other 203.9 182.8 21.1 11.5
Total transportation 220.5 197.4 23.1 11.7
Elimination(1) (19.1) (14.6) (4.5) (30.8)
Total throughput 299.6 233.1 66.5 28.5
(1) This elimination is made to prevent the overstatement
of total throughput which would otherwise occur due to
physical volumes which were both sold and transported by
Trading and Transportation and are therefore included in the
above volumetric data in both categories.
Second quarter 1995 operating income for Trading &
Transportation decreased by $3.4 million or 14% from the second
quarter of 1994. This decline was primarily due to lower second
quarter results from the Company's interstate pipelines which
offset improved second quarter margins in NES and NFS. The
reduced 1995 pipeline margins are primarily due to lower 1995
margins on gas sales as a result of lower gas prices (see the
discussion following), a 1994 inventory adjustment and the
inclusion in 1994 of certain favorable effects of the transition
to operations under FERC Order 636. These unfavorable variances
were partially offset by improved 1995 marketing margins due to<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)
increased sales volumes and expanded use of gas storage
arrangements. These arrangements allow NES to mitigate the cost
of supplying peak or swing load demands by decreasing the need to
acquire spot market supplies of gas on short notice. Improved
gathering margins are primarily attributable to higher gathering
rates subsequent to the "spindown" of gathering in February 1995
(see Note J of Notes to Consolidated Financial Statements) and
the effect of certain low pressure projects as discussed
following.
Sales to Distribution increased by $1.7 million (6%)
primarily due to a 0.5 million MMBtu (4%) increase in sales by
NES. Industrial and other sales increased by $31.9 million (23%)
primarily due to a 47.4 million MMBtu (131 %) increase in sales
volumes. Approximately 86% of this volume increase is
attributable to higher sales by NES, primarily due to increased
marketing activity related to "off-system" sales for
transportation by third-party pipelines. The effect of these
higher sales volumes was partially offset by lower second quarter
1995 spot market prices ($0.52/MMBtu or 26% below the average for
the second quarter of 1994), which lowers the commodity cost
component of the total sales rate, thereby decreasing total sales
revenues. This decrease in gas cost also had an unfavorable
impact on the net sales margin earned by the pipeline due to the
fact that the pipeline's sales rate generally includes the cost
of gas at an index plus a margin, while the cost of the related
gas supply is composed largely of fixed price contracts, with a
lesser amount of supply that varies with market conditions.
Additionally, second quarter 1994 sales revenues include
$10.0 million of non-recurring sales revenue related to MRT's
sale of storage gas to its customers as part of its transition
to Order 636, which revenue was offset by increased gas purchase
cost.
Total purchased gas cost increased by $35.7 million,
primarily due to a corresponding increase in sales revenues,
partially offset by the 1994 sale of MRT storage gas as discussed
previously. Operation and maintenance expenses increased by $2.4
million (13%), with approximately $1.5 million (62%) of the
variance attributable to increased cost incurred by the gathering
affiliate related to rental of field compressors for "low
pressure" projects. These projects are designed to lower the
operating pressure of certain lines in order to increase
throughput in certain areas of the gathering system. The
incremental cost of this service is included as a component of
the total gathering rate and is thereby recovered through
increased gathering revenues. The remaining operation and
maintenance expense variance is due to adjustments which reduced
1994 O&M expense by recapitalization of certain items to material
inventory.
<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)
CORPORATE AND OTHER
The increase in the operating loss of Corporate and Other
from the second quarter of 1994 to the second quarter of 1995 was
due to a decrease in income from miscellaneous activities.
CONSOLIDATED
The consolidated net loss increased from $6.9 million in the
second quarter of 1994 to $7.1 million in the second quarter of
1995, an increase of $0.2 million, while (as discussed preceding)
operating income decreased $1.8 million during the same period.
The principal reasons for the decreased net expense below the
operating income line were as follows:
* The decrease of $4.2 million in second quarter 1995
interest expense, due to a reduced level of debt and
lower interest rates.
* The inclusion in 1994 results of a $0.5 million after-
tax loss due to premiums on the early retirement of
debt.
These favorable impacts were partially offset by:
* The decrease of $2.6 million in the 1995 income tax
benefit, reflecting a higher 1994 interim effective tax
rate and a decrease in the 1995 loss before income
taxes.
* The increase of $0.4 million in "Other, net" for 1995,
principally due to an increase in the loss on sale of
accounts receivable.
(2) COMPARISON OF THE FIRST SIX MONTHS OF 1995 TO THE FIRST SIX
MONTHS OF 1994
Six Months
Ended June 30 Increase(Decrease)
1995 1994 $ %
Operating Income(Loss) (millions of dollars)
Natural gas distribution $ 107.2 $ 116.0 $ (8.8) (7.6)
Trading and Transportation 57.3 59.0 (1.7) (2.9)
Corporate and Other (2.5) (2.4) (0.1) (4.2)
Consolidated $ 162.0 $ 172.6 $(10.6) (6.1)
<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)
DISTRIBUTION
Six Months
Ended June 30 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Natural gas sales $ 1,043.1 $ 1,176.3 $ (133.2) (11.3)
Transportation revenue 10.1 9.9 0.2 2.0
Other revenue 31.3 32.0 (0.7) (2.2)
Total operating revenues 1,084.5 1,218.2 (133.7) (11.0)
Purchased gas cost
Unaffiliated 539.7 628.8 (89.1) (14.2)
Affiliated 139.0 175.2 (36.2) (20.7)
Operations and maintenance 207.2 208.1 (0.9) (0.4)
Depreciation and 45.6 43.8 1.8 4.1
amortization
Other operating expenses 45.8 46.3 (0.5) (1.1)
Operating income $ 107.2 $ 116.0 $ (8.8) (7.6)
OPERATING STATISTICS (billions of cubic feet)
Residential sales 106.0 114.9 (8.9) (7.7)
Commercial sales 68.2 70.0 (1.8) (2.6)
Industrial sales 78.6 65.1 13.5 20.7
Sales for resale 20.5 8.7 11.8 135.6
Transportation 36.5 34.9 1.6 4.6
Total throughput 309.8 293.6 16.2 5.5
DEGREE DAYS Normal 1995 1994
ALG 1,857 1,632 1,837
Entex 926 796 933
Minnegasco 4,671 4,567 4,987
Distribution operating income decreased from $116.0 million
in the first six months of 1994 to $107.2 million in the first
six months of 1995, a decrease of $8.8 million (7.6%), reflecting
a decrease in both operating revenues and operating expenses.
Operating revenues decreased from $1,218.2 million in the
first six months of 1994 to $1,084.5 million in the first six
months of 1995 due primarily to (1) warmer 1995 weather in the
service areas of all three distribution units and (2) a 20.3%
decline in the average cost of purchased gas from $3.11/Mcf in
1994 to $2.48/Mcf in 1995. As a result of the warmer 1995
weather, total weather-sensitive residential and commercial sales
volumes decreased 10.7 Bcf (5.8%) in comparison to 1994.
However, the continued improvement in the economic conditions in
Entex's service area and intensified marketing efforts were
principally responsible for an increase of 13.5 Bcf (20.7%) in
the industrial sales volumes from 1994 to 1995.
Total purchase gas cost decreased by $125.3 million (15.6%)
in the first half of 1995 in comparison to the first half of<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 22
Condition and Results of Operations (continued)
Material Changes in the Results of Operations (continued)
1994, principally due to the decrease in the average cost of
purchased gas as discussed above. Operating expenses, exclusive
of purchased gas cost, increased $0.4 million (0.1 %) in the
first six months of 1995 in comparison to the first six months of
1994 due to increased depreciation and amortization expense
reflecting increased investment, partially offset by decreased
O&M and other operating expenses.
TRADING AND TRANSPORTATION
Six Months
Ended June 30 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Gas sales revenue
Sales to Distribution $ 76.3 $ 90.1 $ (13.8) (15.3)
Industrial sales and other 308.2 353.8 (45.6) (12.9)
Total gas sales revenue 384.5 443.9 (59.4) (13.4)
Transportation revenue
Distribution 62.3 53.1 9.2 17.3
Other 55.3 62.6 (7.3) (11.7)
Total transportation revenue 117.6 115.7 1.9 1.6
Total operating revenue 502.1 559.6 (57.5) (10.3)
Purchased gas cost
Affiliated 2.7 3.5 (0.8) (22.9)
Unaffiliated 344.3 403.2 (58.9) (14.6)
Operations and maintenance 40.3 36.9 3.4 9.2
expense
Depreciation and amortization 21.7 21.5 0.2 0.9
Other operating expenses, net 35.8 35.5 0.3 0.8
Operating income $ 57.3 $ 59.0 $ (1.7) (2.9)
OPERATING STATISTICS (million MMBtu)
Sales to Distribution 36.8 39.3 (2.5) (6.4)
Sales for resale and other 147.1 69.1 78.0 112.9
Total sales 183.9 108.4 75.5 69.6
Transportation
Distribution 59.3 59.8 (0.5) (0.8)
Other 429.6 410.2 19.4 4.7
Total transportation 488.9 470.0 18.9 4.0
Elimination(1) (38.2) (33.3) (4.9) (14.7)
Total throughput 634.6 545.1 89.5 16.4
(1) This elimination is made to prevent the overstatement
of total throughput which would otherwise occur due to
physical volumes which were both sold and transported by
Trading and Transportation and are therefore included in the
above volumetric data in both categories.<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)
Operating income for Trading & Transportation through June
1995 decreased by $1.7 million (3%) from the corresponding period
in 1994. This unfavorable variance is primarily due to (1) lower
pipeline sales margins, (2) pipeline fuel usage which exceeded
corresponding tariff-allowed fuel recoveries from customers and
(3) the inclusion in 1994 of the effect of the transition to
operations under FERC Order 636. These pipeline variances offset
improved margins in NES and NFS, and a 1995 adjustment to
purchased gas cost as described following. The increased 1995
marketing margins are primarily attributable to increased sales
volumes and expanded use of storage arrangements (which mitigates
the cost of supplying peak or swing load demand by decreasing the
need to acquire spot market supplies on short notice). Higher
gathering margins are primarily attributable to higher gathering
rates subsequent to the "spindown" of gathering in February 1995
(see Note J of Notes to Consolidated Financial Statements) and
certain low pressure projects as discussed following.
Sales to Distribution decreased by $13.8 million (15%) due
to a combination of lower spot market prices during 1995 (see
discussion above) and a 2.5 million MMBtu decrease in sales
volumes primarily related to a 1.8 million MMBtu reduction in
Sales to Distribution by NES. Spot market prices during the
first six months of 1995 have been approximately $0.52/MMBtu or
27% below the average for the corresponding period of 1994, which
reduces the commodity cost component of the sales rate and lowers
total sales revenue, see the discussion for the three months
ended June 30, 1995 and 1994 elsewhere herein. Industrial sales
and other decreased by $45.6 million (13%) primarily due to
approximately $50.5 million in sales revenues associated with
MRT's sale of storage gas to its customers which was recorded in
the first and second quarter of 1994 as part of their transition
to Order 636 and is offset by incremental purchase gas cost.
In addition to lower 1995 spot market prices, the MRT
storage transaction contributed to a decrease of $59.7 million or
15% in total purchased gas cost. Also, the first quarter of 1995
included a favorable adjustment to purchased gas cost associated
with certain fixed-price gas sale commitments as discussed
following. Purchased gas cost also includes the negative impact
of fuel usage on the pipeline in excess of tariff-allowed
recovery from customers. The tariff mechanism currently in place
will be updated for historical experience in May and November
each year which, combined with more efficient operations, should
mitigate the effect of this under-recovery in the future.
Operation and maintenance expenses during the first six
months of 1995 were $3.4 million (9%) above 1994, with
approximately $1.7 million (50%) of the variance related to
increased third-party transportation. This increased expense was
primarily due to increased "off-system" sales by NES that require
transportation on a thirdparty pipeline. The remainder of the
operation and maintenance expense variance primarily represents
increased cost incurred by NFS related to rental of field
compressors for projects designed to lower the operating pressure<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)
of certain lines in order to increase production in certain areas
of the gathering system. The incremental cost of this service is
included as a component of the gathering rate and is thereby
recovered through increased gathering revenues.
As discussed in the Company's 1994 Report on Form 10-K, the
Company enters into natural gas futures contracts, swaps and
options in order to mitigate the risk from market fluctuations in
the price of natural gas and transportation, and to meet certain
of its customers' needs for fixed price gas supply.
With respect to swaps which are incidental to the Company's
ongoing marketing and storage activities and in which one party
agrees to pay either a fixed price or a fixed differential from
the NYMEX price while the other party agrees to pay based on a
published index, at June 30, 1995, the Company was obligated
under swaps covering 73.6 Bcf and 89.6 Bcf of gas in which it was
the fixed price payor and the fixed price receiver, respectively,
and these swaps collectively represented an unrealized loss of
$0.2 million.
At June 30, 1995, the Company held NYMEX futures contracts
covering the purchase of 21.9 Bcf of gas (a notional amount of
$39.5 million) through August 1996 and the sale of 12.6 Bcf of
gas (a notional amount of $23.1 million) through August 1996.
These contracts collectively represented an unrealized loss of
$1.8 million.
With respect to a price risk management program associated
with certain agreements which commit the Company to deliver
specified quantities of gas at fixed prices ratably through April
1999, at June 30, 1995, the Company was obligated under swaps
covering 87.0 Bcf and 56.8 Bcf of gas in which it was the fixed
price payor and the fixed price receiver, respectively, and these
swaps collectively represented an unrealized loss of $12.5
million. There were no changes during the second quarter of 1995
in the options purchased in conjunction with this program.
During the second quarter of 1995, the Company recorded a
decrease of approximately $2.5 million in purchased gas cost
resulting from the Company's success in securing supplies of gas
at prices less than those anticipated in the calculation of the
Company's previously recorded reserve for losses under the
relevant agreements.
CORPORATE AND OTHER
The operating loss of Corporate and Other for the first six
months of 1995 increased to a loss of $2.5 million from a loss of
$2.4 million in the first six months of 1994.
CONSOLIDATED
Net income decreased from $48.6 million in the first six
months of 1994 to $44.9 million in the corresponding period of
1995, a decrease of $3.7 million, while (as discussed preceding)<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)
operating income decreased by $10.6 million during the same
period. The principal reasons for the decreased net expense
below the operating income line were as follows:
* The decrease of $6.8 million in 1995 interest expense,
principally due to a reduced level of debt and lower
interest rates.
* The decrease of $0.7 million in the 1995 provision for
income taxes, reflecting a reduced level of 1995 income
before income taxes, partially offset by a higher 1995
interim effective tax rate.
* The decrease of $0.5 million in 1995 for the after-tax
loss due to premiums on the early retirement of debt.
These favorable impacts were partially offset by:
* The increase of $1.1 million in "Other, net" for 1995,
due primarily to the increased loss on sale of accounts
receivable.
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, 1995.
June 30 December 31
INVESTED 1995 1994 1993 1992 1991 1990
CAPITAL
(millions of dollars)
Long-Term Debt $ 1,323.7 $ 1,414.4 $ 1,629.4 $ 1,783.1 $ 1,551.5 $ 1,450.2
Total Equity 760.8 717.4 708.0 712.9 948.0 1,115.4
Total 2,084.5 2,131.8 2,337.4 2,496.0 2,499.5 2,565.6
Capitalization
Short-Term Debt 284.0 274.6 192.4 120.0 772.6 712.4
Total Invested $ 2,368.5 $ 2,406.4 $ 2,529.8 $ 2,616.0 $ 3,272.1 $ 3,278.0
Capital
Long-Term Debt
as a Percent of 63.5% 66.3% 69.7% 71.4% 62.1% 56.5%
Total Capitalization
Equity as a
Percent of Total
Capitalization 36.5% 33.7% 30.3% 28.6% 37.9% 43.5%
Total Debt as a
Percent of Total
Invested Capital 67.9% 70.2% 72.0% 72.7% 71.0% 66.0%
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 26
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
At July 31, 1995, the Company's unrealized after-tax gain on
its investment in Itron, Inc. had decreased to $5.2 million,
based on a closing price of $23 for Itron common stock on the
NASDAQ.
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 $215.9 million in the first six months
1994 to $236.0 million in the first six months of 1995. This
increase of $20.1 million (9.3%) was principally due to decreased
cash used for gas accounts payable in 1995 due to the relatively
lower December 31, 1994 gas accounts payable balance, partially
offset by decreased 1995 cash provided by inventories,
principally due to MRT's 1994 sale of gas in underground storage
to its customers.
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.
Six Months
Ended June 30
1995 1994
(millions of
dollars)
Use (Source)
Recovery under gas contract disputes $ (18.6) $ (13.1)
Capital expenditures 72.2 75.7
Common and preferred dividends 21.2 21.0
Debt retirement 81.4 120.8
Change in receivables sold 40.9 150.4
Return of advance received under
contingent sales agreement 50.0 -
Decrease in overdrafts 16.1 4.3
Selected External Uses of Cash 263.2 359.1<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 27
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
Less:
Proceeds from sale of - (12.3)
properties/assets
Sale of Itron stock (1.4) -
Common stock issuance (4.9) -
Change in cash balance 0.9 0.9
Cash Generated from Other Sources,
Principally Internal $ 257.8 $ 347.7
Net Cash Flows from Investing Activities
The Company's capital expenditures for continuing operations
by business unit for the six months ended June 30, 1995 and 1994
were as follows:
Six Months
Ended June 30 Increase(Decrease)
1995 1994 $ %
(millions of dollars)
Natural gas distribution $ 54.5 $ 52.4 $ 2.1 4.0
Trading and Transportation 17.5 22.5 (5.0) (22.2)
Other 0.2 0.8 (0.6) (75.0)
Consolidated $ 72.2 $ 75.7 $ (3.5) (4.6)
Capital expenditures decreased from $75.7 million in the
first six months of 1994 to $72.2 million in the first six
months of 1995, a decrease of $3.5 million (4.6%), reflecting
decreased spending in Trading and Transportation, partially
offset by increased spending in Distribution. The increased
capital spending in Distribution reflects customer growth and
increased replacement of existing facilities. The decreased
spending in Trading and Transportation is principally due to
planned 1995 expenditures which have been delayed to match demand
for additional capacity. The Company's capital expenditures for
1995 were budgeted at approximately $207 million, but are now
expected to total approximately $180 million.
Net Cash Flows from Financing Activities
The Company's principal source of short-term borrowing is
its November 1994 Credit Agreement ("the Facility") with
Citibank, N.A., as Agent and a group of sixteen other commercial
banks which provides a $400 million commitment to the Company
through October 31, 1997 and which is collateralized by the stock
of MRT and NGT. Borrowings under the Facility bear interest at
various Eurodollar and domestic rates at the option of the
Company, which rates are subject to adjustment based on the
rating of the Company's senior debt securities. The Company pays
a facility fee on the total commitment to each bank each year,<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 28
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
currently .30% and subject to decrease based on the Company's
debt rating, and will pay an incremental rate of 1/8% on
outstanding borrowings in excess of $200 million.
The Company had borrowings under the Facility of $50 million
and $65 million at June 30, 1995 and July 31, 1995, respectively,
and therefore, had approximately $335 million in capacity under
the Facility at July 31, 1995, which capacity is expected to be
adequate to cover the Company's current and projected needs for
shortterm financing. The Company had borrowings of $13 million
and $35 million under informal lines of credit at June 30, 1995
and July 31, 1995, respectively.
As further described in the Company's 1994 Report on Form
1O-K, the Facility contains a provision which requires the
Company to maintain a specific level of total stockholders'
equity, as well as placing a limitation of (1) $2,055 million on
total debt and (2) $150 million on the amount of outstanding
long-term debt which may be retired in advance of its maturity
using funds borrowed under the Facility. Certain of the
Company's other financial arrangements contain similar
provisions. Based on these restrictions, at June 30, 1995, the
Company had incremental debt capacity of $402.5 million and,
while the Company is not required to calculate and apply the
equity limitation on an interim basis, if it were applied at June
30, 1995, the Company would have had incremental dividend
capacity of $64.3 million.
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. There has been no change in the makeup or
notional amount of the Company's portfolio of swaps since
December 31, 1993 and, as of June 30, 1995, $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, 1995, 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 6.6%, while the
counterparties' obligations were based on a weighted average
fixed rate of approximately 5.1%. The Company's performance
under these swaps is collateralized by the stock of MRT and NGT,
and the Company is permitted to increase the amount outstanding
under such collateralized arrangements to a total of $350
million, a limitation imposed by the terms of the Facility.
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
$0.9 million and $0.5 million for the three months and six months<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 29
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
ended June 30, 1995, respectively, and by $0.8 million and $1.4
million for the three months and six months ended June 30, 1994,
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 $1.6 million at June
30, 1995. This gain is expected to be amortized as follows: the
remainder of 1995 - $0.8 million; 1996 - $0.7 million; 1997 -
$0.1 million. At June 30, 1995, the unrealized loss (mark-to-
market value) associated with outstanding swap arrangements was
approximately $4.3 million.
In October 1995, $150 million of the Company's 9.45% Series
medium-term notes mature, representing the full amount of this
series.
In early August 1995, the Company filed with the SEC to
publicly offer approximately $200 million of fiveyear notes, see
"Recent Developments" elsewhere herein.
Commitments
The Company had capital commitments of less than $10 million
at June 30, 1995, which are expected to be funded through cash
provided by operations and/or incremental borrowings. As
described in the Company's 1994 Annual Report on Form 10-K, the
Company has commitments under certain of its leasing
arrangements.
CONTINGENCIES
Letters of Credit. At June 30, 1995, the Company was
obligated for $27.3 million under letters of credit which are
incidental to its ordinary business operations.
Indemnity Provisions. As discussed in the Company's 1994
Report on Form 10-K, the Company has obligations under the
indemnification provisions of certain sale agreements.
Sale of Receivables. Certain of the Company's receivables
are collateral for receivables which have been sold, see Note G
of Notes to Consolidated Financial Statements.
Credit Risk and Off-Balance-Sheet Risk. As discussed in the
Company's 1994 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 1994 Report on Form 10-K, the Company has off-
balance-sheet risk as a result of its natural gas hedging
activities, see "Trading and Transportation" for the six months
ended June 30, 1995 and 1994 under "Material Changes in the
Results of Operations" elsewhere herein.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 30
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
Gas Purchase Claims. As discussed in the Company's 1994
Report on Form 10-K, the Company is a party to certain claims
involving, and has certain commitments under, its gas purchase
contracts.
Environmental. As more fully described in the Company's
1994 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.
On October 24, 1994, the United States Environmental
Protection Agency advised MRT that it, together with a number of
other parties, had been named a potentially responsible party
under federal law with respect to a landfill site in West
Memphis, Arkansas, see "Legal Proceedings" elsewhere herein.
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,
financial position or cash flows.
Litigation. The Company is party to litigation which arises
in the normal course of business. See "Legal Proceedings"
elsewhere herein.
Part II. Other Information
Item 1. Legal Proceedings
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<PAGE>
Page 31
Item 1. Legal Proceedings (continued)
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 State Claim. In a hearing held on
May 19, 1994, the Court heard arguments on this motion. On
September 20, 1994, the Court entered an order granting the
Company's motion to dismiss. The plaintiffs have appealed this
order granting the motion to dismiss, and a hearing date for the
appeal has been set for September 25, 1995. 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. The Federal Claim was dismissed in August 1992.
Since the State Claim is based on essentially the same underlying
factual basis as the Federal Claim and in light of the Court's
order granting the Company's motion to dismiss the State Claim,
the Company continues to believe that the State Claim is without
merit, intends to vigorously contest any appeal of the order
granting dismissal and does not believe that the outcome will
have a material adverse effect on the financial position, results
of operations or cash flows of the Company.
On October 24, 1994, the United States Environmental
Protection Agency advised Mississippi River Transmission
Corporation ("MRT"), a wholly-owned subsidiary of the Company,
that MRT along with a number of other companies have been named
under federal law as potentially responsible parties for a
landfill site in West Memphis, Arkansas and may be required to
share in the cost of remediation of this site. However,
considering the information currently known about the site and
the involvement of MRT, the Company does not believe that this
matter will have a material adverse effect on the financial
position, results of operations or cash flows of the Company.<PAGE>
Page 32
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27, Financial Data Schedule
(b) Reports on Form 8-K
None<PAGE>
Page 33
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 11, 1995 <PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,377,394
<OTHER-PROPERTY-AND-INVEST> 681,870
<TOTAL-CURRENT-ASSETS> 276,286
<TOTAL-DEFERRED-CHARGES> 72,403
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,407,953
<COMMON> 77,470
<CAPITAL-SURPLUS-PAID-IN> 876,436
<RETAINED-EARNINGS> (336,309)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 630,808
0
130,000
<LONG-TERM-DEBT-NET> 1,323,674
<SHORT-TERM-NOTES> 63,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 221,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,039,471
<TOT-CAPITALIZATION-AND-LIAB> 3,407,953
<GROSS-OPERATING-REVENUE> 1,453,990
<INCOME-TAX-EXPENSE> 35,833
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 1,292,008
<OPERATING-INCOME-LOSS> 161,982
<OTHER-INCOME-NET> (4,370)
<INCOME-BEFORE-INTEREST-EXPEN> 157,612
<TOTAL-INTEREST-EXPENSE> 76,855
<NET-INCOME> 44,872
3,900
<EARNINGS-AVAILABLE-FOR-COMM> 40,972
<COMMON-STOCK-DIVIDENDS> 17,285
<TOTAL-INTEREST-ON-BONDS> 32,643
<CASH-FLOW-OPERATIONS> 236,008
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
