Page 1 of 42
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1996
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, 32nd Floor
Houston, Texas 77002
(Address of principal executive offices)
(713) 654-5699
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Outstanding Common Stock, $.625 Par Value
at July 31, 1996 - 137,067,805
Exhibit Index Appears on Page 41
<PAGE>
INDEX
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1996 and 1995
and December 31, 1995 4
Consolidated Statement of Income - Quarter Ended
June 30, 1996 and 1995 and Six Months Ended
June 30, 1996 and 1995 6
Statement of Consolidated Cash Flows - Six Months Ended
June 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Item 1. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 41
Signature 42
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
The consolidated financial statements of NorAm Energy Corp. and
Subsidiaries (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 1995 Report on Form 10-K. The Company recently announced that it had
signed a definitive agreement which will result in the merger of the Company
with and into a wholly owned subsidiary of Houston Industries Incorporated
("Houston Industries"), see Note L.
<PAGE>
<TABLE>
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
<CAPTION>
ASSETS June 30 December 31 June 30
- ------
1996 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Property, Plant and Equipment
Natural Gas Distribution .......................... $ 2,102,130 $ 2,059,376 $ 1,981,508
Interstate Pipelines .............................. 1,678,651 1,666,017 1,667,777
Natural Gas Gathering ............................. 213,341 208,989 208,510
Other ............................................. 38,197 35,157 34,545
----------- ----------- -----------
4,032,319 3,969,539 3,892,340
Less: Accumulated depreciation and amortization .... 1,626,415 1,561,764 1,514,946
----------- ----------- -----------
2,405,904 2,407,775 2,377,394
Investments and Other Assets
Goodwill, net ..................................... 474,032 481,125 488,218
Prepaid pension asset ............................. 48,916 57,965 59,120
Investment in Itron, Inc. ......................... 42,635 50,711 46,955
Regulatory asset for environmental costs .......... 42,408 48,500 41,703
Gas purchased in advance of delivery .............. 34,040 24,284 27,183
Other ............................................. 16,742 21,324 21,994
----------- ----------- -----------
658,773 683,909 685,173
Current Assets
Cash and cash equivalents ......................... 21,600 13,311 18,539
Accounts and notes receivable, principally customer 336,714 335,779 104,041
Deferred income taxes ............................. 12,628 13,601 14,465
Inventories
Gas in underground storage ...................... 48,364 53,183 49,157
Materials and supplies .......................... 31,407 33,354 34,670
Other ........................................... 393 445 335
Deferred gas cost ................................. (1,710) 13,019 4,965
Gas purchased in advance of delivery .............. 6,200 23,440 23,404
Other current assets .............................. 14,840 25,496 26,710
----------- ----------- -----------
470,436 511,628 276,286
Deferred Charges .................................... 61,214 62,671 69,100
----------- ----------- -----------
TOTAL ASSETS ...................................... $ 3,596,327 $ 3,665,983 $ 3,407,953
=========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
<TABLE>
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30 December 31 June 30
- ------------------------------------
1996 1995 1995
------------------ ------------------- ------------------
<S> <C> <C> <C>
Stockholders' Equity
Preferred stock (Note E) $ - $ 130,000 $ 130,000
Common stock 85,590 78,002 77,470
Paid-in capital 991,637 880,885 876,436
Accumulated deficit (299,503) (336,940) (336,309)
Unrealized gain on investment, net of tax 10,171 15,316 13,211
------------------ ------------------- ------------------
Total Stockholders' Equity 787,895 767,263 760,808
Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities of Subsidiary Trust
Holding Solely $177.8 Million Principal Amount of
6.25% Convertible Subordinated Debentures Due
2026 of NorAm Energy Corp. (Note E) 167,762 - -
Long-Term Debt, Less Current Maturities 1,106,969 1,474,924 1,323,674
Current Liabilities
Current maturities of long-term debt 280,250 118,750 221,000
Notes payable to banks - 10,000 63,000
Accounts payable, principally trade 421,652 472,374 241,191
Income taxes payable 20,810 5,337 24,195
Interest payable 34,188 38,730 41,960
General taxes 35,237 48,320 31,818
Customers' deposits 34,472 35,651 34,895
Other current liabilities 103,800 96,645 90,382
------------------ ------------------- ------------------
930,409 825,807 748,441
Other Liabilities and Deferred Credits
Accumulated deferred income taxes 313,296 303,445 276,770
Estimated environmental remediation costs 42,408 48,500 41,703
Payable under capacity lease agreement 41,000 41,000 41,000
Supplemental retirement and deferred compensation 40,555 40,869 40,159
Estimated obligations under indemnification
provisions of sale agreements 31,823 34,207 35,881
Refundable excess deferred income taxes 19,642 26,599 27,026
Other 114,568 103,369 112,491
------------------ ------------------- ------------------
603,292 597,989 575,030
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,596,327 $ 3,665,983 $ 3,407,953
================== =================== ==================
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
<TABLE>
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in thousands of dollars except per share amounts)
(unaudited)
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
---------------------------- -------------------------------
1996 1995 1996 1995
-------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operating Revenues $ 891,325 $ 565,842 $ 2,308,988 $ 1,453,990
Operating Expenses
Cost of natural gas purchased, net 684,997 346,713 1,712,539 887,889
Operating, maintenance, cost of sales & other 102,791 128,127 253,640 272,448
Depreciation and amortization (Note I) 35,862 38,482 71,572 77,078
Taxes other than income taxes 28,002 25,257 62,638 54,593
Early retirement and severance (Note D) - - 22,344 -
-------------- ------------- --------------- ---------------
851,652 538,579 2,122,733 1,292,008
Operating Income 39,673 27,263 186,255 161,982
Other Deductions
Interest expense, net 34,537 37,093 70,707 76,855
Dividend requirement on preferred
securities of subsidiary trust (Note E) 425 - 425 -
Other, net 2,326 1,493 5,753 4,370
-------------- ------------- --------------- ---------------
37,288 38,586 76,885 81,225
Income(Loss) Before Income Taxes 2,385 (11,323) 109,370 80,757
Provision for Income Taxes(Benefit) (Note B) 50 (4,251) 45,838 35,833
-------------- ------------- --------------- ---------------
Income(Loss) Before Extraordinary Item 2,335 (7,072) 63,532 44,924
Extraordinary loss on early
retirement of debt, less taxes (Note B) (4,455) - (4,733) (52)
-------------- ------------- --------------- ---------------
Net Income(Loss) (2,120) (7,072) 58,799 44,872
Preferred dividend requirement (Note E) 1,647 1,950 3,597 3,900
-------------- ------------- --------------- ---------------
Balance Available to Common Stock $ (3,767) $ (9,022) $ 55,202 $ 40,972
============== ============= =============== ===============
Per Share Data:
Primary:
Before extraordinary item $ 0.01 $ (0.07) $ 0.48 $ 0.33
Extraordinary item, less taxes (0.04) - (0.04) 0.00
-------------- ------------- --------------- ---------------
Earnings per common share (0.03) (0.07) 0.44 0.33
============== ============= =============== ===============
Fully Diluted:
Before extraordinary item 0.01 (0.07) 0.47 0.33
Extraordinary item, less taxes (0.04) - (0.04) 0.00
-------------- ------------- --------------- ---------------
Earnings per common share $ (0.03) $ (0.07) $ 0.43 $ 0.33
============== ============= =============== ===============
Average Common Shares
Outstanding (in thousands)
Primary 127,006 123,735 125,995 123,350
Fully diluted 129,195 123,735 127,090 123,350
Cash Dividends per Common Share $ 0.07 $ 0.07 $ 0.14 $ 0.14
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
<TABLE>
NorAm Energy Corp. and Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase(Decrease) in Cash and Cash Equivalents
(in thousands of dollars)
(unaudited)
<CAPTION>
Six Months
Ended June 30
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58,799 $ 44,872
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 71,572 77,078
Early retirement and severance, less cash costs (Note D) 12,941 -
Deferred income taxes 13,653 8,910
Extraordinary loss, less taxes (Note B) 4,733 52
Other 1,762 1,563
Changes in certain assets and liabilities, net of noncash transactions:
Accounts and notes receivable, principally customer 19,065 111,805
Inventories 6,818 27,932
Deferred gas costs 14,729 (11,777)
Other current assets 10,656 9,447
Accounts payable, principally trade (68,041) (53,642)
Income taxes payable 15,473 19,505
Interest payable (4,542) (220)
General taxes (13,083) (13,899)
Customers' deposits (1,179) (606)
Other current liabilities 655 (1,112)
Recoveries under gas contract disputes 8,000 18,600
---------------- ----------------
Net cash provided by operating activities 152,011 238,508
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (62,100) (72,200)
Sale of Itron stock - 1,441
Other, net 11,643 (3,112)
---------------- ----------------
Net cash used in investing activities (50,457) (73,871)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of long-term debt (Note B) (341,188) (34,352)
Public issuance of common stock (Note E) 108,963 -
Public issuance of convertible preferred securities of subsidiary
trust (Note E) 167,756 -
Other interim debt repayments (10,000) (47,000)
Return of advance received under contingent sales agreement - (50,000)
Issuance of common stock under Direct Stock Purchase Plan 5,246 4,915
Common and preferred stock dividends (Note E) (21,361) (21,185)
Decrease in overdrafts (2,681) (16,108)
---------------- ----------------
Net cash used in financing activities (93,265) (163,730)
---------------- ----------------
Net increase in cash and cash equivalents 8,289 907
Cash and cash equivalents - beginning of period 13,311 17,632
---------------- ----------------
Cash and cash equivalents - end of period $ 21,600 $ 18,539
================ ================
</TABLE>
For supplemental cash flow information,
see Note C.
The Notes to Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
================================================================================
NorAm Energy Corp. and Subsidiaries
================================================================================
Notes to Consolidated Financial Statements
(unaudited)
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 the 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 that 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 each 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 the
current presentation. The Company recently announced that it had signed a
definitive agreement which will result in the acquisition of the Company by
Houston Industries, see Note L.
B. Following are components of and additional information concerning certain
line items from the accompanying consolidated financial statements:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Provision for Income June 30 June 30
- --------------------
----------------------------- ------------------------------
Taxes(Benefit) 1996 1995 1996 1995
- ----------------
--------------- ------------- -------------- --------------
(millions of dollars)
<S> <C> <C> <C> <C>
Federal
Current $ (4.7) $ (9.1) $ 28.6 $ 22.8
Deferred 6.4 5.0 10.8 5.5
Investment tax credit (0.2) (0.1) (0.3) (0.3)
State
Current (2.2) (1.9) 3.9 4.4
Deferred 0.7 1.8 2.8 3.4
=============== ============= ============== ==============
$ 0.0 $ (4.3) $ 45.8 $ 35.8
=============== ============= ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Retirements and Reacquisitions Six Months Ended June 30
- ------------------------------
---------------------------------
of Long Term Debt (1) 1996 1995
- -----------------------
-------------- -------------
(millions of dollars)
<S> <C> <C> <C> <C>
Reacquisition of 9.875% Series due 2018 $ 7.4 (2) $ 5.7 (2)
Reacquisition of 10% Debentures due 2019 - 15.0 (2)
Retirement, at maturity, of Medium Term Notes,
weighted average interest rate of approximately 9.27% 70.0 -
Retirement of Bank Term Loan due 2000 (Note E) 150.0 -
Retirement of 9.875% Series Due 2018 (Note E) 109.1 (2) -
Retirement, at maturity, of Note Payable to Gas Supplier - 13.6
Loss on reacquisition of debt, less taxes 4.7 0.1
============== =============
$ 341.2 $ 34.4
============== =============
</TABLE>
(1) In July 1996, the Company retired $23.8 million and $25.0 million of its
Medium Term Notes bearing interest rates of 8.74% and 8.78%, respectively,
representing the last of the Company's 1996 debt maturities.
(2) The premiums associated with these reacquisitions and retirements are
reported in the accompanying Statement of Consolidated Income as
"Extraordinary loss on early retirement of debt, less taxes", and are net
of tax benefits of $3.0 million and $0.03 million for the six months ended
June 30, 1996 and 1995, respectively.
<PAGE>
C. In the accompanying consolidated financial statements, all highly liquid
investments purchased with an original maturity of three months or less are
considered to be cash equivalents. Following is selected supplemental cash
flow information.
Six Months Ended June 30
-----------------------
1996 1995
--------- -----------
(millions of dollars)
Cash interest payments, $ 75.3 $ 75.2
net of capitalized interest
Net income tax payments $ 14.9 $ 8.7
In June 1996, the Company exercised its right to exchange its $3.00
Preferred Stock Series A for its 6% Convertible Subordinated Debentures due
2012 in a non-cash transaction, see Note E.
D. During the first quarter of 1996, the Company instituted a reorganization
plan affecting its NorAm Gas Transmission Company ("NGT") and Mississippi
River Transmission Corporation ("MRT") subsidiaries, pursuant to which a
total of approximately 275 positions were eliminated, resulting in expense
for severance payments and enhanced retirement benefits. Also during the
first quarter of 1996, (1) the Company's Entex division instituted an early
retirement program which was accepted by approximately 100 employees and
(2) the Company's Minnegasco division reorganized certain functions,
resulting in the elimination of approximately 25 positions. Collectively,
these programs resulted in a non-recurring pre-tax charge of approximately
$22.3 million (approximately $13.4 million or $0.11 per share after tax),
which pre-tax amount is reported in the accompanying Statement of
Consolidated Income as "Early retirement and severance".
E. During June 1996, the Company engaged in the following significant
financing transactions:
*The Company issued 11,500,000 shares of NorAm Energy Corp. Common
Stock (the "Common Stock") to the public at a price of $9.875 per
share, yielding net cash proceeds of approximately $109.0 million after
deducting an underwriting discount of 4.05% and before deducting
expenses estimated to total $0.1 million. The net proceeds from the
offering principally were used to retire debt as described following.
*The Company issued $177.8 million of 6.25% Convertible Subordinated
Debentures due 2026 (unless extended by the Company as discussed
following) (the "Trust Debentures") to NorAm Financing I (the "Trust"),
a statutory business trust under Delaware law. The Trust Debentures
were purchased by the Trust using the proceeds from (1) the public
issuance by the Trust of 3,450,000 shares of 6.25% Convertible
Preferred Securities (the "Trust Preferred") at $50 per share, a total
of $172.5 million and (2) the sale of approximately $5.3 million of the
Trust's common stock (representing 100% of the Trust's common equity)
to the Company. The sole assets of the Trust are and will be the Trust
Debentures. The interest and other payment dates on the Trust
Debentures correspond to the interest and other payment dates on the
Trust Preferred. In conjunction with the issuance of the Trust
Preferred, the Company paid an underwriting commission of $1.375 per
share and expenses expected to total approximately $0.1 million in view
of the fact that the proceeds from such issuance would be invested in
the Trust Debentures. The net proceeds from these transactions
principally were used to retire debt as described following.
The Trust Preferred, as more fully described in the offering
documents, accrues a dividend equal to 6.25% of the $50 liquidation
amount, payable quarterly in arrears. The ability of the Trust to pay
distributions on the Trust Preferred is solely dependent on its receipt
of interest payments on the Trust Debentures. The Company has the right
to defer interest payments on the Trust Debentures as discussed
following. In the case of such deferral, quarterly distributions on the
Trust Preferred would be deferred by the Trust but would continue to
accumulate quarterly and would accrue interest. Each share of Trust
Preferred is convertible at the option of the holder into shares of
Common Stock at an initial conversion rate of 4.1237 shares of Common
Stock for each share of the Trust Preferred, subject to adjustment in
certain circumstances. The Trust Preferred does not have a stated
maturity date, although it is subject to mandatory redemption upon
maturity of the Trust Debentures or to the extent that the Trust
Debentures are redeemed. In general, holders of the Trust Preferred do
not have any voting rights.
The Trust Debentures, as more fully described in the offering
documents, bear interest at 6.25% and are redeemable for cash at the
option of the Company, in whole or in part, from time to time on or
after June 30, 2000, if and only if for 20 trading days within any
period of 30 consecutive days, including the last trading day of such
period, the current market price of the Common Stock equals or exceeds
125% of the then-applicable conversion price of the Trust Debentures,
or at any time in certain circumstances upon the occurrence of a
specified tax event. The Trust Debentures will mature on June 30, 2026,
although the maturity date may be extended only once at the Company's
election for up to an additional 19 years, provided certain
requirements and conditions are met. Under existing law, interest
payments made by the Company for the Trust Debentures are deductible
for federal income tax purposes. The Company has the right at any time
and from time to time to defer interest payments on the Trust
Debentures for successive periods not to exceed 20 consecutive quarters
for each such extension period. In such case, (1) quarterly
distributions on the Trust Preferred would also be deferred as
discussed preceding and (2) the Company has agreed not to declare or
pay any dividend on any common or preferred stock, except in certain
instances.
The Trust is consolidated with the Company for financial
reporting purposes and, therefore, the Trust Debentures are eliminated
in consolidation and the Trust Preferred appears on the Company's
Consolidated Balance Sheet under the caption "Company-Obligated
Mandatorily Redeemable Convertible Preferred Securities of Subsidiary
Trust Holding Solely $177.8 Million Principal Amount of 6.25%
Convertible Subordinated Debentures due 2026 of NorAm Energy Corp.".
The dividend on the Trust Preferred is reported on a pre-tax basis in
the accompanying Statement of Consolidated Income under the caption
"Dividend requirement on preferred securities of subsidiary trust".
*Utilizing, in large part, the proceeds from the offerings discussed
preceding, the Company (1) retired the $109.1 million principal amount
then outstanding of its 9.875% Debentures due 2018 at a price equal to
105.93% of face value, recognizing an extraordinary pre-tax loss of
approximately $6.5 million (approximately $3.9 million or $0.03 per
share after-tax) and (2) retired its $150 million bank term loan due
2000 at face value, see Note B.
*The Company exercised its right to exchange the $130 million
principal amount of its $3.00 Preferred Stock Series A (the
"Preferred") for its 6% Convertible Subordinated Debentures due 2012
(the "Subordinated Debentures"). The holders of the Subordinated
Debentures will receive interest quarterly at 6% and have the right at
any time on or before the maturity date thereof to convert the
Subordinated Debentures into Common Stock, initially at the conversion
rate in effect for the Preferred at the date of the exchange, which
conversion rate of approximately 1.7467 shares of the Common Stock for
each $50 principal amount of the Subordinated Debentures is subject to
adjustment should certain events occur. The Company is required to
make annual sinking fund payments of $6.5 million on the Subordinated
Debentures beginning on March 15, 1997 and on each succeeding March 15
to and including March 15, 2011. The Company (1) may credit against
the sinking fund requirements (i) any Subordinated debentures redeemed
by the Company and (ii) Subordinated Debentures which have been
converted at the option of the holder and (2) may deliver outstanding
Subordinated Debentures in satisfaction of the sinking fund
requirements.
F. During April 1996, the Company announced that, together with its partners,
it had submitted a Declaration of Interest to the Mexican Regulatory
Commission to construct, own and operate a natural gas distribution system
for the geographic area that includes the cities of Chihuahua, Delicias and
Cuauchtemoc/Anahuac in North Central Mexico. Chihuahua is the capital city
of Mexico's largest state and, together with the surrounding geographic
area, has a population of approximately 850,000 and includes expanding
commercial and industrial development. The Company and its partners
previously had announced the filing of a similar proposal with respect to
the Mexico City Metropolitan Area. The Mexican regulatory process which
governs these activities provides for, among other things, a competitive
bidding process before any franchise is awarded, and Mexico City may be
subdivided into several franchises to be awarded separately. For these
reasons, among others, the Company cannot yet determine with respect to
either project whether (1) bids will actually be solicited, (2) it will be
the successful bidder on any project or (3) construction will ultimately be
undertaken and completed.
G. Primary earnings per share is computed using the weighted average number of
shares of Common Stock actually outstanding during each period presented.
Outstanding options for purchase of Common Stock, the Company's only
"common stock equivalent" as that term is defined in the authoritative
accounting literature, have been excluded due to the immaterial number of
such options which would be dilutive if exercised. Fully diluted earnings
per share, in addition to the actual weighted average common shares
outstanding, assumes the conversion, as of its issuance date of June 17,
1996, of the 3,450,000 shares of the Trust Preferred (see Note E) at a
conversion rate of 4.1237 shares of Common Stock for each share of the
Trust Preferred (resulting in the assumed issuance of a total of 14,226,765
shares of Common Stock), and reflects the increase in earnings in each
period from the cessation of the dividends on the Trust Preferred (net of
the related tax benefit) which would result from such assumed conversion.
For the quarter and six months ended June 30, 1996, this assumed earnings
increase was approximately $0.4 million, net of a related tax benefit of
approximately $0.2 million. The Company's 6% Convertible Subordinated
Debentures due 2012 (see Note E) and the Company's $3.00 Series A Preferred
Stock (prior to its exchange as described preceding), due to their exchange
rates, are anti-dilutive and are therefore excluded from all earnings per
share calculations. During the periods in which the Company's $3.00 Series
A Preferred Stock was outstanding, all per share calculations are made
using earnings after reduction for the preferred stock dividend requirement
on such security.
H. As further discussed in the Company's 1995 Report on Form 10-K, under
an August 1995 agreement (the "Receivable Sale Agreement"), the Company
sells an undivided interest in a pool of accounts receivable with
limited recourse. Total receivables sold under the Receivable Sale
Agreement but not yet collected were approximately $138.1 million,
$235.0 million and $151.9 million at June 30, 1996, December 31, 1995
and June 30, 1995, respectively, which amounts have been deducted from
"Accounts and notes receivable, principally customer" in the
accompanying Consolidated Balance Sheet and, at June 30, 1996,
approximately $18.6 million of the Company's remaining receivables were
collateral for receivables which had been sold.
I. Pursuant to a revised study of the useful lives of certain assets, in
July 1995, the Company changed the depreciation rates associated with
certain of its natural gas gathering and pipeline assets. The effect of
this change was to reduce depreciation expense for the quarter and six
months ended June 30, 1996 by approximately $2.7 million and $5.4
million, respectively, (approximately $1.6 million or $0.013/share and
$3.2 million or $0.026/share after tax, respectively) from the amount
which would have been recorded if the depreciation rates in effect
during the first half of 1995 had been applied to these assets during
1996.
J. As more fully described in the Company's 1995 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 remains 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 December 18, 1995, the Louisiana Department of Environmental Quality
advised the Company that it had been named a potentially responsible
party under state law with respect to a hazardous substance site in
Shreveport, Louisiana, see Note K.
On October 24, 1994, the United States Environmental Protection Agency
advised MRT that it had been named a potentially responsible party
under federal law with respect to a landfill site in West Memphis,
Arkansas, see Note K.
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.
K. The Minnesota Public Utilities Commission (the "MPUC") decided in
Minnegasco's 1993 rate case that (1) Minnegasco's unregulated appliance
sales and service operations are required to pay the regulated natural
gas distribution operations a fee for the use of Minnegasco's name,
image and reputation and (2) a portion of the cost of responding to
certain gas leak calls not be allowed in rates. Minnegasco appealed
those decisions to the Minnesota Supreme Court (the "Court"). On June
13, 1996, the Court reversed the MPUC's decisions, finding in
Minnegasco's favor.
On December 18, 1995, the Louisiana Department of Environmental Quality
advised the Company that the Company, through one of its subsidiaries
and together with several other unaffiliated entities, had been named
under state law as a potentially responsible party with respect to a
hazardous substance site in Shreveport, Louisiana and may be required
to share in the remediation cost, if any, of the site. However,
considering the information currently known about the site and the
involvement of the Company and its subsidiaries with respect to the
site, the Company does not believe that the matter 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,
together with a number of other companies, had been named under federal
law as a potentially responsible party 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.
The Company is a party to litigation (other than that specifically
noted) which arises in the normal course of business. Management
regularly analyzes current information and, as necessary, provides
accruals for probable liabilities on the eventual disposition of these
matters. Management believes that the effect on the Company's results
of operations, financial position or cash flows, if any, from the
disposition of these matters will not be material.
L. On August 11, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Houston Industries Incorporated
("Houston Industries"), Houston Lighting & Power Company ("HL&P") and
a newly formed Delaware subsidiary of Houston Industries ("HI Merger,
Inc."). Under the Merger Agreement, the Company would merge with and
into HI Merger, Inc. and would become a wholly owned subsidiary of HII
(as defined below). Houston Industries would merge with and into HL&P,
which would be renamed Houston Industries Incorporated ("HII").
Consideration for the purchase of Company shares will be a combination
of cash and shares of HII common stock. The transaction is valued at
$3.8 billion, consisting of $2.4 billion for the Company's common
stock and equivalents and $1.4 billion of the Company's debt. For
information regarding the Merger Agreement, see the Company's current
report on Form 8-K dated August 11, 1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
NorAm Energy Corp., referred to herein together with its consolidated
subsidiaries and divisions (all of which are wholly owned) as "NorAm" or "the
Company", principally conducts operations in the natural gas industry, including
gathering, transmission, marketing, storage and distribution which,
collectively, account for in excess of 90% of the Company's total revenues,
income or loss and identifiable assets. The Company also makes certain
non-energy sales and provides certain non-energy services, principally to
certain of its retail gas distribution customers. The reader is directed to the
Company's Report on Form 10-K for 1995 for (1) a more detailed discussion of the
business units into which the Company currently has been segregated and the
activities conducted by each such business unit, including (i) a reconciliation
to the Company's previous business unit reporting structure and (ii) information
concerning major customers and (2) a discussion of the Company's significant
accounting policies. The Company recently announced that it had signed a
definitive agreement which will result in the merger of the Company with and
into a wholly owned subsidiary of Houston Industries Incorporated, see "Recent
Developments" following.
Recent Developments
Merger with Houston Industries Incorporated
On August 11, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Houston Industries Incorporated ("Houston
Industries"), Houston Lighting & Power Company ("HL&P") and a newly formed
Delaware subsidiary of Houston Industries ("HI Merger, Inc."). Under the Merger
Agreement, the Company would merge with and into HI Merger, Inc. and would
become a wholly owned subsidiary of HII (as defined below). Houston Industries
would merge with and into HL&P, which would be renamed Houston Industries
Incorporated ("HII"). Consideration for the purchase of Company shares will be a
combination of cash and shares of HII common stock. The transaction is valued at
$3.8 billion, consisting of $2.4 billion for the Company's common stock and
equivalents and $1.4 billion of the Company's debt. For information regarding
the merger, see the Company's current report on Form 8-K dated August 11, 1996.
Securities Ratings
Largely in response to the Company's recent financing activities, on
May 15, June 10 and July 1, 1996, respectively, Duff & Phelps Credit Rating Co.,
Standard and Poor's Corp. and Moody's Investors Services upgraded the rating on
the Company's senior unsecured debt to BBB-, BBB- and Baa3, respectively, the
minimum ratings considered to be "investment grade", see "Net Cash Flows from
Financing Activities" elsewhere herein.
Dividend Declaration
On July 10, 1996, the Company's Board of Directors declared dividends
of $0.07 per share on common stock, payable September 13 to owners of record on
August 26, 1996. The Company's $3.00 Preferred Stock, Series A is no longer
outstanding, see "Net Cash Flows from Financing Activities" elsewhere herein.
Regulatory Matters
In June 1996, the Minnesota Public Utilities Commission (the "MPUC")
issued its order in Minnegasco's August 1995 rate case. The MPUC granted an
annual increase of $12.9 million as compared to the requested increase of $24.3
million. Interim rates reflecting an increase of $17.8 million had been put into
effect in October 1995 subject to refund. As a part of its decision, the MPUC
granted Minnegasco full recovery of its ongoing net environmental costs through
the use of a true-up mechanism whereby any amounts collected in rates which
differ from actual costs incurred will be deferred for recovery or refund in the
next rate case. Minnegasco has requested reconsideration on several issues.
Among them are (1) a request to give effect, in this rate case, to the Minnesota
Supreme Court's (the "Court") recent rulings (an annual impact of $2.0 million)
and (2) a request to deduct from any interim rate refund the additional amount
that Minnegasco would have realized from its 1993 rate case, had the Court's
rulings been in effect at that time (an impact of $1.4 million), see "Legal
Proceedings" elsewhere herein. The Company currently expects that refunds
ultimately made, if any, will not be materially in excess of existing accruals.
On May 31, 1996, Mississippi River Transmission Corporation ("MRT")
received authorization from the Federal Regulatory Commission (the "FERC") in
Docket No. CP95-376 to abandon by transfer to NorAm Field Services ("NFS")
certain certificated natural gas gathering facilities. In March 1996, MRT filed
with the FERC in Docket No. CP96-268 seeking authorization to spindown the
remainder of its gathering facilities to NFS. MRT currently expects a FERC order
in August 1996.
In April 1996, the FERC approved NorAm Gas Transmission Company's
("NGT") previously filed request for negotiated rates, providing enhanced rate
flexibility on the NGT system. Pursuant to a new policy statement (under Docket
No. RM96-7-000) issued by the FERC in January 1996, NGT and its shippers may now
negotiate a rate for service more consistent with actual market conditions,
which rates may exceed the maximum cost-based rate set forth in NGT's filed
tariff and/or deviate from the current FERC-mandated rate design. NGT has
negotiated certain "market-sensitive" transactions which allow shippers' rates
to be based on various factors such as gas price differentials between the west
and east side of the NGT system. As a result, there is the potential that, in
some instances, NGT will charge and collect a negotiated rate which exceeds
NGT's then-current maximum tariff rate. NGT made a compliance filing on May 28,
1996 which was rejected without prejudice by the FERC on June 26. NGT made its
second compliance filing on July 11 and is awaiting a final FERC order.
In April 1996, MRT submitted a general rate increase filing to the FERC
applicable to its unbundled transportation and storage services. MRT has
requested a rate increase of $14.7 million to cover increased costs and an
increased rate of return. This proceeding is in the discovery phase and MRT is
attempting to reach a settlement with its customers.
In April 1996, the Minnesota Public Utilities Commission voted to
approve Minnegasco's Performance-Based Gas Purchasing Plan (the "PBR"),
effective from September 1, 1995 to June 30, 1998. To the extent that
Minnegasco's actual purchased gas cost is either significantly higher or lower
than specified benchmarks, the PBR will require that Minnegasco and its
customers share in the savings or additional cost, resulting in a maximum reward
or penalty of up to 2% of annual gas cost (e.g. $7 million using Minnegasco's
1995 gas cost) for Minnegasco during any year.
<PAGE>
Material Changes in the Results of Operations
The Company's results of operations are seasonal due to seasonal
fluctuations in the demand for and, to a lesser extent, the price of natural gas
and, accordingly, the results of operations for interim periods are not
necessarily indicative of the results to be expected for an entire year. As
reported in the Company's 1995 Report on Form 10-K, however, the Company's
regulated businesses have obtained rate design changes which have lessened the
seasonality of the Company's results of operations and further such changes may
occur. In addition to the demand for and price of natural gas, the Company's
results of operations are significantly affected by regulatory actions (see
"Regulatory Matters" elsewhere herein and in the Company's 1995 Report on Form
10-K), competition and, below the operating income line, by (1) the level of
borrowings and interest rates thereon and (2) income tax expense, see
"NON-OPERATING INCOME AND EXPENSE" elsewhere herein. Following are detailed
discussions of material changes in the results of operations by business unit:
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
--------------------------------------------- -----------------------------------------------
Increase Increase
Operating Income(Loss) 1996 1995 (Decrease) 1996 1995 (Decrease)
- ----------------------
------------ ---------- ------------------- ---------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in millions) ($/%) ($/%)
Natural Gas Distribution $ 5.0 $ 4.2 $0.8 / 19.0% $ 127.4 (1) $ 96.9 $30.5 / 31.5%
Interstate Pipelines (2) 29.6 19.9 9.7 / 48.7% 60.4 (1) 50.9 9.5 / 18.7%
Wholesale Energy Marketing (0.2) (1.4) 1.2 / 85.7% 9.0 2.4 6.6 / 275.0%
Natural Gas Gathering (2) 3.4 2.1 1.3 / 61.9% 6.1 3.9 2.2 / 56.4%
Retail Energy Marketing 7.9 5.2 2.7 / 51.9% 17.0 11.3 5.7 / 50.4%
Corporate and Other (3) (6.1) (2.7) (3.4) / (125.9)% (11.4) (3.4) (8.0) / (235.3)%
------------ ---------- ---------- -----------
39.6 27.3 12.3 / 45.1% 208.5 162.0 46.5 / 28.7%
Early Retirement and
Severance (4) - - - / - (22.3) - (22.3) / N/A
------------ ---------- ---------- -----------
Consolidated $ 39.6 $ 27.3 $12.3 / 45.1% $ 186.2 $ 162.0 $24.2 / 14.9%
============ ========== ========== ===========
</TABLE>
(1) Before expenses for early retirement and severance, see (4) following.
(2) Includes the impact of a change in depreciation rates, see the individual
discussions of the results of operations for these business units
following.
(3) Includes approximately $3.6 million and $7.2 million of goodwill
amortization in each quarter and six-month period presented, respectively.
(4) During the first quarter of 1996, the Company recorded non-recurring
charges in "Natural Gas Distribution" and "Interstate Pipelines" associated
with staffing reductions, see the individual discussions of the results of
operations for these business units elsewhere herein.
<PAGE>
NATURAL GAS DISTRIBUTION
The Company's natural gas distribution business is conducted by its
Entex, Minnegasco and Arkla Divisions, collectively referred to herein as
"Distribution" or "Natural Gas Distribution". Certain issues exist with respect
to environmental matters, see "Contingencies" elsewhere herein.
During the first quarter of 1996, approximately 100 employees of Entex
accepted an early retirement program and approximately 25 positions were
eliminated at Minnegasco as a result of the reorganization of certain functions,
resulting in a total non-recurring pre-tax charge of approximately $5.8 million,
which amount is included under the caption "Early retirement and severance" in
the accompanying Statement of Consolidated Income and in the following table.
The Company currently expects that a substantial portion of this expense will be
offset during 1996 by the associated cost savings.
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
--------------------------------------------- --------------------------------------------
FINANCIAL RESULTS Increase Increase
- -----------------
(dollars in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----------- ----------- ------------------- ------------ ----------- -------------------
($/%) ($/%)
<S> <C> <C> <C> <C> <C> <C>
Natural gas sales $ 335.4 $ 284.3 $51.1 / 18.0% $1,137.9 $ 903.2 $234.7 / 26.0%
Transportation revenue 3.3 3.7 (0.4) / (10.8)% 9.8 9.6 0.2 / 2.1%
Other revenue 6.1 5.5 0.6 / 10.9% 13.3 12.3 1.0 / 8.1%
----------- ----------- ------------ -----------
Total operating revenues 344.8 293.5 51.3 / 17.5% 1,161.0 925.1 235.9 / 25.5%
Purchased gas cost
Unaffiliated 171.9 132.8 39.1 / 29.4% 563.9 418.7 145.2 / 34.7%
Affiliated 26.7 23.3 3.4 / 14.6% 176.0 135.1 40.9 / 30.3%
Operations and maintenance 94.5 89.2 5.3 / 5.9% 194.2 181.0 13.2 / 7.3%
Depreciation and amortization 23.6 22.5 1.1 / 4.9% 47.1 44.9 2.2 / 4.9%
Other operating expenses 23.1 21.5 1.6 / 7.4% 52.4 48.5 3.9 / 8.0%
----------- ----------- ------------ -----------
5.0 4.2 0.8 / 19.0% 127.4 96.9 30.5 / 31.5%
Early retirement and severance - - - / - 5.8 - 5.8 / N/A
----------- ----------- ------------ -----------
Operating income $ 5.0 $ 4.2 $ 0.8 / 19.0% $ 121.6 $ 96.9 $ 24.7 / 25.5%
=========== =========== ============ ===========
OPERATING STATISTICS
(billions of cubic feet) (Bcf/%) (Bcf/%)
Residential sales 26.7 25.6 1.1 / 4.3% 122.4 106.0 16.4 / 15.5%
Commercial sales 22.6 21.0 1.6 / 7.6% 76.8 68.2 8.6 / 12.6%
Industrial sales 13.5 12.5 1.0 / 8.0% 28.1 25.7 2.4 / 9.3%
Transportation 9.7 10.6 (0.9) / (8.5)% 23.0 25.1 (2.1) / (8.4)%
----------- ----------- ------------ -----------
Total throughput 72.5 69.7 2.8 / 4.0% 250.3 225.0 25.3 / 11.2%
=========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
DEGREE DAYS 1996 1995 Normal 1996 1995 Normal
------------ ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Arkla 180 167 144 1,925 1,632 1,857
Entex 72 38 51 1,064 816 887
Minnegasco 1,037 947 771 5,313 4,567 4,675
</TABLE>
Quarter Comparison
Distribution operating income increased from $4.2 million in the second
quarter of 1995 to $5.0 million in the second quarter of 1996, an increase of
$0.8 million (19.0%). This increased operating income reflected both increased
operating revenues and increased operating expenses as discussed following.
"Natural gas sales", representing approximately 97% of Distribution's
total operating revenues in each quarter presented, increased from $284.3
million in the second quarter of 1995 to $335.4 million in the second quarter of
1996, an increase of $51.1 million (18.0%). This increase, approximately $33.3
million (65.2%) of which is attributable to an increase in the average sales
price and approximately $17.8 million (34.8%) of which is attributable to
increased volume, is principally due to (1) an increase in the average cost of
gas (a component of the sales price) as discussed following, (2) colder weather;
1,289 total degree days in the second quarter of 1996 vs. 1,152 in the second
quarter of 1995, an increase of 137 degree days (11.9%) which was largely
responsible for increases of 1.1 Bcf (4.3%) and 1.6 Bcf (7.6%) in residential
and commercial sales volumes, respectively, and (3) rate increases obtained in
certain jurisdictions, see "Regulatory Matters" elsewhere herein and in the
Company's 1995 Report on Form 10-K.
"Purchased gas cost" increased from $156.1 million in the second
quarter of 1995 to $198.6 million in the second quarter of 1996, an increase of
$42.5 million (27.2%), approximately $32.7 million (76.9%) of which is
attributable to an increase in the average cost of purchased gas and
approximately $9.8 million (23.1%) of which is attributable to increased volume.
The increased volume was principally due to the colder 1996 weather and the
related increase in residential and commercial sales volumes as discussed
preceding, while the increase in the weighted average cost of gas from
approximately $2.64 per Mcf in the second quarter of 1995 to approximately $3.16
per Mcf in the second quarter of 1996, an increase of approximately $0.52 per
Mcf (19.7%), principally was reflective of an overall increase in the market
price of gas.
The gross sales margin ("Natural gas sales" minus total purchased gas
cost) increased from $128.2 million in the second quarter of 1995 to $136.8
million in the second quarter of 1996, an increase of $8.6 million (6.7%). This
increase was principally due to (1) the largely weather-related 3.7 Bcf (6.3%)
increase in total sales volume representing $8.0 million (93.0%) of the increase
and (2) a 0.4% increase in the average sales margin, representing $0.6 million
(7.0%) of the increase, largely due to regulatory relief, each as discussed
preceding.
Operating expenses, exclusive of purchased gas cost and the 1996 charge
for early retirement and severance, increased from $133.2 million in the second
quarter of 1995 to $141.2 million in the second quarter of 1996, an increase of
$8.0 million (6.0%), principally due to (1) increased environmental costs
(which, as discussed in the Company's 1995 Report on Form 10-K and in
"Regulatory Matters" elsewhere herein, are substantially being recovered through
the regulatory process), (2) increased bad debt provisions largely resulting
from weather-related increases in customer bills and (3) increased depreciation
expense due to increased investment, including the transfer to Distribution of
certain Corporate assets as described in the Company's 1995 Report on Form 10-K.
Year-to-Date Comparison
Distribution operating income increased from $96.9 million in the first
six months of 1995 to $127.4 million (before the 1996 charge for early
retirement and severance as discussed preceding) in the first six months of
1996, an increase of $30.5 million (31.5%). This increased operating income
reflected both increased operating revenues and increased operating expenses as
discussed following.
"Natural gas sales", representing approximately 98% of Distribution's
total operating revenues in each six-month period presented, increased from
$903.2 million in the first six months of 1995 to $1,137.9 million in the first
six months of 1996, an increase of $234.7 million (26.0%). This increase,
approximately $123.8 million (52.7%) of which is attributable to increased 1996
volume and approximately $110.9 million (47.3%) of which is attributable to an
increase in the 1996 average sales price, is principally due to (1) colder
weather; 8,302 total degree days in the first six months of 1996 vs. 7,015 in
the first six months of 1995, an increase of 1,287 degree days (18.3%) which was
largely responsible for increases of 16.4 Bcf (15.5%) and 8.6 Bcf (12.6%) in
residential and commercial sales volumes, respectively, (2) rate increases
obtained in certain jurisdictions, see "Regulatory Matters" elsewhere herein and
in the Company's 1995 Report on Form 10-K and (3) an increase in the average
cost of gas (a component of the sales price) as discussed following.
"Purchased gas cost" increased from $553.8 million in the first six
months of 1995 to $739.9 million in the first six months of 1996, an increase of
$186.1 million (33.6%), approximately $110.2 million (59.2%) of which is
attributable to an increase in the average cost of purchased gas and
approximately $75.9 million (40.8%) of which is attributable to increased
volume. The increased volume was principally due to the colder weather and the
related increase in residential and commercial sales volumes as discussed
preceding, while the increase in the weighted average cost of gas from
approximately $2.77 per Mcf in the first six months of 1995 to approximately
$3.26 per Mcf in the first six months of 1996, an increase of approximately
$0.49 per Mcf (17.7%), principally was reflective of an overall increase in the
market price of gas.
The gross sales margin ("Natural gas sales" minus total purchased gas
cost) increased from $349.4 million in the first six months of 1995 to $398.0
million in the first six months of 1996, an increase of $48.6 million (13.9%).
This increase was principally due to the largely weather-related 13.7% increase
in total sales volume as discussed preceding.
Operating expenses, exclusive of purchased gas cost and the 1996 charge
for early retirement and severance, increased from $274.4 million in the first
six months of 1995 to $293.7 million in the first six months of 1996, an
increase of $19.3 million (7.0%), principally due to (1) increased environmental
costs (which, as discussed in the Company's 1995 Report on Form 10-K and in
"Regulatory Matters" elsewhere herein, are substantially being recovered through
the regulatory process), (2) increased bad debt provisions largely resulting
from weather-related increases in customer bills and (3) increased depreciation
expense due to increased investment, including the transfer to Distribution of
certain Corporate assets as described in the Company's 1995 Report on Form 10-K.
<PAGE>
INTERSTATE PIPELINES
The Company's interstate pipeline business is conducted by NorAm Gas
Transmission Company ("NGT") and Mississippi River Transmission Corporation
("MRT"), together with certain subsidiaries and affiliates, collectively
referred to herein as "Pipeline" or "Interstate Pipelines". The Company is a
party to certain claims involving its gas purchase contracts and issues exist
with respect to environmental matters, see "Contingencies" elsewhere herein.
During the first quarter of 1996, the Company instituted a
reorganization plan (the "Plan") affecting NGT and MRT. The Plan, which included
the reorganization of a number of departments and the redesign of a number of
processes, is intended to allow Pipeline to operate more efficiently, thus
improving its ability to compete in its market areas. Approximately 275
positions were eliminated pursuant to the Plan, resulting in a non-recurring
pre-tax charge of approximately $16.5 million, included in the accompanying
Statement of Consolidated Income and in the following table under the caption
"Early retirement and severance." The Company currently expects that a
substantial portion of this expense will be offset during 1996 by the associated
cost savings.
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
-------------------------------------------- -------------------------------------------
FINANCIAL RESULTS Increase Increase
- -----------------
(dollars in millions) 1996 1995 (Decrease) 1996 1995 (Decrease)
----------- ----------- ------------------- ----------- ----------- ------------------
($/%) ($/%)
<S> <C> <C> <C> <C> <C> <C>
Natural gas sales
Sales to Distribution $ 18.0 $ 13.4 $ 4.6 / 34.3% $ 45.0 $ 31.4 $13.6 / 43.3%
Sales for resale and other 2.5 8.3 (5.8) / (69.9)% 8.2 14.5 (6.3) / (43.4)%
----------- ----------- ----------- -----------
Total gas sales revenue 20.5 21.7 (1.2) / (5.5)% 53.2 45.9 7.3 / 15.9%
Transportation revenue
Distribution 23.9 21.8 2.1 / 9.6% 49.1 44.6 4.5 / 10.1%
Unaffiliated 40.4 36.1 4.3 / 11.9% 80.3 73.8 6.5 / 8.8%
----------- ----------- ----------- -----------
Total transportation revenue 64.3 57.9 6.4 / 11.1% 129.4 118.4 11.0 / 9.3%
----------- ----------- ----------- -----------
Total operating revenues 84.8 79.6 5.2 / 6.5% 182.6 164.3 18.3 / 11.1%
Purchased gas cost 18.3 21.7 (3.4) / (15.7)% 45.7 38.5 7.2 / 18.7%
Operations and maintenance
expense 12.0 14.3 (2.3) / (16.1)% 26.9 27.4 (0.5) / (1.8)%
Depreciation and amortization 7.5 9.2 (1.7) / (18.5)% 15.1 18.5 (3.4) / (18.4)%
General, administrative and other 17.4 14.5 2.9 / 20.0 34.5 29.0 5.5 / 19.0%
----------- ----------- ----------- -----------
29.6 19.9 9.7 / 48.7% 60.4 50.9 9.5 / 18.7%
Early retirement and severance - - - / - 16.5 - 16.5 / N/A
----------- ----------- ----------- -----------
Operating income $ 29.6 $ 19.9 $ 9.7 /48.7% $ 43.9 $ 50.9 $(7.0) / (13.8)%
=========== =========== =========== ===========
OPERATING STATISTICS
(millions of MMBtu) (millions of (millions of
Natural gas sales MMBtu/%) MMBtu/%)
Sales to Distribution 7.2 7.1 0.1 / 1.4% 16.9 14.1 2.8 / 19.9%
Sales for resale and other 0.6 6.7 (6.1) / (91.0)% 3.4 12.6 (9.2) / (73.0)%
----------- ----------- ----------- -----------
Total sales 7.8 13.8 (6.0) / (43.5)% 20.3 26.7 (6.4) / (24.0)%
----------- ----------- ----------- -----------
Transportation
Distribution 18.3 17.8 0.5 / 2.8% 67.0 59.3 7.7 / 13.0%
Other 193.7 202.7 (9.0) / (4.4)% 448.8 429.6 19.2 / 4.5%
----------- ----------- ----------- -----------
Total transportation 212.0 220.5 (8.5) / (3.9)% 515.8 488.9 26.9 / 5.5%
Elimination (1) (7.3) (12.1) 4.8 / 39.7% (19.1) (24.4) 5.3 / 21.7%
----------- ----------- ----------- -----------
Total throughput 212.5 222.2 (9.7) / (4.4)% 517.0 491.2 25.8 / 5.3%
=========== =========== =========== ===========
</TABLE>
(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 Pipeline and are therefore included
in the above volumetric data in both categories. No elimination is made
for volumes of 47.4 million MMBtu, 48.4 million MMBtu, 108.1 million
MMBtu and 100.0 million MMBtu in the quarters ended June 30, 1996 and
1995, and the six months ended June 30, 1996 and 1995, respectively,
which were transported on both the NGT and MRT systems.
Quarter Comparison
Interstate Pipeline operating income for the second quarter of 1996 was
$29.6 million, an increase of $9.7 million (48.7%) from the second quarter of
1995. This increase reflected increased operating revenues and decreased
operating expenses as discussed following.
"Total gas sales revenue" decreased from $21.7 million in the second
quarter of 1995 to $20.5 million in the second quarter of 1996, a decrease of
$1.2 million (5.5%). This net decrease was composed of a $9.4 million decrease
attributable to reduced 1996 sales volume, partially offset by an $8.2 million
increase attributable to a higher 1996 average sales price, each as discussed
following. "Sales to Distribution" for the second quarter of 1996 increased by
$4.6 million (34.3%) from the corresponding quarter of 1995, principally due to
increased 1996 natural gas prices which affect the total sales rate as discussed
following. "Sales for resale and other" decreased by $5.8 million (69.9%)
primarily due to a 6.1 million MMBtu (91.0%) decrease in second-quarter 1996
sales volumes, principally due to the 1996 sale of certain volumes by other
NorAm business units, which volumes were sold by Pipeline during 1995. The
higher 1996 average sales rates were principally due to increased second-quarter
1996 average purchased gas cost as discussed following, which increased by
approximately $0.77 per MMBtu (49.2%) over the second quarter of 1995. These
higher gas costs, in general, increase the commodity component of the overall
sales price (and purchased gas cost), thus increasing total revenues without
necessarily increasing total margins.
"Total transportation revenue" increased by $6.4 million (11.1%) from
the second quarter of 1995 to the second quarter of 1996, while transportation
volumes decreased by 8.5 million MMBtu (3.9%). These increased transportation
revenues are primarily attributable to the positive impact of NGT's recent rate
case which became effective in February 1995 (see "Regulatory Matters" elsewhere
herein and in the Company's 1995 Report on Form 10-K), combined with an increase
in the price spreads between gas sourced in the Gulf Coast compared with
Mid-Continent gas supplies. When prices of Gulf Coast gas increase significantly
over Mid-Continent gas (Pipeline's principal supply area), the competitive
pressure on Pipeline's transportation rates are reduced. During the second
quarter of 1996, there was an average $0.27 per MMBtu Mid-Continent/Gulf Coast
price differential (the "differential"), compared to an average differential of
only $0.15 per MMBtu during the second quarter of 1995. The decrease in
transportation volumes tends to have a less than proportionate impact on
transportation revenues because, under the "straight-fixed-variable" rate design
currently applicable to Pipeline, a relatively small portion of the overall
transportation rate varies directly with the volume actually transported. During
the second quarter of 1996, Pipeline continued to utilize the Company's risk
management program to mitigate the market risk, associated with certain of
Pipeline's transportation agreements which contain market-sensitive pricing
provisions, arising from movement in certain basin differentials, see
"Regulatory Matters" and "Wholesale Energy Marketing" elsewhere herein.
"Purchased gas cost" decreased from $21.7 million in the second quarter
of 1995 to $18.3 million in the second quarter of 1996, a decrease of $3.4
million (15.7%). This net decrease was composed of a $9.4 million decrease
attributable to reduced 1996 sales volume, partially offset by an increase of
$6.0 million attributable to an increase of $0.77 per MMBtu in the 1996 average
purchased gas cost. The increase of $0.77 per MMBtu (49.2%) in the average cost
of purchased gas during 1996 was principally due to a general increase in the
market price of natural gas and, to a lesser extent, to a $2.5 million favorable
adjustment to purchased gas cost in the second quarter of 1995.
The gross margin on sales ("Total gas sales revenue" minus "Purchased
gas cost") increased from essentially zero in the second quarter of 1995 to $2.2
million in the second quarter of 1996. This improvement, which occurred despite
the decrease in total sales volume as discussed preceding, was attributable to a
higher 1996 average sales margin resulting from (1) a decrease in the average
cost of gas purchased under certain non-market-sensitive contracts and (2) a
favorable variance associated with system management activities.
"Operations and maintenance expense" decreased from $14.3 million in
the second quarter of 1995 to $12.0 million in the second quarter of 1996, a
decrease of $2.3 million (16.1%). Approximately $0.7 million of this decrease is
due to a reduction in third-party transportation expense, with the remainder of
the favorable variance attributable to cost reductions associated with the
reorganization plan implemented in the first quarter of 1996, see the discussion
preceding. These favorable variances were partially offset by a reduction in the
amount of labor capitalized during 1996 due to lower capital expenditures, as
well as a change in policy which has resulted in increased use of contract
personnel in place of Company personnel for certain capital projects.
"Depreciation and amortization" decreased by $1.7 million (18.5%) from the
second quarter of 1995 to the second quarter of 1996, substantially all of which
was attributable to a July 1995 change in the depreciation rate associated with
certain Pipeline assets, see Note I of the accompanying Notes to Consolidated
Financial Statements. "General, administrative and other" increased by
approximately $2.9 million (20.0%) from the second quarter of 1995 to the second
quarter of 1996 principally due to increases of (1) $0.4 million in taxes other
than income taxes, (2) $0.5 million in allocated costs from Corporate and (3)
$2.1 million in general and administrative expenses. The $2.1 million increase
in general and administrative expenses is principally due to (1) an increase in
relocation and consulting expenses during 1996 related to the Pipeline
reorganization plan and (2) a non-recurring $1.2 million 1995 favorable
adjustment to medical expenses.
Year-to-Date Comparison
Interstate Pipeline operating income for the first six months of 1996
was $60.4 million (before the charge for early retirement and severance as
discussed preceding), an increase of $9.5 million (18.7%) from the first six
months of 1995. This increase reflected both increased operating revenues and
increased operating expenses as discussed following.
"Total gas sales revenue" increased from $45.9 million in the first six
months of 1995 to $53.2 million in the first six months of 1996, an increase of
$7.3 million (15.9%). This net increase was composed of an $18.3 million
increase attributable to a higher 1996 average sales price, partially offset by
an $11.0 million decrease attributable to reduced 1996 sales volume, each as
discussed following. "Sales to Distribution" for the first six months of 1996
increased by $13.6 million (43.3%) over the corresponding period of 1995.
Approximately $9.0 million of this increase was attributable to increased sales
revenues during the first quarter of 1996, with $6.9 million attributable to
increased volume, principally due to increased demand resulting from the
relatively colder first-quarter weather in Distribution's service areas, and the
balance due to an increase in the average sales price. The remainder of the
favorable variance was principally due to an increase in the average sales price
during the second quarter of 1996 relative to the second quarter of 1995
(volumes were essentially static). The higher 1996 average sales rates were
principally due to increased average purchased gas cost as discussed following,
which increased by approximately $0.81 per MMBtu (56.1%) during the first six
months of 1996 in comparison to the corresponding period of 1995. These higher
gas costs, in general, increase the commodity component of the overall sales
price (and purchased gas cost), thus increasing total revenues without
necessarily increasing total margins. "Sales for resale and other" decreased by
$6.3 million (43.4%) primarily due to a 9.2 million MMBtu (73.0%) decrease in
sales volumes during the first six months of 1996, principally due to the 1996
sale of certain volumes by other NorAm business units, which volumes were sold
by Pipeline during 1995.
"Total transportation revenue" increased by $11.0 million (9.3%) from
the first six months of 1995 to the first six months of 1996, approximately $6.5
million of which is attributable to increased transportation volumes (which
increased by 26.9 million MMBtu or 5.5%). The balance of the increase is
attributable to an increase in the 1996 average transportation rate, principally
reflecting the positive impact of NGT's recent rate case which became effective
in February 1995 (see "Regulatory Matters" elsewhere herein and in the Company's
1995 Report on Form 10-K), combined with an increase in the 1996 average price
spreads between gas sourced in the Gulf Coast compared with Mid-Continent gas
supplies, see "Quarter Comparison" preceding. The increase in transportation
volumes tends to have a less than proportionate impact on transportation
revenues as discussed preceding. During the first six months of 1996, Pipeline
continued to utilize the Company's risk management program to mitigate the
market risk, associated with certain of Pipeline's transportation agreements
which contain market-sensitive pricing provisions, arising from movement in
certain basin differentials, see "Regulatory Matters" and "Wholesale Energy
Marketing" elsewhere herein.
"Purchased gas cost" increased from $38.5 million in the first six
months of 1995 to $45.7 million in the first six months of 1996, an increase of
$7.2 million (18.7%). This net increase was composed of a $16.4 million increase
attributable to the increase of $0.81 per MMBtu in 1996 average purchased gas
cost as discussed preceding, partially offset by a decrease of $9.2 million
attributable to a decrease in the volume of gas purchased. The increase of $0.81
per MMBtu (56.1%) in the average cost of purchased gas during 1996 was
principally due to a general increase in the market price of natural gas and, to
a lesser extent, to a $2.5 million favorable adjustment to purchased gas cost in
1995.
The gross margin on sales ("Total gas sales revenue" minus "Purchased
gas cost") increased by $0.1 million (1.4%) from the first six months of 1995 to
the first six months of 1996. A favorable variance of $1.9 million attributable
to an increase in the average margin on gas sales during 1996 was largely offset
by a decrease of $1.8 million attributable to the decreased 1996 sales volume.
"Operations and maintenance expense" decreased from $27.4 million in
the first six months of 1995 to $26.9 million in the first six months of 1996, a
decrease of $0.5 million (1.8%) principally due to cost savings associated with
the Pipeline reorganization as discussed preceding, partially offset by a
reduction in capitalized cost associated with lower 1996 capital expenditures
and a change in policy which has resulted in the use of contract personnel
rather than Company personnel on certain capital projects. "Depreciation and
amortization" decreased by $3.4 million (18.4%) from the first six months of
1995 to the first six months of 1996, substantially all of which was
attributable to a July 1995 change in the depreciation rate associated with
certain Pipeline assets, see Note I of the accompanying Notes to Consolidated
Financial Statements. "General, administrative and other" increased by
approximately $5.5 million (19.0%) from the first six months of 1995 to the
first six months of 1996. Approximately $1.0 million of this increase is due to
higher taxes other than income taxes (principally property). The remainder of
the increase is due to a number of factors including (1) increased consulting
and relocation cost associated with the Pipeline reorganization plan as
discussed preceding, (2) a non-recurring favorable adjustment to medical
expenses in the second quarter of 1995, (3) reduced 1996 levels of
capitalization of general and administrative costs and (4) a change in the
method of recording payments collected for and submitted to the Gas Research
Institute (the "GRI"). During 1996, these payments, which previously did not
affect individual line items, result in both expense and revenue in equal
amounts. Partially offsetting these negative variances were 1996 general and
administrative cost savings associated with the Pipeline reorganization plan.
<PAGE>
WHOLESALE ENERGY MARKETING
The Company's marketing of natural gas and risk management services to
natural gas resellers and certain large volume industrial consumers is
principally conducted by NorAm Energy Services, Inc., together with certain
affiliates, collectively referred to herein as "NES" or "Wholesale Energy
Marketing". During the second quarter of 1996, NES opened regional offices in
Boulder, Colorado; Williamsburg, Virginia and Midland, Michigan to facilitate
its plans for nationwide marketing of energy services. NES had previously
announced the opening of its Miami, Florida and St. Louis, Missouri offices, and
further expansion is expected. The nature of natural gas marketing is such that
contractual disputes arise, see "Contingencies" elsewhere herein.
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
---------------------------------------------- --------------------------------------------
FINANCIAL AND Increase Increase
OPERATING RESULTS 1996 1995 (Decrease) 1996 1995 (Decrease)
- -----------------
----------- ----------- --------------------- ---------- ---------- --------------------
(dollars in millions) ($/%) ($/%)
<S> <C> <C> <C> <C> <C> <C>
Natural gas sales
Unaffiliated sales $ 392.8 $ 157.4 $235.4 / 149.6% $ 802.6 $ 293.8 $508.8 / 173.2%
Sales to Distribution 11.5 10.0 1.5 / 15.0% 54.4 32.9 21.5 / 65.3%
Sales to Pipeline 17.1 18.0 (0.9) / (5.0)% 37.4 26.0 11.4 / 43.8%
Other affiliated sales 4.8 8.5 (3.7) / (43.5)% 8.9 11.6 (2.7) / (23.3)%
----------- ----------- ---------- ----------
Total gas sales revenue 426.2 193.9 232.3 / 119.8% 903.3 364.3 539.0 / 148.0%
Electricity sales 6.3 1.7 4.6 / 270.6% 10.7 1.8 8.9 / 494.4%
Other operating revenues (0.1) 0.1 (0.2) / (200.0)% - 0.3 (0.3) / (100.0)%
----------- ----------- ---------- ----------
Total operating revenues 432.4 195.7 236.7 / 121.0% 914.0 366.4 547.6 / 149.5%
Purchased gas costs
Unaffiliated 402.8 166.7 236.1 / 141.6% 829.2 309.4 519.8 / 168.0%
Affiliated 9.5 15.9 (6.4) / (40.3)% 30.0 26.3 3.7 / 14.1%
Transportation and storage
expense 11.0 10.8 0.2 / 1.9% 29.5 22.5 7.0 / 31.1%
Electricity purchases and
transmission costs 5.8 1.7 4.1 / 241.2% 9.9 1.8 8.1 / 450.0%
----------- ----------- ---------- ----------
Operating margin 3.3 0.6 2.7 / 450.0% 15.4 6.4 9.0 / 140.6%
General and administrative 3.5 2.0 1.5 / 75.0% 6.4 4.0 2.4 / 60.0%
----------- ----------- ---------- ----------
Operating income $ (0.2) $ (1.4) $1.2 / 85.7% $ 9.0 $ 2.4 $6.6 / 275.0%
=========== =========== ========== ==========
(Bcf/%) (Bcf/%)
Natural gas sales volume (Bcf) 195.3 106.5 88.8 / 83.4% 397.2 212.2 185.0 / 87.2%
($/Mcf/%) ($/Mcf/%)
Average sales margin ($/Mcf) $0.015 $0.005 $0.01 / 200.0% $0.037 $0.029 $0.008 / 27.6%
</TABLE>
Quarter Comparison
The operating loss for NES in the second quarter of 1996 was $(0.2)
million, an improvement of $1.2 million from the $(1.4) million operating loss
in the second quarter of 1995. This improvement reflected both increased
operating revenues and increased operating expenses as discussed following.
"Total gas sales revenue" increased from $193.9 million in the second
quarter of 1995 to $426.2 million in the second quarter of 1996, an increase of
$232.3 million (119.8%). Approximately $161.7 million (69.6%) of this increase
was attributable to increased volume and approximately $70.6 million (30.4%) was
attributable to an increase in the average sales price. The increase of 88.8 Bcf
(83.4%) in 1996 sales volume was principally due to the continuing expansion of
NES's marketing efforts. Utilizing an increased staff of marketers and
additional office locations as discussed preceding, NES continues to accelerate
its efforts to become a nationwide marketing company with an emphasis on
increasing market share, principally targeting end-use customers in the
industrial, local gas distribution and electric generation sectors. The increase
of $0.362 per Mcf (19.9%) in the average sales price of natural gas in the
second quarter of 1996 was principally due to a general increase in the market
price of natural gas, principally due to colder than normal weather early in the
year and concerns about the level of gas in storage inventories. This increased
demand caused both an increase in natural gas prices (a component of the overall
sales rate) and a divergence in pipeline basin differentials.
Total purchased gas costs were $412.3 million in the second quarter of
1996, an increase of $229.7 million (125.8%) from the corresponding quarter of
1995. This total increase was composed of (1) a $152.3 million increase
attributable to the increased 1996 sales volumes as discussed preceding and (2)
a $77.4 million increase attributable to a $0.397 per Mcf increase in the
average cost of purchased gas, reflecting the increased second-quarter 1996
market price of natural gas as discussed preceding. "Transportation and storage
expense" increased from $10.8 million in the second quarter of 1995 to $11.0
million in the second quarter of 1996, an increase of $0.2 million (1.9%),
principally representing expenditures made in support of the increased 1996
sales volume as discussed preceding. In addition, the transportation and storage
expense per unit of sales declined by approximately 44.5% during the second
quarter of 1996 due to decreased use of firm transportation arrangements.
"Electricity sales" and "Electricity purchases and transmission costs" of $6.3
million and $5.8 million, respectively, in the second quarter of 1996
represented significant increases over the amounts for the corresponding quarter
of 1995, as NES's power marketing group was initially established and staffed
during the first quarter of 1995.
The operating margin for the second quarter of 1996 was $3.3 million,
an increase of $2.7 million (450.0%) over the second quarter of 1995. The margin
on gas sales was $2.9 million, an increase of $2.4 million (480.0%) over the
second quarter of 1995. Of this total increase, $0.4 million (16.7%) was
attributable to the increased 1996 sales volume as discussed preceding and $2.0
million (83.3%) was attributable to a $0.010 per Mcf increase in the 1996
average margin per unit of sales, principally due to the enhanced marketing
efforts, increased demand, divergence in basin differentials during 1996 and
decreased 1996 per unit transportation and storage costs, each as discussed
preceding.
The increase of $1.5 million (75.0%) in "General and administrative"
from the second quarter of 1995 to the second quarter of 1996 was principally
due to costs associated with staffing increases made in support of the increased
sales and marketing efforts as described preceding.
Year-to-Date Comparison
Operating income for NES in the first six months of 1996 was $9.0
million, an increase of $6.6 million from the $2.4 million earned in the first
six months of 1995. This improvement reflected both increased operating revenues
and increased operating expenses as discussed following.
"Total gas sales revenue" increased from $364.3 million in the first
six months of 1995 to $903.3 million in the first six months of 1996, an
increase of $539.0 million (148.0%). Approximately $317.6 million (58.9%) of
this increase was attributable to increased volume and approximately $221.4
million (41.1%) was attributable to an increase in the average sales price. The
increase of 185.0 Bcf (87.2%) in 1996 gas sales volume was principally due to
the continuing expansion of NES's marketing efforts. Utilizing an increased
staff of marketers and additional office locations as discussed preceding, NES
continues to accelerate its efforts to become a nationwide marketing company
with an emphasis on increasing market share, principally targeting end-use
customers in the industrial, local gas distribution and electric generation
sectors. The increase of $0.557 per Mcf (32.5%) in the average sales price of
natural gas in the first six months of 1996 was principally due to a colder than
normal winter heating season, particularly in the Mid-Continent and Northeast,
which both increased demand for natural gas supplies for heating and caused
above normal storage withdrawals in comparison to the first six months of 1995.
This increased demand caused both an increase in natural gas prices (a component
of the overall sales rate) and a divergence in pipeline basin differentials.
Total purchased gas costs were $859.2 million in the first six months
of 1996, an increase of $523.5 million (155.9%) over the corresponding period of
1995. This total increase was composed of (1) a $292.7 million increase
attributable to the increased 1996 gas sales volumes as discussed preceding and
(2) a $230.8 million increase attributable to a $0.581 per Mcf increase in the
average cost of purchased gas, reflecting the increased 1996 market price of
natural gas as discussed preceding. "Transportation and storage expense"
increased from $22.5 million in the first six months of 1995 to $29.5 million in
the first six months of 1996, an increase of $7.0 million (31.1%), principally
representing expenditures made in support of the increased 1996 gas sales volume
as discussed preceding, which more than offset a decrease in the 1996
transportation and storage expense per unit of sales due to decreased usage of
firm transportation arrangements. "Electricity sales" and "Electricity purchases
and transmission costs" of $10.7 million and $9.9 million, respectively, in the
first six months of 1996 represented significant increases over the amounts for
the corresponding period of 1995, as NES's power marketing group was initially
established and staffed during early 1995.
The operating margin for the first six months of 1996 was $15.4
million, an increase of $9.0 million (140.6%) from the first six months of 1995.
The margin on gas sales was $14.6 million, an increase of $8.5 million (139.3%)
from the first six months of 1995. Of this total increase, $5.3 million (62.6%)
was attributable to the increased 1996 sales volume as discussed preceding and
$3.2 million (37.4%) was attributable to a $0.008 per Mcf increase in the 1996
average margin per unit of sales, principally due to the enhanced marketing
efforts, increased demand, divergence in basin differentials during 1996 and the
decreased 1996 transportation and storage expense per unit of sales, each as
discussed preceding.
The increase of $2.4 million (60.0%) in "General and administrative"
from the first six months of 1995 to the first six months of 1996 was
principally due to costs associated with staffing increases made in support of
the increased sales and marketing efforts as described preceding.
As further discussed in the Company's 1995 Report on Form 10-K, the
Company's earnings from its gas supply, marketing, gathering and transportation
activities are subject to variability based on fluctuations in both the price of
natural gas and the value of transportation as measured by changes in the
delivered price of natural gas at various points in the nation's natural gas
grid. In order to mitigate this financial risk both for itself and for certain
customers who have requested the Company's assistance in managing similar
exposures, the Company, generally through NES, routinely enters into natural gas
swaps, futures contracts and options (collectively, "derivatives"). None of
these derivatives are held for speculative purposes and, in general, the
Company's risk management policy requires that these positions be offset by
positions in physical transactions or in other derivatives. In general,
therefore, gains and losses resulting from the Company's risk management
activities are offset by changes in value associated with the items being hedged
or are reimbursed by the customers who request this service.
<PAGE>
Natural Gas Swaps (1)
(volumes in Bcf's, dollars in millions)
Volume
---------------------------------- Estimated
Fixed Price Fixed Price Mkt. Value
Payor Receiver Gain (Loss) (2)
--------------- --------------- ------------------
June 30, 1996 205.5 151.7 $ 7.3
December 31, 1995 235.7 214.3 (2.3)
June 30, 1995 73.6 89.6 $ (0.2)
Natural Gas Futures (3)
(volumes in Bcf's, dollars in millions)
Purchased Sold
------------------- --------------------- Estimated
Notional Notional Mkt. Value
Volume Amount (4) Volume Amount (4) Gain(Loss) (2)
--------- --------- ------- ----------- --------------
June 30, 1996 20.9 $ 52.8 26.9 $ 57.7 $ 0.8
December 31, 1995 15.1 29.6 8.2 18.9 3.3
June 30, 1995 21.9 $ 39.5 12.6 $ 23.1 $ (1.8)
(1) The financial impact of these swaps was to increase(decrease) earnings
by $1.0 million, $(0.7) million and $(6.8) million during 1995 and the
quarter and six months ended June 30, 1996, respectively. For the
quarter and six months ended June 30, 1995, the financial impact was to
increase(decrease) earnings by $(0.3) million and $0.7 million,
respectively.
(2) Represents the amount which would have been realized upon termination
of the relevant derivative as of the date indicated. As more fully
discussed in the Company's 1995 Annual Report on Form 10-K, in the case
of swaps associated with certain agreements pursuant to which the
Company has committed to supply gas to a distribution affiliate through
April 1999, no earnings impact is expected due to the existing
accruals. Swaps associated with these commitments and included in the
above totals had fair market values of $4.1 million, $(1.0) million and
$(12.5) million at June 30, 1996, December 31, 1995 and June 30, 1995,
respectively.
(3) The financial impact of these futures was to increase(decrease)
earnings by $(4.1) million, $2.4 million and $(2.9) million during 1995
and the quarter and six months ended June 30, 1996, respectively. For
the quarter and six months ended June 30, 1995, the financial impact
was to decrease earnings by $(0.4) million and $(1.4) million,
respectively.
(4) The term "Notional Amount" refers to the contract unit price times the
contract volume and is intended to be indicative of the Company's level
of activity in these derivatives. In general, however, the amounts at
risk are significantly smaller because, as discussed preceding, changes
in the market value of these derivatives are offset by changes in the
value associated with the underlying physical transactions or in other
derivatives.
At June 30, 1996, the Company held options covering the purchase of 2.8
Bcf of gas, principally in conjunction with the commitment to supply gas to a
distribution affiliate as discussed preceding. The majority of these options,
due to their nature and term, have no readily available market value and the
market value of the remainder is immaterial.
<PAGE>
NATURAL GAS GATHERING
The Company's natural gas gathering business, including related liquids
extraction and marketing activities, is conducted by NorAm Field Services Corp.
together with certain affiliates, collectively referred to herein as "NFS" or
"Natural Gas Gathering".
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
--------------------------------------------- ------------------------------------------
FINANCIAL AND Increase Increase
OPERATING RESULTS 1996 1995 (Decrease) 1996 1995 (Decrease)
- -----------------
----------- ----------- ------------------- ----------- ----------- ------------------
(dollars in millions) ($/%) ($/%)
<S> <C> <C> <C> <C> <C> <C>
Gathering revenue $ 6.2 $ 6.6 $(0.4) / (6.1)% $ 12.5 $ 13.1 $(0.6) / (4.6)%
Natural gas sales 19.0 5.4 13.6 / 251.9% 28.0 9.9 18.1 / 182.8%
Products extraction 2.0 2.3 (0.3) / (13.0)% 4.2 4.6 (0.4) / (8.7)%
Other operating revenue 0.8 0.3 0.5 / 166.7% 1.4 0.6 0.8 / 133.3%
----------- ----------- ----------- -----------
Total operating revenues 28.0 14.6 13.4 / 91.8% 46.1 28.2 17.9 / 63.5%
----------- ----------- ----------- -----------
Gas purchased, net 18.6 5.2 13.4 / 257.7% 27.5 9.4 18.1 / 192.6%
Cost of sales 1.1 1.2 (0.1) / (8.3)% 2.3 2.4 (0.1) / (4.2)%
Operation and maintenance 2.7 3.1 (0.4) / (12.9)% 6.0 6.6 (0.6) / (9.1)%
Administrative expense 1.2 1.1 0.1 / 9.1% 2.4 2.1 0.3 / 14.3%
Depreciation 0.6 1.5 (0.9) / (60.0)% 1.1 3.1 (2.0) / (64.5)%
Taxes other than income 0.4 0.4 - / - 0.7 0.7 - / -
----------- ----------- ----------- -----------
Operating income $ 3.4 $ 2.1 $1.3 / 61.9% $ 6.1 $ 3.9 $2.2 / 56.4%
=========== =========== =========== ===========
(Bcf/%) (Bcf/%)
Total throughput (Bcf) 56.2 60.3 (4.1) / (6.8)% 112.0 119.0 (7.0) / (5.9)%
Margin/unit of throughput ($/Mcf/%) ($/Mcf/%)
($/Mcf) $0.148 $0.136 $0.012 / 8.8% $0.146 $0.138 $0.008 / 5.8%
Number of receipt points 3,074 2,931 143 / 4.9% 3,097 2,940 157 / 5.3%
</TABLE>
Quarter Comparison
Operating income for NFS in the second quarter of 1996 was $3.4
million, an increase of $1.3 million (61.9%) from the $2.1 million earned in the
second quarter of 1995. This increase is principally attributable to reductions
in depreciation and other expenses and to a small increase in margin, each as
discussed following.
During the second quarter of 1996, NFS experienced, as expected,
certain low-margin volume losses to competitors, as well as curtailments due to
well allowables and capacity constraints on downstream pipelines. These factors,
together with normal depletion-related declines in deliverability, resulted in
reduced throughput when compared with the second quarter of 1995. Continued
delays in certain facility transfers (affecting approximately 4 Bcf of
throughput) and delayed drilling activity proximate to NFS's systems also
adversely affected throughput. While these factors are largely beyond its
control, NFS seeks to maximize its throughput through an aggressive program to
attract additional volumes by offering competitive pricing and additional
value-added services.
Despite the impact of the throughput decline as described proceeding,
total operating revenues increased by $13.4 million (91.8%) from the second
quarter of 1995 to the second quarter of 1996. This increase in operating
revenues was due to an increase in NFS's marketing activities and was
substantially offset by an increase in purchased gas cost, with virtually no
impact on margin.
The gross margin ("Total operating revenues" less "Gas purchased, net"
and "Cost of sales") increased from $8.2 million in the second quarter of 1995
to $8.3 million in the second quarter of 1996, an increase of $0.1 million
(1.2%). This net increase included a reduction of $0.6 million attributable to
the decline in throughput as discussed preceding, but was more than offset by a
$0.7 million improvement attributable to an increase in the average margin per
unit of throughput. This increase in average margin per unit of throughput was
principally due to (1) the negotiation of more favorable gathering rates on new
connects and (2) the provision of new services.
Pursuant to a review of the natural gas reserves connected and
proximate to NFS's gathering systems, in July 1995, NFS reduced the depreciation
rates associated with certain of its assets. This decrease in depreciation rates
was responsible for substantially all of the $0.9 million (60.0%) decrease in
second-quarter 1996 depreciation expense in comparison to the second quarter of
1995, see Note I of the accompanying Notes to Consolidated Financial Statements.
Year-to-Date Comparison
Operating income for NFS in the first six months of 1996 was $6.1
million, an increase of $2.2 million (56.4%) from the $3.9 million earned in the
first six months of 1995. This increase is principally attributable to
reductions in depreciation and other expenses, partially offset by a small
decrease in margin, each as discussed following.
During the first six months of 1996, NFS experienced producer shut-ins,
well freeze-offs and, as expected, certain low-margin volume losses to
competitors and curtailments due to well allowables and capacity constraints on
downstream pipelines. These factors, together with normal depletion-related
declines in deliverability, resulted in reduced throughput when compared with
the first six months of 1995. Continued delays in certain facility transfers
(affecting approximately 4 Bcf of throughput) and delayed drilling activity
proximate to NFS's systems also adversely affected throughput. While these
factors are largely beyond its control, NFS seeks to maximize its throughput
through an aggressive program to attract additional volumes by offering
competitive pricing and additional value-added services.
Despite the impact of the throughput decline as described proceeding,
total operating revenues increased by $17.9 million (63.5%) from the first six
months of 1995 to the first six months of 1996. This increase in operating
revenues was due to an increase in NFS's marketing activities and was
substantially offset by an increase in purchased gas cost, with virtually no
impact on margin.
The gross margin ("Total operating revenues" less "Gas purchased, net"
and "Cost of sales") decreased from $16.4 million in the first six months of
1995 to $16.3 million in the first six months of 1996, a decrease of $0.1
million (0.6%). This net decrease included a reduction of $1.0 million
attributable to the decline in throughput as discussed preceding, but was
substantially offset by a $0.9 million improvement attributable to an increase
in the average margin per unit of throughput. This increase in average margin
per unit of throughput was principally due to (1) the negotiation of more
favorable gathering rates on new connects and (2) the provision of new services.
Pursuant to a review of the natural gas reserves connected and
proximate to NFS's gathering systems, in July 1995, NFS reduced the depreciation
rates associated with certain of its assets. This decrease in depreciation rates
was responsible for substantially all of the $2.0 million (64.5%) decrease in
depreciation expense during the first six months of 1996 in comparison to the
corresponding period of 1995, see Note I of the accompanying Notes to
Consolidated Financial Statements.
<PAGE>
RETAIL ENERGY MARKETING
The Company's marketing of natural gas and related services to certain
commercial and industrial customers, including those located behind the
"unbundled city gate" of local gas distribution companies, is principally
carried out by NorAm Energy Management and certain affiliated companies
(collectively, "NEM"). The nature of natural gas marketing activities is such
that contractual disputes arise, see "Contingencies" elsewhere herein. NEM's
results of operations as presented following also include the Company's home
care service activities, including (1) appliance sales and service, (2) home
security services and (3) resale of long distance telephone service, the latter
two of which businesses are essentially in a "start-up" mode.
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
-------------------------------------------- ------------------------------------------
FINANCIAL AND Increase Increase
OPERATING RESULTS 1996 1995 (Decrease) 1996 1995 (Decrease)
- -----------------
----------- ----------- ------------------- ----------- ----------- ------------------
(dollars in millions) ($/%) ($/%)
<S> <C> <C> <C> <C> <C> <C>
Natural gas sales $121.5 $ 74.9 $46.6 / 62.2% $233.5 $148.2 $85.3 / 57.6%
Transportation 0.8 0.8 - / - 2.0 1.9 0.1 / 5.3%
Other, principally Home
Care Services 12.3 10.4 1.9 / 18.3% 23.8 20.4 3.4 / 16.7%
----------- ----------- ----------- -----------
Total operating revenues 134.6 86.1 48.5 / 56.3% 259.3 170.5 88.8 / 52.1%
----------- ----------- ----------- -----------
Purchased gas costs 113.3 68.7 44.6 / 64.9% 214.8 134.2 80.6 / 60.1%
Operations, maintenance, cost
of sales and other, principally
Home Care Services 11.2 10.6 0.6 / 5.7% 23.1 21.7 1.4 / 6.5%
General and administrative 1.4 0.7 0.7 / 100.0% 2.7 1.6 1.1 / 68.8%
Depreciation and amortization 0.4 0.5 (0.1) / (20.0)% 0.9 1.0 (0.1) / (10.0)%
Taxes other than income 0.4 0.4 - / - 0.8 0.7 0.1 / 14.3%
----------- ----------- ----------- -----------
Operating income $ 7.9 $ 5.2 $ 2.7 / 51.9% $ 17.0 $ 11.3 $ 5.7 / 50.4%
=========== =========== =========== ===========
(Bcf/%) (Bcf/%)
Natural gas sales (Bcf) 51.2 43.0 8.2 / 19.1% 97.8 86.1 11.7 / 13.6%
Transportation volume (Bcf) 6.2 5.5 0.7 / 12.7% 14.7 13.3 1.4 / 10.5%
($/Mcf/%) ($/Mcf/%)
Average sales margin ($/Mcf) $0.160 $0.144 $0.016 / 11.1% $0.191 $0.163 $0.028 / 17.2%
</TABLE>
Quarter Comparison
Operating income for NEM increased from $5.2 million in the second
quarter of 1995 to $7.9 million in the second quarter of 1996, an increase of
$2.7 million (51.9%). Approximately $1.4 million of this increase was
attributable to improved results from Home Care Services, principally due to
increased margin from appliance sales and service due to factors discussed under
"Year-to-Date Comparison" following. The balance of the overall NEM increase was
attributable to natural gas marketing activities, reflecting both increased
operating revenues and increased operating expenses as discussed following.
"Natural gas sales" increased from $74.9 million in the second quarter
of 1995 to $121.5 million in the second quarter of 1996, an increase of $46.6
million (62.2%). Approximately $32.3 million (69.3%) of this increase was
attributable to an increase in the average sales price and approximately $14.3
million (30.7%) of the increase was attributable to increased sales volumes. The
increase of $0.63 per Mcf (36.2%) in the average sales price was principally due
to (1) an increase of $0.62 per Mcf in the average cost of purchased gas in 1996
(a component of the sales rate) and (2) an increase in the average sales margin
as discussed following. The increase of 8.2 Bcf (19.1%) in second-quarter 1996
sales volumes was principally due to a non-recurring increase attributable to a
change in the method of billing and reporting sales volumes, with the remainder
of the increase due to increased marketing efforts by an expanded staff to
industrial users along the Texas and Louisiana Gulf Coast.
"Purchased gas costs" increased from $68.7 million in the second
quarter of 1995 to $113.3 million in the second quarter of 1996, an increase of
$44.6 million (64.9%). This increase was principally due to the increase in the
average cost of gas and the increased sales volume as discussed preceding, which
were responsible for $31.5 million (70.6%) and $13.1 million (29.4%),
respectively, of the total increase.
The average sales margin increased from $0.144 per Mcf in the second
quarter of 1995 to $0.160 per Mcf in the second quarter of 1996, an increase of
$0.016 per Mcf (11.1%), principally due to increased demand during the second
quarter of 1996, resulting in decreased availability of pipeline capacity at
various locations. This decreased availability of gas resulted in the payment of
significant premiums by some customers in certain circumstances in order to
avoid interruption of supply.
The increase of $0.6 million (5.7%) in "Operating, maintenance, cost of
sales and other, principally Home Care Services" from the second quarter of 1995
to the second quarter of 1996 was principally due to increased costs of
appliance sales and to increases in miscellaneous expenses not associated with
home care service activities. The increase of $0.7 million (100.0%) in "General
and administrative" was principally due to increased staffing costs incurred in
support of the increased sales as discussed preceding.
Year-to-Date Comparison
Operating income for NEM increased from $11.3 million in the first six
months of 1995 to $17.0 million in the first six months of 1996, an increase of
$5.7 million (50.4%). Approximately $2.2 million of this increase was
attributable to improved results from Home Care Services, principally due to
increased margin from appliance sales and service. The increased appliance sales
and service margin was principally due to (1) an increase in contracts and
options and a basic contract price increase effective the beginning of 1996 and
(2) an increase in technician productivity. The balance of the overall NEM
increase was attributable to natural gas marketing activities, reflecting both
increased operating revenues and increased operating expenses as discussed
following.
"Natural gas sales" increased from $148.2 million in the first six
months of 1995 to $233.5 million in the first six months of 1996, an increase of
$85.3 million (57.6%). Approximately $65.2 million (76.4%) of this increase was
attributable to an increase in the average sales price and approximately $20.1
million (23.6%) of the increase was attributable to increased sales volumes. The
increase of $0.67 per Mcf (38.7%) in the average sales price was principally due
to (1) an increase of $0.64 per Mcf in the average cost of purchased gas in 1996
(a component of the sales rate) and (2) an increase in the average sales margin
as discussed following. The increase of 11.7 Bcf (13.6%) in sales volumes during
the first six months of 1996 was principally due to (1) a change in the method
of billing and reporting sales volumes as discussed preceding, (2) increased
marketing efforts by an expanded staff and (3) increased industrial sales.
During the first quarter of 1996, the weather-related increase in demand for
firm supplies of gas created opportunities to serve customers outside NEM's
traditional service area who were unable to obtain supplies under their usual
arrangements.
"Purchased gas costs" increased from $134.2 million in the first six
months of 1995 to $214.8 million in the first six months of 1996, an increase of
$80.6 million (60.1%). This increase was principally due to the increase in the
average cost of gas and the increased sales volume as discussed preceding, which
were responsible for $62.4 million (77.4%) and $18.2 million (22.6%),
respectively, of the total increase.
The average sales margin increased from $0.163 per Mcf in the first six
months of 1995 to $0.191 per Mcf in the first six months of 1996, an increase of
$0.028 per Mcf (17.2%), principally due to the relatively colder 1996 weather
and resulting decreased availability of pipeline capacity at various locations.
This decreased availability of gas resulted in the payment of significant
premiums by some customers in certain circumstances in order to avoid
interruption of supply.
The increase of $1.4 million (6.5%) in "Operating, maintenance, cost of
sales and other, principally Home Care Services" from the first six months of
1995 to the first six months of 1996 was principally due to increased appliance
service expenses for consulting fees and vehicle leases, and to increases in
miscellaneous expenses not associated with home care service activities. The
increase of $1.1 million (68.8%) in "General and administrative" was principally
due to increased staffing costs incurred in support of the increased sales as
discussed preceding.
<PAGE>
CORPORATE AND OTHER
Quarter Comparison
The $3.4 million increase in the operating loss for Corporate & Other
from $(2.7) million in the second quarter of 1995 to $(6.1) million in the
second quarter of 1996 was principally due to (1) an increase in 1996 general
and administrative expenses, principally due to (i) business development
activities and (ii) a decrease in the 1996 consolidation adjustment related to
pension costs, (2) the first quarter 1995 operating income associated with a
forward oil sale which terminated during 1995 and (3) increased 1996 expenses
for international activities.
Year-to-Date Comparison
The $8.0 million increase in the operating loss for Corporate & Other
from $(3.4) million in the first six months of 1995 to $(11.4) million in the
first six months of 1996, was principally due to (1) an increase in 1996 general
and administrative expenses, principally due to increased business development
activities and a decrease in the 1996 consolidation adjustment related to
pension costs, (2) the 1995 operating income associated with a forward oil sale
agreement which terminated in mid-1995 and (3) increased 1996 expenditures for
international activities. These unfavorable impacts were partially offset by a
decrease in 1996 depreciation expense, principally due to the 1995 transfer of
certain Corporate assets to Distribution.
During April 1996, the Company announced that, together with its
partners, it had submitted a Declaration of Interest to the Mexican Regulatory
Commission to construct, own and operate a natural gas distribution system for
the geographic area that includes the cities of Chihuahua, Delicias and
Cuauchtemoc/Anahuac in North Central Mexico. Chihuahua is the capital city of
Mexico's largest state and, together with the surrounding geographic area, has a
population of approximately 850,000 and includes expanding commercial and
industrial development. The Company and its partners previously had announced
the filing of a similar proposal with respect to the Mexico City Metropolitan
Area. The Mexican regulatory process which governs these activities provides
for, among other things, a competitive bidding process before any franchise is
awarded, and Mexico City may be subdivided into several franchises to be awarded
separately. For these reasons, among others, the Company cannot yet determine
with respect to either project whether (1) bids will actually be solicited, (2)
it will be the successful bidder on any project or (3) construction will
ultimately be undertaken and completed.
NON-OPERATING INCOME AND EXPENSE
Net income(loss) for the quarter and six months ended June 30, 1996 was
$(2.1) million and $58.8 million, respectively, increases of approximately $4.9
million (69.0%) and $13.9 million (31.0%), respectively, from the corresponding
periods of 1995 while, as discussed preceding, operating income increased by
$12.3 million (45.1%) and $24.2 million (14.9%) during the same periods. The
components of these increases of $7.4 million and $10.3 million in net expense
below the operating income line were as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
--------------------------------------------- -------------------------------------------
Increase Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
----------- ----------- ------------------- ----------- ----------- -------------------
(dollars in millions) ($/%) ($/%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense, net $ 34.5 $ 37.1 $(2.6) / (7.0)% (1) $ 70.7 $ 76.8 $(6.1) / (7.9)% (1)
Dividend requirement on
preferred securities of
subsidiary trust (2) 0.4 - 0.4 / N/A 0.4 - 0.4 / N/A
Other, net 2.3 1.5 0.8 / 53.3% 5.7 4.4 1.3 / 29.5%
Provision for income
taxes(benefit) 0.0 (4.3) 4.3 / 100% (3) 45.8 35.8 10.0 / 27.9% (3)
Extraordinary losses (4) 4.5 - 4.5 / N/A 4.7 0.0 4.7 / N/A
=========== =========== =========== ===========
$ 41.7 $ 34.3 $7.4 / 21.6% $127.3 $117.0 $10.3 / 8.8%
=========== =========== =========== ===========
</TABLE>
(1) For the quarter ended June 30, approximately $1.9 million (74.9%) of
the favorable variance was due to a decrease in the average level of
debt and approximately $0.7 million (25.1%) was due to a decrease in
the average interest rate. For the six months ended June 30,
approximately $3.3 million (53.5%) of the favorable variance was due to
a decrease in the average level of debt and approximately $2.8 million
(46.5%) was due to a decrease in the average interest rate. Both the
reduced level of debt and the reduction in interest rates during these
periods were due, in part, to the Company's financing activities
designed to lower its overall cost of debt and increase its financial
flexibility. The Company has engaged in some recent financing
transactions which will affect non-operating income and expense in
future periods, see "Net Cash Flows from Financing Activities"
elsewhere herein and the Company's 1995 Report on Form 10-K.
(2) See "Net Cash Flows from Financing Activities" elsewhere herein.
(3) For the quarter ended June 30, reflects an increase of $5.1 million
attributable to an increase in pre-tax income, partially offset by a
decrease of $0.8 million attributable to a decrease in the 1996 interim
effective tax rate. For the six months ended June 30, reflects an
increase of $12.7 million attributable to an increase in pre-tax
income, partially offset by a decrease of $2.7 million attributable to
a decrease of approximately 2.5% in the 1996 interim effective tax
rate.
(4) See Note B of the accompanying Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
The table below illustrates the sources of the Company's invested
capital during the last four years and at June 30, 1996 and 1995 (see also
"Receivable Sales Facility" elsewhere herein). The Company has engaged in
several recent significant financing transactions, see "Net Cash Flows from
Financing Activities" elsewhere herein.
<TABLE>
<CAPTION>
June 30 December 31,
------------------------- ----------------------------------------------------
INVESTED CAPITAL 1996 1995 1995 1994 1993 1992
- ----------------
------------ ------------ ----------- ------------ ------------ ------------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Long-Term Debt $1,107.0 $1,323.7 $1,474.9 $1,414.4 $1,629.4 $1,783.1
Trust Preferred (1) 167.7 - - - - -
Common Equity (2) 787.9 630.8 637.3 587.4 578.0 582.9
Preferred Stock (3) - 130.0 130.0 130.0 130.0 130.0
------------ ------------ ----------- ------------ ------------ ------------
Total Capitalization 2,062.6 2,084.5 2,242.2 2,131.8 2,337.4 2,496.0
Short-Term Debt 280.3 284.0 128.8 274.6 192.4 120.0
------------ ------------ ----------- ------------ ------------ ------------
Total Invested Capital $2,342.9 $2,368.5 $2,371.0 $2,406.4 $2,529.8 $2,616.0
============ ============ =========== ============ ============ ============
Total Capitalization:
Long-Term Debt 53.7% 63.5% 65.8% 66.3% 69.7% 71.4%
Trust Preferred (1) 8.1% - - - - -
Common Equity 38.2% 30.3% 28.4% 27.6% 24.7% 23.4%
Preferred Stock - 6.2% 5.8% 6.1% 5.6% 5.2%
Total Invested Capital:
Senior Debt (4) 53.7% 67.9% 67.6% 70.2% 72.0% 72.7%
Total Debt:
W/O Receivables Sold (5) 59.2% 67.9% 67.6% 70.2% 72.0% 72.7%
With Receivables Sold (5) 61.5% 69.8% 70.6% 72.4% 74.3% 74.8%
</TABLE>
(1) Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities of Subsidiary Trust Holding Solely $177.8 Million Principal
Amount of 6.25% Convertible Subordinated Debentures due 2026 of NorAm
Energy Corp., see "Net Cash Flows from Financing Activities" elsewhere
herein.
(2) Includes unrealized gains on investment, net of tax of $10.2 million,
$13.2 million, $15.3 million and $2.6 million at June 30, 1996 and
1995 and December 31, 1995 and 1994, respectively.
(3) Exchanged for convertible subordinated debentures in June 1996, see
"Net Cash Flows From Financing Activities" elsewhere herein.
(4) Excludes the $130.0 million of the Company's 6% Convertible
Subordinated Debentures due 2012 outstanding at June 30, 1996, see
"Net Cash Flows From Financing Activities" elsewhere herein.
(5) See "Receivable Sales Facility" under "Net Cash Flows From Operating
Activities" elsewhere herein.
<PAGE>
CASH FLOW ANALYSIS
The Company's cash flows, like its results of operations, are seasonal
and, therefore, the cash flows experienced during an interim period are not
necessarily indicative of the results to be expected for an entire year. The
following discussion of cash flows should be read in conjunction with the
accompanying Statement of Consolidated Cash Flows and related supplemental cash
flow information, and with the cash flow information included in the Company's
1995 Report on Form 10-K.
Net Cash Flows from Operating Activities
"Net cash provided by operating activities" as shown in the
accompanying Statement of Consolidated Cash Flows (the "Cash Flow Statement")
decreased from $238.5 million in the first six months of 1995 to $152.0 million
in the first six months of 1996. This decrease of $86.5 million (36.3%),
approximately $71.6 million (82.8%) of which occurred during the first quarter
of 1996, was principally due to:
*An increase of $107.1 million in 1996 cash used for the net of
accounts receivable and accounts payable, approximately $56.0 million
of which is due to the Company's decreased use of its receivable sales
facility during 1996, see "Receivable Sales Facility" following. The
remainder of the increase is principally due to increased 1996 sales
revenues (particularly in gas marketing activities) and the related
buildup of accounts receivable.
*Decreases totaling $26.3 million (64.1%) in 1996 cash provided by
certain miscellaneous working capital items, approximately $21.1
million (80.2%) of which is attributable to decreased cash provided
from inventories. The decreased 1996 cash provided by inventories was
principally due to the relatively lower December 31, 1995 balance of
gas in underground storage due to the late-1995 storage withdrawals due
to colder weather.
*A decrease of $10.6 million in 1996 cash recoveries under gas contract
disputes as the underlying agreements continue to "unwind".
These unfavorable impacts were partially offset by:
*An increase of $26.5 million in 1996 cash provided by recovery of
deferred gas costs, principally due to the relatively higher December
31, 1995 balance in deferred gas costs.
*An increase of $31.0 million in 1996 income before non-cash charges
and credits, see "Material Changes in the Results of Operations"
elsewhere herein.
As further described in the Company's 1995 Report on Form 10-K, under
an August 1995 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 and subject to a floating interest rate
provision. Following is selected information concerning the utilization of this
facility.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Receivable Sales Facility June 30 June 30
- ---------------------------------------- ------------------------------ ------------------------------------
1996 1995 1996 1995
------------- ------------- ----------------- ---------------
(millions of dollars)
<S> <C> <C> <C> <C>
Net cash outflows $ (55.2) $ (15.3) $ (96.9) $ (40.9)
Pre-tax loss on sale (1.8) (2.3) (4.8) (5.1)
Average receivables sold (1) $ 125.9 $ 126.1 $ 159.8 $ 147.4
Weighted average rate (2) 5.32% 6.08% 5.47% 6.08%
June 30
------------------------------ December 31
1996 1995 1995
------------- ------------- -----------------
(millions of dollars)
Receivables sold and uncollected $ 138.1 $ 151.9 $ 235.0
Collateral for receivables sold $ 18.6 $ 38.9 $ 35.0
</TABLE>
(1) Based on week-end balances.
(2) Exclusive of a facility fee payable on the full commitment of $235
million, which fee was 60 basis points through August 21, 1995,
declined to 40 basis points through March 1, 1996 and currently is 30
basis points. The rate in effect at June 30, 1996 (exclusive of the
facility fee) was 5.40%.
Net Cash Flows from Investing Activities
The Company's capital expenditures by business unit for the six months
ended June 30, 1996 and 1995 were as follows:
Six Months Ended
June 30
----------------------------------------------
Increase
1996 1995 (Decrease)
----------- ----------- ---------------------
(millions of dollars) ($/%)
Natural Gas Distribution $ 48.2 $ 54.5 $(6.3) / (11.6)%
Interstate Pipelines 8.0 15.4 (7.4) / (48.1)%
Wholesale Energy Marketing - - - / -
Natural Gas Gathering 4.7 2.1 2.6 / 123.8%
Retail Energy Marketing 0.8 - 0.8 / N/A
Corporate and Other 0.4 0.2 0.2 / 100.0%
----------- -----------
$ 62.1 $ 72.2 $(10.1) / (14.0)%
=========== ===========
Capital expenditures decreased from $72.2 million in the first six
months of 1995 to $62.1 million in the first six months of 1996, a decrease of
$10.1 million (14.0%), as decreases in spending by Distribution and Pipeline
were partially offset by increased spending in Natural Gas Gathering. The
decreased 1996 spending in Pipeline is principally due to the application of
more restrictive and comprehensive economic analysis to proposed capital
projects and to the delay of certain projects to coincide with demand for
increased capacity. The decrease from 1995 to 1996 in Distribution was
principally due to (1) decreased 1996 expenditures at Minnegasco for
distribution mains, reflecting (i) the late construction start due to cold
weather and (ii) higher system expansion costs in 1995, (2) decreased 1996
capital spending at Entex for system replacements and general plant and (3)
decreased 1996 capital spending at Arkla for system extensions and replacements.
These favorable variances were partially offset by increased 1996 spending in
Natural Gas Gathering, principally due to the purchase of field compression
equipment which formerly had been leased. The Company's capital expenditures for
the full year 1996 are currently budgeted at approximately $184.3 million,
exclusive of expenditures for international projects (which are expected to
average approximately $25 million per year for the next 3-5 years). The Company
expects that its capital spending needs will be met with cash provided by
operations and, if necessary, by incremental borrowing.
During the first quarter of 1995, the Company sold 80,000 shares of the
Common Stock of Itron, Inc., yielding cash proceeds of approximately $1.4
million. As further discussed in the Company's 1995 Report on Form 10-K, the
Company currently owns approximately 1.5 million of such shares.
Net Cash Flows from Financing Activities
As further discussed in the Company's 1995 Report on Form 10-K, the
Company's principal sources of short-term liquidity are (1) its December 1995
unsecured Credit Agreement (the "Facility") with Citibank, N.A., as Agent and a
group of eighteen other commercial banks which provides a $400 million
commitment to the Company through December 11, 1998, (2) the Company's
receivable sales program, see "Net Cash Flows from Operating Activities"
elsewhere herein and, to a lesser extent, (3) informal bank lines of credit.
Following is selected information concerning the Company's short-term
borrowings.
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Short-Term Borrowings June 30 June 30
- ---------------------
------------------------------- -----------------------------------
1996 1995 1996 1995
-------------- -------------- ----------------- --------------
(dollars in millions)
<S> <C> <C> <C> <C>
Weighted average amount borrowed (1) $ 0.0 $ 27.2 $ 10.0 $ 57.0
Maximum amount borrowed (1) $ 0.0 $ 70.0 $ 51.0 $ 135.0
Weighted average rate (1) N/A 6.97% 6.28% 6.80%
June 30
------------------------------- December 31
1996 1995 1995
-------------- -------------- -----------------
(dollars in millions)
Amount Borrowed: (2)
The Facility $ 0.0 $ 50.0 $ 0.0
Informal lines of credit $ 0.0 $ 13.0 $ 10.0
Weighted average rate N/A 7.20% 6.68%
</TABLE>
(1) As applicable, includes both the Facility and informal credit lines.
Weighted average amount borrowed and maximum amount borrowed are based on
week-end balances.
(2) The Company had no borrowings under the Facility at August 5, 1996, and
therefore had $400 million of remaining capacity under the Facility, which
amount is expected to be adequate for the Company's current and projected
needs for short-term financing.
As further discussed in the Company's 1995 Report on Form 10-K, the
Company's long-term financing historically has been obtained through the
issuance of common stock, preferred stock and unsecured debentures and notes
(the Company is precluded under an indenture from issuing mortgage debt).
Following is a discussion of recent financing activities:
Common Stock Offering
In June 1996, the Company issued 11,500,000 shares of NorAm Energy
Corp. Common Stock (the "Common Stock") to the public at a price of $9.875 per
share, yielding net cash proceeds of approximately $109.0 million after
deducting an underwriting discount of 4.05% and before deducting expenses
estimated to total $0.1 million. The net proceeds from the offering principally
were used to retire debt as described following.
Trust Preferred Offering
In June 1996, the Company issued $177.8 million of 6.25%
Convertible Subordinated Debentures due 2026 (unless extended by the Company as
discussed following) (the "Trust Debentures") to NorAm Financing I (the
"Trust"), a statutory business trust under Delaware law. The Trust Debentures
were purchased by the Trust using the proceeds from (1) the public issuance by
the Trust of 3,450,000 shares of 6.25% Convertible Preferred Securities (the
"Trust Preferred") at $50 per share, a total of $172.5 million and (2) the sale
of approximately $5.3 million of the Trust's common stock (representing 100% of
the Trust's common equity) to the Company. The sole assets of the Trust are and
will be the Trust Debentures. The interest and other payment dates on the Trust
Debentures correspond to the interest and other payment dates on the Trust
Preferred. In conjunction with the issuance of the Trust Preferred, the Company
paid an underwriting commission of $1.375 per share and expenses expected to
total approximately $0.1 million in view of the fact that the proceeds from such
issuance would be invested in the Trust Debentures. The net proceeds from these
transactions principally were used to retire debt as described following.
The Trust Preferred, as more fully described in the offering
documents, accrues a dividend equal to 6.25% of the $50 liquidation amount,
payable quarterly in arrears. The ability of the Trust to pay distributions on
the Trust Preferred is solely dependent on its receipt of interest payments on
the Trust Debentures. The Company has the right to defer interest payments on
the Trust Debentures as discussed following. In the case of such deferral,
quarterly distributions on the Trust Preferred would be deferred by the Trust
but would continue to accumulate quarterly and would accrue interest. Each share
of Trust Preferred is convertible at the option of the holder into shares of
Common Stock at an initial conversion rate of 4.1237 shares of Common Stock for
each share of the Trust Preferred, subject to adjustment in certain
circumstances. The Trust Preferred does not have a stated maturity date,
although it is subject to mandatory redemption upon maturity of the Trust
Debentures or to the extent that the Trust Debentures are redeemed. In general,
holders of the Trust Preferred do not have any voting rights.
The Trust Debentures, as more fully described in the offering
documents, bear interest at 6.25% and are redeemable for cash at the option of
the Company, in whole or in part, from time to time on or after June 30, 2000,
if and only if for 20 trading days within any period of 30 consecutive days,
including the last trading day of such period, the current market price of the
Common Stock equals or exceeds 125% of the then-applicable conversion price of
the Trust Debentures, or at any time in certain circumstances upon the
occurrence of a specified tax event. The Trust Debentures will mature on June
30, 2026, although the maturity date may be extended only once at the Company's
election for up to an additional 19 years, provided certain requirements and
conditions are met. Under existing law, interest payments made by the Company
for the Trust Debentures are deductible for federal income tax purposes. The
Company has the right at any time and from time to time to defer interest
payments on the Trust Debentures for successive periods not to exceed 20
consecutive quarters for each such extension period. In such case, (1) quarterly
distributions on the Trust Preferred would also be deferred as discussed
preceding and (2) the Company has agreed not to declare or pay any dividend on
any common or preferred stock, except in certain instances.
The Trust is consolidated with the Company for financial reporting
purposes and, therefore, the Trust Debentures are eliminated in consolidation
and the Trust Preferred appears on the Company's Consolidated Balance Sheet
under the caption "Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary Trust Holding Solely $177.8 Million Principal
Amount of 6.25% Convertible Subordinated Debentures due 2026 of NorAm Energy
Corp.". The dividend on the Trust Preferred is reported on a pre-tax basis in
the accompanying Statement of Consolidated Income under the caption "Dividend
requirement on preferred securities of subsidiary trust".
Debt Retirements
Utilizing, in large part, the proceeds from the offerings discussed
preceding, in June 1996, the Company (1) retired the $109.1 million principal
amount then outstanding of its 9.875% Debentures due 2018 at a price equal to
105.93% of face value, recognizing an extraordinary pre-tax loss of
approximately $6.5 million (approximately $3.9 million or $0.03 per share
after-tax) and (2) retired its $150 million bank term loan due 2000 at face
value, see Note B of the accompanying Notes to Consolidated Financial
Statements.
Exchange of Preferred Stock, Series A
Also in June 1996, the Company exercised its right to exchange the $130
million principal amount of its $3.00 Preferred Stock Series A (the "Preferred")
for its 6% Convertible Subordinated Debentures due 2012 (the "Subordinated
Debentures"). The holders of the Subordinated Debentures will receive interest
quarterly at 6% and have the right at any time on or before the maturity date
thereof to convert the Subordinated Debentures into Common Stock, initially at
the conversion rate in effect for the Preferred at the date of the exchange,
which conversion rate of approximately 1.7467 shares of the Common Stock for
each $50 principal amount of the Subordinated Debentures is subject to
adjustment should certain events occur. The Company is required to make annual
sinking fund payments of $6.5 million on the Subordinated Debentures beginning
on March 15, 1997 and on each succeeding March 15 to and including March 15,
2011. The Company (1) may credit against the sinking fund requirements (i) any
Subordinated Debentures redeemed by the Company and (ii) Subordinated Debentures
which have been converted at the option of the holder and (2) may deliver
outstanding Subordinated Debentures in satisfaction of the sinking fund
requirements.
As more fully discussed in the Company's 1995 Report on Form 10-K, the
Company enters into interest rate swaps in which, in general, one party pays a
fixed rate on the notional amount while the other party pays a LIBOR-based rate
for the purposes of (1) effectively fixing the interest rate on debt expected to
be issued for refunding purposes and (2) adjusting the amount of its overall
debt portfolio which is exposed to market interest rate fluctuations. The effect
of these swaps (none of which are leveraged) was to decrease the Company's
interest expense by $0.6 million, $0.9 million, $1.4 million and $0.5 million
for the quarters ended June 30, 1996 and 1995 and the six months ended June 30,
1996 and 1995, respectively. Following is selected information on the Company's
portfolio of interest rate swaps at June 30, 1996:
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Swap Portfolio at June 30, 1996(1)
- -------------------------------------------------------------------
(dollars in millions) Estimated
Notional Period Interest Rate Market
Initiated Amount Covered Fixed/Floating(2) Value(3)
- ----------------------- ------------ ------------------------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
December 1995 $ 50.0 Apr.1997 - Apr.2002 (4) 5.92% / 6.95% $ 2.0
December 1995 50.0 Apr.1997 - Apr.2002 (4) 5.92% / 6.95% 2.0
January 1996 50.0 Apr.1997 - Apr.2002 (4) 5.80% / 6.95% 2.3
February 1996 50.0 Apr.1997 - Apr.2002 (4) 5.77% / 6.95% 2.4
February 1996 50.0 Mar.1996 - Jan.1998 (5) 4.76% / 6.03% 1.0
February 1996 50.0 Jun.1996 - Dec.1997 (5) 4.71% / 6.07% 1.0
------------ -------------
Totals $ 300.0 $ 10.7
============ =============
</TABLE>
(1) In addition to the swaps entered into during 1996, the Company's
portfolio of interest rate swaps as of December 31, 1995 also changed
due to the termination of $250.0 million notional amount of swaps
during the first quarter of 1996 (no material gain or loss was
recognized).
(2) In each case, the Company is the fixed-price payor. The floating rate
is estimated as of June 30, 1996.
(3) Represents the estimated amount which would have been realized upon
termination of the swap at June 30, 1996.
(4) Swaps entered into for the purpose of effectively fixing the interest
rate on debt expected to be issued in 1997 for refunding purposes.
(5) Swaps entered into for the purpose of reducing the Company's exposure
to fluctuations in market interest rates.
The Company received cash proceeds from sales of its common stock
pursuant to its Direct Stock Purchase Plan of approximately $5.2 million and
$4.9 million during the six months ended June 30, 1996 and 1995, respectively.
The Company (1) paid common and preferred dividends totaling approximately $21.4
million and $21.2 million during the six months ended June 30, 1996 and 1995,
respectively, (2) recently declared its regular quarterly common dividend and
(3) recently exchanged its Preferred Stock, Series A for convertible
subordinated debentures, see "Dividend Declaration" under "Recent Developments"
elsewhere herein and "Exchange of Preferred Stock, Series A" preceding.
As further discussed in the Company's 1995 Report on Form 10-K, the
Facility contains a provision which requires the Company to maintain a minimum
level of total stockholders' equity, as well as placing a limitation of (1)
$2,055 million on total debt and (2) $200 million on the amount of outstanding
long-term debt which may be retired in advance of its maturity using funds
borrowed under the Facility. Certain of the Company's other financial
arrangements contain similar provisions. Based on these restrictions, at June
30, 1996, the Company had incremental debt capacity of $622.3 million and, while
the Company is not required to calculate and apply the stockholders' equity
limitation on an interim basis, if it were applied at June 30, 1996, the Company
would have had incremental dividend capacity of $226.3 million. The Company has
engaged in several transactions which affect these calculations, see "Common
Stock Offering", "Trust Preferred Offering", "Debt Retirements" and "Exchange of
Preferred Stock, Series A" preceding.
<PAGE>
The accompanying Cash Flow Statement has been prepared in accordance
with authoritative accounting guidelines which require the segregation of cash
flows into specific categories. Management believes that other groupings of cash
flows may also be useful and that the following information (which amounts are
consistent with the Cash Flow Statement) will assist in understanding the
Company's sources and uses of cash during the periods presented. This
information should not be viewed as a substitute for the Cash Flow Statement,
nor should the totals or subtotals presented be considered surrogates for totals
or subtotals appearing on the Cash Flow Statement.
Six Months Ended
June 30
--------------------------
1996 1995
------------ ------------
Use (Source) (millions of dollars)
Recoveries under gas contract
settlements $ (8.0) $ (18.6)
Capital expenditures 62.1 72.2
Common and preferred dividends 21.4 21.2
Debt retirements and reacquisitions (1) 341.2 34.4
Other interim debt repayments 10.0 47.0
Change in receivables sold 96.9 40.9
Return of advance received under
contingent sales agreement - 50.0
Decrease in overdrafts 2.7 16.1
------------ ------------
Selected External Uses of Cash 526.3 263.2
Less:
Sale of Itron stock - (1.4)
Common stock issuance (2) (114.2) (4.9)
Issuance of Trust Preferred (2) (167.8) -
Change in cash balance 8.3 0.9
------------ ------------
Cash Generated from Other Sources,
Principally Internal $ 252.6 $ 257.8
============ ============
(1) See Note B of the accompanying Notes to Consolidated Financial
Statements.
(2) See "Net Cash Flows from Financing Activities" elsewhere herein.
COMMITMENTS
Capital Expenditures. The Company had capital commitments of less than
$15 million at June 30, 1996, which projects are expected to be funded through
cash provided by operations and/or incremental borrowings, see "Net Cash Flows
from Investing Activities" elsewhere herein. As described in the Company's 1995
Report on Form 10-K, the Company has commitments under certain of its leasing
arrangements.
Transportation Agreement. As further discussed in the Company's 1995
Report on Form 10-K, the Company has an agreement with ANR Pipeline Company
("ANR") pursuant to which the Company (1) currently retains $41 million
previously advanced by ANR, (2) provides 130 MMcf/day of capacity in certain of
the Company's transportation facilities to ANR and (3) is committed to refund $5
million and $36 million to ANR in 2003 and 2005, respectively, in exchange for
ANR's release of 30 MMcf/day and 100 MMcf/day, respectively, of such capacity.
CONTINGENCIES
Letters of Credit. At June 30, 1996, the Company was obligated for
approximately $35.3 million under letters of credit which are incidental to its
ordinary business operations.
Indemnity Provisions. As discussed in the Company's 1995 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 "Net Cash Flows from
Operating Activities" elsewhere herein.
Gas Contract Issues. As discussed in the Company's 1995 Report on Form
10-K, the Company is a party to certain claims involving, and has certain
commitments under, its gas purchase contracts. The nature of the Company's
natural gas marketing business is such that, in general, and particularly during
periods of production interruptions, delivery curtailments and shortages of
pipeline capacity, disputes arise as to compliance with terms of
purchase/delivery commitments and related pricing provisions. While certain of
these disputes are not resolved for extended periods of time, the Company
believes that it has adequately reserved for any such amounts in dispute which
may ultimately not be resolved in its favor.
Credit Risk and Off-Balance-Sheet Risk. As discussed in the Company's
1995 Report on Form 10-K, the Company has off-balance-sheet risk as a result of
(1) its interest rate swaps, see "Net Cash Flows from Financing Activities"
elsewhere herein and (2) its natural gas hedging activities, see "Wholesale
Energy Marketing" under "Material Changes in the Results of Operations"
elsewhere herein.
Litigation. The Company is a party to litigation which arises in
the normal course of business, see "Legal Proceedings" elsewhere herein.
Environmental. As more fully described in the Company's 1995 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
remains 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 December 18, 1995, the Louisiana Department of Environmental Quality
advised the Company that it had been named a potentially responsible party under
state law with respect to a hazardous substance site in Shreveport, Louisiana,
see "Legal Proceedings" elsewhere herein.
On October 24, 1994, the United States Environmental Protection Agency
advised MRT that it 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.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Minnesota Public Utilities Commission (the "MPUC") decided in
Minnegasco's 1993 rate case that (1) Minnegasco's unregulated appliance sales
and service operations are required to pay the regulated distribution operations
a fee for the use of Minnegasco's name, image and reputation and (2) a portion
of the cost of responding to certain gas leak calls not be allowed in rates.
Minnegasco appealed those decisions to the Minnesota Supreme Court (the
"Court"). On June 13, 1996, the Court reversed the MPUC's decisions, finding in
Minnegasco's favor.
On December 18, 1995, the Louisiana Department of Environmental Quality
advised the Company that the Company, through one of its subsidiaries and
together with several other unaffiliated entities, had been named under state
law as a potentially responsible party with respect to a hazardous substance
site in Shreveport, Louisiana and may be required to share in the remediation
cost, if any, of the site. However, considering the information currently known
about the site and the involvement of the Company and its subsidiaries with
respect to the site, the Company does not believe that the matter 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, together with a
number of other companies, had been named under federal law as a potentially
responsible party 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.
The Company is a party to litigation (other than that specifically
noted) which arises in the normal course of business. Management regularly
analyzes current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. Management believes
that the effect on the Company's results of operations, financial position or
cash flows, if any, from the disposition of these matters will not be material.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the Company's shareholders held on May 14,
1996, all nominees for director were elected, with the votes cast as follows:
Withheld
Nominee For or Abstain
- ------------------------------- -------------- ---------------
Michael B. Bracy 109,143,247 1,979,576
Joe E. Chenoweth 109,243,148 1,879,675
O. Holcombe Crosswell 109,154,333 1,968,490
Walter A. DeRoeck 109,133,677 1,989,146
Mickey P. Foret 109,170,420 1,952,403
Joseph M. Grant 109,259,715 1,863,108
Robert C. Hanna 109,169,207 1,953,616
W. Jeffrey Hart 109,286,053 1,836,770
T. Milton Honea 109,267,912 1,854,911
Myra Jones 109,087,572 2,035,251
Bruce W. Wilkinson 109,229,389 1,893,434
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27, Financial Data Schedule
EX-99.1, Restated Certificate of Incorporation of NorAm Energy
Corp. Dated May 31, 1995 as Amended.
EX-99.2, Form of Severance Agreement for each of the Chief
Executive Officer and four most highly compensated executive
officers of the Company (T. Milton Honea, Charles M. Oglesby,
Michael B. Bracy, William A. Kellstrom, Hubert Gentry, Jr.) and
for 10 other executive officers of the Company.
(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: August 14, 1996
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,405,904
<OTHER-PROPERTY-AND-INVEST> 658,773
<TOTAL-CURRENT-ASSETS> 470,436
<TOTAL-DEFERRED-CHARGES> 61,214
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,596,327
<COMMON> 85,590
<CAPITAL-SURPLUS-PAID-IN> 991,637
<RETAINED-EARNINGS> (299,503)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 787,895
0
0
<LONG-TERM-DEBT-NET> 1,106,969
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 280,250
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,421,213
<TOT-CAPITALIZATION-AND-LIAB> 3,596,327
<GROSS-OPERATING-REVENUE> 2,308,988
<INCOME-TAX-EXPENSE> 45,838
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 2,122,733
<OPERATING-INCOME-LOSS> 186,255
<OTHER-INCOME-NET> (6,178)
<INCOME-BEFORE-INTEREST-EXPEN> 180,077
<TOTAL-INTEREST-EXPENSE> 70,707
<NET-INCOME> 58,799
3,597
<EARNINGS-AVAILABLE-FOR-COMM> 55,202
<COMMON-STOCK-DIVIDENDS> 17,461
<TOTAL-INTEREST-ON-BONDS> 18,857
<CASH-FLOW-OPERATIONS> 152,011
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</TABLE>
EX-99.1
RESTATED
CERTIFICATE OF INCORPORATION
of
NORAM ENERGY CORP.
Effective May 22, 1986
As Amended Through May 31, 1995
<PAGE>
RESTATED CERTIFICATE
OF INCORPORATION
OF NORAM ENERGY CORP.
Duly Adopted In Accordance With The Provisions Of Sections 242 and 245 Of
The General Corporation Law Of The State Of Delaware
(NorAm Energy Corp. Was Originally Incorporated Under The Name Of Southern
Cities Distributing Company By Certificate Of Incorporation Filed With The
Secretary Of State Of Delaware On March 9, 1928.)
FIRST: The name of the Corporation is NorAm Energy Corp.
SECOND: The principal office of the Corporation within the State of
Delaware is located at 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its resident agent is THE CORPORATION TRUST COMPANY.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The capital stock of the Corporation shall consist of ten million
(10,000,000) shares of Preferred Stock of the par value of Ten Cents ($0.10) per
share (herein called "Preferred Stock") and two hundred fifty million
(250,000,000) shares of Common Stock of the par value of Sixty-two and one-half
Cents ($0.625) per share (herein called "Common Stock").
The designations and the powers, preferences and rights and the
qualifications, limitations and/or restrictions thereof, of the classes of stock
of the Corporation and the authority thereto expressly vested in the Board of
Directors of the Corporation shall be as follows:
Voting Rights. Each holder in person or by proxy, of record of Common Stock
shall be entitled to one vote, for each share of such stock standing in such
stockholder's name on the books of the Corporation and each holder of record of
Preferred Stock shall have such voting rights as may be stated and expressed in
a resolution or resolutions adopted by the Board of Directors providing for the
issuance of any series thereof included in a certificate filed pursuant to the
applicable law of the State of Delaware (herein called a "Certificate of
Designations"); provided, however, that in elections of directors there shall be
cumulative voting so that each such stockholder, in person or by proxy, shall
have as many votes as shall equal the number of votes appertaining to the shares
of such stock standing in his name as set forth above multiplied by the number
of directors to be elected, and such stockholder may cast all such votes for a
single director or may distribute them among the number to be voted for, or for
any two or more of them as he may see fit.
The provisions of this Article FOURTH granting cumulative voting privileges
in the election of directors shall not be amended without the affirmative vote
of the holders of at least two-thirds of the outstanding stock of the
Corporation.
The provisions of Article SIXTH granting conditional preemptive rights
shall not be amended without the affirmative vote of the holders of at least
two-thirds of the outstanding Common Stock of the corporation.
The holders of a majority of the voting power of the shares entitled to
vote, and in case of a class vote a majority of the shares of the class entitled
to vote as a class, present in person or represented by proxy, shall constitute
a quorum at any meeting of stockholders. If, for any reason, such quorum shall
not be represented at any meeting, the meeting may be adjourned from time to
time by the stockholders represented at such meeting. At any adjourned meeting
at which the requisite number of shares shall be present in person or
represented by proxy, any business may be transacted which might have been
transacted at the meeting as originally called.
Dividends and Restrictions on Acquisition of Stock. Any and all right,
title, interest and claim in or to any dividends declared, or other
distributions made, by the Corporation, whether in cash, stock or otherwise,
which are unclaimed by the stockholder entitled thereto for a period of six
years after the close of business on the payment date, shall be and be deemed to
be extinguished and abandoned; and such unclaimed dividends or other
distributions in the possession of the Corporation, its transfer agents or other
agents or depositories, shall at such time become the absolute property of the
Corporation, free and clear of any and all claims of any persons whatsoever.
Liquidation and Dissolution. The holders of any series of the Preferred
Stock shall be entitled in the event of the liquidation, dissolution or winding
up of the Corporation, whether voluntary or otherwise, to such amounts and in
such priority of payment among series of Preferred Stock as shall be set forth
in the Certificate of Designations with respect to such series. After the
payment in full to the holders of the Preferred Stock and to any other class of
stock to which the Common Stock ranks junior of all amounts so payable to them
upon such liquidation, dissolution or winding up, the remaining assets shall be
divided and paid to the holders of the Common Stock in equal amounts per share,
according to their respective rights. If upon any such liquidation, dissolution
or winding up, and after distribution to each series of Preferred Stock having
priority in distribution of assets upon liquidation, if any, the assets
available for distribution to holders of shares of Preferred Stock of any series
shall be insufficient to pay such holders and the holders of any other shares
ranking on a parity with such shares as to the distribution of assets on
liquidation the full preferential amount to which they are respectively
entitled, then such assets shall be distributed pro rata among the holders of
shares of such series of Preferred Stock and such other shares according to the
amounts of their respective rights. The sale of all or substantially all the
property of the Corporation to, or the merger or consolidation of the
Corporation into or with, any other corporation, shall not be deemed to be a
distribution of assets or a liquidation, dissolution or winding up for the
purposes of this paragraph.
Issuance of Preferred Stock in Series. The Board of Directors, or a
designated committee thereof, is expressly authorized, subject to limitations
prescribed by law and the provisions of this Article FOURTH to provide by resolu
tion for the issuance of shares of Preferred Stock in series, and by filing a
Certificate of Designations with respect to such series, to establish from time
to time the number of shares to be included in each such series, and to fix the
designations, powers, preferences and relative, participating, optional or other
rights, if any, of the shares of each such series and the qualifications,
limitations or restrictions thereof, if any. Except in respect of series
particulars fixed by the Board of Directors or its committee as permitted
hereby, all shares of Preferred Stock shall be of equal rank and shall be
identical. All shares of any one series of Preferred Stock so designated by the
Board of Directors shall be alike in every particular, except that shares of any
one series issued at different times may differ as to the dates from which
dividends thereon shall be cumulative.
The authority of the Board of Directors, or a designated committee thereof,
with respect to each series shall include, but not be limited to, determination
of the following to be set forth in the Certificate of Designations creating
each such series:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) Whether that series shall pay dividends, and, if so, the dividend rate
on the shares of that series, the payment date for dividends, whether dividends
shall be cumulative, and, if so, the date or dates (or the method of determining
the date or dates) from which dividends payable on such shares shall cumulate,
and the priority, if any, of payment of dividends on shares of that series;
(c) Whether holders of that series shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall be convertible into or exchangeable for other
securities, and, if so, the terms and conditions of such conversion or exchange,
including provision for adjustment of the conversion or exchange rate in such
events as the Board of Directors, or a designated committee thereof, shall
determine;
(e) Whether that series shall be redeemable, and, if so, the terms and
conditions of such redemption, including the time or date upon or after which
they shall be redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and at different
redemption dates;
(f) Whether that series shall have a sinking fund or make other provision
for the redemption or purchase of shares of that series, and, if so, the terms
and amount governing the operation of such sinking fund;
(g) The rights of holders of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series;
(h) The conditions or restrictions upon the creation of indebtedness of the
Corporation or upon the issuance of additional Preferred Stock or other capital
stock ranking on a parity therewith or prior thereto, with respect to dividends
or distribution of assets;
(i) The conditions or restrictions with respect to the payment of dividends
upon, or the making of other distributions to, or the acquisition or redemption
of, shares ranking junior to the Preferred Stock or any series thereof with
respect to dividends or distribution of assets; and
(j) Any other relative rights, preferences and limitations of that series.
Any of the terms, including voting rights, of any series may be made
dependent upon facts ascertainable outside the Certificate of Incorporation and
the Certificate of Designations, provided that the manner in which such facts
shall operate upon such terms is clearly and expressly set forth in the
Certificate of Incorporation or in the Certificate of Designations.
Unless otherwise provided in a Certificate of Designations with respect to
any series, the Preferred Stock, with respect to both dividends and distribution
of assets, shall rank prior to the Common Stock. Whenever reference is made in
this Article FOURTH to shares ranking "prior to" another class or series of
shares or "on a parity with" another class or series of shares, such reference
shall mean and include all other shares of the Corporation in respect of which
the rights of the holders thereof as to payment of dividends and distribution of
assets are given preference over, or rank equally with, as the case may be, the
rights of the holders of such class or series of shares. The terms "junior" and
"junior stock" when used with respect to the Preferred Stock, shall mean shares
of the Corporation ranking junior to the Preferred Stock as to dividends and
distribution of assets. The phrase "distribution of assets" shall mean the
distribution of assets on liquidation, dissolution or winding up.
Any shares of Preferred Stock which are redeemed or purchased by the
Corporation and retired, or which are converted into or exchanged for other
securities, shall be restored to the status of authorized but unissued shares of
Preferred Stock and may be reissued as shares of another series.
FIFTH: The affirmative vote of the holders of not less than 75% of the
outstanding shares of "Voting Stock" (as hereinafter defined) held by
stockholders other than a "Substantial Stockholder" (as hereinafter defined)
shall be required for the approval or authorization of any "Business
Combination" (as hereinafter defined) of the Corporation with any Substantial
Stockholder; provided, however, that the 75% voting requirement shall not be
applicable if either:
(i) The "Continuing Directors" (as hereinafter defined) of the Corporation
by at least a two-thirds vote (a) have expressly approved in advance the
acquisition of the outstanding shares of Voting Stock that caused such
Substantial Stockholder to become a Substantial Stockholder, or (b) have
expressly approved such Business Combination either in advance of or subsequent
to such Substantial Stockholder having become a Substantial Stockholder; or
(ii) The cash or fair market value (as determined by at least two-thirds of
the Continuing Directors) of the property, securities or other consideration to
be received per share by holders of Voting Stock of the Corporation in the
Business Combination is not less than the "Highest Per Share Price" or the
"Highest Equivalent Price" (as these terms are hereinafter defined) paid by the
Substantial Stockholder in acquiring any of its holdings of the Corporation's
Voting Stock.
For purposes of this Article:
(i) The term "Business Combination" shall include, without limitation, (a)
any merger or consolidation of the Corporation, or any entity controlled by or
under common control with the Corporation, with or into any Substantial
Stockholder, or any entity controlled by or under common control with the
Substantial Stockholder, (b) any merger or consolidation of a Substantial
Stockholder, or any entity controlled by or under common control with the
Substantial Stockholder, with or into the Corporation or any entity controlled
by or under common control with the Corporation, (c) any sale, lease, exchange,
transfer, or other disposition of all or substantially all of the property and
assets of the Corporation to a Substantial Stockholder, or any entity controlled
by or under common control with the Substantial Stockholder, (d) any purchase,
lease, exchange, transfer or other acquisition of all or substantially all of
the property and assets of a Substantial Stockholder, or any entity controlled
by or under common control with the Substantial Stockholder, by the Corporation,
(e) any recapitalization that would have the effect of increasing the voting
power of a Substantial Stockholder, and (f) any agreement, contract or other
arrangement providing for any of the transactions described in this definition
of Business Combination.
(ii) The term "Substantial Stockholder" shall mean and include any
individual, corporation, partnership or other person or entity which, together
with its "Affiliates" and "Associates" (as defined in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934 as in effect at
the date of the adoption of this Article by the stockholders of the Corporation)
(collectively, and as so in effect, the "Exchange Act"), "Beneficially Owns" (as
defined in Rule 13d-3 of the Exchange Act) in the aggregate 10 percent or more
of the outstanding Voting Stock of the Corporation, and any Affiliate or
Associate of any such individual, corporation, partnership or other person or
entity.
(iii) Without limitation, any share of Voting Stock of the Corporation that
any Substantial Stockholder has the right to acquire at any time
(notwithstanding that Rule 13d-3 of the Exchange Act deems such shares to be
beneficially owned only if such right may be exercised within 60 days) pursuant
to any agreement, or upon exercise of conversion rights, warrants or options, or
otherwise, shall be deemed to be Beneficially Owned by the Substantial
Stockholder and to be outstanding for purposes of clause (ii) above.
(iv) For the purposes of subparagraph (ii) of the first paragraph of this
Article, the term "other consideration to be received" shall include, without
limitation, Common Stock or other capital stock of the Corporation retained by
its existing stockholders other than Substantial Stockholders or other parties
to such Business Combination in the event of a Business Combination in which the
Corporation is the surviving corporation.
(v) The term "Voting Stock" shall mean all of the outstanding shares of
Common Stock and the outstanding shares of Preference Stock entitled to vote on
each matter on which the holders of record of Common Stock shall be entitled to
vote, and each reference to a proportion of shares of Voting Stock shall refer
to such proportion of the votes entitled to be cast by such shares.
(vi) The term "Continuing Director" shall mean a Director who was a member
of the Board of Directors of the Corporation immediately prior to the time that
the Substantial Stockholder involved in a Business Combination became a
Substantial Stockholder.
(vii) A Substantial Stockholder shall be deemed to have acquired a share of
the Voting Stock of the Corporation at the time when such Substantial
Stockholder became the Beneficial Owner thereof. With respect to the shares
owned by Affiliates, Associates or other persons whose ownership is attributed
to a Substantial Stockholder under the foregoing definition of Substantial
Stockholder, if the price paid by such Substantial Stockholder for such shares
is not determinable by two-thirds of the Continuing Directors, the price so paid
shall be deemed to be the higher of (a) the price paid upon the acquisition
thereof by the Affiliate, Associate or other person or (b) the market price of
the shares in question at the time when the Substantial Stockholder became the
Beneficial Owner thereof.
(viii) The terms "Highest Per Share Price" and "Highest Equivalent Price"
as used in this Article shall mean the following: If there is only one class of
capital stock of the Corporation issued and outstanding, the Highest Per Share
Price shall mean the highest price that can be determined to have been paid at
any time by the Substantial Stockholder for any share or shares of that class of
capital stock. If there is more than one class of capital stock of the
Corporation issued and outstanding, the Highest Equivalent Price shall mean,
with respect to each class and series of capital stock of the Corporation, the
amount determined by two-thirds of the Continuing Directors, on whatever basis
they believe is appropriate, to be the highest per share price equivalent of the
highest price that can be determined to have been paid at any time by the
Substantial Stockholder for any share or shares of any class or series of
capital stock of the Corporation. In determining the Highest Per Share Price and
the Highest Equivalent Price, all purchases by the Substantial Stockholder shall
be taken into account regardless of whether the shares were purchased before or
after the Substantial Stockholder became a Substantial Stockholder. Also, the
Highest Per Share Price and the Highest Equivalent Price shall include any
brokerage commissions, transfer taxes and soliciting dealers' fees or other
value paid by the Substantial Stockholder with respect to the shares of capital
stock of the Corporation acquired by the Substantial Stockholder. In the case of
any Business Combination with a Substantial Stockholder, the Continuing
Directors shall determine the Highest Equivalent Price for each class and series
of the capital stock of the Corporation.
The provisions set forth in this Article may not be amended, altered,
changed or repealed in any respect unless such action is approved by the
affirmative vote of the holders of not less than 75 percent of the outstanding
shares of Voting Stock (as defined in this Article) of the Corporation at a
meeting of the stockholders duly called for the consideration of such amendment,
alterations, change or repeal; provided, however, that if there is a Substantial
Stockholder (as defined in this Article), such action must also be approved by
the affirmative vote of the holders of not less than 75 percent of the
outstanding shares of Voting Stock held by the stockholders other than the
Substantial Stockholder.
SIXTH: The provisions inserted herein for the management of the business
and for the conduct of the affairs of the Corporation and creating, defining,
limiting and regulating the powers thereof and of the directors and
stockholders, the same being in furtherance of and in addition to and not in
limitation of the powers now or hereafter conferred by the present or any future
law or laws of the State of Delaware, are as follows:
The number of directors of the Corporation shall be such as from time to
time shall be fixed by, or in the manner provided in, the By-laws, but shall not
be less than three.
No holder of stock of this Corporation shall be entitled to any preemptive
right to subscribe for or purchase any stock or other securities of this
Corporation.
The Corporation shall have power, acting through its Board of Directors,
except that in cases where the action of the stockholders shall be required by
statute such action shall also be obtained, to do the following:
(a) The Board of Directors shall have power to make, alter, amend, and
repeal the By-laws of the Corporation subject to the power of the stockholders
to amend, alter or repeal any By-laws thus adopted by the Board of Directors;
(b) To guarantee the payment of the principal, interest or dividends on the
stocks, bonds, debentures or other securities issued by or the performance of
any other contract or obligation of any other person, corporation or partnership
whatsoever, so far as the same is not contrary to law, whenever in the judgment
of the Board of Directors or executive committee it shall be necessary, proper
or convenient for the business of the Corporation or in furtherance of its
interest so to do; and in connection with any such guaranty to mortgage, pledge
or convey in trust all or part of the Corporation's properties and assets as
security for the obligation thus incurred;
(c) The Board of Directors shall have power from time to time to appoint an
executive committee consisting of two or more of their number, which committee
shall for the time being, as may be provided in a resolution of the Board of
Directors, or in the By-laws of this Corporation, have or exercise any and all
of the powers of the Board of Directors in the management of the business and
affairs of this Corporation;
(d) The Board of Directors shall have power to determine from time to time
whether and to what extent and under what conditions and regulations the
accounts, books and records of this Corporation, other than as may be required
by the laws of Delaware, or any of them, shall be open to the inspection of the
stockholders; and no stockholder shall have any right to inspect any account or
book or document of this Corporation except as conferred by the Statutes of the
State of Delaware, unless and until authorized to do so by a resolution of the
directors or stockholders of this Corporation.
SEVENTH: A director of the Corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, as the same exists or hereafter may be amended, or (iv) for any transaction
from which the director derived an improper personal benefit. This Article shall
not eliminate or limit the liability of a director for any act or omission
occurring prior to the effective date of the Amendment adding this Article to
the Restated Certificate of Incorporation. Any repeal or amendment of this
Article by the stockholders of the corporation shall be prospective only, and
shall not adversely affect any limitations on the personal liability of a
director of the corporation existing at the time of such repeal or amendment. In
addition to the circumstances in which a director of the corporation is not
personally liable as set forth in the proceeding sentence, a director shall not
be liable to the fullest extent permitted by any Amendment to the Delaware
General Corporation law hereafter enacted that further limits the liability of a
director.
<PAGE>
EX-99.2
FORM OF SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement"), dated as of July 16, 1996,
is made and entered by and between NorAm Energy Corp., a Delaware corporation
(the "Company"), and ______________________________________________________(the
"Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company or one or
more of its Subsidiaries and has made and is expected to continue to make major
contributions to the short and long-term profitability, growth and financial
strength of the Company;
WHEREAS, the Company is contemplating a possible transaction which, if
consummated, would result in a Change in Control (as hereinafter defined);
WHEREAS, the Company wishes to ensure that its senior executives are
not practically disabled from discharging their duties in respect of such a
transaction; and
WHEREAS, the Company desires to provide additional inducement for the
Executive to continue to remain in the ongoing employ of the Company and assist
in the consummation of any such transaction.
NOW, THEREFORE, the Company and the Executive agree as follows:
<PAGE>
1. Certain Defined Terms. In addition to terms defined elsewhere
herein, the following terms have the following meanings when used in this
Agreement with initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a rate not
less than the Executive's annual fixed or base compensation as in effect
for Executive immediately prior to the occurrence of a Change in Control or
such higher rate as may be determined from time to time by the Company, the
Board or a committee thereof.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means that, prior to any termination pursuant to Section
4(b), the Executive committed:
(i) an intentional act of fraud, embezzlement or theft in
connection with his duties or in the course of his employment with the
Company or any Subsidiary;
(ii) intentional wrongful damage to property of the Company or
any Subsidiary; or
(iii) intentional wrongful disclosure of confidential or
proprietary information of the Company or any Subsidiary;
and any such act has been materially harmful to the Company. For purposes
of this Agreement, no act or failure to act on the part of the Executive
will be deemed to be "intentional" if it was due primarily to an error in
judgment or negligence, but will be deemed to be "intentional" only if done
or omitted to be done by the Executive not in good faith and without
reasonable belief that his action or omission was in the best interest of
the Company.
(d) "Change in Control" means the occurrence of one or more of the
following events:
(i) the Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than a majority of
the combined voting power of the then-outstanding Voting Stock of the
surviving corporation or person immediately after such transaction is
held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such transaction;
(ii) the Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and as a result of such sale or transfer less than a majority
of the combined voting power of the then-outstanding Voting Stock of
the acquiring corporation or person immediately after such sale or
transfer is held in the aggregate by the holders of Voting Stock of
the Company immediately prior to such sale or transfer; or
(iii) any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) becomes the
beneficial owner (as the term "beneficial owner" is defined under Rule
13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of securities representing more than 50% of the combined
voting power of the then-outstanding Voting Stock of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Employee Benefits" means the perquisites, benefits and service
credit for benefits as provided under any and all employee retirement
income and welfare benefit policies, plans, programs or arrangements in
which Executive is entitled to participate, including without limitation
any stock option, stock purchase, stock appreciation, savings, pension,
supplemental executive retirement, or other retirement income or welfare
benefit, deferred compensation, incentive compensation, group or other
life, health, medical/hospital or other insurance (whether funded by actual
insurance or self-insured by the Company), disability, salary continuation,
expense reimbursement and other employee benefit policies, plans, programs
or arrangements that may now exist or any equivalent successor policies,
plans, programs or arrangements that may be adopted hereafter by the
Company, providing perquisites, benefits and service credit for benefits at
least as great in the aggregate as are payable thereunder prior to a Change
in Control.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(h) "Incentive Pay" means an annual amount equal to not less than the
annual bonus that would have been paid for the year in which the Change in
Control occurred if the performance goals had been achieved at the
opportunity (i.e., maximum) level, pursuant to any bonus, incentive,
profit-sharing, performance, discretionary pay or similar agreement,
policy, plan, program or arrangement (whether or not funded) of the
Company, or any successor thereto providing benefits at least as great as
the benefits payable thereunder prior to a Change in Control.
(i) "Severance Period" means the period of time commencing on the date
of the first occurrence of a Change in Control and continuing until the
earlier of (i) the third anniversary of the occurrence of the Change in
Control or (ii) the Executive's death.
(j) "Subsidiary" means an entity in which the Company directly or
indirectly beneficially owns 50% or more of the outstanding Voting Stock.
(k) "Termination Date" means the date on which the Executive's
employment is terminated.
(l) "Voting Stock" means securities entitled to vote generally in the
election of directors.
2. Operation of Agreement. This Agreement will be effective and
binding immediately upon its execution. This Agreement will terminate
without further action if a Change in Control has not occurred on or before
January 8, 1997, unless a transaction that upon completion would result in
a Change in Control has been agreed to or is under active negotiation on
January 8, 1997, but has not been consummated by such date, in which event
this Agreement will not expire prior to the date such transaction has been
abandoned as determined by the Chief Executive Officer of the Company.
Otherwise, this Agreement will terminate at the end of the Severance
Period.
3. Acceleration of Incentive Benefits. On the date that the last
regulatory approval is obtained for a transaction which, if consummated,
would result in a Change in Control, (i) all outstanding stock options to
purchase stock of the Company that are then held by the Executive will
become immediately exercisable notwithstanding any provision contained in
any stock option agreement to the contrary, and (ii) all shares of
restricted stock previously issued to the Executive which have not been
forfeited by the terms of any restricted stock agreement, together with any
opportunity shares provided for in such agreement, will be delivered
immediately to the Executive free of all restrictions (other than
restrictions on transfer imposed by federal or state securities laws)
notwithstanding any provision contained in any restricted stock agreement
to the contrary.
4. Termination Following a Change in Control. (a) In the event of a
Change in Control, the Executive's employment may be terminated by the
Company during the Severance Period and the Executive will be entitled to
the benefits provided in Section 5 unless such termination results from the
occurrence of one or more of the following events:
(i) the Executive's death;
(ii) the Executive's permanent disability within the meaning of,
and actual receipt of disability benefits pursuant to, the long-term
disability plan in effect for, or applicable to, Executive immediately
prior to the Change in Control; or
(iii) Cause.
If, during the Severance Period, the Executive's employment is terminated
by the Company or any Subsidiary other than pursuant to Section 4(a)(i),
4(a)(ii) or 4(a)(iii), the Executive will be entitled to the benefits
provided in Section 5.
(b) In the event of the occurrence of a Change in Control, the
Executive may terminate employment with the Company and any Subsidiary
during the Severance Period with the right to benefits provided in Section
5 upon the occurrence of one or more of the following events (regardless of
whether any other reason for such termination exists or has occurred,
including without limitation other employment):
(i) the failure to elect or reelect or otherwise to maintain the
Executive in the office or the position, or a substantially equivalent
office or position, of or with the Company and/or a Subsidiary, as the
case may be, which the Executive held immediately prior to the Change
in Control;
(ii) a significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties attached to
the position with the Company and any Subsidiary which the Executive
held immediately prior to the Change in Control, which is not remedied
by the Company within 10 calendar days after receipt by the Company of
written notice from the Executive of such change;
(iii) a reduction in the aggregate of the Executive's Base Pay
and Incentive Pay received from the Company and any Subsidiary or the
termination or denial of the Executive's rights to Employee Benefits
or a reduction in the scope or value thereof, any of which is not
remedied by the Company within 10 calendar days after receipt by the
Company of written notice from the Executive of such reduction,
termination or denial, as the case may be;
(iv) a determination by the Executive (which determination will
be conclusive and binding upon the parties hereto provided it has been
made in good faith and in all events will be presumed to have been
made in good faith unless otherwise shown by the Company by clear and
convincing evidence) that a change in circumstances has occurred
following a Change in Control, including, without limitation, a change
in the scope of the business or other activities for which the
Executive was responsible immediately prior to the Change in Control,
which has rendered the Executive substantially unable to carry out,
has substantially hindered Executive's performance of, or has caused
Executive to suffer a substantial reduction in, any of the
authorities, powers, functions, responsibilities or duties attached to
the position held by the Executive immediately prior to the Change in
Control, which situation is not remedied within 10 calendar days after
written notice to the Company from the Executive of such
determination;
(v) the liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all
of its business and/or assets after a Change in Control has occurred,
unless the successor or successors (by liquidation, merger,
consolidation, reorganization, transfer or otherwise) to which all or
substantially all of its business and/or assets have been transferred
(directly or by operation of law) assumed all duties and obligations
of the Company under this Agreement pursuant to Section 11(a);
(vi) the relocation of the Company's principal executive offices,
or the relocation of the Executive's principal location of work, to
any location that is in excess of 25 miles from the location thereof
immediately prior to the Change in Control, or the requirement that
the Executive travel away from his office in the course of discharging
his responsibilities or duties hereunder at least 20% more (in terms
of aggregate days in any calendar year or in any calendar quarter when
annualized for purposes of comparison to any prior year) than was
required of Executive in any of the three full years immediately prior
to the Change in Control without, in either case, his prior written
consent; or
(vii) without limiting the generality or effect of the foregoing,
any material breach of this Agreement by the Company or any successor
thereto.
(c) A termination by the Company pursuant to Section 4(a) or by the
Executive pursuant to Section 4(b) will not affect any rights that the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits, which rights will
be governed by the terms thereof.
5. Severance Compensation. (a) If, following the occurrence of a
Change in Control, the Company terminates the Executive's employment during
the Severance Period (other than by reason of death, disability or Cause),
or if the Executive terminates his employment pursuant to Section 4(b), the
Company will pay to the Executive the amount set forth in Section 5(a)(i)
within five business days after the Termination Date and will provide to
the Executive the benefits set forth in Sections 5(a)(ii), 5(a)(iii) and
5(a)(iv):
(i) The Company will pay the Executive, in a single lump sum, an
amount equal to 2.99 times the sum of (A) Base Pay (at the highest
rate in effect for any period prior to the Termination Date) plus (B)
Incentive Pay (determined in accordance with the standards set forth
in Section 1(h)).
(ii) The Company will provide the Executive with outplacement
services by a firm selected by the Executive, at the expense of the
Company in an amount not less than $25,000, plus an additional amount
of up to $5,000 for travel and other expenses incurred by the
Executive in connections with his efforts to secure other employment.
(iii) For a period of 36 months following the Termination Date
(the "Continuation Period"), the Company will arrange to provide the
Executive with Employee Benefits that are welfare benefits (but not
stock option, stock purchase, stock appreciation or similar
compensatory benefits) substantially similar to those that the
Executive was receiving or entitled to receive immediately prior to
the Termination Date or, if greater, immediately prior to the
reduction, termination, or denial described in Section 4(b)(iii). For
purposes of determining the Executive's eligibility for and the amount
of benefits due and payable to the Executive under the Company's
retirement income, supplemental executive retirement and all other
benefit plans of the Company applicable to the Executive, his
dependents or his beneficiaries, including without limitation
eligibility for retiree medical benefits (as described in Section
5(a)(iv)) and for early retirement subsidies under retirement income
plans, (A) the Continuation Period will be considered service with the
Company for the purpose of determining service credits for such
benefit plan purposes, (B) the Executive's age on the last day of the
Continuation Period will be deemed to be the Executive's age on the
Termination Date, and (C) the lump sum severance payment set forth in
Section 5(a)(i) will be considered to be wages for benefit plan
purposes paid monthly during the Continuation Period.
(iv) The Company will provide the Executive with retiree welfare
benefits, including without limitation retiree medical benefits, that
are not less than the retiree welfare benefits the Executive would be
entitled to receive under the Company's welfare benefit plans in
effect on the Termination Date, or if greater, under such plans in
effect at any time during the period beginning immediately prior to
the occurrence of a Change in Control and ending on the Termination
Date, determined without regard to any subsequent reduction or
termination of such retiree welfare benefits by the Company.
(v) If and to the extent that any benefit described in Sections
5(a)(iii) and 5(a)(iv) is not or cannot be paid or provided under any
policy, plan, program or arrangement of the Company or any Subsidiary,
as the case may be, then the Company will itself pay or provide for
the payment to the Executive, his dependents and beneficiaries, of
such Employee Benefits. Employee Benefits that are welfare benefits
otherwise receivable by the Executive pursuant to Sections 5(a)(iii)
and 5(a)(iv) will be reduced to the extent comparable welfare benefits
are actually received by the Executive from another employer during
the Continuation Period, and any such benefits actually received by
the Executive will be reported by the Executive to the Company.
(b) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to
be made or provided hereunder on a timely basis, the Company will pay
interest on the amount or value thereof at an annualized rate of interest
equal to the so-called composite "prime rate" as quoted from time to time
during the relevant period in the Southwest Edition of The Wall Street
Journal. Such interest will be payable as it accrues on demand. Any change
in such prime rate will be effective on and as of the date of such change.
(c) Notwithstanding any provision of this Agreement to the contrary,
the parties' respective rights and obligations under this Section 5, under
Sections 6 and 8 and under Exhibit A will survive any termination or
expiration of this Agreement, or the termination of the Executive's
employment for any reason whatsoever, following a Change in Control.
6. Certain Additional Payments by the Company. (a) Anything in this
Agreement to the contrary notwithstanding, in the event that this Agreement
becomes operative and it is determined (as hereafter provided) that any
payment or distribution by the Company or any of its affiliates to or for
the benefit of the Executive, including without limitation the Income Tax
Payment described in Section 6(b), whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise
pursuant to or by reason of any other agreement, policy, plan, program or
arrangement, including without limitation any stock option, stock
appreciation right or similar right, or the lapse or termination of any
restriction on or the vesting or exercisability of any of the foregoing (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of
the Code (or any successor provision thereto) by reason of being considered
"contingent on a change in ownership or control" of the Company, within the
meaning of Section 280G of the Code (or any successor provision thereto) or
to any similar tax imposed by state or local law, or any interest or
penalties with respect to such tax (such tax or taxes, together with any
such interest and penalties, being hereafter collectively referred to as
the "Excise Tax"), then the Executive will be entitled to receive an
additional payment or payments (collectively, an "Excise Tax Payment"). The
Excise Tax Payment will be in an amount such that, after payment by the
Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including any Excise Tax imposed upon the Excise
Tax Payment, the Executive retains an amount of the Excise Tax Payment
equal to the Excise Tax imposed upon the Payment. Procedures for
determining the amount of the Excise Tax Payment and other matters related
to the Excise Tax Payment are set forth in Exhibit A attached to and made a
part of this Agreement.
(a) If the Company is obligated to provide the Executive with medical
benefits pursuant to Section 5(a)(iii) or Section 5(a)(iv), and the amount
of such benefits or the value of such benefit coverage (including without
limitation any insurance premiums paid by the Company to provide such
benefits) is subject to any income, employment or similar tax imposed by
federal, state or local law, or any interest or penalties with respect to
such tax (such tax or taxes, together with any such interest and penalties,
being hereafter collectively referred to as the "Income Tax") because such
benefits cannot be provided under a nondiscriminatory health plan described
in Section 105 of the Code or for any other reason, the Company will pay to
the Executive an additional payment or payments (collectively, an "Income
Tax Payment"). The Income Tax Payment will be in an amount such that, after
payment by the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), the Executive retains an amount of the
Income Tax Payment equal to the Income Tax imposed with respect to such
medical benefits or such medical benefit coverage. Procedures for
determining the amount of the Income Tax Payment and other matters related
to the Income Tax Payment are set forth in Exhibit A attached to and made a
part of this Agreement.
7. No Mitigation Obligation. The Company hereby acknowledges that it
may be difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date. Accordingly, the
payment of the severance compensation by the Company to the Executive in
accordance with the terms of this Agreement is hereby acknowledged by the
Company to be reasonable, and the Executive will not be required to
mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise, nor will any profits, income,
earnings or other benefits from any source whatsoever create any
mitigation, offset, reduction or any other obligation on the part of the
Executive hereunder or otherwise, except as expressly provided in the last
sentence of Section 5(a)(v).
8. Legal Fees and Expenses. (a) It is the intent of the Company that
the Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to
be extended to the Executive hereunder. Accordingly, if it should appear to
the Executive that the Company has failed to comply with any of its
obligations under this Agreement or in the event that the Company or any
other person takes or threatens to take any action to declare this
Agreement void or unenforceable, or institutes any litigation or other
action or proceeding designed to deny, or to recover from, the Executive
the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to
time to retain counsel of Executive's choice, at the expense of the Company
as hereafter provided, to advise and represent the Executive in connection
with any such interpretation, enforcement or defense, including without
limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any
jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company irrevocably
consents to the Executive's entering into an attorney-client relationship
with such counsel, and in that connection the Company and the Executive
agree that a confidential relationship will exist between the Executive and
such counsel. Without respect to whether the Executive prevails, in whole
or in part, in connection with any of the foregoing, the Company will pay
and be solely financially responsible for any and all attorneys' and
related fees and expenses incurred by the Executive in connection with any
of the foregoing.
(a) Without limiting the obligations of the Company pursuant to
Section 8(a), in the event a Change in Control occurs, the performance of
the Company's obligations under this Section 8 will be secured by amounts
deposited or to be deposited in trust pursuant to certain trust agreements
to which the Company will be a party providing that the fees and expenses
of counsel selected from time to time by the Executive pursuant to Section
8(a) will be paid, or reimbursed to the Executive if paid by the Executive,
either in accordance with the terms of such trust agreements, or, if not so
provided, on a regular, periodic basis upon presentation by the Executive
to the trustee of a statement or statements prepared by such counsel in
accordance with its customary practices. Any failure by the Company to
satisfy any of its obligations under this Section 8(b) will not limit the
rights of the Executive hereunder. Subject to the foregoing, the Executive
will have the status of a general unsecured creditor of the Company and
will have no right to, or security interest in, any assets of the Company
or any Subsidiary.
9. Employment Rights. Nothing expressed or implied in this Agreement
will create any right or duty on the part of the Company or the Executive
to have the Executive remain in the employment of the Company or any
Subsidiary prior to or following a Change in Control. Any termination of
employment of the Executive or the removal of the Executive from the office
or position in the Company or any Subsidiary following the approval by the
stockholders of the Company of a transaction that ultimately results in a
Change in Control will be deemed to be a termination or removal of the
Executive after a Change in Control for purposes of this Agreement.
10. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government
regulation or ruling.
11. Successors and Binding Agreement. (a) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to
the Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required to
perform if no such succession had taken place. This Agreement will be
binding upon and inure to the benefit of the Company and any successor to
the Company, including without limitation any persons acquiring directly or
indirectly all or substantially all of the business or assets of the
Company whether by purchase, merger, consolidation, reorganization or
otherwise (and such successor will thereafter be deemed the "Company" for
the purposes of this Agreement), but will not otherwise be assignable,
transferable or delegable by the Company.
(a) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(b) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 11(a) and 11(b). Without limiting the generality or
effect of the foregoing, the Executive's right to receive payments
hereunder will not be assignable, transferable or delegable, whether by
pledge, creation of a security interest, or otherwise, other than by a
transfer by Executive's will or by the laws of descent and distribution
and, in the event of any attempted assignment or transfer contrary to this
Section 11(c), the Company will have no liability to pay any amount so
attempted to be assigned, transferred or delegated.
12. Notices. For all purposes of this Agreement, all communications,
including without limitation notices, consents, requests or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed),
or five business days after having been mailed by United States registered
or certified mail, return receipt requested, postage prepaid, or three
business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS, or Purolator, addressed to
the Company (to the attention of the Secretary of the Company) at its
principal executive office and to the Executive at his principal residence,
or to such other address as any party may have furnished to the other in
writing and in accordance herewith, except that notices of changes of
address will be effective only upon receipt.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in
accordance with the substantive laws of the State of Texas, including the
Texas statute of limitations, but without giving effect to the principles
of conflict of laws of such State.
14. Validity. If any provision of this Agreement or the application of
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not
be affected, and the provision so held to be invalid, unenforceable or
otherwise illegal will be reformed to the extent (and only to the extent)
necessary to make it enforceable, valid or legal.
15. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and the Company. No waiver by
either party hereto at any time of any breach by the other party hereto or
compliance with any condition or provision of this Agreement to be
performed by such other party will be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
expressed or implied with respect to the subject matter hereof have been
made by either party which are not set forth expressly in this Agreement.
References to Sections are to references to Sections of this Agreement.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of
which together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
NORAM ENERGY CORP.
By_______________________________
Name:
Title:
EXECUTIVE
__________________________________
<PAGE>
EXHIBIT A
PROCEDURES RELATING TO TAX PAYMENTS
(a) Subject to the provisions of paragraph (e), all determinations
required to be made under Section 6 of the Agreement, including whether an
Excise Tax or an Income Tax (collectively, a "Tax") is payable by the
Executive and the amount of the Tax and whether an Excise Tax Payment or an
Income Tax Payment (collectively, a "Tax Payment") is required to be paid
by the Company to the Executive and the amount of the Tax Payment, if any,
will be made by a nationally recognized accounting firm (the "Accounting
Firm") selected by the Executive in his sole discretion. The Executive will
direct the Accounting Firm to submit its determination and detailed
supporting calculations to both the Company and the Executive within 30
calendar days after the Termination Date, if applicable, and any such other
time or times as may be requested by the Company or the Executive. If the
Accounting Firm determines that any Tax is payable by the Executive, the
Company will pay the required Tax Payment to the Executive within five
business days after receipt of such determination and calculations with
respect to such Tax. If the Accounting Firm determines that no Tax is
payable by the Executive, it will, at the same time as it makes such
determination, furnish the Company and the Executive an opinion that the
Executive has substantial authority not to report any Tax on his federal,
state or local income or other tax return. As a result of the uncertainty
in the application of Section 4999 and other applicable provisions of the
Code (or any successor provisions thereto) and the possibility of similar
uncertainty regarding applicable state or local tax law at the time of any
determination by the Accounting Firm hereunder, it is possible that Tax
Payments which will not have been made by the Company should have been made
(an "Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts or fails to pursue its
remedies pursuant to paragraph (e) and the Executive thereafter is required
to make a payment of any Tax, the Executive will direct the Accounting Firm
to determine the amount of the Underpayment that has occurred and to submit
its determination and detailed supporting calculations to both the Company
and the Executive as promptly as possible. Any such Underpayment will be
promptly paid by the Company to, or for the benefit of, the Executive
within five business days after receipt of such determination and
calculations.
(b) The Company and the Executive will each provide the Accounting
Firm access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the
Accounting Firm in connection with the preparation and issuance of the
determinations and calculations contemplated by paragraph (a). Any
determination by the Accounting Firm as to the amount of the Tax Payment
will be binding upon the Company and the Executive.
(c) The federal, state and local income or other tax returns filed by
the Executive will be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Tax payable by the
Executive. The Executive will make proper payment of the amount of any Tax,
and at the request of the Company, provide to the Company true and correct
copies (with any amendments) of his federal income tax return as filed with
the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Tax Payment should be reduced, the
Executive will within five business days pay to the Company the amount of
such reduction.
(d) The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by
paragraph (a) will be borne by the Company. If such fees and expenses are
initially paid by the Executive, the Company will reimburse the Executive
the full amount of such fees and expenses within five business days after
receipt from the Executive of a statement therefor and reasonable evidence
of his payment thereof.
(e) The Executive will notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if
successful, would require the payment by the Company of a Tax Payment. Such
notification will be given as promptly as practicable but no later than 10
business days after the Executive actually receives notice of such claim
and the Executive will further apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid (in each
case, to the extent known by the Executive). The Executive will not pay
such claim prior to the earlier of (i) the expiration of the
30-calendar-day period following the date on which he gives such notice to
the Company and (ii) the date that any payment of amount with respect to
such claim is due. If the Company notifies the Executive in writing prior
to the expiration of such period that it desires to contest such claim, the
Executive will:
(i) provide the Company with any written records or documents in
his possession relating to such claim reasonably requested by the
Company;
(ii) take such action in connection with contesting such claim as
the Company will reasonably request in writing from time to time,
including without limitation accepting legal representation with
respect to such claim by an attorney competent in respect of the
subject matter and reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company will bear and pay directly all costs
and expenses (including interest and penalties) incurred in connection with
such contest and will indemnify and hold harmless the Executive, on an
after-tax basis, for and against any tax, including interest and penalties
with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this paragraph (e), the Company will control all proceedings taken in
connection with the contest of any claim contemplated by this paragraph (e)
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim (provided, however, that the Executive may
participate therein at his own cost and expense) and may, at its option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company determines; provided, however, that if the Company
directs the Executive to pay the tax claimed and sue for a refund, the
Company will advance the amount of such payment to the Executive on an
interest-free basis and will indemnify and hold the Executive harmless, on
an after-tax basis, from any tax, including interest or penalties with
respect thereto, imposed with respect to such advance; and provided
further, however, that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to
which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested
claim will be limited to issues with respect to which a Tax Payment would
be payable hereunder and the Executive will be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(f) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to paragraph (e), the Executive receives any refund
with respect to such claim, the Executive will (subject to the Company's
complying with the requirements of paragraph (e)) promptly pay to the
Company the amount of such refund (together with any interest paid or
credited thereon after any taxes applicable thereto). If, after the receipt
by the Executive of an amount advanced by the Company pursuant to paragraph
(e), a determination is made that the Executive will not be entitled to any
refund with respect to such claim and the Company does not notify the
Executive in writing of its intent to contest such denial or refund prior
to the expiration of 30 calendar days after such determination, then such
advance will be forgiven and will not be required to be repaid and the
amount of any such advance will offset, to the extent thereof, the amount
of Tax Payment required to be paid by the Company to the Executive pursuant
to Section 6 of the Agreement.
