FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 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 May 10, 1996 - 125,368,779
Exhibit Index Appears on Page 27<PAGE>
INDEX
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1996 and 1995
and December 31, 1995 4
Consolidated Statement of Income - Three Months Ended
March 31, 1996 and 1995 5
Statement of Consolidated Cash Flows - Three Months Ended
March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
2<PAGE>
Part I. Financial Information
Item 1. Financial Statements
The consolidated financial statements of the Company included
herein have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and notes normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make
the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Report on
Form 10-K for the year ended December 31, 1995.
3<PAGE>
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
ASSETS March 31 December 31 March 31
1996 1995 1995
PROPERTY, PLANT AND EQUIPMENT $ 3,998,927 $ 3,969,539 $ 3,857,176
Less: Accumulated depreciation and 1,595,742 1,561,764 1,484,687
amortization
2,403,185 2,407,775 2,372,489
INVESTMENTS AND OTHER ASSETS (Note B) 695,163 683,909 686,316
CURRENT ASSETS
Cash and cash equivalents 22,774 13,311 18,428
Accounts and notes receivable, 467,701 335,779 175,911
principally customer
Deferred income taxes 14,084 13,601 14,318
Inventories (Note B) 38,305 86,982 59,868
Deferred gas cost (16,866) 13,019 (12,533)
Gas purchased in advance of 6,200 23,440 23,415
delivery
Other current assets 9,749 25,496 19,734
541,947 511,628 299,141
DEFERRED CHARGES 47,461 62,671 77,179
TOTAL ASSETS $ 3,687,756 $ 3,665,983 $ 3,435,125
LIABILITIES AND STOCKHOLDERS'
EQUITY
Stockholders' equity
Preferred stock $ 130,000 $ 130,000 $ 130,000
Common stock 78,281 78,002 77,157
Paid-in capital 884,152 880,885 874,086
Accumulated deficit (286,683) (336,940) (318,663)
Unrealized gain on investment, 25,844 15,316 5,646
net of tax
Total Stockholders' Equity 831,594 767,263 768,226
Long-term debt, less current 1,467,524 1,474,924 1,323,674
maturities
CURRENT LIABILITIES
Current maturities of long-term 48,750 118,750 221,000
debt
Notes payable to banks - 10,000 13,000
Other notes payable - - 6,800
4<PAGE>
Accounts payable, principally 482,588 472,374 235,551
trade
Income taxes payable 45,148 5,337 45,600
Interest payable 30,876 38,730 37,658
General taxes 48,149 48,320 43,813
Customers' deposits 35,611 35,651 35,769
Other current liabilities 91,514 96,645 83,555
782,636 825,807 722,746
OTHER LIABILITIES AND DEFERRED
CREDITS
Accumulated deferred income taxes 316,479 303,445 265,580
Other deferred credits and 289,523 294,544 354,899
noncurrent liabilities
606,002 597,989 620,479
TOTAL LIABILITIES AND STOCKHOLDERS' $ 3,687,756 $ 3,665,983 $ 3,435,125
EQUITY
The Notes to Consolidated Financial Statements are an integral part of
this statement.
5<PAGE>
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in thousands of dollars except per share amounts)
(unaudited)
Three Months
Ended March 31
1996 1995
Operating Revenues $1,417,663 $ 888,148
Operating Expenses
Cost of natural gas purchased, net 1,027,542 541,176
Operating, maintenance, cost of 150,849 144,321
sales & other
Depreciation and amortization 35,710 38,596
(Note I)
Taxes other than income taxes 34,636 29,336
Early retirement and severance 22,344 -
(Note C)
1,271,081 753,429
Operating Income 146,582 134,719
Other Deductions
Interest expense, net 36,170 39,762
Other, net 3,427 2,877
39,597 42,639
Income Before Income Taxes 106,985 92,080
Provision for Income Taxes(Benefit)
Federal
Current 33,290 31,893
Deferred 4,449 500
Investment Tax Credit (159) (159)
State
Current 6,116 6,254
Deferred 2,092 1,596
45,788 40,084
Income Before Extraordinary Item 61,197 51,996
Extraordinary loss on early
retirement of debt, less taxes (278) (52)
(Note D)
Net Income 60,919 51,944
Preferred dividend requirement 1,950 1,950
Balance Available to Common Stock $ 58,969 $ 49,994
6<PAGE>
Per Share Data:
Before extraordinary item $ 0.47 $ 0.41
Extraordinary loss, less taxes 0.00 0.00
Earnings per Common Share $ 0.47 $ 0.41
Average Common Shares
Outstanding (in thousands) 124,991 122,960
Cash Dividends per Common Share $ 0.07 $ 0.07
The Notes to Consolidated Financial Statements are an integral part of this
statement.
7<PAGE>
NorAm Energy Corp. and Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase(Decrease) in Cash and Cash Equivalents (1)
(in thousands of dollars)
(unaudited)
Three Months
Ended March 31
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 60,919 $ 51,944
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 35,710 38,596
Early retirement and severance, 12,941 -
less cash costs
Deferred income taxes 6,541 2,096
Extraordinary loss, less taxes 278 52
(Note D)
Other 885 803
Changes in certain assets and
liabilities, net of noncash
transactions:
Accounts and notes receivable, (131,922) 39,935
principally customer
Inventories 48,677 52,226
Deferred gas costs 29,885 5,721
Other current assets 26,614 16,423
Accounts payable, principally 8,246 (52,081)
trade
Income taxes payable 39,811 40,910
Interest payable (7,854) (4,522)
General taxes (171) (1,904)
Customers' deposits (40) 268
Other current liabilities (11,631) (7,939)
Recoveries under gas contract 7,200 15,200
disputes
Net cash provided by operating 126,089 197,728
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (25,200) (30,600)
Sale of Itron stock - 1,441
Other, net 2,184 (11,300)
Net cash used in investing (23,016) (40,459)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of (77,678) (27,552)
long-term debt
Increase (decrease) in overdrafts 1,968 (23,309)
Other interim debt repayments (10,000) (97,000)
8<PAGE>
Issuance of common stock under Direct 2,761 1,958
Stock Purchase Plan
Common and preferred stock dividends (10,661) (10,570)
Net cash used in financing (93,610) (156,473)
activities
Net increase in cash and cash 9,463 796
equivalents
Cash and cash equivalents - 13,311 17,632
beginning of period
Cash and cash equivalents - $ 22,774 $ 18,428
end of period
(1) All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash equivalents.
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash interest payments, net of $ 43,891 $ 42,684
capitalized interest
Net cash income tax payments $ 94 $ (1,811)
(refunds)
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 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.
B. Following are components of certain line items from the
accompanying consolidated financial statements:
March 31 December 31 March 31
1996 1995 1995
Investments and other assets
(millions of dollars)
Goodwill, net $ 477.6 $ 481.1 $ 491.8
Prepaid pension asset 58.0 58.0 56.7
Investment in Itron, Inc. (1) 67.2 50.7 35.3
Regulatory asset for 45.7 48.5 42.5
environmental costs
Gas purchased in advance of 34.7 24.3 29.3
delivery
Cash surrender value of life 0.1 0.1 8.5
insurance
Other 11.9 21.2 22.2
$ 695.2 $ 683.9 $ 686.3
(1) At April 30 1996, the Company's investment in Itron, Inc. had
increased to $88.3 million and its unrealized gain to $39.2
million (net of tax of $22.4 million). As discussed in the
Company's 1995 Report on Form 10-K, the market for this
security has limited liquidity.
March 31 December 31 March 31
Inventories 1996 1995 1995
(millions of dollars)
Gas in underground $ 8.2 $ 53.2 $ 22.5
storage (1)
Materials and supplies 29.7 33.4 37.1
Other 0.4 0.4 0.3
$ 38.3 $ 87.0 $ 59.9
(1) The change in "Gas in underground storage" from December
31, 1995 to March 31, 1996 is principally a normal seasonal
fluctuation and is reflective of the cold weather during the
first quarter of 1996.
C. 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
10<PAGE>
NorAm Energy Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
25 positions. Collectively, these programs resulted in a
nonrecurring 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".
D. During March 1996, the Company reacquired $7.4 million principal
amount of its 9.875% debentures due 2018. The premium associated
with this reacquisition is reported in the accompanying Statement
of Consolidated Income for 1996 as "Extraordinary loss on early
retirement of debt, less taxes".
E. In March 1996, the Company's "shelf" registration statement
("the Shelf") filed in late 1995, became effective, allowing the
Company to issue a wide variety of securities (including both debt
and equity) for an approximately two-year period beginning with
the effective date. In May 1996, the Company announced that,
pursuant to the Shelf, it intends to offer for sale to the public
in underwritten transactions (1) approximately $100 million of
common stock and (2) approximately $150 million of convertible
trust originated preferred securities ("TOPS"). The TOPS, if
issued, will (1) pay a dividend which, under current federal tax
law, is tax deductible in the Company's federal income tax return
and which may be suspended for a period of up to five years at any
time if dividends are not paid on common or preferred stock, (2)
be convertible into the Company's common stock at the option of
the holder, (3) after an initial noncallable period, be callable
by the Company under certain conditions and (4) be redeemable in
30 years and, at the option of the Company, may be extended for an
additional period. A more complete description of this security
will be contained in the offering documents.
If these transactions are consummated, the Company plans to use
the proceeds (1) to exercise its right to redeem all of the
outstanding $109.1 million of its 9.875% debentures due 2018 at a
redemption price of 105.93% of face value, (2) to retire all or a
portion of the Company's bank term loan and (3) for general
corporate purposes. In addition, concurrently with and as an
integral part of this financial restructuring, the Company plans
to exercise its right to exchange all of the outstanding $130
million of its $3.00 Convertible Exchangeable Preferred Stock,
Series A at $50 per share for a like amount of the Company's 6%
Convertible Subordinated Debentures due 2012 (see the Company's
1995 Report on Form 10-K for a more complete description of these
securities).
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
11<PAGE>
NorAm Energy Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
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 and (3) whether
construction will ultimately be undertaken and completed.
G. Earnings per common share is computed using the weighted average
number of shares of common stock outstanding during each period
and is based on earnings after deducting preferred stock dividend
requirements.
H. As further discussed in the Company's 1995 Report on Form 10-K,
under an August 1995 agreement ("the Agreement"), the Company
sells an undivided interest in a pool of accounts receivable with
limited recourse. Total receivables sold under the Agreement but
not yet collected were approximately $193.3 million, $235.0
million and $167.2 million at March 31, 1996, December 31, 1995
and March 31, 1995, respectively, which amounts have been deducted
from "Accounts and notes receivable, principally customer" in
the accompanying Consolidated Balance Sheet and, at March 31,1996,
approximately $25.9 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 first-quarter
1996 depreciation expense by approximately $2.7 million
(approximately $1.6 million or $0.013/share after tax) from the
amount which would have been recorded if the first-quarter 1995
depreciation rates 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
12<PAGE>
NorAm Energy Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
jurisdictions, set up regulatory assets in anticipation of
recovery through the ratemaking process.
On October 24, 1994, the United States Environmental Protection
Agency advised MRT that it had been named a potentially
responsible party under federal law with respect to a landfill
site in West Memphis, Arkansas, see Note K.
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.
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. 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.
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.
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.
13<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.
Recent Developments
Regulatory Proceedings
There have been recent developments with respect to regulatory
proceedings, see "Regulatory Matters" following.
Expression of Interest in Chihuahua and Environs
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) whether construction will ultimately be
undertaken and completed.
14<PAGE>
Proposed Public Offerings
In May 1996, the Company announced that, pursuant to its "shelf"
registration statement which became effective in March 1996 (see "Net
Cash Flows from Financing Activities" elsewhere herein), it intends to
offer for sale to the public in underwritten transactions (1)
approximately $100 million of common stock and (2) approximately $150
million of convertible trust originated preferred securities
("TOPS"). The TOPS, if issued, will (1) pay a dividend which, under
current federal tax law, is tax deductible in the Company's federal
income tax return and which may be suspended for a period of up to five
years at any time if dividends are not paid on common or preferred
stock, (2) be convertible into the Company's common stock at the option
of the holder, (3) after an initial noncallable period, be callable by
the Company and (4) be redeemable in 30 years and, at the option of the
Company, may be extended for an additional period. A more complete
description of this security will be contained in the offering
documents.
If these transactions are consummated, the Company plans to use
the proceeds (1) to exercise its right to redeem all of the outstanding
$109.1 million of its 9.875% debentures due 2018 at a redemption price
of 105.93% of face value, (2) to retire all or a portion of the
Company's bank term loan and (3) for general corporate purposes. In
addition, concurrently with and as an integral part of this financial
restructuring, the Company plans to exercise its right to exchange all
of the outstanding $130 million of its $3.00 Convertible Exchangeable
Preferred Stock, Series A at $50 per share for a like amount of the
Company's 6% Convertible Subordinated Debentures due 2012 (see the
Company's 1995 Report on Form 10-K for a more complete description of
these securities).
15<PAGE>
Dividend Declaration
On May 14, 1996, the Company's Board of Directors declared
dividends of $0.07 per share on common stock and $0.75 per share on
Preferred Stock, Series A. The common dividend will be payable June 14
and the preferred dividend will be payable June 17, in each case
payable to owners of record on May 24, 1996. The Company has announced
that it will exercise its right to exchange the Preferred Stock, Series
A for its convertible subordinated debentures, see "Proposed Public
Offerings" preceding.
Regulatory Matters
In April 1996, the Federal Energy Regulatory Commission ("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.
On April 1, 1996, Mississippi River Transmission Corporation
("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.
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.
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
16<PAGE>
10-K, however, the Company's regulated businesses have obtained rate
design changes which have lessened the seasonality of the Company's
results of operations and further such changes are anticipated. In
addition to the demand for and price of natural gas, the Company's
results of operations are significantly affected by regulatory actions
(see the discussion of regulatory matters in the Company's 1995 Report
on Form 10-K and "Regulatory Matters" elsewhere herein), 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:
(1) COMPARISON OF THE FIRST QUARTER OF 1996 TO THE FIRST QUARTER OF
1995
Quarter Ended
March 31 Increase(Decrease)
1996 1995 $ %
Operating Income(Loss) (millions of dollars)
Natural Gas Distribution (1) $ 122.4 $ 92.7 $ 29.7 32.0
Interstate Pipelines (1),(2) 30.8 31.0 (0.2) (0.6)
Wholesale Energy Marketing 9.2 3.8 5.4 142.1
Natural Gas Gathering (2) 2.7 1.8 0.9 50.0
Retail Energy Marketing 9.1 6.1 3.0 49.2
Corporate and Other (3) (5.3) (0.7) (4.6) N/M (4)
168.9 134.7 34.2 25.4
Early Retirement and (22.3) - (22.3) N/A
Severance (5)
Consolidated $ 146.6 $ 134.7 $ 11.9 8.8
(1) Before expenses for early retirement and severance, see (5)
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 of goodwill amortization in
each quarter presented.
(4) Indicates that the item is not meaningful.
(5) During the first quarter of 1996, the Company recorded
nonrecurring 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.
17<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 nonrecurring
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.
19<PAGE>
Quarter Ended
March 31 Increase(Decrease)
DISTRIBUTION 1996 1995 $ %
FINANCIAL RESULTS (millions of dollars)
Natural gas sales $ 802.5 $ 618.9 $ 183.6 29.7
Transportation revenue 6.5 5.9 0.6 10.2
Other revenue 7.2 6.8 0.4 5.9
Total operating revenues 816.2 631.6 184.6 29.2
Purchased gas cost
Unaffiliated 392.0 285.9 106.1 37.1
Affiliated 149.3 111.8 37.5 33.5
Operations and maintenance 99.7 91.8 7.9 8.6
Depreciation and 23.5 22.4 1.1 4.9
amortization
Other operating expenses 29.3 27.0 2.3 8.5
122.4 92.7 29.7 32.0
Early retirement and 5.8 - 5.8 N/A
severance
Operating income $ 116.6 $ 92.7 $ 23.9 25.8
DISTRIBUTION
OPERATING STATISTICS (billions of cubic feet)
Residential sales 95.7 80.4 15.3 19.0
Commercial sales 54.2 47.2 7.0 14.8
Industrial sales 14.6 13.2 1.4 10.6
Transportation 13.3 14.5 (1.2) (8.3)
Total throughput 177.8 155.3 22.5 14.5
DEGREE DAYS Normal 1996 1995
Arkla 1,713 1,745 1,465
Entex 836 992 761
Minnegasco 3,904 4,276 3,620
Distribution operating results which, due to the seasonal nature
of the residential and commercial demand for natural gas are routinely
positive in the first quarter, improved from operating income of $92.7
million in the first quarter of 1995 to $122.4 million (before the 1996
charge for early retirement and severance as discussed preceding) in
the first quarter of 1996, an increase of $29.7 million (32.0%). This
20<PAGE>
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 quarter presented,
increased from $618.9 million in the first quarter of 1995 to $802.5
million in the first quarter of 1996, an increase of $183.6 million
(29.7%). This increase, approximately $104.2 million (56.8%) of which
is attributable to increased volume and approximately $79.4 million
(43.2%) of which is attributable to an increase in the average sales
price, is principally due to (1) colder 1996 weather; 7,013 total
degree days in the first quarter of 1996 vs. 5,846 total degree days in
the first quarter of 1995, an increase of 1,167 degree days (20.0%),
which was largely responsible for increases of 15.3 Bcf (19.0%) and 7.0
Bcf (14.8%) in residential and commercial sales volumes, respectively,
(2) rate increases obtained in certain jurisdictions, see "Regulatory
Proceedings" 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.
Total purchased gas cost increased from $397.7 million in the
first quarter of 1995 to $541.3 million in the first quarter of 1996,
an increase of $143.6 million (36.1%), approximately $76.7 million
(53.4%) of which is attributable to an increase in the average cost of
purchased gas and approximately $66.9 million (46.6%) of which is
attributable to increased volume. The increased volume was principally
due to the colder weather and related increased residential and
commercial sales volumes as discussed preceding, while the increase in
the weighted average cost of gas from approximately $2.82 per Mcf in
the first quarter of 1995 to approximately $3.29 per Mcf in the first
quarter of 1996, an increase of approximately $0.47 per Mcf (16.7%),
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 $221.2 million in the first quarter
of 1995 to $261.2 million in the first quarter of 1996, an increase of
$40.0 million (18.1%). This increase was principally due to (1) the
largely weather-related 16.8% increase in total sales volume
representing $37.2 million (93.0%) of the increase and (2) a 1.1%
increase in the average sales margin, representing $2.8 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 $141.2
million in the first quarter of 1995 to $152.5 million in the first
quarter of 1996, an increase of $11.3 million (8.0%), principally due
to (1) increased environmental costs (which, as discussed in the
Company's 1995 Report on Form 10-K and in "Environmental" under
"Contingencies" 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.
21<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 nonrecurring 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.
22<PAGE>
Quarter Ended
March 31 Increase(Decrease)
INTERSTATE PIPELINES 1996 1995 $ %
FINANCIAL RESULTS (millions of dollars)
Natural gas sales
Sales to Distribution $ 27.0 $ 18.0 $ 9.0 50.0
Sales for resale and 5.7 6.2 (0.5) (8.1)
other
Total gas sales 32.7 24.2 8.5 35.1
revenue
Transportation revenue
Distribution 25.2 22.8 2.4 10.5
Unaffiliated 39.9 37.7 2.2 5.8
Total transportation 65.1 60.5 4.6 7.6
revenue
Total operating 97.8 84.7 13.1 15.5
revenues
Purchased gas cost 27.4 16.8 10.6 63.1
Operations and 14.9 13.1 1.8 13.7
maintenance expense
Depreciation and 7.6 9.3 (1.7) (18.3)
amortization
General, administrative 17.1 14.5 2.6 17.9
and other
30.8 31.0 (0.2) (0.6)
Early retirement and 16.5 - 16.5 N/A
severance
Operating income $ 14.3 $ 31.0 $ (16.7) (53.9)
INTERSTATE PIPELINES
OPERATING STATISTICS (million MMBtu)
Natural gas sales
Sales to Distribution 9.7 7.0 2.7 38.6
Sales for resale and 2.8 5.9 (3.1) (52.5)
other
Total sales 12.5 12.9 (0.4) (3.1)
Transportation
Distribution 48.7 41.5 7.2 17.3
Other 255.1 226.9 28.2 12.4
Total transportation 303.8 268.4 35.4 13.2
Elimination (1) (11.8) (12.3) 0.5 4.1
Total throughput 304.5 269.0 35.5 13.2
23<PAGE>
(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 60.7 million
MMBtu and 51.6 million MMBtu in the three months ended March 31,
1996 and 1995, respectively, which were transported on both the
NGT and MRT systems.
Interstate Pipeline operating income, before the charge for early
retirement and severance as discussed preceding, decreased by $0.2
million (0.6%) from the first quarter of 1995 to the first quarter of
1996. This decrease reflected both increased operating revenues,
increased operating expenses and certain nonrecurring adjustments as
discussed following.
"Total gas sales revenue" increased from $24.2 million in the
first quarter of 1995 to $32.7 million in the first quarter of 1996, an
increase of $8.5 million (35.1%). This total improvement was composed
of a $9.3 million increase attributable to a higher 1996 average sales
price, partially offset by a $0.8 million decrease attributable to
reduced 1996 sales volume, each as discussed following. "Sales to
Distribution" for the first quarter of 1996 increased by $9.0 million
(50.0%) over the corresponding quarter of 1995, principally due to (1)
a 2.7 million MMBtu (38.6%) increase in sales volume largely
attributable to increased Distribution demand resulting from relatively
colder first-quarter 1996 weather (see "Natural Gas Distribution"
elsewhere herein) and (2) increased 1996 natural gas prices which
affect the total sales rate as discussed following. "Sales for resale
and other" decreased by only $0.5 million (8.1%) despite a
corresponding 3.1 million MMBtu (52.5%) decrease in sales volumes, as
the higher 1996 sales rate served to largely offset the negative volume
variance. The higher 1996 average sales rate was principally due to
increased first-quarter 1996 gas prices, which increased by
approximately $0.56 per MMBtu over first-quarter 1995. These higher
gas prices, in general, increase the commodity component of the overall
sales price, thus increasing total revenues without necessarily
increasing total margins.
"Total transportation revenue" increased by $4.6 million (7.6%)
from the first quarter of 1995 to the first quarter of 1996, with
transportation for Distribution, largely due to the colder first-
quarter 1996 weather, representing approximately 52% of the variance.
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" in the Company's 1995 Report
on Form 10-K) and, to a lesser extent, the 13.2% increase in
transported volumes. The increase in transported volumes has 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
24<PAGE>
directly with the volume actually transported. During the first
quarter of 1996, Pipeline continued to utilize the Company's risk
management program to mitigate the market risk, associated with certain
of its transportation agreements which contain market-sensitive pricing
provisions, arising from movement in certain basin differentials, see
"Regulatory Matters" and "Wholesale Energy Marketing" elsewhere
herein, and the Company's 1995 Report on Form 10-K.
"Purchased gas cost" increased from $16.8 million in the first
quarter of 1995 to $27.4 million in the first quarter of 1996, an
increase of $10.6 million (63.1%). This increase was composed of an
$11.1 million increase attributable to a higher 1996 average cost of
purchased gas, partially offset by a decrease of $0.5 million
attributable to the reduction in total sales volume. The increase of
$0.89 per MMBtu (68.3%) in the average cost of purchased gas during
1996 was principally due to (1) the increased first-quarter 1996 market
price of gas as discussed preceding and (2) the inclusion, in first-
quarter 1995 results, of favorable adjustments totaling approximately
$5.0 million to purchased gas cost related to (1) a fixed-price sales
commitment and (2) the resolution of certain take-or-pay-related
issues.
The gross margin on sales ("Total gas sales revenue" minus
"Purchased gas cost"), after adjustment for the non-recurring 1995
adjustment to purchased gas cost as discussed preceding, increased from
$2.4 million in the first quarter of 1995 to $5.3 million in the first
quarter of 1996. This improvement of $2.9 million was composed of a
$3.0 million increase attributable to a higher 1996 average sales
margin, partially offset by a decrease of $0.1 million attributable to
the reduced 1996 sales volumes.
"Operations and maintenance expense" increased from $13.1
million in the first quarter of 1995 to $14.9 million in the
first quarter of 1996, an increase of $1.8 million
(13.7%), principally due to (1) reductions in labor costs charged to
capital projects due to reduced 1996 capital spending and (2) increased
1996 expense for uncollectible accounts. "Depreciation and
amortization" decreased by $1.7 million (18.3%) from the first quarter
of 1995 to the first quarter of 1996, substantially all of which was
attributable to a July 1995 change in the depreciation rate associated
with certain Pipeline assets. "General, administrative and other"
increased by approximately $2.6 million (17.9%) from the first quarter
of 1995 to the first quarter of 1996. Approximately $0.6 million
(23.1%) of this increase is due to increases in taxes other than
income, principally due to higher 1996 property taxes. The remainder
of the increase is attributable to a number of factors including (1) a
lower 1996 level of capitalized general and administrative costs, (2)
relocation and consulting costs associated with the reorganization as
discussed preceding and (3) a change in the method of recording
payments to the Gas Research Institute. During the first quarter of
1995, these payments were recorded as a "flow-through", with no
effect on income or expense. During 1996, these payments result in
both expense and revenues in equal amounts.
25<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 April 1996, NES
announced the opening of a regional office in Boulder, Colorado 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.
26<PAGE>
Quarter Ended
March 31 Increase(Decrease)
WHOLESALE ENERGY MARKETING 1996 1995 % $
FINANCIAL AND OPERATING (millions of dollars)
RESULTS
Natural gas sales
Unaffiliated sales $ 409.8 $136.4 $ 273.4 200.4
Sales to Distribution 42.9 22.9 20.0 87.3
Sales to Pipeline 20.3 8.0 12.3 153.8
Other affiliated sales 4.1 3.1 1.0 32.3
Total gas sales revenue 477.1 170.4 306.7 180.0
Electricity sales 4.4 0.1 4.3 N/M
Other operating revenues 0.1 0.2 (0.1) (50.0)
Total operating revenues 481.6 170.7 310.9 182.1
Purchased gas costs
Unaffiliated 426.4 142.7 283.7 198.8
Affiliated 20.5 10.4 10.1 97.1
Transportation and storage 18.5 11.7 6.8 58.1
expense
Electricity purchases and
transmission costs 4.1 0.1 4.0 N/M
Operating margin 12.1 5.8 6.3 108.6
General and administrative 2.9 2.0 0.9 45.0
Operating income $ 9.2 $ 3.8 $ 5.4 142.1
Natural gas sales volume (Bcf) 201.9 105.7 96.2 91.0
Average sales margin ($/Mcf) $ 0.060 $ 0.055 $ 0.005 9.1
Operating income for NES in the first quarter of 1996 was $9.2
million, an increase of $5.4 million over the $3.8 million earned in
the corresponding quarter of 1995. This improvement reflected both
increased operating revenues and increased operating expenses as
discussed following.
"Total gas sales revenue" increased from $170.4 million in the
first quarter of 1995 to $477.1 million in the first quarter of 1996,
an increase of $306.7 million (180.0%). Approximately $155.1 million
(50.6%) of this increase was attributable to increased volume and
approximately $151.6 million (49.4%) was attributable to an increase in
the average sales price. The increase of 96.2 Bcf (91%) 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
27<PAGE>
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 $0.751 per Mcf (46.6%) in the
average sales price of natural gas in the first quarter of 1996 was
principally due to a colder than normal winter, particularly in the
mid-continent and northeast regions, which both increased demand for
natural gas supplies for heating and caused above normal storage
withdrawals in comparison to the first quarter of 1995. This increased
demand caused both an increase in natural gas prices and a widening of
pipeline basin differentials.
Total purchased gas costs were $446.9 million in the first quarter
of 1996, an increase of $293.8 million (191.9%) over the corresponding
quarter of 1995. This total increase was composed of (1) a $139.3
million increase attributable to the increased 1996 sales volumes as
discussed preceding and (2) a $154.5 million increase attributable to a
$0.765 per Mcf increase in the average cost of purchased gas,
reflecting the increased first-quarter 1996 market price of natural gas
as discussed preceding. "Transportation and storage expense"
increased from $11.7 million in the first quarter of 1995 to $18.5
million in the first quarter of 1996, an increase of $6.8 million
(58.1%), principally representing expenditures made in support of the
increased 1996 sales volume as discussed preceding. "Electricity
sales" and "Electricity purchases and transmission costs" of $4.4
million and $4.1 million, respectively, in the first 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 total operating margin for the first quarter of 1996 was $12.1
million, an increase of $6.3 million (108.6%) over the first quarter of
1995. The margin on gas sales was $11.7 million, an increase of $6.1
million (108.9%) over the first quarter of 1995. Of this total
increase, $5.1 million (83.6%) was attributable to the increased 1996
sales volume as discussed preceding and $1.0 million (16.4%) was
attributable to a $0.005 per Mcf increase in the 1996 average margin
per unit of sales, principally due to the enhanced marketing efforts,
increased demand and widened basin differentials in 1996 as discussed
preceding.
The increase of $0.9 million (45%) in "General and
administrative" from the first quarter of 1995 to the first 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.
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. None of these
derivatives are held for speculative purposes and, in general, the
28<PAGE>
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
requested this service.
At March 31, 1996, the Company was obligated under swaps covering
230.8 Bcf and 204.0 Bcf of gas in which it was the fixed-price payor
and the fixed-price receiver, respectively, and these swaps
collectively represented an unrealized gain of approximately $4.1
million. The financial impact of these swaps was to decrease the
Company's pre-tax earnings by approximately $6.1 million and increase
the Company's pre-tax earnings by approximately $1.1 million during the
first quarter of 1996 and 1995, respectively, as swap transactions were
matched with hedged transactions during these periods. Swaps
representing approximately $4.6 million of the total March 31, 1996
market value of $4.1 million are in conjunction with a program
requiring delivery of certain volumes to a distribution affiliate. As
further discussed in the Company's 1995 Report on Form 10-K, the
Company previously has accrued its expected losses under this program
which ends in April 1999 and, accordingly, no earnings impact from
these swaps is expected. At March 31, 1996, the Company held NYMEX
futures contracts covering the purchase of 14.5 Bcf of gas (a notional
amount of $27.7 million) through February 1997 and the sale of 9.3 Bcf
of gas (a notional amount of $19.5 million) through October 1996.
Collectively, at March 31, 1996, these futures represented an
unrealized gain of $2.7 million. The financial impact of these futures
was to decrease the Company's pre-tax earnings by approximately $5.5
million and $1.0 million during the first quarter of 1996 and 1995,
respectively, as futures transactions were matched with hedged
transactions during these periods. At March 31, 1996, the Company held
options covering the purchase of 13.2 Bcf of gas, principally in
conjunction with the commitment to a distribution affiliate as
discussed preceding. The majority of these options, due to their
nature and term, have no readily determinable market value and the
market value of the remainder is immaterial.
29<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".
Quarter Ended
March 31 Increase(Decrease)
NATURAL GAS GATHERING 1996 1995 $ %
FINANCIAL AND OPERATING (millions of dollars)
RESULTS
Gathering revenue $ 6.3 $ 6.5 $ (0.2) (3.1)
Natural gas sales 9.0 4.5 4.5 100.0
Products extraction 2.2 2.3 (0.1) (4.3)
Other operating revenue 0.6 0.3 0.3 100.0
Total operating 18.1 13.6 4.5 33.1
revenues
Gas purchased, net 8.9 4.2 4.7 111.9
Cost of sales 1.2 1.2 - -
Operation and maintenance 3.3 3.5 (0.2) (5.7)
Administrative expense 1.2 1.0 0.2 20.0
Depreciation 0.5 1.6 (1.1) (68.8)
Taxes other than income 0.3 0.3 - -
Operating income $ 2.7 $ 1.8 $ 0.9 50.0
Total throughput (Bcf) 55.8 58.7 (2.9) (4.9)
Margin/unit of $ 0.144 $ 0.139 $ 0.005 3.6
throughput($/MMBtu)
Number of receipt points 3,004 2,920 84 2.9
Operating income for NFS in the first quarter of 1996 was $2.7
million, an increase of $0.9 million (50%) over the $1.8 million earned
in the first quarter of 1995. This increase was principally
attributable to a reduction in depreciation expense, partially offset
by a small decrease in margin, each as discussed following.
During the first quarter of 1996, NFS experienced numerous well
freeze-offs as a result of extremely cold temperatures in its service
areas. These weather-related production interruptions, together with
normal depletion-related declines in deliverability, reduced first-
quarter 1996 volumes by approximately 2.9 Bcf (4.9%) in comparison to
the first quarter of 1995. Continued delays in certain Federal Energy
Regulatory Commission rulings on various requested 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
30<PAGE>
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
preceding, total operating revenues increased by $4.5 million (33.1%)
from the first quarter of 1995 to the first 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 minimal impact on margin.
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
decreased depreciation rate was responsible for substantially all of
the $1.1 million (68.8%) decrease in first-quarter 1996 depreciation
expense in comparison to the first quarter of 1995.
The gross margin ("Total operating revenues" less "Gas
purchased, net" and "Cost of Sales") decreased from $8.2 million in
the first quarter of 1995 to $8.0 million in the first quarter of 1996,
a decline of $0.2 million (2.4%). This decrease included a reduction
of $0.4 million attributable to the decline in throughput as discussed
preceding, but was partially offset by a $0.2 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.
31<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 ("HCS"), 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.
Quarter Ended
March 31 Increase(Decrease)
RETAIL ENERGY MARKETING 1996 1995 $ %
FINANCIAL AND OPERATING (millions of dollars)
RESULTS
Natural gas sales $ 112.0 $ 73.3 $ 38.7 52.8
Transportation 1.2 1.1 0.1 9.1
Other, principally Home Care 11.5 10.0 1.5 15.0
Services
Total operating revenues 124.7 84.4 40.3 47.7
Purchased gas costs 101.5 65.5 36.0 55.0
Operations, maintenance,
cost of sales and other,
principally Home Care Services 11.9 11.1 0.8 7.2
General and administrative 1.3 0.9 0.4 44.4
Depreciation and 0.5 0.5 - -
amortization
Taxes other than income 0.4 0.3 0.1 33.3
Operating income $ 9.1 $ 6.1 $ 3.0 49.2
Natural gas sales (Bcf) 46.6 43.1 3.5 8.1
Average sales margin ($/Mcf) $0.225 $0.181 $0.044 24.3
Transportation volume (Bcf) 8.5 7.8 0.7 9.0
Operating income for NEM increased from $6.1 million in the first
quarter of 1995 to $9.1 million in the first quarter of 1996, an
increase of $3.0 million (49.2%). Approximately $0.8 million of this
increase was attributable to improved results from Home Care Services,
principally due to increased margin from appliance sales and service.
The balance of the increase was attributable to natural gas marketing
32<PAGE>
activities, reflecting both increased operating revenues and increased
expenses as discussed following.
Natural gas sales revenues increased from $73.3 million in the
first quarter of 1995 to $112.0 million in the first quarter of 1996,
an increase of $38.7 million (52.8%). Approximately $32.7 million
(84.6%) of this increase was attributable to an increase in the average
sales price and approximately $6.0 million (15.4%) of the increase was
attributable to increased sales volumes. The increase of $0.70 per Mcf
(41.2%) in the average sales price was principally due to (1) an
increase of $0.66 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 3.5 Bcf (8.1%) in
first-quarter 1996 sales volumes was principally due to increased
marketing efforts by an expanded staff and weather-related increases in
commercial and industrial needs for space heating. In addition, the
weather-related increased demand for firm supplies of gas created
opportunities to serve customers outside NEM's traditional service
territory who were unable to obtain sufficient supplies under their
usual arrangements.
Purchased gas cost increased from $65.5 million in the first
quarter of 1995 to $101.5 million in the first quarter of 1996, an
increase of $36.0 million (55%). This increase was principally due to
(1) the increase in the average cost of gas and (2) purchases made in
support of the increased sales volume as discussed preceding, which
were responsible for $30.7 million (85.2%) and $5.3 million (14.8%),
respectively, of the total increase.
The average sales margin increased from $0.181 per Mcf in the
first quarter of 1995 to $0.225 per Mcf in the first quarter of 1996,
an increase of $0.044 per Mcf (24.3%), principally due to the colder
first-quarter 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 certain
customers in certain circumstances in order to avoid interruption of
supply.
33<PAGE>
The increase of $0.8 million (7.2%) in "Operating, maintenance,
cost of sales and other, principally Home Care Services" from the
first quarter of 1995 to the first quarter of 1996 was principally due
to increased costs of appliance service parts. The increase of $0.4
million (44.4%) in "General and administrative" was principally due
to increased staffing costs incurred in support of the increased sales
as discussed preceding.
CORPORATE AND OTHER
The $4.6 million increase in the operating loss for Corporate &
Other from $(0.7) million in the first quarter of 1995 to $(5.3)
million in the first 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) timing differences in
the allocation of costs to business units, (2) an increase in 1996
pension costs, (3) the first-quarter 1995 operating income associated
with a forward oil sale which terminated during 1995 and (4) increased
1996 expenses for international activities.
NON-OPERATING INCOME AND EXPENSE
Net income for the three months ended March 31, 1996 was $60.9
million, an increase of approximately $9.0 million (17.3%) from the
corresponding quarter of 1995 while, as discussed preceding, operating
income increased by $11.9 million (8.8%) during the same period. The
components of this increase of $2.9 million in net expense below the
operating income line were as follows:
Quarter Ended
March 31 Increase(Decrease)
1996 1995 $ %
(millions of dollars)
Interest expense, net $ 36.2 $ 39.8 $ (3.6) (1) (9.0)
Other, net 3.4 2.9 0.5 17.2
Provision for income 45.8 40.1 5.7 (2) 14.2
taxes
Extraordinary items 0.3 0.0 0.3 N/A
$ 85.7 $ 82.8 $ 2.9 3.5
(1) Reflects both a reduced level of borrowings and lower
interest rates due, in part, to the Company's recent
refinancing activities, see "Net Cash Flows from Financing
Activities" elsewhere herein and the Company's 1995 Report
on Form 10-K. The Company has announced proposed
transactions which, if consummated, will affect future
interest expense, see "Recent Developments" elsewhere
herein.
34<PAGE>
(2) Reflects an increase of $6.5 million attributable to an
increase in pre-tax income, partially offset by a decrease
of $(0.8) million attributable to a decrease of .73% in the
1996 interim effective tax rate.
35<PAGE>
Liquidity and Capital Resources
The table below illustrates the sources of the Company's invested
capital during the last four years and at March 31, 1996 and 1995 (see
also "Receivable Sales Facility" elsewhere herein). The Company has
announced proposed transactions which, if consummated, will affect the
Company's capital structure, see "Recent Developments" elsewhere
herein.
<TABLE>
<CAPTION>
March 31, December 31,
INVESTED CAPITAL 1996 1995 1995 1994 1993 1992
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Long-Term Debt $1,467.5 $1,323.7 $1,474.9 $1,414.4 $1,629.4 $1,783.1
Total Equity 831.6 768.2 767.3 717.4 708.0 712.9
Total 2,299.1 2,091.9 2,242.2 2,131.8 2,337.4 2,496.0
Capitalization
Short-Term Debt 48.8 240.8 128.8 274.6 192.4 120.0
Total Invested $2,347.9 $2,332.7 $2,371.0 $2,406.4 $2,529.8 $2,616.0
Capital
Long-Term Debt as a
Percent of Total
Capitalization 63.8% 63.3% 65.8% 66.3% 69.7% 71.4%
Equity as a
Percent of Total
Capitalization 36.2% 36.7% 34.2% 33.7% 30.3% 28.6%
Total Debt as a
Percent of Total
Invested Capital:
Excluding
Receivables Sold 64.6% 67.1% 67.6% 70.2% 72.0% 72.7%
Including
Receivables Sold 67.3% 69.3% 70.6% 72.4% 74.3% 74.8%
</TABLE>
36<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 ("Cash Flow
Statement") decreased from $197.7 million in the first quarter of 1995
to $126.1 million in the first quarter of 1996. This decrease of $71.6
million (36.2%) was principally due to:
* An increase of $111.5 million in 1996 cash used for the net of
accounts receivable and accounts payable, principally due to
the first-quarter 1996 buildup of accounts receivable,
reflecting the relatively colder weather and related increased
billings to customers.
* A decrease of $8.0 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 $24.2 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 $23.7 million in 1996 income before depreciation
and amortization, deferred income taxes, extraordinary items
and other non-cash charges and credits, see "Material Changes
in the Results of Operations" elsewhere herein.
37<PAGE>
As further described in the Company's Report on Form 10-K for the
year ended December 31, 1995, 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>
Receivable Three Months Ended March 31 or
Sales Facility As of Twelve Months Ended December 31
---------------------- -------------------------------------
(dollars in Receivables Collateral Net Cash Pre-tax Average Weighted
millions) Sold and for Inflows Loss on Receivables Average
Uncollected Receivable (Outflows) Sale Sold (1) Rate (2)
---------- ---------- -------- ----- --------- -------
<C> <C> <C> <C> <C> <C> <C>
March 31, 1996 $ 193.3 $ 25.9 $ (41.7) $ (3.0) $191.1 5.56%
December 31, 1995 235.0 35.0 42.2 (9.8) 136.6 6.02%
March 31, 1995 $ 167.2 $ 42.9 $ (25.6) $ (2.8) $168.6 6.09%
</TABLE>
(1) Based on week-end balances.
(2) Exclusive of a facility fee payable on the full commitment of $235
million which 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 March 31, 1996 (exclusive of the
facility fee) was 5.31%.
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.
38<PAGE>
Three Months
Ended March 31
1996 1995
(millions of dollars)
Use (Source)
Recoveries under gas contract
settlements $ (7.2) $ (15.2)
Capital expenditures 25.2 30.6
Common and preferred dividends 10.7 10.6
Debt retirement 87.7 124.6
Change in receivables sold 41.7 25.6
(Increase) decrease in overdrafts (2.0) 23.3
Selected External Uses of Cash 156.1 199.5
Less:
Sale of Itron stock - (1.4)
Common stock issuance (2.8) (2.0)
Change in cash balance (9.5) (0.8)
Cash Generated from Other Sources,
Principally Internal $ 143.8 $ 195.3
39<PAGE>
Net Cash Flows from Investing Activities
The Company's capital expenditures by business unit for the three
months ended March 31, 1996 and 1995 were as follows:
Three Months
Ended March 31 Increase(Decrease)
1996 1995 $ %
(millions of dollars)
Natural Gas Distribution $ 21.9 $ 22.9 $ (1.0) (4.4)
Interstate Pipelines 2.3 5.9 (3.6) (61.0)
Wholesale Energy Marketing - - - -
Natural Gas Gathering 0.6 1.5 (0.9) (60.0)
Retail Energy Marketing 0.2 0.2 - -
Corporate and Other 0.2 0.1 0.1 100.0
Consolidated $ 25.2 $ 30.6 $ (5.4) (17.6)
Capital expenditures decreased from $30.6 million in the first
quarter of 1995 to $25.2 million in the first quarter of 1996, a
decline of $5.4 million (17.6%). While this decline, in total and by
business unit, is within the normal range of variation in the Company's
capital spending program, the $3.6 million (61%) decline in Interstate
Pipelines' capital spending is due, in part, to the application of more
restrictive and comprehensive economic analysis to proposed capital
projects and to the delay of projects to coincide with demand for
increased capacity. The Company's capital expenditures for 1996 are
budgeted at approximately $184.3 million, exclusive of expenditures for
international projects (which are expected to total approximately $25
million during 1996).
During the first quarter of 1995, the Company sold 80,000 shares
of Itron common stock, yielding cash proceeds of approximately $1.4
million. The Company received cash proceeds from sales of its common
stock pursuant to its Direct Stock Purchase Plan of approximately $2.8
million and $2.0 million during the first quarter of 1996 and 1995,
respectively. As further discussed in the Company's 1995 Report on
Form 10-K, the Company currently owns approximately 1.5 million of such
shares, see also Note B of the accompanying Notes to Consolidated
Financial Statements. The Company paid common and preferred dividends
totaling approximately $10.7 million and $10.6 million during the first
quarter of 1996 and 1995, respectively, has recently declared its
regular quarterly dividend and has announced the exchange of its
Preferred Stock, Series A, see "Dividend Declaration" and "Proposed
Public Offerings" under "Recent Developments" elsewhere herein.
40<PAGE>
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 (3)
informal bank lines of credit. Following is selected information
concerning the Company's short-term borrowings.
Short-Term Borrowings
As of (1)
------------------------ Three Months Ended March 31 or
Amount Borrowed Twelve Months Ended December 31
------------------------- -------------------------------
(dollars in millions)
The Informal Wtg. Avg. Wtg. Avg. Wtg. Avg. Max. Amt.
Facility Lines Int. Borrowed Rate (2) Borrowed
Rate (2) (2) (2)
______ ______ _______ _______ ________ _________
March 31, 1996 $ 0.0 $ 0.0 N/A $ 19.3 6.28% $ 51.0
December 31, 1995 0.0 10.0 6.68% 56.5 6.73% 135.0
March 31, 1995 $ 0.0 $ 13.0 7.0% $ 86.8 6.75% $135.0
(1) The Company had no borrowings under the Facility at May 1, 1996,
and therefore, had $400 million of remaining capacity under the
Facility at May 1, 1996, which amount is expected to be adequate for
the Company's current and projected needs for short-term financing.
(2) As applicable, includes both the Facility and informal credit
lines. Weighted average amount borrowed and maximum amount borrowed
are based on week-end balances.
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 and
planned financing activities.
In March 1996, the Company's "shelf" registration statement
(filed in late 1995) became effective, allowing the Company to issue up
to $500 million of a wide variety of securities (including both debt
and equity) over an approximately two-year period following the
effective date. During March 1996, the Company reacquired $7.4 million
principal amount of its 9.875% debentures due 2018 as a part of its
ongoing program to reduce its cost of debt. The premium associated
with this reacquisition is reported in the accompanying Statement of
Consolidated Income as "Extraordinary loss on early retirement of
debt, less taxes". In May 1996, the Company announced its intention
to (1) sell common equity and trust originated convertible preferred
stock in public offerings, (2) redeem certain outstanding debt and (3)
exchange its existing $3.00 Preferred Stock, Series A for its 6%
Convertible Subordinated Debentures, see "Recent Developments"
elsewhere herein.
41<PAGE>
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 $0.8 million and to increase the Company's interest expense by $0.4
million for the three months ended March 31, 1996 and 1995,
respectively. Following is selected information on the Company's
portfolio of interest rate swaps as of March 31, 1996:
42<PAGE>
Interest Rate Swap Portfolio at March 31, 1996 (1)
(dollars in millions)
Estimated
Notional Period Interest Rate Market
Initiated Amount Covered Fixed/Floating(2) Value(3)
------------- ------- ----------------------- ----------- -------
December 1995 $ 50.0 Apr.1997 - Apr.2002 (4) 5.92%/6.70% $ 1.5
December 1995 50.0 Apr.1997 - Apr.2002 (4) 5.92%/6.70% 1.5
January 1996 50.0 Apr.1997 - Apr.2002 (4) 5.80%/6.70% 1.8
February 1996 50.0 Apr.1997 - Apr.2002 (4) 5.77%/6.70% 1.8
February 1996 50.0 Mar.1996 - Dec.1997 (5) 4.71%/5.79% 0.8
February 1996 50.0 Jun.1996 - Jan.1998 (5) 4.76%/5.73% 0.8
------- ------
Totals $ 300.0 $ 8.2
(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 March 31, 1996.
(3) Represents the estimated amount which would have been realized
upon termination of the swap at March 31, 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.
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 March 31,
1996, the Company had incremental debt capacity of $499.3 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 March 31, 1996, the Company would have had incremental
dividend capacity of $115.8 million. The Company has announced
financing plans which will impact these calculations, see "Recent
Developments" elsewhere herein.
43<PAGE>
COMMITMENTS
Capital Expenditures. The Company had capital commitments of less
than $10 million at March 31, 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 March 31, 1996, the Company was obligated
for approximately $31.2 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.
44<PAGE>
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" for the three
months ended March 31, 1996 and 1995 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 is in its preliminary stages, it
is likely that compliance costs will be identified and become subject
to reasonable quantification. To the extent that such potential costs
are quantified, the Company will provide an appropriate accrual and, to
the extent justified based on the circumstances within each of the
Company's regulatory jurisdictions, set up regulatory assets in
anticipation of recovery through the ratemaking process.
On October 24, 1994, the United States Environmental Protection
Agency advised MRT that it 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.
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.
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.
45<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
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.
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.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27, Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 7, 1996 reporting
under "Item 5. Other Events", announcing the Company's
annual earnings for 1995.
46<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 May 15, 1996
47<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,403,185
<OTHER-PROPERTY-AND-INVEST> 695,163
<TOTAL-CURRENT-ASSETS> 541,947
<TOTAL-DEFERRED-CHARGES> 47,461
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,687,756
<COMMON> 78,281
<CAPITAL-SURPLUS-PAID-IN> 884,152
<RETAINED-EARNINGS> (286,683)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 701,594
0
130,000
<LONG-TERM-DEBT-NET> 1,467,524
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 48,750
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,339,888
<TOT-CAPITALIZATION-AND-LIAB> 3,687,756
<GROSS-OPERATING-REVENUE> 1,417,663
<INCOME-TAX-EXPENSE> 45,788
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 1,271,081
<OPERATING-INCOME-LOSS> 146,582
<OTHER-INCOME-NET> (3,427)
<INCOME-BEFORE-INTEREST-EXPEN> 143,155
<TOTAL-INTEREST-EXPENSE> 36,170
<NET-INCOME> 60,919
1,950
<EARNINGS-AVAILABLE-FOR-COMM> 58,969
<COMMON-STOCK-DIVIDENDS> 8,711
<TOTAL-INTEREST-ON-BONDS> 9,416
<CASH-FLOW-OPERATIONS> 126,089
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
