- ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1996 ------------- Commission File Number 1-3880 ----------------------------- NATIONAL FUEL GAS COMPANY (Exact name of registrant as specified in its charter) New Jersey 13-1086010 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 Lafayette Square Buffalo, New York 14203 ------------------- ----- (Address of principal executive offices) (Zip Code) (716) 857-6980 -------------- (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 and (2) has been subject to such filing requirements for the past 90 days. YES X NO --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $1 par value, outstanding at July 31, 1996: 37,772,653 shares. - -------------------------------------------------------------------------------
Company or Group of Companies for which Report is Filed: - ------------------------------------------------------- NATIONAL FUEL GAS COMPANY (Company or Registrant) SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution Corporation) National Fuel Gas Supply Corporation (Supply Corporation) Seneca Resources Corporation (Seneca) Highland Land & Minerals, Inc. (Highland) National Fuel Resources, Inc. (NFR) Horizon Energy Development, Inc. (Horizon) Leidy Hub, Inc. (Leidy Hub) Data-Track Account Services, Inc. (Data-Track) Utility Constructors, Inc. (UCI) INDEX Part I. Financial Information Page ----------------------------- ---- Item 1. Financial Statements a. Consolidated Statements of Income and Earnings Reinvested in the Business - Three Months and Nine Months Ended June 30, 1996 and 1995 3 - 4 b. Consolidated Balance Sheets - June 30, 1996 and September 30, 1995 5 - 6 c. Consolidated Statement of Cash Flows - Nine Months Ended June 30, 1996 and 1995 7 d. Notes to Consolidated Financial Statements 8 - 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 28 Part II. Other Information -------------------------- Item 1. Legal Proceedings * Item 2. Changes in Securities * Item 3. Defaults Upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders * Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K 28 Signature 29 * The Company has nothing to report under this item.
Part I. - Financial Information - ------------------------------- Item 1. - Financial Statements - ------------------------------ National Fuel Gas Company ------------------------- Consolidated Statements of Income and Earnings ---------------------------------------------- Reinvested in the Business -------------------------- (Unaudited) ----------- Three Months Ended June 30, ------------------ 1996 1995 ---- ---- (Thousands of Dollars) INCOME Operating Revenues $239,330 $193,461 -------- -------- Operating Expenses Purchased Gas 80,078 60,153 Operation Expense 63,663 62,733 Maintenance 6,104 6,539 Property, Franchise and Other Taxes 23,582 20,881 Depreciation, Depletion and Amortization 26,533 17,930 Income Taxes - Net 9,683 6,238 -------- -------- 209,643 174,474 -------- -------- Operating Income 29,687 18,987 Other Income 1,172 3,210 -------- -------- Income Before Interest Charges 30,859 22,197 -------- -------- Interest Charges Interest on Long-Term Debt 10,539 9,694 Other Interest 3,010 3,522 -------- -------- 13,549 13,216 -------- -------- Net Income Available for Common Stock 17,310 8,981 EARNINGS REINVESTED IN THE BUSINESS Balance at April 1 437,913 408,306 -------- -------- 455,223 417,287 Dividends on Common Stock (1996 - $.42; 1995 - $.405) 15,784 15,097 -------- -------- Balance at June 30 $439,439 $402,190 ======== ======== Earnings Per Common Share $0.46 $0.24 ===== ===== Weighted Average Common Shares Outstanding 37,674,241 37,421,500 ========== ========== See Notes to Consolidated Financial Statements
Item 1. - Financial Statements (Cont.) - -------------------------------------- National Fuel Gas Company ------------------------- Consolidated Statements of Income and Earnings ---------------------------------------------- Reinvested in the Business -------------------------- (Unaudited) ----------- Nine Months Ended June 30, ----------------- 1996 1995 ---- ---- (Thousands of Dollars) INCOME Operating Revenues $1,048,034 $851,555 ---------- -------- Operating Expenses Purchased Gas 460,020 329,349 Operation Expense 205,686 203,954 Maintenance 19,274 18,646 Property, Franchise and Other Taxes 83,040 75,725 Depreciation, Depletion and Amortization 72,086 53,796 Income Taxes - Net 62,267 51,354 -------- -------- 902,373 732,824 -------- -------- Operating Income 145,661 118,731 Other Income 2,979 4,686 -------- -------- Income Before Interest Charges 148,640 123,417 -------- -------- Interest Charges Interest on Long-Term Debt 30,413 30,463 Other Interest 12,833 10,095 -------- -------- 43,246 40,558 -------- -------- Net Income Available for Common Stock 105,394 82,859 EARNINGS REINVESTED IN THE BUSINESS Balance at October 1 380,123 363,854 -------- -------- 485,517 446,713 Dividends on Common Stock (1996 - $1.23; 1995 - $1.195) 46,078 44,523 -------- -------- Balance at June 30 $439,439 $402,190 ======== ======== Earnings Per Common Share $2.81 $2.22 ===== ===== Weighted Average Common Shares Outstanding 37,555,248 37,385,301 ========== ========== See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- June 30, 1996 September 30, (Unaudited) 1995 ----------- ------------- (Thousands of Dollars) ASSETS Property, Plant and Equipment $2,417,648 $2,322,335 Less - Accumulated Depreciation, Depletion and Amortization 740,262 673,153 ---------- ---------- 1,677,386 1,649,182 ---------- ---------- Current Assets Cash and Temporary Cash Investments 15,368 12,757 Receivables - Net 156,466 75,933 Unbilled Utility Revenue 13,187 20,838 Gas Stored Underground 12,579 25,589 Materials and Supplies - at average cost 23,610 24,374 Prepayments 16,726 29,753 ---------- ---------- 237,936 189,244 ---------- ---------- Other Assets Recoverable Future Taxes 92,868 94,053 Unamortized Debt Expense 25,705 26,976 Other Regulatory Assets 58,966 37,040 Deferred Charges 7,987 8,653 Other 39,900 33,154 ---------- ---------- 225,426 199,876 ---------- ---------- $2,140,748 $2,038,302 ========== ========== See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- June 30, 1996 September 30, (Unaudited) 1995 ----------- ------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES Capitalization: Common Stock Equity Common Stock, $1 Par Value Authorized - 100,000,000 Shares; Issued and Outstanding - 37,708,120 Shares and 37,434,363 Shares, Respectively $ 37,708 $ 37,434 Paid in Capital 391,333 383,031 Earnings Reinvested in the Business 439,439 380,123 ---------- ---------- Total Common Stock Equity 868,480 800,588 Long-Term Debt, Net of Current Portion 574,000 474,000 ---------- ---------- Total Capitalization 1,442,480 1,274,588 ---------- ---------- Current and Accrued Liabilities Notes Payable to Banks and Commercial Paper 87,200 147,600 Current Portion of Long-Term Debt 30,000 88,500 Accounts Payable 61,845 53,842 Amounts Payable to Customers 10,314 51,001 Other Accruals and Current Liabilities 122,622 52,118 ---------- ---------- 311,981 393,061 ---------- ---------- Deferred Credits Accumulated Deferred Income Taxes 290,033 288,763 Taxes Refundable to Customers 23,080 23,080 Unamortized Investment Tax Credit 12,879 13,380 Other Deferred Credits 60,295 45,430 ---------- ---------- 386,287 370,653 ---------- ---------- Commitments and Contingencies - - ---------- ---------- $2,140,748 $2,038,302 ========== ========== See Notes to Consolidated Financial Statements
Item 1. - Financial Statements (Cont.) - -------------------------------------- National Fuel Gas Company ------------------------- Consolidated Statement of Cash Flows ------------------------------------ (Unaudited) ----------- Nine Months Ended June 30, ------------------ 1996 1995 ---- ---- (Thousands of Dollars) OPERATING ACTIVITIES Net Income Available for Common Stock $105,394 $ 82,859 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation, Depletion and Amortization 72,086 53,796 Deferred Income Taxes 9,332 8,352 Other 4,534 3,489 Change in: Receivables and Unbilled Utility Revenue (72,882) (12,107) Gas Stored Underground and Materials and Supplies 13,774 8,645 Prepayments 13,027 (1,347) Accounts Payable 8,003 (33,981) Amounts Payable to Customers (40,687) 16,623 Other Accruals and Current Liabilities 61,760 47,548 Other Assets and Liabilities - Net 4,356 13,916 -------- -------- Net Cash Provided by Operating Activities 178,697 187,793 -------- -------- INVESTING ACTIVITIES Capital Expenditures (115,874) (135,198) Other (1,326) 10,616 -------- -------- Net Cash Used in Investing Activities (117,200) (124,582) -------- -------- FINANCING ACTIVITIES Change in Notes Payable to Banks and Commercial Paper (60,400) (39,300) Net Proceeds from Issuance of Long-Term Debt 99,650 99,099 Reduction of Long-Term Debt (58,500) (96,000) Proceeds from Issuance of Common Stock 5,759 2,328 Dividends Paid on Common Stock (45,395) (44,097) -------- -------- Net Cash Used in Financing Activities (58,886) (77,970) -------- -------- Net Increase (Decrease) in Cash and Temporary Cash Investments 2,611 (14,759) Cash and Temporary Cash Investments at October 1 12,757 29,016 -------- -------- Cash and Temporary Cash Investments at June 30 $ 15,368 $ 14,257 ======== ======== See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Notes to Consolidated Financial Statements ------------------------------------------ Note 1 - Summary of Significant Accounting Policies Quarterly Earnings. The Company, in its opinion, has included all adjustments that are necessary for a fair statement of the results of operations for the periods. The consolidated financial statements and notes thereto, included herein, should be read in conjunction with the financial statements and notes for the years ended September 30, 1995, 1994 and 1993, that are included in the Company's combined Annual Report to Shareholders/Form 10-K for 1995. The fiscal 1996 consolidated financial statements will be examined by the Company's independent accountants after the end of the fiscal year. The earnings for the nine months ended June 30, 1996 should not be taken as a prediction for the fiscal year ending September 30, 1996, as most of the Company's business is seasonal in nature and is influenced by weather conditions. Because of the seasonal nature of the Company's heating business, earnings during the winter months normally represent a substantial part of earnings for the entire fiscal year. Earnings during the summer months tend to decline and may reach a point where expenses exceed revenues. The impact of abnormal weather on earnings during the heating season is partially reduced by the operation of a weather normalization clause included in Distribution Corporation's New York tariff. The weather normalization clause is effective for October through May billings. In addition, Supply Corporation's straight fixed-variable rate design, which allows for recovery of substantially all fixed costs in the demand or reservation charge, reduces the earnings impact of weather. Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of generally three months or less to be cash equivalents. Cash interest payments during the nine months ended June 30, 1996 and 1995, amounted to $36.7 million and $37.1 million, respectively. Net income taxes paid during the nine months ended June 30, 1996 and 1995 amounted to $49.2 million and $25.6 million, respectively. Gas Stored Underground - Current. Gas stored underground is carried at lower of cost or market. Distribution Corporation's inventory cost at June 30, 1996 of approximately $9.0 million has been determined under the last-in, first-out (LIFO) method and Supply Corporation's inventory cost of approximately $3.6 million has been determined under the average cost method. Supply Corporation adopted the average cost method to value gas received from shippers under tariff allowances that is not consumed in operations. Note 2 - Regulatory Matters FERC Order 636 Transition Costs. As a result of the industrywide restructuring under the FERC's Order 636, Distribution Corporation is incurring transition costs billed to it by Supply Corporation and other upstream pipeline companies.
Item 1. Financial Statements (Cont.) - ------------------------------------- As of June 30, 1996, Distribution Corporation's estimate of its exposure to outstanding transition costs claims is in the range of $12.8 million to $65.2 million. The estimated maximum exposure is declining as transition costs are incurred and paid. At June 30, 1996, Distribution Corporation has recorded the minimum liability and corresponding regulatory asset of $12.8 million. In addition, Distribution Corporation's estimated share of Supply Corporation's $10.4 million of stranded gathering costs at June 30, 1996 is approximately $9.7 million. See further discussion under "Gathering Rates" below. Distribution Corporation is currently recovering transition costs from its sales and transportation customers in New York and Pennsylvania. Distribution Corporation will continue to actively challenge relevant FERC filings made by the upstream pipeline companies to ensure the eligibility and prudency of all transition cost claims. Management believes that any transition costs resulting from the implementation of the FERC's Order 636 which have been determined to be both eligible and prudently incurred should be fully recoverable from customers. Gathering Rates. A Stipulation and Agreement complying with the FERC's directives under its restructuring orders to fully unbundle the production and gathering cost of service from the transmission cost of service, and to establish a separate gathering rate, was approved by the FERC in February 1996. As approved, the Stipulation and Agreement permits Supply Corporation to fully recover its net investment in production and gathering plant, as well as its production and gathering cost of service. A portion of Supply Corporation's net investment in production and gathering plant is being recovered over a five year period as a stranded transition cost. The unamortized portion amounts to approximately $10.4 million at June 30, 1996 and is included in Other Regulatory Assets on the Consolidated Balance Sheet.
Item 1. Financial Statements (Cont.) - ------------------------------------- Note 3 - Income Taxes The components of federal and state income taxes included in the Consolidated Statement of Income are as follows (in thousands): Nine Months Ended June 30, ----------------- 1996 1995 ---- ---- Operating Expenses: Current Income Taxes - Federal $47,947 $37,790 State 4,988 5,212 Deferred Income Taxes 9,332 8,352 ------- ------- 62,267 51,354 Other Income: Deferred Investment Tax Credit (501) (515) ------- ------- Total Income Taxes $61,766 $50,839 ======= ======= Total income taxes as reported differ from the amounts that were computed by applying the federal income tax rate to income before income taxes. The following is a reconciliation of this difference (in thousands): Nine Months Ended June 30, ----------------- 1996 1995 ---- ---- Net income available for common stock $105,394 $ 82,859 Total income taxes 61,766 50,839 -------- -------- Income before income taxes $167,160 $133,698 ======== ======== Income tax expense, computed at statutory rate of 35% $58,506 $46,794 Increase (reduction) in taxes resulting from: Current state income taxes, net of federal income tax benefit 3,266 3,388 Depreciation 1,544 1,779 Production tax credits (408) (690) Miscellaneous (1,142) (432) -------- ------- Total Income Taxes $ 61,766 $50,839 ======== =======
Item 1. Financial Statements (Cont.) - ------------------------------------- Significant components of the Company's deferred tax liabilities (assets) were as follows (in thousands): At June 30, 1996 At September 30, 1995 ------------------------- ------------------------- Accumulated Deferred Accumulated Deferred Deferred Income Taxes Deferred Income Taxes Income Taxes Current* Income Taxes Current* ------------ ------------ ------------ ------------ Deferred Tax Liabilities: Excess of tax over book depreciation $185,177 $ - $185,595 $ - Exploration and intangible well drilling costs 96,161 - 84,380 - Other 67,155 - 67,831 - -------- ------- -------- ------- Total Deferred Tax Liabilities 348,493 - 337,806 - -------- ------- -------- ------- Deferred Tax Assets: Deferred investment tax credits (7,861) - (7,860) - Overheads capitalized for tax purposes (13,107) - (11,766) - Unrecovered purchased gas costs - (1,444) - (8,322) Other (37,492) - (29,417) - -------- ------- -------- ------- Total Deferred Tax Assets (58,460) (1,444) (49,043) (8,322) -------- ------- -------- ------- Total Net Deferred Income Taxes $290,033 $(1,444) $288,763 $(8,322) ======== ======= ======== ======= * Included on the Consolidated Balance Sheets in "Other Accruals and Current Liabilities." Note 4 - Capitalization Common Stock. During the nine months ended June 30, 1996, the Company issued 88,100 shares of common stock under the Company's section 401(k) Plans, 90,559 shares to participants in the Company's Dividend Reinvestment Plan, and 21,973 shares to participants in the Company's Customer Stock Purchase Plan. Additionally, 73,125 shares of common stock were issued under the Company's stock option and stock award plans. On March 19, 1996, the Company's Board of Directors adopted a shareholder rights plan, the adoption of which was subsequently approved by the Securities and Exchange Commission (SEC), pursuant to the Public Utility Holding Company Act of 1935, as amended. On June 13, 1996, the Company's Board of directors declared a dividend of one right (Right) for each share of common stock held by the shareholders of record on July 31, 1996. The Rights become exercisable ten days after an acquirer (a) announces it has acquired or has the right to acquire 10% or more of the Company's voting stock, or (b) announces a tender offer which would result in it owning 10% or more of the Company's voting stock. If the Rights become exercisable, each Company stockholder, except an acquirer, will be able to exercise a Right and receive common stock (or, in certain cases, cash, property or other securities) of the Company, or common stock of the acquirer, having a market
Item 1. Financial Statements (Cont.) - ------------------------------------- value equal to twice the Right's then current purchase price. If a Right were currently exercisable, it would entitle a Company stockholder, other than an acquirer, to purchase $130 worth of Company common stock (or the common stock of the acquirer) for $65. The Rights have a term of ten years. The Board of Directors is able to exchange the Rights at an exchange ratio of one share of common stock per Right. It also is able to redeem, in whole but not in part, the Rights at a price of $0.01 per Right anytime until ten days after an acquirer announces that it has acquired or has the right to acquire 10% or more of the Company's voting stock. Long-Term Debt. In December 1995, the Company retired $58.5 million of maturing medium-term notes with short-term borrowings. This consisted of $38.5 million of 8.90% medium-term notes and $20.0 million of 8.875% medium-term notes. In March 1996, the Company issued $100.0 million of 5.58% medium-term notes due in March 1999. After reflecting underwriting discounts and commissions, the net proceeds to the Company amounted to $99.7 million. The Company currently has authorization from the SEC to issue and sell up to $150.0 million of debentures and/or medium-term notes. New Accounting Pronouncement. In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). This statement establishes a fair value based method of accounting for employee stock options or similar equity instruments and encourages all companies to adopt that method of accounting for all of their employee stock compensation plans. Measurement of compensation cost under SFAS 123, if adopted, is effective for all awards granted after the beginning of the fiscal year in which that method is first applied. Management is currently reviewing the provisions of SFAS 123 and has not decided whether to adopt the fair value based measurement provisions. If the fair value based measurement provisions of SFAS 123 are adopted, they are not expected to have a material impact on the results of operations or financial condition of the Company. SFAS 123 allows companies to continue to measure compensation cost for employee stock options or similar equity instruments using the method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Companies electing to remain with this method are required to make pro forma disclosures of net income and earnings per share as if SFAS 123 accounting had been applied. The Company is required to adopt the disclosure requirements of SFAS 123 for its fiscal year ending September 30, 1997.
Item 1. Financial Statements (Cont.) - ------------------------------------- Note 5 - Derivative Financial Instruments The Company, in its Exploration and Production operations, has entered into certain price swap agreements that effectively hedge a portion of the market risk associated with fluctuations in the price of natural gas and crude oil. These agreements are not held for trading purposes. The price swap agreements call for the Company to receive monthly payments from (or make payments to) other parties based upon the difference between a fixed and a variable price as specified by the agreement. The variable price is either a crude oil price quoted on the New York Mercantile Exchange or a quoted natural gas price in "Inside FERC." These variable prices represent the current market prices at the locations where the Company delivers its natural gas and crude oil production. The following summarizes the Company's activity under price swap agreements for the quarter and nine-month periods ended June 30, 1996 and 1995, respectively: Quarter Ended Quarter Ended June 30, 1996 June 30, 1995 ------------- ------------- Natural Gas Price Swap Agreements: Notional Amount - Equivalent Billion Cubic Feet (Bcf) 5.6 5.0 Fixed Prices per Thousand Cubic Feet (Mcf) $1.71 - $1.99 $1.74 - $2.16 Variable Prices per Mcf $2.27 - $2.70 $1.59 - $1.77 Gain (Loss) $(3,311,000) $1,342,000 Crude Oil Price Swap Agreements: Notional Amount - Equivalent Barrels (bbl) 314,000 185,000 Fixed Prices per bbl $17.40 - $19.25 $16.68 - $19.60 Variable Prices per bbl $20.43 - $23.30 $18.40 - $19.89 Loss $(1,020,000) $(185,000) Nine Months Ended Nine Months Ended June 30, 1996 June 30, 1995 ----------------- ----------------- Natural Gas Price Swap Agreements: Notional Amount - Equivalent Bcf 17.5 9.7 Fixed Prices per Mcf $1.71 - $3.05 $1.74 - $2.39 Variable Prices per Mcf $1.67 - $3.43 $1.36 - $1.77 Gain (Loss) $(6,602,000) $4,311,000 Crude Oil Price Swap Agreements: Notional Amount - Equivalent bbl 732,000 516,000 Fixed Prices per bbl $17.40 - $19.25 $16.68 - $19.60 Variable Prices per bbl $17.40 - $23.30 $17.16 - $19.89 Loss $(1,236,000) $(338,000)
Item 1. Financial Statements (Cont.) - ------------------------------------- The Company had the following price swap agreements outstanding at June 30, 1996. Natural Gas Price Swap Agreements: Notional Amount Fiscal Year (Equivalent Bcf) Fixed Price Per Mcf - ----------- ---------------- ------------------- 1996 5.6 $1.71 - $1.99 1997 24.9 $1.71 - $2.10 1998 9.7 $1.77 - $2.06 1999 1.1 $2.00 ---- 41.3 ==== Crude Oil Price Swap Agreements: Notional Amount Fiscal Year (Equivalent bbl) Fixed Price Per bbl - ----------- ---------------- ------------------- 1996 339,000 $17.40 - $19.25 1997 1,218,000 $17.40 - $18.33 1998 396,000 $17.50 - $18.31 --------- 1,953,000 ========= Gains or losses from these price swap agreements are reflected in operating revenues on the Consolidated Statement of Income at the time of settlement with the other parties. At June 30, 1996, the Company had unrecognized losses of approximately $19.1 million related to price swap agreements which are offset by corresponding unrecognized gains from the Company's anticipated natural gas and crude oil production over the terms of the price swap agreements. The Company has SEC authority to enter into interest rate swaps and other derivative instruments associated with long-term borrowings up to a notional amount of $350.0 million at any one time outstanding. All such interest rate swaps and other derivative instruments must be directly related to then outstanding long or short-term debt, at the time they are entered into. The Company also has SEC authority to enter into interest rate and currency exchange agreements associated with short-term borrowings covering a total principal amount of $300.0 million. No such agreements were entered into during the quarter or nine months ended June 30, 1996 and none are currently outstanding. Credit Risk. Credit risk relates to the risk of loss that the Company would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. The Company is at risk in the event of nonperformance by counterparties on its derivative financial instruments. The counterparties to the Company's derivative financial instruments are investment grade financial institutions. Furthermore, the Company has guarantees from counterparty affiliates on a large portion of its derivative financial instruments. Accordingly, the Company does not anticipate any material impact to its financial position, results of operations or cash flow as a result of nonperformance by counterparties.
Item 1. Financial Statements (Concl.) - -------------------------------------- Note 6 - Retirement Plan and Other Post-Employment Benefits On July 29, 1996, the Company announced a special early retirement offer (SERO) to certain salaried, non-union hourly and union employees of Distribution Corporation and Supply Corporation who have completed at least five years of service and have attained at least 55 years of age on or before October 1, 1996. Approximately 400 employees are eligible for the SERO. The offer must be accepted by any eligible employee by August 31, 1996 and will become effective October 1, 1996. Management's estimate of the pre-tax expense associated with this SERO is approximately $7 million to $9 million. A charge to earnings will be reflected in the Company's fourth quarter financial results after the number of employees accepting the offer is known. Note 7 - Commitments and Contingencies Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for on-going evaluation of its operations to identify potential environmental exposures and assure compliance with regulatory policies and procedures. It is the Company's policy to accrue estimated environmental clean-up costs when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. Distribution Corporation has estimated that clean-up costs related to several former manufactured gas plant sites and several other waste disposal sites are in the range of $8.7 million to $10.1 million. At June 30, 1996, Distribution Corporation has recorded the minimum liability of $8.7 million. The Company is currently not aware of any material additional exposure to environmental liabilities. However, changes in environmental regulations or other factors could adversely impact the Company. In New York, Distribution Corporation is recovering site investigation and remediation costs in rates. In Pennsylvania, Distribution Corporation expects to recover such costs in rates, as the Pennsylvania Public Utility Commission has allowed recovery of other environmental clean-up costs in rate cases. Accordingly, the Consolidated Balance Sheet at June 30, 1996 includes related regulatory assets in the amount of approximately $8.0 million. For further discussion, see disclosure in Note H - Commitments and Contingencies under the heading "Environmental Matters" in Item 8 of the Company's 1995 Form 10-K. Other. The Company is involved in litigation arising in the normal course of business. In addition to the regulatory matters discussed in Note 2, the Company is involved in other regulatory matters arising in the normal course of business that involve rate base, cost of service and purchased gas cost issues. While the resolution of such litigation or other regulatory matters could have a material effect on earnings and cash flows, none of this litigation, and none of these other regulatory matters, is expected to have a material effect on the financial condition of the Company at this time.
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations --------------------- RESULTS OF OPERATIONS Earnings. The Company's earnings were $17.3 million, or $0.46 per common share, during the quarter ended June 30, 1996. This compares with earnings of $9.0 million, or $0.24 per common share, during the quarter ended June 30, 1995. The Company's earnings were $105.4 million, or $2.81 per common share, during the nine months ended June 30, 1996. This compares with earnings of $82.9 million, or $2.22 per common share during the nine months ended June 30, 1995. The increase in earnings for the quarter and nine months ended June 30, 1996 is primarily attributable to the higher earnings of the Company's Exploration and Production and Utility segments. The earnings of the Exploration and Production segment increased because of higher natural gas and oil production coupled with an increase in the weighted average price received for this production. The earnings of the Utility segment reflect the positive impact of colder weather, new rates that became effective in September 1995 in both the New York and Pennsylvania jurisdictions, and operation and maintenance expense savings. Additionally, new rates that became effective in December 1994 in the Pennsylvania jurisdiction have contributed to higher earnings for the nine-month period. The Pipeline and Storage segment contributed to the increase in earnings for the quarter ended June 30, 1996, primarily because of the February 1996 Federal Energy Regulatory Commission (FERC) approval of Supply Corporation's rate case. New rates were in effect for the entire quarter ended June 30, 1996. For the nine months ended June 30, 1996, however, the Pipeline and Storage segment experienced a decrease in earnings as revenues related to unbundled pipeline sales and open access transportation decreased from the prior year. This decrease was partly offset by the impact of Supply Corporation's rate increase which became effective on April 1, 1996 retroactive to June 1, 1995. Since the rate increase was retroactive, earnings for the nine months ended June 30, 1996 include approximately $1.2 million, or $0.03 per share related to fiscal 1995. The Other Nonregulated operations experienced a decline in earnings for the quarter and nine months ended June 30, 1996 mainly because of expenses associated with developing international opportunities. Many of these expenses may be reimbursed to the Company upon the occurrence of certain events and at such time would be taken into earnings. As discussed in more detail under "International Investments" on page 24, on May 11, 1996, Horizon obtained from certain lenders a commitment to provide the debt financing necessary to construct a power plant in Pakistan. It is expected that the lenders will reimburse Horizon in the future for certain expenses related to this project. The decline in earnings for the quarter and nine months ended June 30, 1996 can also be attributed to the gain on the sale of the Company's pipeline construction equipment, net of certain accrued expenses, during the quarter ended June 30,1995. A more detailed discussion of current period results can be found in the business segment information that follows.
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- <TABLE> <CAPTION> OPERATING REVENUES (in thousands) Three Months Ended Nine Months Ended June 30, June 30, ------------------------- -------------------------- 1996 1995 % Change 1996 1995 % Change ---- ---- -------- ---- ---- -------- <S> <C> <C> <C> <C> <C> <C> Regulated Utility Retail Revenues: Residential $123,214 $103,661 18.9 $ 614,691 $507,479 21.1 Commercial 27,133 24,017 13.0 152,784 124,446 22.8 Industrial 3,799 3,506 8.4 20,407 16,048 27.2 -------- -------- ---------- -------- 154,146 131,184 17.5 787,882 647,973 21.6 Off-System Sales 5,976 5,518 8.3 25,272 15,809 59.9 Transportation 13,218 10,580 24.9 39,428 33,689 17.0 Other 784 1,193 (34.3) 2,617 3,698 (29.2) -------- -------- ---------- -------- 174,124 148,475 17.3 855,199 701,169 22.0 -------- -------- ---------- -------- Pipeline and Storage Storage Service 16,630 14,499 14.7 51,653 45,011 14.8 Transportation 22,825 21,994 3.8 69,476 67,313 3.2 Other 706 2,583 (72.7) 8,898 14,245 (37.5) -------- -------- ---------- -------- 40,161 39,076 2.8 130,027 126,569 2.7 -------- -------- ---------- -------- Exploration and Production 31,367 14,318 119.1 84,512 41,587 103.2 Other Nonregulated 19,161 13,287 44.2 59,243 48,901 21.1 -------- -------- ---------- -------- 50,528 27,605 83.0 143,755 90,488 58.9 -------- -------- ---------- -------- Less-Intersegment Revenues 25,483 21,695 17.5 80,947 66,671 21.4 -------- -------- ---------- -------- $239,330 $193,461 23.7 $1,048,034 $851,555 23.1 ======== ======== ========== ======== </TABLE> <TABLE> <CAPTION> OPERATING INCOME (LOSS) BEFORE INCOME TAXES (in thousands) Three Months Ended Nine Months Ended June 30, June 30, ------------------------ ------------------------- 1996 1995 % Change 1996 1995 % Change ---- ---- -------- ---- ---- -------- <S> <C> <C> <C> <C> <C> <C> Utility $10,323 $ 4,999 106.5 $119,676 $ 97,547 22.7 Pipeline and Storage 17,345 16,559 4.7 56,797 58,508 (2.9) Exploration and Production 12,683 4,833 162.4 35,012 11,939 193.3 Other Nonregulated (564) (620) 9.0 (1,863) 3,859 (148.3) Corporate (417) (546) 23.6 (1,694) (1,768) 4.2 ------- ------- -------- -------- $39,370 $25,225 56.1 $207,928 $170,085 22.2 ======= ======= ======== ======== </TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- <TABLE> <CAPTION> SYSTEM NATURAL GAS VOLUMES (millions of cubic feet-MMcf) Three Months Ended Nine Months Ended June 30, June 30, ------------------------- ------------------------- 1996 1995 % Change 1996 1995 % Change ---- ---- -------- ---- ---- -------- <S> <C> <C> <C> <C> <C> <C> Utility Gas Sales Residential 15,138 14,088 7.5 84,513 73,565 14.9 Commercial 3,720 3,860 (3.6) 23,259 20,392 14.1 Industrial 880 1,035 (15.0) 4,577 4,093 11.8 Off-System 2,190 2,956 (25.9) 8,600 7,746 11.0 ------ ------ ------- ------- 21,928 21,939 (0.1) 120,949 105,796 14.3 ------ ------ ------- ------- Non-Utility Gas Sales Gas Sales for Resale - 94 NM - 323 NM Production (in equivalent MMcf) 13,055 6,535 99.8 36,309 19,128 89.8 ------ ------ ------- ------- 13,055 6,629 96.9 36,309 19,451 86.7 ------ ------ ------- ------- Total Gas Sales 34,983 28,568 22.5 157,258 125,247 25.6 ------ ------ ------- ------- Transportation Utility 15,196 13,789 10.2 47,983 43,275 10.9 Pipeline and Storage 63,174 64,344 (1.8) 281,074 242,172 16.1 Nonregulated 91 377 (75.9) 559 1,954 (71.4) ------ ------ ------- ------- 78,461 78,510 (0.1) 329,616 287,401 14.7 ------ ------ ------- ------- Marketing Volumes 5,089 5,193 (2.0) 17,929 15,607 14.9 ------ ------ ------- ------- Less-Intersegment Volumes: Transportation 28,075 27,728 1.3 149,766 137,462 9.0 Production 1,145 1,329 (13.8) 3,620 3,720 (2.7) Gas Sales - - - 814 8 NM Marketing 24 - NM 119 - NM ------ ------ ------- ------- 29,244 29,057 0.6 154,319 141,190 9.3 ------ ------ ------- ------- Total System Natural Gas Volumes 89,289 83,214 7.3 350,484 287,065 22.1 ====== ====== ======= ======= </TABLE> NM = Not meaningful. Utility. Operating revenues for the Utility segment increased $25.6 million and $154.0 million, respectively, for the quarter and nine months ended June 30, 1996, as compared with the same periods a year ago. These increases reflect the recovery of increased gas costs mainly because of higher residential gas sales in the quarter and higher total gas sales for the nine-month period as well as an increase in the average cost of purchased gas. In addition, higher transportation volumes in both the quarter and nine-month period increased the Utility segment's operating revenues. Overall, Utility gas sales and transportation volumes increased 1.4 billion cubic feet (Bcf) and 19.9 Bcf, respectively, for the quarter and nine-month periods. Weather in Distribution Corporation's service territory that was colder than last year contributed significantly to the increase in volumes. The increase in operating revenues for both the quarter and nine-month period also reflects general rate increases of $14.2 million and $6.0 million, respectively, in the New York and
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Pennsylvania rate jurisdictions, effective in September 1995. For the nine-month period, the increase in operating revenues also reflects a general rate increase of $4.8 million in the Pennsylvania rate jurisdiction, effective in December 1994. Operating income before income taxes for the Utility segment increased $5.3 million and $22.1 million, respectively, for the quarter and nine months ended June 30, 1996, as compared with the same periods a year ago. This resulted primarily from the general rate increases, discussed above, an emphasis on controlling operation and maintenance expenses and colder weather. Although the New York jurisdiction of Distribution Corporation has a weather normalization clause (WNC) which mitigates the impact of weather on its utility customers, the mechanism is only in effect for October through May billings. An increase in weather related throughput subsequent to the May billing cycle benefited earnings in the quarter ended June 30, 1996, while a weather related decline in throughput for the same non-weather normalized period during the quarter ended June 30, 1995 reduced earnings for that quarter. Nonetheless, for the entire quarter ended June 30, 1996, the WNC resulted in a benefit to customers of $3.6 million, and for the nine months ended June 30, 1996, the WNC resulted in a benefit to customers of $10.6 million. Degree Days Three Months Ended June 30: -------------------------- Percent Colder Than Normal 1996 1995 Normal 1995 - ------------------------------------------------------------------ Buffalo 918 1,032 943 12.4 9.4 Erie 880 954 919 8.4 3.8 Nine Months Ended June 30: ------------------------- Buffalo 6,559 7,057 6,000 7.6 17.6 Erie 6,158 6,645 5,633 7.9 18.0 - ------------------------------------------------------------------ Pipeline and Storage. Operating income before income taxes for the Pipeline and Storage segment increased $0.8 million for the quarter ended June 30, 1996, as compared with the same period a year ago. The increase is attributable primarily to the February 1996 FERC approval of Supply Corporation's rate case. New rates were in effect for all of the quarter ended June 30, 1996. For the nine months ended June 30, 1996, operating income before income taxes decreased $1.7 million compared with the same period a year ago. The decrease is attributable primarily to lower revenues related to unbundled pipeline sales and open access transportation. This decrease was partly offset by the implementation of new rates which became effective on April 1, 1996 retroactive to June 1, 1995. Since the new rates were retroactive, the nine months ended June 30, 1996 include approximately $1.2 million, or $0.03 per share, related to fiscal 1995.
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Exploration and Production. Operating income before income taxes from the Company's Exploration and Production segment increased $7.9 million and $23.1 million, respectively, for the quarter and nine months ended June 30, 1996, compared with the same periods a year ago, mainly because of increased natural gas and oil production combined with higher weighted average prices for both natural gas and oil. As indicated in the tables below, natural gas production increased 4.3 Bcf and 13.2 Bcf, respectively, for the quarter and nine-month periods, and the weighted average price received for this production increased $0.75 per thousand cubic feet (Mcf) and $0.66 per Mcf, respectively. Oil and condensate production increased 363,000 barrels (bbls) and 668,000 bbls, respectively, for the quarter and nine-month periods, and the weighted average price received for this production increased $3.21 per bbl and $2.56 per bbl, respectively. The increase in natural gas and oil production is attributable primarily to Gulf Coast production from West Cameron 552, West Delta Block 30, Vermilion 252, and to the Hamp Lease in California. The fluctuation in prices denoted above does not reflect gains and losses from hedging activities. These hedging activities reduced operating revenues by $4.3 million and $7.8 million, respectively, for the quarter and nine months ended June 30, 1996. For the quarter and nine months ended June 30, 1995, hedging activities contributed $1.2 million and $4.0 million, respectively, to operating revenues. As the Company utilizes its hedging program to effectively manage the market risk associated with fluctuations in the price of natural gas and crude oil, any gains or losses on hedging transactions are offset by lower or higher prices received for actual natural gas and crude oil production. Refer to further discussion of the Company's hedging activities under "Financing Cash Flow" and in Note 5 - Derivative Financial Instruments.
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- PRODUCTION VOLUMES Exploration and Production. Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ----------------------- 1996 1995 % Change 1996 1995 % Change ---- ---- -------- ---- ---- -------- Gas Production - (MMcf) Gulf Coast 8,202 3,835 113.9 24,201 10,952 121.0 West Coast 242 195 24.1 747 536 39.4 Appalachia 1,350 1,424 (5.2) 4,107 4,395 (6.6) ----- ----- ------ ------ 9,794 5,454 79.6 29,055 15,883 82.9 ===== ===== ====== ====== Oil Production - (Thousands of Barrels) Gulf Coast 397 63 530.2 805 218 269.3 West Coast 142 111 27.9 392 311 26.0 Appalachia 4 6 (33.3) 12 12 - --- --- ----- --- 543 180 201.7 1,209 541 123.5 === === ===== === WEIGHTED AVERAGE PRICES Exploration and Production. Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ----------------------- 1996 1995 % Change 1996 1995 % Change ---- ---- -------- ---- ---- -------- Weighted Avg. Gas Price/Mcf Gulf Coast $2.48 $1.68 47.6 $2.35 $1.59 47.8 West Coast $1.25 $1.30 (3.8) $1.21 $1.46 (17.1) Appalachia $2.89 $1.98 46.0 $2.63 $2.02 30.2 Weighted Average Price $2.50 $1.75 42.9 $2.36 $1.70 38.8 Weighted Avg. Oil Price/bbl Gulf Coast $20.87 $17.84 17.0 $19.81 $16.93 17.0 West Coast $18.68 $16.66 12.1 $16.95 $15.86 6.9 Appalachia $20.22 $17.00 18.9 $18.07 $16.21 11.5 Weighted Average Price $20.29 $17.08 18.8 $18.86 $16.30 15.7 Other Nonregulated. The Other Nonregulated segment experienced operating losses before income taxes during the quarters ended June 30, 1996 and June 30, 1995, with only a slight improvement when comparing the two quarters. The operating loss before income taxes during the quarter ended June 30, 1996 is primarily attributable to expenses incurred by Horizon, the Company's foreign and domestic energy projects subsidiary, in developing international opportunities. Many of these expenses may be reimbursed to Horizon upon the occurrence of certain events and at such time would be taken into earnings. As discussed in more detail under "International Investments" on page 24, on May 11, 1996, Horizon obtained from certain lenders a commitment to provide the debt financing necessary to construct a power plant in Pakistan. It is expected that the lenders will reimburse Horizon in the future for certain expenses related to this project. The operating loss before income taxes during the quarter ended June 30, 1995 was primarily attributable to higher operating expenses from UCI, the Company's pipeline construction subsidiary,
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- as a result of management's decision to discontinue its pipeline construction operations. As a result of this decision, approximately $1.0 million of expenses were accrued. UCI also recorded a gain of approximately $2.5 million related to the sale of its pipeline construction equipment, which was recorded below the "Operating Income" line as "Other Income." For the nine months ended June 30, 1996, operating income before income taxes decreased $5.7 million compared with the same period a year ago. The decrease is attributable to the expenses incurred by Horizon, as discussed above, partly offset by a lower pretax operating loss by UCI as its operations are now discontinued. Income Taxes. Income taxes increased $3.4 million and $10.9 million, respectively, for the quarter and nine months ended June 30, 1996, mainly because of an increase in pretax income. Interest Charges. Total interest charges increased $0.3 million and $2.7 million, respectively, for the quarter and nine months ended June 30, 1996. For the quarter, interest on long-term debt increased $0.8 million while other interest decreased $0.5 million. The increase in interest on long-term debt for the quarter can be attributed to a higher average amount of long-term debt compared with the same period a year ago. The decrease in other interest for the quarter is mainly a result of lower average short-term borrowings compared with the same period a year ago. For the nine months ended June 30, 1996, the $2.7 million increase in interest expense resulted primarily from higher average short-term borrowings compared with the same period a year ago. Subsequent Event. On July 29, 1996, the Company announced a special early retirement offer (SERO) to certain salaried, non-union hourly and union employees of Distribution Corporation and Supply Corporation who have completed at least five years of service and have attained at least 55 years of age on or before October 1, 1996. Approximately 400 employees are eligible for the SERO. The offer must be accepted by any eligible employee by August 31, 1996 and will become effective October 1, 1996. Management's estimate of the pre-tax expense associated with this SERO is approximately $7 million to $9 million. A charge to earnings will be reflected in the Company's fourth quarter financial results after the number of employees accepting the offer is known. CAPITAL RESOURCES AND LIQUIDITY The Company's primary sources of cash during the nine-month period consisted of cash provided by operating activities, long-term debt, and short-term bank loans and commercial paper. These sources were supplemented by issuances of common stock under the Company's Customer Stock Purchase Plan, Dividend Reinvestment Plan and section 401(k) Plans.
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Operating Cash Flow Internally generated cash from operating activities consists of net income available for common stock, adjusted for noncash expenses, noncash income and changes in operating assets and liabilities. Noncash items include depreciation, depletion and amortization, deferred income taxes and allowance for funds used during construction. Cash provided by operating activities in the Utility and the Pipeline and Storage segments may vary substantially from period to period because of supplier refunds, the impact of rate cases and for the Utility segment, fluctuations in weather and over- or under-recovered purchased gas costs. The impact of weather on cash flow is tempered in the Utility segment's New York rate jurisdiction by its WNC. The Pipeline and Storage segment's cash flow is not significantly impacted by weather because of Supply Corporation's straight fixed-variable (SFV) rate design. Because of the seasonal nature of the Company's heating business, revenues are relatively high during the nine months ended June 30 and receivables historically increase from September to June because of winter weather. The storage gas inventory normally declines during the first and second quarters of the fiscal year and is replenished during the third and fourth quarters. For storage gas inventory accounted for under the last-in, first-out (LIFO) method, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statement of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheet and is included under the caption "Other Accruals and Current Liabilities." Such reserve is reduced as the inventory is replenished. Net cash provided by operating activities totaled $178.7 million for the nine months ended June 30, 1996, a decrease of $9.1 million compared with $187.8 million provided by operating activities for the nine months ended June 30, 1995. This shift in cash flow can be attributed primarily to an increase in receivable balances, mainly in the Utility and Exploration and Production segments, and a decrease in amounts owed to customers in the Utility segment. These are offset partly by higher net income and higher payable balances in the Utility and Exploration and Production segments. Investing Cash Flow Capital Expenditures - -------------------- The Company's capital expenditures totaled $115.9 million during the nine months ended June 30, 1996. Total expenditures for the nine-month period represent 67% of the total current capital expenditure budget for fiscal 1996 of $172.9 million.
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- The following table presents capital expenditures for the nine months ended June 30, 1996, by business segment: (in thousands) -------------- Utility $43,342 Pipeline and Storage 12,846 Exploration and Production 57,938 Other Nonregulated 2,914 -------- 117,040 Intersegment Elimination (1,166) -------- $115,874 ======== The bulk of the Utility segment's capital expenditures were made for replacement of mains and main extensions, as well as for the replacement of service lines and, to a minor extent, the installation of new services. The bulk of the Pipeline and Storage segment's capital expenditures were made for additions, improvements and replacements to this segment's transmission and storage systems. The Exploration and Production segment spent approximately $38.6 million on its offshore program in the Gulf of Mexico, including offshore lease acquisitions and drilling and construction expenditures. Lease acquisitions included the acquisition of Galveston Block 225, Vermilion 309 and Viosca Knoll 432 through federal lease sales. Approximately $19.3 million was spent on the Exploration and Production segment's onshore program, including horizontal drilling in central Texas and recompletion activity in California. Other Nonregulated capital expenditures consisted primarily of timberland purchases. The Company's capital expenditure program is under continuous review. The amounts are subject to modification for opportunities in the natural gas industry such as the acquisition of attractive oil and gas properties or storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures in the Company's other business segments depends, to a large degree, upon market conditions. International Investments - ------------------------- On May 11, 1996, Horizon and its equity partners obtained from certain lenders a commitment, which is subject to standard conditions precedent, to provide the debt financing necessary to construct a 151 Megawatt power plant near Kabirwala, Punjab Province in east-central Pakistan. Horizon, along with the Fauji Foundation of Pakistan and the Asian Development Bank, will be an equity investor in a new corporation, the Fauji Kabirwala Power Company
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Limited (FKPC). FKPC will own and operate the combined cycle gas-fired power plant, which is projected to cost $170 million. The Fauji Foundation and Horizon's affiliate, Sceptre Power Company, are joint developers of the project. The project will be financed with $127.5 million of non-recourse project-financed debt and $42.5 million of equity. Horizon's equity investment is projected to be approximately $18 million, with the remainder coming from the Fauji Foundation and the Asian Development Bank, the lead lender for the project. Certain conditions precedent, including receipt of required permits from local and regional as well as central governmental agencies in Pakistan, must be satisfied before the funding will become available and the project can proceed. The project will utilize low Btu gas from two nearby fields in combination with pipeline quality gas to provide electric generating capacity. The power will be sold to the Pakistan Water and Power Development Authority under a 30-year power purchase agreement. Construction is expected to begin by the end of September or in October 1996. The plant is expected to achieve commercial operations less than two years thereafter. On June 25, 1996, Horizon purchased Beheer-en Beleggingsmaatschappij Bruwabel B.V. (Bruwabel) from a subsidiary of Cinergy Corporation. Bruwabel is a Dutch company that in turn directly or indirectly owns three Czech corporations. Bruwabel's principal assets are a power development group, which is involved in development initiatives for the conversion of district heating plants into cogeneration facilities, and a district heating plant located in the eastern part of the Czech Republic. Horizon plans to convert the heating plant to a combined-cycle cogeneration facility, with electrical output of up to 50 Megawatts. Financing Cash Flow In December 1995, the Company retired $38.5 million of maturing 8.90% medium-term notes and $20.0 million of 8.875% medium-term notes. Short-term borrowings were used to retire the medium-term notes. In March 1996, the Company issued $100.0 million of 5.58% medium-term notes due in March 1999. After reflecting underwriting discounts and commissions, the net proceeds to the Company amounted to $99.7 million. Consolidated short-term debt decreased by $60.4 million during the first nine months of fiscal 1996. The Company considers short-term bank loans and commercial paper important sources of cash for temporarily financing construction expenditures, gas in storage inventory, unrecovered purchased gas costs and other working capital needs. The Company's present liquidity position is believed to be adequate to satisfy known demands. Under the Company's covenants contained in its indenture covering long-term debt, at June 30, 1996, the Company would have been permitted to issue up to a maximum of $632.0 million in additional long-term unsecured indebtedness, in light of then current long-term interest
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- rates. In addition, at June 30, 1996, the Company had regulatory authorizations and unused short-term credit lines that would have permitted it to borrow an additional $512.8 million of short-term debt. The Company currently has authorization from the Securities and Exchange Commission (SEC) to issue and sell up to $150.0 million of debentures and/or medium term notes. The Company, through Seneca, is engaged in certain price swap agreements as a means of managing a portion of the market risk associated with fluctuations in the market price of natural gas and crude oil. These price swap agreements are not held for trading purposes. During the quarter ended June 30, 1996, Seneca utilized natural gas and crude oil price swap agreements with notional amounts of 5.6 equivalent Bcf and 314,000 equivalent bbl, respectively. These hedging activities reduced operating revenues by approximately $4.3 million. For the nine months ended June 30, 1996, Seneca utilized natural gas and crude oil price swap agreements with notional amounts of 17.5 equivalent Bcf and 732,000 equivalent bbl, respectively. These hedging activities reduced operating revenues by approximately $7.8 million. As the Company utilizes its hedging program to effectively manage the market risk associated with fluctuations in the price of natural gas and crude oil, any gains or losses on hedging transactions are offset by lower or higher prices received for actual natural gas and crude oil production. At June 30, 1996, Seneca had natural gas price swap agreements outstanding with a notional amount of 41.3 equivalent Bcf at prices ranging from $1.71 per Mcf to $2.10 per Mcf. Seneca also had crude oil price swap agreements outstanding at June 30, 1996 with a notional amount of 1,953,000 equivalent bbl at prices ranging from $17.40 per bbl to $19.25 per bbl. In addition, the Company has SEC authority to enter into certain interest rate swap agreements. For further discussion, refer to Note 5 - Derivative Financial Instruments. The Company is involved in litigation arising in the normal course of business. In addition to the regulatory matters discussed in Note 2, the Company is involved in other regulatory matters arising in the normal course of business that involve rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such litigation or other regulatory matters could have a material effect on earnings and cash flows, none of this other litigation and none of these other regulatory matters are expected to materially change the Company's present liquidity position. RATE MATTERS Utility New York Jurisdiction - --------------------- In November 1995, Distribution Corporation filed in its New York jurisdiction a request for an annual base rate increase of $28.9 million with a requested return on equity of 11.5%. A two year settlement with the parties in this rate proceeding has been approved by the State of New York Public Service Commission (PSC). The settlement calls for annual base rate increases of $7.2 million in each of the fiscal years beginning October 1, 1996 and October 1, 1997 with no specified rate of return on equity. Earnings above a
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- 12% return on equity (excluding certain items and determined on a cumulative basis over the three years ending September 30, 1998) will be shared equally between shareholders and rate payers. On April 30, 1996, Distribution Corporation made a filing with the PSC that will provide a framework for a plan to make it possible for its residential and small commercial customers to purchase gas from a supplier other than Distribution Corporation. This filing, effective May 1, 1996 on a temporary basis, was made in compliance with the PSC's March 28, 1996 Order regarding Restructuring of the Emerging Competitive Natural Gas Market. Under the plan, all customers are able to choose from whom they want to buy gas, which could be Distribution Corporation, another utility, or a non-utility supplier or marketer. If a customer purchases gas from a supplier other than Distribution Corporation, the supplier would obtain and transport the gas to Distribution Corporation's pipeline system and Distribution Corporation would then deliver the gas to the customer. Distribution Corporation would continue to be responsible for maintaining its pipelines and responding to safety calls, but billing and other traditional services would be assumed by the alternate supplier. Final PSC approval of the April 30, 1996 filing is pending. In October 1994, Distribution Corporation filed in its New York jurisdiction a request for an annual base rate increase of $56.5 million with a requested return on equity of 12.85%. In September 1995, the PSC issued an order authorizing an annual base rate increase of $14.2 million with a return on equity of 10.4%. The new rates became effective as of September 20, 1995. Pennsylvania Jurisdiction - ------------------------- Distribution Corporation currently does not have a rate case on file with the Pennsylvania Public Utility Commission (PaPUC). Distribution Corporation will continue to monitor its financial position in the Pennsylvania jurisdiction to determine the necessity of filing a rate case in the future. On March 15, 1995, Distribution Corporation filed in its Pennsylvania jurisdiction a request for an annual base rate increase of $22.0 million with a return on equity of 13.25%. In September 1995, the PaPUC approved a settlement authorizing an annual base rate increase of $6.0 million with no specified rate of return on equity. The new rates became effective as of September 27, 1995. On March 8, 1994, Distribution Corporation filed in its Pennsylvania jurisdiction a request for an annual base rate increase of $16.0 million with a return on equity of 12.25%. A proposal for a WNC was included in this filing. On December 6, 1994, an order was issued by the PaPUC authorizing an annual base rate increase of $4.8 million with a return on equity of 11.0% and without a WNC. The new rates became effective as of December 7, 1994. General rate increases do not reflect the recovery of purchased gas costs. Such costs are recovered through operation of the purchased gas adjustment clauses of the regulatory authorities having jurisdiction. Pipeline and Storage. For a discussion of Supply Corporation's gathering rates, refer to Note 2 - Regulatory Matters.
Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Concl.) ------------------------------ On October 31, 1994, Supply Corporation filed for an annual rate increase of $21.0 million, with a requested return on equity of 12.6%. In February 1996, the FERC approved a settlement authorizing an annual rate increase of approximately $6.0 million with a return on equity of 11.3%. The new rates were put into effect on April 1, 1996, retroactive to June 1, 1995. With this settlement, Supply Corporation agreed not to seek recovery for increased cost of service until April 1, 1998. As part of the settlement discussed above, Supply Corporation also agreed not to seek recovery of revenues related to terminated Penn-York service from other storage customers until April 1, 2000, as long as the terminations were not greater than approximately 30% of the terminable service. Supply Corporation did receive notification of the termination of 3.3 Bcf of such service, effective March 31, 1996. However, Supply Corporation has successfully obtained executed contracts for all 3.3 Bcf at discounted prices. Such discounts will not have a material impact on the results of operations for Supply Corporation. An open season was recently completed concerning an additional 2.1 Bcf of such storage service, which will become available on April 1, 1997, and management is currently evaluating the results. Part II. Other Information - --------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits Exhibit Number Description of Exhibit ------- ---------------------- (12) Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the Twelve Months Ended June 30, 1996 and the fiscal years ended September 30, 1991 through 1995. (27) Financial Data Schedule (99) National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended June 30, 1996 and 1995. (b) Reports on Form 8-K (i) Report on Form 8-K was filed on June 14, 1996. Date of Report - June 13, 1996. Item 5. Other Events. Shareholder Rights Plan.
SIGNATURE --------- 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. NATIONAL FUEL GAS COMPANY (Registrant) /s/Joseph P. Pawlowski -------------------------------------- Joseph P. Pawlowski Treasurer and Principal Accounting Officer Date: August 9, 1996 --------------