Page 1 of 20
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 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 April 19, 1995 - 123,549,226
Exhibit Index Appears on Page 19<PAGE>
Page 2
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1995 and 1994
and December 31, 1994 4
Consolidated Statement of Income - Three Months Ended
March 31, 1995 and 1994 5
Statement of Consolidated Cash Flows - Three Months
Ended March 31, 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 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20<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 March 31 December 31 March 31
1995 1994 1994
PROPERTY, PLANT AND EQUIPMENT $ 3,730,742 $ 3,710,348 $ 3,630,942
Less: Accumulated depreciation 1,449,253 1,424,204 1,362,854
and amortization 2,281,489 2,286,144 2,268,088
INVESTMENTS AND OTHER ASSETS 773,220 789,754 828,890
(Note C)
CURRENT ASSETS
Cash and cash equivalents 18,428 17,632 14,382
Accounts and notes receivable 175,911 215,846 381,424
Deferred income taxes 14,318 10,287 23,252
Inventories (Note D) 59,868 112,094 59,501
Gas purchased in advance of 23,415 26,571 29,002
delivery
Other current assets 7,201 29,345 5,358
299,141 411,775 512,919
DEFERRED CHARGES 81,275 73,825 53,324
TOTAL ASSETS $ 3,435,125 $ 3,561,498 $ 3,663,221
LIABILITIES AND STOCKHOLDERS'
EQUITY
Stockholders' equity
Preferred stock $ 130,000 $ 130,000 $ 130,000
Common stock 77,157 76,581 76,481
Paid-in capital 874,086 868,289 867,704
Accumulated deficit (318,663) (360,079) (321,109)
Unrealized gain on Itron 5,646 2,586 -
investment, net of tax
Total Stockholders' Equity 768,226 717,377 753,076
Long-term debt, less current 1,323,674 1,414,374 1,622,564
maturities
CURRENT LIABILITIES
Current maturities of long- 221,000 151,000 77,000
term debt
Notes payable 13,000 110,000 -
Other notes payable 6,800 13,600 20,400
Gas accounts payable 169,895 215,221 219,351
Other accounts payable 156,656 186,720 191,292
Income taxes payable 45,600 4,690 32,167
Interest payable 37,658 42,180 40,143
General taxes 43,813 45,717 49,574
Customers' deposits 38,069 55,729 35,421
Other current liabilities 81,255 71,266 106,626
813,746 896,123 771,974
OTHER LIABILITIES AND DEFERRED
CREDITS<PAGE>
Page 5
Accumulated deferred income 265,580 257,839 250,069
taxes
Other deferred credits and 263,899 275,785 265,538
noncurrent liabilities
529,479 533,624 515,607
TOTAL LIABILITIES AND $ 3,435,125 $ 3,561,498 $ 3,663,221
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
Ended March 31
1995 1994
Operating Revenues $ 888,148 $1,100,869
Operating Expenses
Cost of natural gas purchased, 541,176 747,103
net
Operating, maintenance, cost of 144,321 141,157
sales & other
Depreciation and amortization 38,596 38,054
Taxes other than income taxes 29,336 31,091
753,429 957,405
Operating Income 134,719 143,464
Other Deductions
Interest expense, net 39,762 42,413
Other, net 2,877 2,074
42,639 44,487
Income Before Income Taxes 92,080 98,977
Provision for Income Taxes (Note E) 40,084 43,490
Income Before Extraordinary Item 51,996 55,487
Extraordinary loss, less taxes (52) -
Net Income 51,944 55,487
Preferred dividend requirement 1,950 1,950
Balance Available to Common Stock $ 49,994 $ 53,537
Per Share Data:
Before extraordinary item $ 0.41 $ 0.44
Extraordinary loss, less taxes 0.00 -
Earnings per Common Share $ 0.41 $ 0.44
Average Common Shares
Outstanding (in thousands) 122,960 122,370
Cash Dividends per Common Share $ 0.07 $ 0.07
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)
Three Months
Ended March 31
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,944 $ 55,487
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 38,596 38,054
Deferred income taxes 2,096 14,580
Extraordinary loss, less taxes 52 -
Other 803 (352)
Changes in certain assets and
liabilities, net of noncash 101,737 4,566
transactions (Note F)
Net cash provided by operating 195,228 112,335
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (30,600) (29,400)
Sale of assets - 12,315
Sale of Itron stock 1,441 -
Other, net (6,842) 5,993
Net cash used in investing (36,001) (11,092)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of (27,552) (6,800)
long-term debt
Increase (decrease) in overdrafts (23,309) 10,545
Other interim debt repayments (97,000) (95,000)
Common and preferred stock dividends (10,570) (10,516)
Net cash used in financing (158,431) (101,771)
activities
Net increase (decrease) in cash 796 (528)
Cash and cash equivalents - 17,632 14,910
beginning of period
Cash and cash equivalents - $ 18,428 $ 14,382
end of period
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:
March 31 December 31 March 31
1995 1994 1994
(millions of dollars)
Goodwill, net $ 491.8 $ 495.3 $ 506.0
Gas purchased in advance of 29.3 43.5 56.9
delivery
Notes receivable 6.0 6.1 8.6
Pipeline assets held for 91.0 91.0 91.0
sale (Note I)
Other 155.1 153.9 166.4
$ 773.2 $ 789.8 $ 828.9
D. "Inventories" as presented on the accompanying Consolidated
Balance Sheet includes the following:
March 31 December 31 March 31
1995 1994 1994
(millions of dollars)
Gas in underground $ 22.5 $ 73.8 $ 23.3
storage<PAGE>
Page 9
Materials and 37.1 38.1 35.7
supplies
Other 0.3 0.2 0.5
$ 59.9 $ 112.1 $ 59.5
The increased gas in underground storage at December 31,
1994 in comparison to March 31, 1995 and 1994 is largely a
normal seasonal fluctuation.
E. "Provision for Income Taxes" as presented on the
accompanying Consolidated Statement of Income includes the
following:
Three Months
Ended March 31
1995 1994
(millions of dollars)
Federal
Current $ 31.9 $ 23.7
Deferred 0.5 12.8
Investment (0.2) (0.2)
tax credit
State
Current 6.3 5.4
Deferred 1.6 1.8
$ 40.1 $ 43.5
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:
Three Months
Ended March 31
1995 1994
(millions of dollars)
Accounts and notes $ 37.4 $ (66.9)
receivable
Inventories 52.2 94.3
Other current assets 22.1 12.0
Gas accounts payable (45.3) (47.9)
Other accounts payable (6.7) (9.3)
Income taxes payable 40.9 19.2
Interest payable (4.5) (4.5)
General taxes payable (1.9) (0.5)
Customers' deposits (17.7) (11.5)
Other current liabilities 10.0 8.8
Settlement of gas contract 15.2 10.9
disputes
$ 101.7 $ 4.6
All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash<PAGE>
Item 1. Financial Statements (continued) Page 10
Notes to Consolidated Financial Statements (continued)
equivalents. Following is selected supplemental cash flow
information:
Three Months
Ended March 31
1995 1994
(millions of dollars)
Cash interest
payments, net of $ 42.7 $ 46.5
capitalized interest
Net cash income tax
payments (refunds) $ (1.8) $ 9.2
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 $167.2 million, $192.8 million
and $118.7 million, respectively, at March 31, 1995,
December 31, 1994 and March 31, 1994, which amounts have
been deducted from "Accounts and notes receivable" in the
accompanying Consolidated Balance Sheet and, at March 31,
1995, $42.9 million of the Company's remaining receivables
were collateral for receivables which had been sold. During
the three months ended March 31, 1995 and 1994, the Company
experienced cash outflows of $25.6 million and $107.7
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 which
require 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<PAGE>
Item 1. Financial Statements (continued) Page 11
Notes to Consolidated Financial Statements (continued)
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 has been recorded as a liability and the assets
subject to the transaction have been segregated as "Pipeline
assets held for sale" and included with "Investments and
other assets" on the accompanying Consolidated Balance
Sheet, see Note C. Prospectively, these assets will be
reclassified to property, plant and equipment.
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. As further discussed in the Company's 1994 Report on Form
10-K, the Company, due in part to its acquisition of
Minnegasco in November 1990, is in the process of
identifying and providing for remediation of various sites
where gas was manufactured from the late 1800's to
approximately 1960. The Company has provided an accrual
(undiscounted and without regard to potential third-party
recoveries) for expected costs of remediation (which largely
are expected to be recovered through the regulatory process)
based on the latest available information.
In addition, the Company, as well as other similarly
situated firms in the industry, is investigating the
possibility that it may elect or be required to perform
remediation of various sites where meters containing mercury
were disposed of improperly or where mercury from such
meters may have leaked or been improperly disposed of.
While the Company's evaluation of this issue is in its
preliminary stages, it is likely that compliance costs will
be identified and become subject to reasonable
quantification. To the extent that such potential costs are
quantified, the Company will provide an appropriate accrual
and, to the extent justified based on the circumstances
within each of the Company's regulatory jurisdictions, set
up regulatory assets in anticipation of recovery through the
ratemaking process.
On October 24, 1994, the United States Environmental
Protection Agency advised Mississippi River Transmission
Corporation ("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 L.
While the nature of environmental contingencies makes
complete evaluation impractical, the Company is currently
aware of no other environmental matter which could<PAGE>
Item 1. Financial Statements (continued) Page 12
Notes to Consolidated Financial Statements (continued)
reasonably be expected to have a material impact on its
results of operations, financial position or cash flows.
L. 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, but a hearing date for the appeal has
not yet been set. 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
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,<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 13
Condition and Results of Operations (continued)
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
Outcome of Annual Stockholders' Meeting Votes
At the Company's annual stockholders' meeting held on May 9,
1995, the Company's stockholders voted on three proposals (in
addition to the election of directors) as described following:
* The Company's stockholders approved a proposal to amend
the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Company
Common Stock from 150,000,000 shares to 250,000,000
shares.
* The Company's stockholders approved a proposal
recommending prior stockholder approval of future
agreements providing for the payment of executive
compensation in the event of a change in control of the
Company.
* The Company's stockholders rejected a proposal which
would have recommended prior stockholder approval of
any changes in compensation for nonemployee directors
of the Company.
These proposals are described in detail in the Company's
1994 Proxy Statement.
Sale of Pipeline Facilities
The Company recently determined that it will not complete
the sale of certain pipeline facilities to ANR Pipeline Company
("ANR"), see Note I of Notes to Consolidated Financial
Statements.
Dividend Declaration
On May 9, 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 June 15, 1995 to
owners of record on May 2, 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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 14
Condition and Results of Operations (continued)
Material Changes in the Results of Operations (continued)
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:
COMPARISON OF THE FIRST QUARTER OF 1995 TO THE FIRST QUARTER OF 1994
Quarter Ended
March 31 Increase(Decrease)
1995 1994 $ %
Operating (millions of dollars)
Income(Loss)
Natural gas $ 97.9 $ 108.8 $ (10.9) (10.0)
distribution
Trading and 36.6 34.9 1.7 4.9
Transportation
Corporate and 0.2 (0.2) 0.4 200.0
Other
Consolidated $ 134.7 $ 143.5 $ (8.8) (6.1)
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.<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)
This system serves approximately 23,000 customers in 14
communities.
Quarter Ended
March 31 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Natural gas sales $ 676.2 $ 824.4 $ (148.2) (18.0)
Transportation revenue 6.3 5.8 0.5 8.6
Other revenue 26.8 16.7 10.1 60.5
Total operating revenues 709.3 846.9 (137.6) (16.2)
Purchased gas cost
Unaffiliated 341.4 435.5 (94.1) (21.6)
Affiliated 116.2 146.3 (30.1) (20.6)
Operations and maintenance 106.1 108.2 (2.1) (1.9)
Depreciation and 22.8 21.8 1.0 4.6
amortization
Other operating expenses 24.9 26.3 (1.4) (5.3)
Operating income $ 97.9 $ 108.8 $ (10.9) (10.0)
OPERATING STATISTICS (billions of cubic feet)
Residential sales 80.4 89.8 (9.4) (10.5)
Commercial sales 47.2 50.4 (3.2) (6.3)
Industrial sales 39.5 33.0 6.5 19.7
Sales for resale 8.1 4.1 4.0 97.6
Transportation 21.4 19.1 2.3 12.0
Total throughput 196.6 196.4 0.2 0.1
DEGREE Normal 1995 1994
DAYS
Arkla 1,713 1,465 1,670
Entex 876 761 886
Minnegasco 3,893 3,620 4,236
Distribution operating income decreased from $108.8 million
in the first quarter of 1994 to $97.9 million in the first
quarter of 1995, a decrease of $10.9 million (10.0%), reflecting
a decrease in both operating revenues and operating expenses.
Operating revenues decreased from $846.9 million in the
first quarter of 1994 to $709.3 million in the first quarter of
1995 due primarily to warmer 1995 weather in the service areas of
all three distribution units and a 20.4% decline in the average
cost of purchased gas from $3.28/Mcf in 1994 to $2.61/Mcf in 1995
(purchased gas cost is a component of the overall sales rate).
As a result of the warmer first quarter 1995 weather, total
weather-sensitive residential and commercial sales volumes
decreased 12.6 Bcf (9.0%) in comparison to the first three months
of 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 6.5 Bcf<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)
(19.7%) in the industrial sales volume from 1994 to 1995. Other
operating revenues increased from $16.7 million in the first
quarter of 1994 to $26.8 million in the first quarter of 1995.
This $10.1 million increase is due primarily to growth in
Minnegasco's non-regulated energy management business.
Total purchased gas cost decreased by $124.2 million (21.3%)
in the first quarter of 1995 in comparison to the first quarter
of 1994 due to the decreased sales volume and decrease in the
average cost of purchased gas as discussed above. Operating
expenses, exclusive of purchased gas cost, decreased by $2.5
million in the first quarter of 1995 in comparison to the first
quarter of 1994 principally due to decreased O&M expense related
to decreased throughput, partially offset by increased
depreciation and amortization 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".
On February 1, 1995, the Company transferred the natural gas
gathering assets of NGT into NFS, a wholly owned subsidiary of
NorAm Energy Corp. 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
"Recent Developments" elsewhere herein.<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)
Quarter Ended
March 31 Increase(Decrease)
1995 1994 $ %
FINANCIAL RESULTS (millions of dollars)
Gas sales revenue
Sales to Distribution $ 45.7 $ 61.4 $ (15.7) (25.6)
Industrial sales and 138.1 213.6 (75.5) (35.3)
other
Total gas sales 183.8 275.0 (91.2) (33.2)
revenue
Transportation revenue
Distribution 31.1 28.4 2.7 9.5
Other 37.5 37.1 0.4 1.1
Total transportation 68.6 65.5 3.1 4.7
revenue
Total operating 252.4 340.5 (88.1) (25.9)
revenue
Purchased gas cost
Affiliated 0.2 2.6 (2.4) (92.3)
Unaffiliated 158.7 250.8 (92.1) (36.7)
Operations and 28.0 23.8 4.2 17.6
maintenance expense
Depreciation and 11.0 10.7 0.3 2.8
amortization
Other operating expenses, 17.9 17.7 0.2 1.1
net
Operating income $ 36.6 $ 34.9 $ 1.7 4.9
OPERATING STATISTICS (million MMBtu)
Sales to Distribution 22.2 25.2 (3.0) (11.9)
Sales for resale and 63.5 32.9 30.6 93.0
other
Total sales 85.7 58.1 27.6 47.5
Transportation
Distribution 42.7 45.2 (2.5) (5.5)
Other 225.7 227.4 (1.7) (0.7)
Total transportation 268.4 272.6 (4.2) (1.5)
Elimination(1) (19.1) (18.7) (0.4) (2.1)
Total throughput 335.0 312.0 23.0 7.4
(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.
Operating income for the NorAm Trading and Transportation
Group in the first quarter of 1995 increased by $1.7 million or
5% over the corresponding quarter of 1994. This favorable
variance was primarily attributable to increased 1995 sales
margins by NES which offset slightly lower first quarter 1995
results by the Company's interstate pipelines, and an adjustment<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)
to purchased gas cost in the first quarter of 1995 as described
following. The increase in sales margins by NES in 1995 was
largely due to an expanded use of gas storage arrangements.
These gas storage activities serve 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. Additional
positive variance in 1995 resulted from fuel cost savings due to
decreased spot market prices for natural gas.
Sales to Distribution decreased by $15.7 million (26%) in
1995, 87% of which decrease was due to decreased revenues from
sales by NES. The reduction in 1995 revenues from sales by NES
to Distribution was principally due to significantly lower spot
market prices in the first quarter of 1995 (approximately
$0.65/MMBtu, or 31%, below 1994, on average) which lowers the
commodity cost component of the total sales rate, thereby
decreasing total sales revenues. Industrial and other sales
revenues for the first quarter of 1995 decreased by $75.5 million
(35%) in comparison to the first quarter of 1994. Approximately
37% of this total reduction was due to reduced NES revenues and
the reduction in spot market prices described above. More than
50% of the reduction is attributable to MRT, whose 1994 revenues
included $40.5 million of revenue associated with storage gas
held for customers that was sold, withdrawn and transported to
customers' facilities during the first quarter of 1994 as a
transition measure to FERC Order 636 unbundled services. This
gas was replaced by customer-owned gas, with MRT continuing to
own and operate the storage facilities for a fee.
Total purchased gas cost decreased by $94.5 million from the
first quarter of 1994 to the first quarter of 1995 principally
due to the previously discussed reduction in spot market prices
and the inclusion of $40.5 million of gas purchase expense
associated with MRT's sale of storage gas to customers. In
addition, the first quarter of 1995 included a favorable
adjustment to purchased gas cost associated with certain fixed-
price gas sale commitments as discussed following. Operation and
maintenance expense increased by $4.2 million (18%) in the first
quarter of 1995 as compared to the first quarter of 1994
primarily due to a $3.7 million increase in transportation
expenses paid to third-party pipelines.
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 March 31, 1995, the Company was obligated
under swaps covering 104.7 Bcf and 89.1 Bcf of gas in which it
was the fixed price payor and the fixed price receiver,<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)
respectively, and these swaps collectively represented an
unrealized gain of $0.7 million.
At March 31, 1995, the Company held NYMEX futures contracts
covering the purchase of 5.3 Bcf of gas (a notional amount of
$10.3 million) through August 1996 and the sale of 3.3 Bcf of gas
(a notional amount of $6.2 million) through August 1996. These
contracts collectively represented an unrealized gain of $1.1
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 March 31, 1995, the Company was obligated under swaps
covering 94.0 Bcf and 64.1 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 $14.7
million. There were no changes during the first quarter of 1995
in the options purchased in conjunction with this program.
During the first 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
Operating income for Corporate and Other increased from a
loss of $0.2 million in the first quarter of 1994 to income of
$0.2 million in the first quarter of 1995, an improvement of $0.4
million reflecting increased income from miscellaneous
activities.
CONSOLIDATED
Net income decreased from $55.5 million in the first quarter
of 1994 to $51.9 million in the corresponding period of 1995, a
decrease of $3.6 million, while (as discussed above) operating
income decreased by $8.8 million during the same period. This
decreased net expense below the operating line was principally
due to (1) a decrease of $3.4 million in the 1995 provision for
income taxes, reflecting a reduced level of income before income
taxes and (2) a decrease of $2.7 million in 1995 interest
expense, principally due to a reduced level of total debt.<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)
Liquidity and Capital Resources
The table below illustrates the sources of the Company's
invested capital during the last five years and at March 31,
1995.
March 31 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 768.2 717.4 708.0 712.9 948.0 1,115.4
Total 2,091.9 2,131.8 2,337.4 2,496.0 2,499.5 2,565.6
Capitalization
Short-Term Debt 240.8 274.6 192.4 120.0 772.6 712.4
Total Invested $ 2,332.7 $ 2,406.4 $ 2,529.8 $ 2,616.0 $ 3,272.1 $ 3,278.0
Capital
Long-Term Debt
as a Percent of 63.3% 66.3% 69.7% 71.4% 62.1% 56.5%
Total Capitalization
Equity as a Percent
of Total 36.7% 33.7% 30.3% 28.6% 37.9% 43.5%
Capitalization
Total Debt as a
Percent of
Total Invested 67.1% 70.2% 72.0% 72.7% 71.0% 66.0%
Capital
CASH FLOW ANALYSIS
The Company's cash flows, like its results of operations,
are seasonal and, therefore, the cash flows experienced during an
interim period are not necessarily indicative of the results to
be expected for an entire year.
Net Cash Flows from Operating Activities
"Net cash provided by operating activities" as shown in the
accompanying Statement of Consolidated Cash Flows ("Cash Flow
Statement") increased from $112.3 million in the first three
months 1994 to $195.2 million in the first three months of 1995.
This increase of $82.9 million was principally attributable to
increased cash provided by accounts receivable collections during
1995, reflecting the reduced level of outflows under the
Company's receivables sales program during 1995, see Note H of
Notes to Consolidated Financial Statements. This favorable
impact was partially offset by (1) decreased 1995 cash provided<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 21
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
from sale of inventories principally due to MRT's first quarter
1994 sale of gas in underground storage to its customers as
discussed elsewhere herein and the relatively warmer first
quarter 1995 weather and (2) decreased 1995 income before noncash
charges and credits.
The accompanying Cash Flow Statement has been prepared in
accordance with authoritative accounting guidelines which require
the segregation of cash flows into specific categories.
Management believes that other groupings of cash flows may also
be useful and that the following information (which amounts are
consistent with the Cash Flow Statement) will assist in
understanding the Company's sources and uses of cash during the
periods presented. This information should not be viewed as a
substitute for the Cash Flow Statement nor should the totals or
subtotals presented be considered surrogates for totals or
subtotals appearing on the Cash Flow Statement.
Three Months
Ended March 31
1995 1994
(millions of dollars)
Use (Source)
Recovery under gas contract $ (15.2) $ (10.9)
disputes
Capital expenditures 30.6 29.4
Common and preferred dividends 10.6 10.5
Debt retirement 124.6 101.8
Change in receivables sold 25.6 107.7
(Increase) decrease in 23.3 (10.5)
overdrafts
Selected External Uses of 199.5 228.0
Cash
Less:
Proceeds from sale of - (12.3)
properties/assets
Sale of Itron stock (1.4) -
Change in cash balance (0.8) 0.5
Cash Generated from Other
Sources, Principally $ 197.3 $ 216.2
Internal<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 22
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
Net Cash Flows from Investing Activities
The Company's capital expenditures for continuing operations
by business unit for the three months ended March 31, 1995 and
1994 were as follows:
Three Months
Ended March 31 Increase(Decrease)
1995 1994 $ %
(millions of dollars)
Natural gas $ 23.1 $ 21.1 $ 2.0 9.5
distribution
Trading and 7.4 8.0 (0.6) (7.5)
Transportation
Other 0.1 0.3 (0.2) (66.7)
Consolidated $ 30.6 $ 29.4 $ 1.2 4.1
Capital expenditures increased from $29.4 million in the
first three months of 1994 to $30.6 million in the first three
months of 1995, an increase of $1.2 million (4.1%), reflecting
increased spending in Distribution. The increased capital
spending in Distribution reflects customer growth and increased
replacement of existing facilities. The Company's capital
expenditures for 1995 are budgeted at approximately $207 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
March 31, 1995 or April 30, 1995 and, therefore, had
approximately $400 million in capacity under the Facility at
April 30, 1995, which capacity is expected to be adequate to
cover the Company's current and projected needs for short-term
financing. The Company had borrowings of $13 million and $20
million under informal lines of credit at March 31, 1995 and
April 30, 1995, respectively.
As further described in the Company's 1994 Report on Form
10-K, the Facility contains a provision which requires the<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 23
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
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) $100 million on the amount of outstanding
long-term debt which may be retired in advance of its maturity.
Certain of the Company's other financial arrangements contain
similar provisions. Based on these restrictions, at March 31,
1995, the Company had incremental debt capacity of $445.9 million
and, while the Company is not required to calculate and apply the
dividend limitation on an interim basis, if it were applied at
March 31, 1995, the Company would have had incremental dividend
capacity of $68.2 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 March 31, 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 March 31, 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 increase interest expense by $0.4 million for
the three months ended March 31, 1995 and decrease interest
expense by $0.6 million for the three months ended March 31,
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 $2.0 million at March
31, 1995. This gain is expected to be amortized as follows: the
remainder of 1995 - $1.2 million; 1996 - $0.7 million; 1997 -
$0.1 million. At March 31, 1995, the unrealized loss (mark-to-
market value) associated with outstanding swap arrangements was
approximately $10.2 million.
Commitments<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 24
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
The Company had capital commitments of less than $10 million
at March 31, 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 March 31, 1995, the Company was
obligated for $27.1 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" 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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Page 25
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
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 Proceeding" 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
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, but a hearing date for the
appeal has not yet been set. 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,<PAGE>
Item 1. Legal Proceedings (continued) Page 26
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27, Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated January 27, 1995
reporting under "Item 5. Other Events" and "Item 7.
Financial Statement, Pro Forma Financial Information
and Exhibits", reporting the addition of three Board
members.
Current Report on Form 8-K dated February 10, 1995
reporting under "Item 5. Other Events" and "Item 7.
Financial Statement, Pro Forma Financial Information
and Exhibits", reporting fourth quarter earnings.<PAGE>
Page 27
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 May 15, 1995 <PAGE>
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