Page 1 of 25
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 September 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 October 19, 1995 - 124,534,434
Exhibit Index Appears on Page 24<PAGE>
Page 2
INDEX
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1995 and
1994 and December 31, 1994 4
Consolidated Statement of Income - Three Months Ended
September 30, 1995 and 1994 and Nine Months Ended
September 30, 1995 and 1994 5
Statement of Consolidated Cash Flows - Nine Months
Ended September 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 11
Part II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25<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 September 30 December 31 September 30
1995 1994 1994
PROPERTY, PLANT AND EQUIPMENT $ 3,922,734 $ 3,836,782 $ 3,805,320
Less: Accumulated depreciation and 1,533,402 1,459,638 1,441,352
amortization
2,389,332 2,377,144 2,363,968
INVESTMENTS AND OTHER ASSETS (Note C) 667,809 698,754 718,929
CURRENT ASSETS
Cash and cash equivalents 7,343 17,632 11,733
Accounts and notes receivable 180,480 215,846 74,584
Deferred income taxes 8,247 10,287 13,198
Inventories (Note D) 105,104 112,094 134,564
Gas purchased in advance of delivery 23,404 26,571 29,001
Other current assets 57,638 29,345 55,573
382,216 411,775 318,653
DEFERRED CHARGES 70,669 73,825 47,332
TOTAL ASSETS $ 3,510,026 $ 3,561,498 $ 3,448,882
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Preferred stock $ 130,000 $ 130,000 $ 130,000
Common stock 77,735 76,581 76,546
Paid-in capital 878,850 868,289 868,372
Accumulated deficit (361,191) (360,079) (370,698)
Unrealized gain on Itron 9,793 2,586 -
investment, net of tax
Total Stockholders' Equity 735,187 717,377 704,220
Long-term debt, less current 1,474,924 1,414,374 1,604,104
maturities
CURRENT LIABILITIES
Current maturities of long-term debt 269,750 151,000 2,000
Notes payable to banks - 110,000 100,000
Other notes payable - 13,600 13,600
Gas accounts payable 181,500 215,221 127,877
Other accounts payable 112,853 186,720 169,234
Income taxes payable (3,975) 4,690 (8,549)
Interest payable 41,252 42,180 40,117
General taxes 43,265 45,717 46,414
Customers' deposits 46,037 55,729 45,054
Other current liabilities 74,837 71,266 88,445
765,519 896,123 624,192
OTHER LIABILITIES AND DEFERRED CREDITS
Accumulated deferred income taxes 277,848 257,839 257,539
Other deferred credits and 256,548 275,785 258,827
noncurrent liabilities
534,396 533,624 516,366<PAGE>
Page 5
TOTAL LIABILITIES AND STOCKHOLDERS' $ 3,510,026 $ 3,561,498 $ 3,448,882
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 Nine Months
Ended September 30 Ended September 30
1995 1994 1995 1994
Operating Revenues $ 542,611 $ 475,626 $1,996,601 $2,123,641
Operating Expenses
Cost of natural gas purchased,
net 324,746 267,102 1,212,635 1,334,213
Operating, maintenance, cost of
sales & other 143,682 139,565 416,130 416,138
Depreciation and amortization 34,893 38,450 111,971 114,598
Taxes other than income taxes 23,171 22,311 77,764 77,911
526,492 467,428 1,818,500 1,942,860
Operating Income 16,119 8,198 178,101 180,781
Other Deductions
Interest expense, net 41,399 43,272 118,254 126,974
Other, net 1,317 2,673 5,687 5,902
42,716 45,945 123,941 132,876
Income(Loss) Before Income Taxes (26,597) (37,747) 54,160 47,905
Provision for Income Taxes(Benefit) (12,313) (16,090) 23,520 20,450
(Note E)
Income(Loss) Before Extraordinary
Item (14,284) (21,657) 30,640 27,455
Extraordinary loss, less taxes - - (52) (517)
Net Income(Loss) (14,284) (21,657) 30,588 26,938
Preferred dividend requirement 1,950 1,950 5,850 5,850
Balance Available to Common Stock $(16,234) $(23,607) $ 24,738 $ 21,088
Per Share Data:
Before extraordinary item $ (0.13) $ (0.19) $ 0.20 $ 0.18
Extraordinary loss, less taxes - - 0.00 (0.01)
$ (0.13) $ (0.19) $ 0.20 $ 0.17
Average Common Shares
Outstanding (in thousands) 124,103 122,442 123,604 122,401
Cash Dividends per Common Share $ 0.07 $ 0.07 $ 0.21 $ 0.21
The Notes to Financial Statements are an integral part of this statement.<PAGE>
Page 7
NorAm Energy Corp. and Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase(Decrease) in Cash and Cash Equivalents
(in thousands of dollars)
(unaudited)
Nine Months
Ended September 30
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,588 $ 26,938
Adjustments to reconcile net income to cash
provided
by operating activities:
Depreciation and amortization 111,971 114,598
Deferred income taxes 18,082 32,098
Extraordinary loss, less taxes 52 517
Other 2,455 (578)
Changes in certain assets and liabilities, net
of noncash (26,915) 51,353
transactions (Note F)
Net cash provided by operating activities 136,233 224,926
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (118,000) (121,100)
Sale of Distribution properties - 23,172
Other asset sales - 12,315
Sale of Itron stock 1,441 -
Other, net 3,591 4,493
Net cash used in investing activities (112,968) (81,120)
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of long-term (34,352) (107,577)
debt
Decrease in overdrafts (15,076) (12,850)
Other interim debt borrowings (repayments) (110,000) 5,000
Issuance of 7 1/2% Notes due 2000 200,000 -
Issuance of common stock under
direct stock purchase plan 7,698 -
Return of advance received under
contingent sales agreement (Note I) (50,000) -
Common and preferred stock dividends (31,824) (31,556)
Net cash used in financing activities (33,554) (146,983)
Net decrease in cash and cash equivalents (10,289) (3,177)
Cash and cash equivalents - beginning of 17,632 14,910
period
Cash and cash equivalents - end of period $ 7,343 $ 11,733
The Notes to Financial Statements are an integral part of this statement.<PAGE>
Page 8
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:
September December September
30 31 30
1995 1994(1) 1994(1)
(millions of dollars)
Goodwill, net $ 484.7 $ 495.3 $ 498.9
Gas purchased in advance of 24.6 43.5 47.1
delivery
Notes receivable 6.6 6.1 8.6
Other 151.9 153.9 164.3
$ 667.8 $ 698.8 $ 718.9
(1) "Investments and other assets" as previously presented at September
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:
September December September
30 31 30
1995 1994 1994
(millions of dollars)
Gas in underground $ 66.9 $ 73.8 $ 92.8
storage
Materials and 37.9 38.1 41.5
supplies
Other 0.3 0.2 0.3
$ 105.1 $ 112.1 $ 134.6<PAGE>
Item 1. Financial Statements (continued) Page 9
Notes to Consolidated Financial Statements (continued)
E. "Provision for Income Taxes(Benefit)" as presented on the accompanying
Consolidated Statement of Income includes the following:
Three Months Nine Months
Ended September 30 Ended September 30
1995 1994 1995 1994
(millions of dollars)
Federal
Current $ (15.3) $ (24.3) $ 7.5 $ (12.1)
Deferred 6.7 8.0 12.2 31.6
Investment tax (0.2) (0.2) (0.5) (0.5)
credit
State
Current (6.0) 0.5 (1.6) 0.9
Deferred 2.5 (0.1) 5.9 0.5
$ (12.3) $ (16.1) $ 23.5 $ 20.4
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:
Nine Months
Ended September 30
1995 1994
(millions of
dollars)
Increase(Decrease) in Cash
and Cash Equivalents
Accounts and notes receivable $ 32.9 $ 239.9
Inventories 7.0 20.2
Other current assets (28.3) (37.2)
Gas accounts payable (33.7) (139.4)
Other accounts payable (8.8) (7.9)
Income taxes payable (8.7) (21.5)
Interest payable (0.9) (4.6)
General taxes payable (2.5) (3.7)
Customers' deposits (9.7) (1.9)
Other current liabilities 3.6 (8.3)
Recoveries under gas contract 22.2 15.8
settlements
$ (26.9) $ 51.4
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:<PAGE>
Item 1. Financial Statements (continued) Page 10
Notes to Consolidated Financial Statements (continued)
Nine Months
Ended September 30
1995 1994
(millions of
dollars)
Cash interest payments,
net of $ 115.7 $ 126.9
capitalized interest
Net cash income tax
payments $ 17.1 $ 10.1
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 $82.1 million, $192.8 million and $146.6
million, respectively, at September 30, 1995, December 31, 1994 and
September 30, 1994, which amounts have been deducted from "Accounts and
notes receivable" in the accompanying Consolidated Balance Sheet and, at
September 30, 1995, $18.7 million of the Company's remaining receivables
were collateral for receivables which had been sold. During the nine
months ended September 30, 1995 and 1994, the Company experienced cash
outflows of $110.7 million and $79.8 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 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<PAGE>
Item 1. Financial Statements (continued) Page 11
Notes to Consolidated Financial Statements (continued)
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 August 1995, the Company issued $200 million of five-year notes with
a coupon of 7.5% in a public offering pursuant to a previously filed
registration statement. The proceeds were used to reduce the Company's
bank borrowings and participation in its receivable sales program and
for general corporate purposes pending the retirement of $150 million of
9.45% notes which matured and were retired in October 1995.
L. In early November 1995, the Company filed, with the Securities and
Exchange Commission under Rule 415, a "Universal Shelf" registration
statement. This registration statement, which has not yet become
effective, will allow the Company to issue up to a total of $500 million
of a wide variety of debt and equity securities over the next few years.
M. Effective with July 1995, the Company changed the estimated service
lives of certain depreciable assets in its interstate transmission and
natural gas gathering businesses pursuant to revised depreciation
studies. These changes had the effect of reducing the Company's third
quarter depreciation expense by $1.7 million and $1 million for
interstate pipeline and natural gas gathering, respectively, and
increasing the Company's net income and earnings per common share by
approximately $1.7 million and $0.01/share, respectively.
N. 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.<PAGE>
Item 1. Financial Statements (continued) Page 12
Notes to Consolidated Financial Statements (continued)
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 0.
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.
O. 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. On October 23,
1995, the Supreme Court of Arkansas affirmed the Circuit Court's order
granting the Company's motion to dismiss. The plaintiffs have the right
to request a rehearing of this decision. 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
and the Supreme Court's affirmation of this order, 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 together with a number of
other companies had 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>
Item 2. Management's Discussion and Analysis of Financial Condition Page 13
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 August 1995, the Company issued $200 million of new debt and, in
October 1995, retired $150 million of 9.45% notes, see "Net Cash Flows from
Financing Activities" elsewhere herein.
Dividend Declaration
On November 8, 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 December 15, 1995 to owners of record on
November 20, 1995.
Universal Shelf Registration Statement
In early November 1995, the Company filed a registration statement
pursuant to Rule 415 of the Securities and Exchange Commission's regulations,
see "Net Cash Flows from Financing Activities" elsewhere herein.
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 its
borrowings and interest rates thereon. Following are detailed discussions of
material changes in the results of operations by business unit:<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 14
and Results of Operations
(1) COMPARISON OF THE THIRD QUARTER OF 1995 TO THE THIRD QUARTER OF 1994
Quarter Ended
September 30 Increase(Decrease)
1995 1994 $ %
Operating Income(Loss) (millions of dollars)
Natural Gas $ (5.2) $ (11.0) $ 5.8 52.7
Distribution
Trading and 23.7 22.1 1.6 7.2
Transportation
Corporate and Other (2.4) (2.9) 0.5 17.2
Consolidated $ 16.1 $ 8.2 $ 7.9 96.3<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 15
and Results of Operations
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.
Quarter Ended
September 30 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Natural gas sales $ 287.0 $ 291.7 $ (4.7) (1.6)
Transportation revenue 3.8 3.7 0.1 2.7
Other revenue 16.5 15.9 0.6 3.8
Total operating revenues 307.3 311.3 (4.0) (1.3)
Purchased gas cost
Unaffiliated 149.8 159.7 (9.9) (6.2)
Affiliated 18.2 19.8 (1.6) (8.1)
Operations and maintenance 102.6 102.1 0.5 0.5
Depreciation and amortization 23.1 22.2 0.9 4.1
Other operating expenses 18.8 18.5 0.3 1.6
Operating loss $ (5.2) $ (11.0) $ 5.8 52.7
OPERATING STATISTICS (billions of cubic feet)
Residential sales 15.8 15.8 - -
Commercial sales 15.7 15.6 0.1 0.6
Industrial sales 37.0 34.6 2.4 6.9
Sales for resale 11.1 5.5 5.6 101.8
Transportation 14.7 14.5 0.2 1.4
Total throughput 94.3 86.0 8.3 9.7
DEGREE DAYS Normal 1995 1994
ALG 7 29 19
Entex 2 4 1
Minnegasco 208 205 158
Distribution operating results which, due to the cyclical nature of
the residential and commercial demand for natural gas are routinely negative
in the third quarter, improved from a loss of $11.0 million in the third
quarter of 1994 to a loss of $5.2 million in the third quarter of 1995, as a
slight decrease in operating revenues was more than offset by a decrease in
purchased gas cost as described following.
Operating revenues decreased slightly from $311.3 million in the
third quarter of 1994 to $307.3 million in the third quarter of 1995 due
primarily to a 15.9% decline in the average cost of purchased gas from
$2.51/Mcf in 1994 to $2.11/Mcf in 1995 (purchased gas cost is a component of
the overall sales rate). This decrease was partially offset by a 2.4 Bcf
(6.9%) increase in industrial sales volume and a 5.6 Bcf (101.8%) increase in
lowermargin sales for resale.
Total purchased gas cost decreased $11.5 million in the third
quarter of 1995 in comparison to the third quarter of 1994 due to the decrease<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 16
and Results of Operations
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 $1.7 million (1.2%) in the third quarter of 1995 in comparison
to the third 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 nine months ended September 30, 1995 and 1994 elsewhere
herein.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 17
and Results of Operations
Quarter Ended
September 30 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Gas sales revenue
Sales to Distribution $ 27.7 $ 29.7 $ (2.0) (6.7)
Industrial sales and other 188.9 121.3 67.6 55.7
Total gas sales revenue 216.6 151.0 65.6 43.4
Transportation revenue
Distribution 18.8 17.6 1.2 6.8
Other 43.3 40.3 3.0 7.4
Total transportation 62.1 57.9 4.2 7.3
revenue
Total operating revenues 278.7 208.9 69.8 33.4
Purchased gas cost
Affiliated 3.6 - 3.6 N/A
Unaffiliated 199.2 139.2 60.0 43.1
Operations and maintenance 24.6 19.5 5.1 26.2
expense
Depreciation and amortization 8.2 10.7 (2.5) (23.4)
Other operating expenses, net 19.4 17.4 2.0 11.5
Operating income $ 23.7 $ 22.1 $ 1.6 7.2
OPERATING STATISTICS (million MMBtu)
Sales to Distribution 16.4 14.8 1.6 10.8
Sales for resale and other 99.7 39.6 60.1 151.8
Total sales 116.1 54.4 61.7 113.4
Transportation
Distribution 15.9 13.2 2.7 20.5
Other 201.5 150.2 51.3 34.2
Total transportation 217.4 163.4 54.0 33.0
Elimination(1) (20.5) (15.4) (5.1) (33.1)
Total throughput 313.0 202.4 110.6 54.6
(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.
Third quarter operating income for Trading and Transportation group
increased by $1.6 million (7%) over the corresponding period in 1994. Lower
third quarter results by the Company's interstate pipelines were offset by
improved third quarter NES and NFS margins and a reduction in the depreciation
rates of NGT and NFS based on revised depreciation studies. Effective July
1995, the effective depreciation rates were changed from 2.27% and 4.00% to
1.50% and 1.12% for NGT and NFS, respectively, inclusive of the amortization
of the excess depreciation reserve. The result of this depreciation rate
reduction was to reduce third quarter 1995 depreciation expense by $1.7
million and $1.0 million for NGT and NFS, respectively. The lower third
quarter results by the interstate pipelines are primarily related to reduced
sales margins resulting from lower 1995 gas prices as discussed following and
a 1994 inventory adjustment which did not recur in 1995. Improved NFS margins
are primarily attributable to higher gathering rates subsequent to the
"spindown" of gathering in February 1995. The improved NES margins are
primarily attributable to increased sales volumes and expanded use of gas<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 18
and Results of Operations
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.
Trading and Transportation's sales to Distribution decreased by $2.0
million (7%) primarily due to a 1.5 million MMBtu (17%) reduction in sales by
NGT, combined with a reduction of $0.26/MMBtu in spot prices. Industrial and
other sales increased by $67.6 million (56%) primarily due to a 60.1 million
MMBtu increase in sales volumes. Approximately 94% of this volume increase is
attributable to higher sales by NES, primarily due to increased marketing
activity related to "off-system" sales which were transported by third party
pipelines. The interstate pipelines account for the remaining 6% increase in
sales volumes, however, the effect of higher sales volumes were partially
offset by lower third quarter 1995 spot market prices which were $0.26/MMBtu
below the average for the third quarter of 1994. This decline in spot market
prices had a negative impact on the net sales margins earned by the pipelines
because the sales rate generally includes the cost of gas at an index plus a
margin, while the cost of the related gas supplies is composed largely of
fixed price contracts, with a lesser amount of supply that varies with market
conditions. Transportation revenues increased by $4.2 million (7%) with 50%
of the increase attributable to increased transportation related to NFS,
largely due to increased gathering rates subsequent to the "spindown" of NFS.
Affiliated purchased gas cost of $3.6 million in 1995 reflected
purchases by NES from Distribution. Unaffiliated purchased gas cost increased
by $60.0 million (43%) primarily due to a corresponding increase in sales
revenue as discussed above. Operating and maintenance expense increased by
$5.1 million (26%) with approximately 65% of the increase attributable to
increased transportation expense due to increased off-system sales by NES in
which transportation services are provided by third party pipelines. The
remainder of the increase in operation and maintenance expense is due to
several factors including (1) a third quarter 1994 adjustment which decreased
O&M expense by transferring certain items to material inventory, which
adjustment did not recur in 1995, (2) higher 1995 labor due to a decrease in
labor cost capitalized to construction projects, (3) compression rental
associated with certain low pressure gathering projects, the cost of which is
recovered through increased gathering revenues and (4) the write-off of
certain excess clearing account and overhead balances which was partially
offset by the reclassification in 1995 of certain data processing expenses
from O&M expense to administrative expense. Depreciation and amortization
expense decreased by $2.5 million (23%) due to depreciation rate reductions
discussed preceding. "Other operating expenses, net" increased by $2.0
million (11%) due to higher 1995 property taxes, increased staffing at NES and
the reclassification of certain data processing expenses from the O&M category
as discussed preceding.
CORPORATE AND OTHER
The $0.5 million decrease in the operating loss of Corporate and Other
from the third quarter of 1994 to the third quarter of 1995 was due to an
increase in 1995 income from miscellaneous activities.
CONSOLIDATED
The consolidated net loss decreased from $21.7 million in the third
quarter of 1994 to $14.3 million in the third quarter of 1995, a decrease of
$7.4 million, while (as discussed preceding) operating income increased by<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 19
and Results of Operations
$7.9 million during the same period. The principal reasons for the increased
net expense below the operating income line were as follows:
* The decrease of $3.8 million in the 1995 income tax benefit,
reflecting a decrease in the 1995 loss before income taxes,
partially offset by an increase in the 1995 interim effective tax
rate.
This unfavorable impact was partially offset by:
* The decrease of $1.9 million in third quarter 1995 interest
expense, due to a reduced level of debt and lower interest rates.
* The decrease of $1.4 million in "Other, net" for 1995, principally
due to an increase in interest income.
(2) COMPARISON OF THE FIRST NINE MONTHS OF 1995 TO THE FIRST NINE MONTHS OF
1994
Nine Months
Ended September 30 Increase(Decrease)
1995 1994 $ %
Operating Income(Loss) (millions of dollars)
Natural Gas $ 102.0 $ 105.0 $ (3.0) (2.9)
Distribution
Trading and 81.0 81.1 (0.1) (0.1)
Transportation
Corporate and Other (4.9) (5.3) 0.4 7.5
Consolidated $ 178.1 $ 180.8 $ (2.7) (1.5)
DISTRIBUTION<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 20
and Results of Operations
Nine Months
Ended September 30 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Natural gas sales $ 1,330.1 $ 1,468.0 $ (137.9) (9.4)
Transportation revenue 13.9 13.6 0.3 2.2
Other revenue 47.8 47.9 (0.1) (0.2)
Total operating revenues 1,391.8 1,529.5 (137.7) (9.0)
Purchased gas cost
Unaffiliated 689.5 788.5 (99.0) (12.6)
Affiliated 157.2 195.0 (37.8) (19.4)
Operations and maintenance 309.8 310.2 (0.4) (0.1)
Depreciation and amortization 68.7 66.0 2.7 4.1
Other operating expenses 64.6 64.8 (0.2) (0.3)
Operating income $ 102.0 $ 105.0 $ (3.0) (2.9)
OPERATING STATISTICS (billions of cubic feet)
Residential sales 121.8 130.7 (8.9) (6.8)
Commercial sales 83.9 85.6 (1.7) (2.0)
Industrial sales 115.6 99.7 15.9 15.9
Sales for resale 31.6 14.2 17.4 122.5
Transportation 51.2 49.4 1.8 3.6
Total throughput 404.1 379.6 24.5 6.5
DEGREE DAYS Normal 1995 1994
ALG 1,864 1,661 1,856
Entex 928 800 934
Minnegasco 4,879 4,772 5,145
Distribution operating income decreased from $105.0 million in the first
nine months of 1994 to $102.0 million in the first nine months of 1995, a
decrease of $3.0 million (2.9%), reflecting a decrease in both operating
revenues and operating expenses.
Operating revenues decreased from $1,529.5 million in the first nine
months of 1994 to $1,391.8 million in the first nine months of 1995, a decline
of $137.7 million (9%), due primarily to (1) warmer 1995 weather in the
service areas of all three distribution units and (2) a 19.5% decline in the
average cost of purchased gas (a component of the overall sales rate) from
$2.98/Mcf in 1994 to $2.40/Mcf in 1995. Principally as a result of the warmer
1995 weather, total weather-sensitive residential and commercial sales volumes
decreased by 10.6 Bcf (4.9%) 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 15.9 Bcf
(15.9%) in the industrial sales volumes from 1994 to 1995. Lower-margin sales
for resale increased 17.4 Bcf between the two periods.
Total purchase gas cost decreased by $136.8 million (13.9%) in the first
nine months of 1995 in comparison to the first nine months of 1994,
principally due to the decrease in the average cost of purchased gas as
discussed preceding. Operating expenses, exclusive of purchased gas cost,
increased $2.1 million (0.5%) in the first nine months of 1995 in comparison
to the first nine months of 1994 due to increased depreciation and<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 21
and Results of Operations
amortization expense reflecting increased investment, partially offset by
decreased O&M and other operating expenses.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 22
and Results of Operations
TRADING AND TRANSPORTATION
Nine Months
Ended September 30 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Gas sales revenue
Sales to Distribution $ 103.9 $ 119.8 $ (15.9) (13.3)
Industrial sales and other 497.2 475.1 22.1 4.7
Total gas sales revenue 601.1 594.9 6.2 1.0
Transportation revenue
Distribution 81.1 70.7 10.4 14.7
Other 98.6 102.9 (4.3) (4.2)
Total transportation 179.7 173.6 6.1 3.5
revenue
Total operating revenues 780.8 768.5 12.3 1.6
Purchased gas cost
Affiliated 6.3 3.5 2.8 80.0
Unaffiliated 543.5 542.4 1.1 0.2
Operations and maintenance 64.9 56.4 8.5 15.1
expense
Depreciation and amortization 29.9 32.2 (2.3) (7.1)
Other operating expenses, net 55.2 52.9 2.3 4.3
Operating income $ 81.0 $ 81.1 $ (0.1) (0.1)
OPERATING STATISTICS (million MMBtu)
Sales to Distribution 53.2 54.1 (0.9) (1.7)
Sales for resale and other 246.8 108.7 138.1 127.0
Total sales 300.0 162.8 137.2 84.3
Transportation
Distribution 75.2 73.0 2.2 3.0
Other 631.1 560.4 70.7 12.6
Total transportation 706.3 633.4 72.9 11.5
Elimination (1) (58.7) (48.7) (10.0) (20.5)
Total throughput 947.6 747.5 200.1 26.8
(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.
Year-to-date operating income for Trading and Transportation was $81.0
million which was comparable with 1994 results of $81.1 million. Lower 1995
results by the interstate pipelines were offset by improved NES and NFS
margins, together with a reduction in 1995 depreciation rates. Effective July
1995, depreciation rates for NES and NFS were reduced based on revised
depreciation studies, see the discussion of the results of operations for
Trading and Transportation for the three months ended September 30, 1995 and
1994 elsewhere herein. Lower 1995 pipeline margins are 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. Increased
1995 marketing margins are largely due to increased sales volumes and expanded
use of storage arrangements which mitigates peak or swing load demand by
decreasing the need to acquire spot market supplies on short notice.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 23
and Results of Operations
Increased NFS margins are primarily attributable to higher gathering rates
subsequent to the "spindown" of gathering in February 1995.
Sales to Distribution decreased by $15.9 million (13%) due to a volume
decrease of 0.9 million MMBtu combined with lower 1995 spot prices which were
approximately $0.43/MMBtu (17%) below 1994. Industrial and other sales
increased by $22.1 million (5%) due to an increase in NES industrial and other
sales of $75.4 million which was partially offset by a $49.7 million decrease
in MRT industrial and other sales. Increased NES sales are primarily
attributable to increased volumes associated with off-system sales. The
decrease in MRT sales is due to approximately $50.5 million in sales revenues
associated with MRT's sale of storage gas to its customers in the first and
second quarters of 1994 (which sale did not recur in 1995) as part of the
transition to Order 636. This 1994 revenue from the sale of storage gas was
fully offset by incremental purchase gas cost. Transportation revenues in
1995 increased by $6.1 million (4%) primarily due to increased gathering rates
subsequent to the "spindown" of NES and, to a lesser degree, increased
transportation volumes.
Purchased gas cost increased by $3.9 million (1%) reflecting a
corresponding net increase in sales revenues of 1% (purchased gas cost is a
component of the overall sales rate). Additionally, 1995 results include a
favorable adjustment to purchased gas cost associated with certain fixed-price
gas sales commitments as discussed following.
Operation and maintenance expense for 1995 increased by $8.5 million
(15%), with approximately 59% of the increase attributable to increased
transportation expense primarily related to increased off-system sales by NES
in which the transportation is provided by third party pipelines.
Approximately 20% of the increase is attributable to compression rental
associated with certain low pressure gathering projects. These projects are
designed to lower the operating pressure 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. The remainder of the increase
is due to several factors including (1) adjustments in the second and third
quarter of 1994 which decreased O&M expense by transferring certain items to
material inventory, (2) higher labor cost due to a decrease in labor
capitalized to construction projects and (3) the write-off of certain excess
clearing account and overhead balances, partially offset by the
reclassification of certain data processing cost from O&M expense to
administration expense. Depreciation and amortization expense decreased by
$2.3 million (7%) in 1995 primarily due to the reduction in depreciation rates
as discussed preceding. "Other operating expenses, net" increased by $2.3
million (4%) primarily due to certain data processing expenses which were
charged to O&M during 1994 and are reported as administrative expense in 1995.
Additionally, increased NES staffing and lower capitalization of
administration expenses also contributed to the increase in other operating
expenses.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 24
and Results of Operations
fixed price or a fixed differential from the NYMEX price while the other party
agrees to pay based on a published index, at September 30, 1995, the Company
was obligated under swaps covering 34.7 Bcf and 58.4 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 $1.0 million.
At September 30, 1995, the Company held NYMEX futures contracts covering
the purchase of 26.6 Bcf of gas (a notional amount of $48.3 million) through
August 1996 and the sale of 16.9 Bcf of gas (a notional amount of $30.2
million) through August 1996. These contracts collectively represented an
unrealized loss of $0.6 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 September 30, 1995, the Company
was obligated under swaps covering 83.0 Bcf and 45.5 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 $9.2 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 decreased from a loss of $5.3
million in the first nine months of 1994 to a loss of $4.9 million in the
first nine months of 1995, a decrease of $0.4 million.
CONSOLIDATED
Net income increased from $26.9 million in the first nine months of 1994
to $30.6 million in the corresponding period of 1995, an increase of $3.7
million, while (as discussed preceding) operating income decreased by $2.7
million during the same period. The principal reasons for the decreased net
expense below the operating income line were as follows:
* The decrease of $8.7 million in 1995 interest expense, principally
due to a reduced level of debt and lower interest rates.
* The $0.5 million 1995 after-tax loss due to premiums on the early
retirement of debt.
* The decrease of $0.2 million in "Other, net" for 1995.
These favorable impacts were partially offset by:
* The increase of $3.1 million in the 1995 provision for income
taxes, reflecting an increased level of 1995 income before income
taxes and a small increase in the 1995 interim effective tax rate.
Liquidity and Capital Resources
The table below illustrates the sources of the Company's invested
capital during the last five years and at September 30, 1995.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition Page 25
and Results of Operations
Sept. December 31
30
INVESTED CAPITAL 1995 1994 1993 1992 1991 1990
(millions of dollars)
Long-Term Debt $1,474.9 $1,414.4 $1,629.4 $1,783.1 $1,551.5 $1,450.2
Total Equity 735.2 717.4 708.0 712.9 948.0 1,115.4
Total 2,210.1 2,131.8 2,337.4 2,496.0 2,499.5 2,565.6
Capitalization
Short-Term Debt 269.8 274.6 192.4 120.0 772.6 712.4
Total Invested $2,479.9 $2,406.4 $2,529.8 $2,616.0 $3,272.1 $3,278.0
Capital
Long-Term Debt as
a Percent of Total 66.7% 66.3% 69.7% 71.4% 62.1% 56.5%
Capitalization
Equity as a
Percent
of Total 33.3% 33.7% 30.3% 28.6% 37.9% 43.5%
Capitalization
Total Debt as a
Percent of Total
Invested Capital 70.4% 70.2% 72.0% 72.7% 71.0% 66.0%
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") decreased from
$224.9 million in the first nine months 1994 to $136.2 million in the first
nine months of 1995. This decrease of $88.7 million (39.4%) was principally
due to decreased cash provided by accounts receivable during 1995 reflecting,
(1) the relatively higher September 30, 1995 accounts receivable balance due,
in part, to the Company's reduced utilization of its receivable sales program
offset by decreased cash used for gas accounts payable in 1995 due to the
relatively lower December 31, 1994 gas accounts payable balance.
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>
Nine Months
Ended September 30
1995 1994
(millions of dollars)
Use (Source)
Recoveries under gas contract
settlements $ (22.2) $ (15.8)
Capital expenditures 118.0 121.1
Common and preferred dividends 31.8 31.6
Debt retirement 144.4 107.6
Change in receivables sold 110.7 79.8
Return of advance received
under contingent sales agreement 50.0 -
Decrease in overdrafts 15.1 12.9
Selected External Uses of 447.8 337.2
Cash
Less:
Proceeds from sale of - (35.5)
properties/assets
Sale of Itron stock (1.4) -
Issuance of debt (200.0) (5.0)
Common stock issuance (7.7) -
Change in cash balance (10.3) (3.2)
Cash Generated from Other
Sources, $ 228.4 $ 293.5
Principally Internal
Net Cash Flows from Investing Activities
The Company's capital expenditures for continuing operations by business
unit for the nine months ended September 30, 1995 and 1994 were as follows:
Nine Months
Ended September 30 Increase(Decrease)
1995 1994 $ %
(millions of dollars)
Natural Gas $ 89.7 $ 86.9 $ 2.8 3.2
Distribution
Trading and 28.0 33.2 (5.2) (15.7)
Transportation
Other 0.3 1.0 (0.7) (70.0)
Consolidated $ 118.0 $ 121.1 $ (3.1) (2.6)
Capital expenditures decreased from $121.1 million in the first nine
months of 1994 to $118.0 million in the first nine months of 1995, a decrease
of $3.1 million (2.6%), 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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources (continued)
which have been delayed to correspond with demand for incremental 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, 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 no borrowings under the Facility at September 30, 1995,
and had borrowings of $105 million at October 31, 1995, and therefore, had
approximately $295 million in capacity under the Facility at October 31, 1995,
which capacity is expected to be adequate to cover the Company's current and
projected needs for short-term financing. The increase in borrowings from
September 30 to October 31 was principally due to the Company's retirement of
its 9.45% notes as discussed following.
As further described in the Company's 1994 Report on Form 10-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 September 30, 1995 and October 31, 1995, the Company had
incremental debt capacity of $266.2 million and $321.6 million, respectively,
and while the Company is not required to calculate and apply the equity
limitation on an interim basis, if it were applied at September 30, 1995, the
Company would have had incremental dividend capacity of $45.9 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 September 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 September 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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources (continued)
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 increase the
Company's interest expense by $0.5 million and $1.3 million for the three
months ended September 30, 1995 and 1994, respectively, and to decrease the
Company's interest expense by $0.1 million for the nine months ended September
30, 1994. 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 $1.2 million
at September 30, 1995. This gain is expected to be amortized as follows: the
remainder of 1995 - $0.4 million; 1996 - $0.7 million; 1997 $0.1 million. At
September 30, 1995, the unrealized loss (mark-to-market value) associated with
outstanding swap arrangements was approximately $3.9 million.
In August 1995, the Company issued $200 million of 7 1/2% notes due 2000
in a public offering pursuant to a previously filed registration statement.
The proceeds of the offering were used to reduce the Company's bank borrowings
and its participation in its receivable sales program and for general
corporate purposes, pending the Company's October 1995 retirement at maturity
of the $150 million of its 9.45% notes.
In early November 1995, the Company filed, with the Securities and
Exchange Commission under Rule 415, a "Universal Shelf" registration
statement. This registration statement, which has not yet become effective,
will allow the Company to issue up to a total of $500 million of a wide
variety of debt and equity securities over the next few years. Although the
Company currently has no definitive plans with respect to any specific
security issue, more than $650 million in debt securities are either
redeemable or mature during the next 18 months, at least a portion of which
the Company intends to refinance.
Commitments
The Company had capital commitments of less than $10 million at
September 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 September 30, 1995, the Company was obligated for
$28.3 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 H of Notes to
Consolidated Financial Statements.<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources (continued)
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 offbalance-sheet risk as a result of its natural gas hedging
activities, see "Trading and Transportation" for the nine months ended
September 30, 1995 and 1994 under "Material Changes in the Results of
Operations" elsewhere herein.
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 11. 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 lawsuit (the "State Claim") filed in the
Circuit Court of Independence County, Arkansas. This complaint alleges that<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources (continued)
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. On October 23, 1995, the Supreme Court of
Arkansas affirmed the Circuit Court's order granting the Company's motion to
dismiss. The plaintiffs have the right to request a rehearing of this
decision. 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 and the Supreme
Court's affirmation of this order, 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 together with a number of other companies
had 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27, Financial Data Schedule
(b) Reports on Form 8-K
None<PAGE>
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: /s/Jack W. Ellis II
Jack W. Ellis II
Vice President & Controller
Dated November 14, 1995<PAGE>
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