-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, sZrlPJIHwU/TD9sQqqBuQUGxh3UevUB/sD5kSsLfOGQimxsUs/mU7nlhQ1fVBNOx ttUbIjh3KTuiae6kSXjhjQ== 0000070145-94-000042.txt : 19940513 0000070145-94-000042.hdr.sgml : 19940513 ACCESSION NUMBER: 0000070145-94-000042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL FUEL GAS CO CENTRAL INDEX KEY: 0000070145 STANDARD INDUSTRIAL CLASSIFICATION: 4924 IRS NUMBER: 131086010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03880 FILM NUMBER: 94527456 BUSINESS ADDRESS: STREET 1: 30 ROCKEFELLER PLZ CITY: NEW YORK STATE: NY ZIP: 10112 BUSINESS PHONE: 2125417533 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to 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.) 30 Rockefeller Plaza New York, New York 10112 (Address of principal executive offices) (Zip Code) (212) 541-7533 (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 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 April 30, 1994: 37,131,170 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) Penn-York Energy Corporation (Penn-York) Seneca Resources Corporation (Seneca) Empire Exploration, Inc. (Empire) Utility Constructors, Inc. (UCI) Highland Land & Minerals, Inc. (Highland) Leidy Hub, Inc. (Leidy Hub) Data-Track Account Services, Inc. (Data-Track) National Fuel Resources, Inc. (NFR) INDEX Part I. Financial Information Page Item 1. Financial Statements a. Consolidated Statements of Income and Earnings Reinvested in the Business - Three Months and Six Months Ended March 31, 1994 and 1993 3 - 4 b. Consolidated Balance Sheet - March 31, 1994 and September 30, 1993 5 - 6 c. Consolidated Statement of Cash Flows - Six Months Ended March 31, 1994 and 1993 7 d. Notes to Consolidated Financial Statements 8 - 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 26 Part II. Other Information Item 1. Legal Proceedings 27 - 29 Item 2. Changes in Securities * Item 3. Defaults Upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5. Other Information 30 Item 6. Exhibits and Reports on Form 8-K 30 Signature 31 * 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 March 31, 1994 1993 (Thousands of Dollars) INCOME Operating Revenues $473,722 $391,790 Operating Expenses Purchased Gas 251,998 188,732 Operation Expense 71,572 64,278 Maintenance 9,646 6,472 Property, Franchise and Other Taxes 37,206 32,079 Depreciation, Depletion and Amortization 18,744 18,051 Income Taxes - Net 29,870 24,983 419,036 334,595 Operating Income 54,686 57,195 Other Income 776 1,176 Income Before Interest Charges 55,462 58,371 Interest Charges Interest on Long-Term Debt 8,865 9,516 Other Interest 2,758 3,695 11,623 13,211 Net Income Available for Common Stock 43,839 45,160 EARNINGS REINVESTED IN THE BUSINESS Balance at January 1 353,342 327,554 397,181 372,714 Dividends on Common Stock (1994 - $.385; 1993 - $.375) 14,230 12,749 Balance at March 31 $382,951 $359,965 Earnings Per Common Share $1.18 $1.33 Weighted Average Common Shares Outstanding 37,049,775 33,988,070 See Notes to Consolidated Financial Statements Item 1. - Financial Statements National Fuel Gas Company Consolidated Statements of Income and Earnings Reinvested in the Business (Unaudited) Six Months Ended March 31, 1994 1993 (Thousands of Dollars) INCOME Operating Revenues $783,854 $686,010 Operating Expenses Purchased Gas 396,156 322,745 Operation Expense 135,120 126,268 Maintenance 15,062 12,328 Property, Franchise and Other Taxes 62,489 56,664 Depreciation, Depletion and Amortization 36,629 34,590 Income Taxes - Net 44,967 37,768 690,423 590,363 Operating Income 93,431 95,647 Other Income 1,815 2,686 Income Before Interest Charges 95,246 98,333 Interest Charges Interest on Long-Term Debt 17,748 19,587 Other Interest 5,859 7,644 23,607 27,231 Income Before Cumulative Effect 71,639 71,102 Cumulative Effect of Change in Accounting for Income Taxes 3,826 - Net Income Available for Common Stock 75,465 71,102 EARNINGS REINVESTED IN THE BUSINESS Balance at October 1 335,907 314,334 411,372 385,436 Dividends on Common Stock (1994 - $.77 ; 1993 - $.75) 28,421 25,471 Balance at March 31 $382,951 $359,965 Earnings Per Common Share Income Before Cumulative Effect $1.95 $2.09 Cumulative Effect of Change in Accounting for Income Taxes .10 - Net Income Available for Common Stock $2.05 $2.09 Weighted Average Common Shares Outstanding 36,899,747 33,948,193 See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) National Fuel Gas Company Consolidated Balance Sheet March 31, 1994 September 30, (Unaudited) 1993 (Thousands of Dollars) ASSETS Property, Plant and Equipment $2,070,661 $2,039,436 Less - Accumulated Depreciation, Depletion and Amortization 571,864 561,433 1,498,797 1,478,003 Current Assets Cash and Temporary Cash Investments 19,713 13,595 Receivables - Net 210,869 86,957 Unbilled Utility Revenue 54,180 27,210 Gas Stored Underground 4,301 22,120 Materials and Supplies - at average cost 21,982 20,848 Unrecovered Purchased Gas Costs 2,994 20,772 Prepayments 23,428 17,094 337,467 208,596 Other Assets Recoverable Future Taxes 104,156 - Deferred Contract Reformation Costs 14,394 24,862 Unamortized Debt Expense 27,115 28,735 Other Regulatory Assets 37,429 37,788 Deferred Charges 6,005 2,249 Other 23,839 21,307 212,938 114,941 $2,049,202 $1,801,540 See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) National Fuel Gas Company Consolidated Balance Sheet March 31, 1994 September 30, (Unaudited) 1993 (Thousands of Dollars) CAPITALIZATION AND LIABILITIES Capitalization: Common Stock Equity Common Stock, $1 Par Value Authorized - 100,000,000 Shares; Issued and Outstanding - 37,096,941 Shares and 36,661,008 Shares, Respectively $ 37,097 $ 36,661 Paid in Capital 373,937 363,677 Earnings Reinvested in the Business 382,951 335,907 Total Common Stock Equity 793,985 736,245 Long-Term Debt 478,417 478,417 Total Capitalization 1,272,402 1,214,662 Current and Accrued Liabilities Notes Payable to Banks and Commercial Paper 179,600 196,800 Accounts Payable 70,120 42,893 Amounts Payable to Customers 16,036 40,776 Other Accruals and Current Liabilities 158,958 69,523 424,714 349,992 Deferred Credits Taxes Refundable to Customers 31,985 - Unamortized Investment Tax Credit 14,401 14,743 Accumulated Deferred Income Taxes 273,596 188,793 Other Deferred Credits 32,104 33,350 352,086 236,886 Commitments and Contingencies - - $2,049,202 $1,801,540 See Notes to Consolidated Financial Statements Item 1. - Financial Statements (Cont.) National Fuel Gas Company Consolidated Statement of Cash Flows (Unaudited) Six Months Ended March 31, 1994 1993 (Thousands of Dollars) OPERATING ACTIVITIES Net Income Available for Common Stock $ 75,465 $ 71,102 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Effect of Noncash Adjustments: Cumulative Effect of Change in Accounting for Income Taxes (3,826) - Depreciation, Depletion and Amortization 36,629 34,590 Deferred Income Taxes 2,031 113 Other 3,082 3,014 113,381 108,819 Change in: Receivables and Unbilled Utility Revenue (150,882) (140,352) Gas Stored Underground and Materials and Supplies 16,685 25,419 Unrecovered Purchased Gas Costs 17,778 13,033 Prepayments (6,334) (8,094) Accounts Payable 27,227 21,295 Amounts Payable to Customers (24,741) (3,613) Other Accruals and Current Liabilities 103,903 81,514 Other Assets and Liabilities - Net 3,561 (7,348) Net Cash Provided by Operating Activities 100,578 90,673 INVESTING ACTIVITIES Capital Expenditures (57,197) (56,993) Other 3,002 7 Net Cash Used in Investing Activities (54,195) (56,986) FINANCING ACTIVITIES Change in Notes Payable to Banks and Commercial Paper (17,200) (57,200) Proceeds from Issuance of Long-Term Debt - 99,000 Reduction of Long-Term Debt - (111,380) Proceeds from Issuance of Common Stock 5,228 2,502 Dividends Paid on Common Stock (28,293) (25,403) Net Cash Used in Financing Activities (40,265) (92,481) Net Increase (Decrease) in Cash and Temporary Cash Investments 6,118 (58,794) Cash and Temporary Cash Investments at October 1 13,595 76,278 Cash and Temporary Cash Investments at March 31 $ 19,713 $ 17,484 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 fiscal 1994 consolidated financial statements will be examined by the Company's independent accountants after the end of the fiscal year. 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, 1993, 1992 and 1991, that are included in the Company's 1993 Annual Report to the Securities and Exchange Commission (SEC) on Form 10-K. The earnings for the six months ended March 31, 1994 should not be taken as a prediction for the fiscal year ending September 30, 1994, 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. 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. Rate Refunds. Supply Corporation and Penn-York collect revenues subject to refund if a final rate case settlement is pending. Estimated rate refunds are recorded which reflect management's current estimate as to the ultimate outcome of each rate case. On October 15, 1993, Supply Corporation filed a Stipulation and Agreement (the Settlement) with the Federal Energy Regulatory Commission (FERC) respecting two rate proceedings, which resolved all the issues in these proceedings. On December 30, 1993, the FERC issued an order approving the Settlement, with slight modification. Supply Corporation refunded to its customers $13,600,000, including interest, during the second quarter of fiscal 1994. Distribution Corporation will pass back its portion of this refund to its customers over a one year period beginning in March 1994 in New York and a one year period beginning in August 1994 in Pennsylvania. 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 six months ended March 31, 1994 and 1993, amounted to $24,453,000 and $25,813,000, respectively. Net income taxes paid during the six months ended March 31, 1994 and 1993 amounted to $15,616,000 and $9,052,000, respectively. Item 1. Financial Statements (cont.) On December 10, 1993, the Company entered into a non-cash investing activity whereby it issued 108,396 shares of Company common stock to Empire, which in turn exchanged those shares for approximately $3,200,000 of natural gas production assets. Reclassification. The cost of transporting gas is included on the Consolidated Statement of Income in "Purchased Gas." Prior period amounts have been reclassified to conform with current period presentation. Financial Instruments. Seneca has entered into certain price swap agreements to effectively manage a portion of the market risk associated with fluctuations in the price of natural gas. The agreements call for Seneca to make monthly payments to (or receive payments from) other parties based upon the differential between a fixed and a variable price as specified by the contract. The current agreements run through December 1994 and have a remaining notional amount of 9,900,000 million British Thermal Units of natural gas equivalent at March 31, 1994. NFR participates in the gas futures market to lock in natural gas prices to decrease volatility related to fluctuations in market prices. Gains or losses resulting from changes in the market value of these transactions are deferred until the hedged commodity transaction occurs. Seneca and NFR are exposed to credit risk in the event of nonperformance by counterparties on natural gas swaps and futures, but Seneca and NFR do not anticipate nonperformance by any of these counterparties. Management does not expect the gas futures or swap agreements to have a material effect on either the results of operations or the financial condition of the Company. The Company has SEC authority to enter into interest rate swaps associated with short-term borrowings up to a notional amount of $200,000,000. Currently, the Company does not have any interest rate swap agreements outstanding. NOTE 2 - Regulatory Matters FERC Order 636 Transition Costs. As a result of the industry-wide restructuring under FERC Order 636, Distribution Corporation is incurring transition costs billed by Supply Corporation and other upstream pipeline companies. Distribution Corporation's current estimate of these transition costs, including its allocable share of Supply Corporation's transition costs, is approximately $147,000,000. The majority of these costs relate to gas supply realignment (GSR) and stranded costs. This estimate was determined from information provided in the Order 636 compliance filings of Supply Corporation and the five interstate pipeline companies that directly serve Supply Corporation, and is exclusive of any potential stranded costs related to production plant or gathering facilities which pipeline companies, including Supply Corporation, may file for at a future date and any potential GSR costs charged by an upstream supplier, which are subject to the outcome of its bankruptcy proceedings. To date, approximately $26,100,000 of transition costs have been accepted by the FERC for billing to Distribution Corporation or Item 1. Financial Statements (cont.) Supply Corporation, subject to refund. This is exclusive of $14,687,000 of Supply Corporation's over-recovered purchased gas costs refunded to Distribution Corporation on September 30, 1993. Distribution Corporation has been and will continue to be actively challenging relevant FERC filings made by the upstream pipeline companies to ensure the eligibility and prudency of all transition cost claims. This industry-wide issue will potentially involve years of rate proceedings before the FERC and state commissions. Currently, Distribution Corporation has estimated that transition costs allocable to the Pennsylvania jurisdiction are approximately $50,600,000. On October 15, 1993, the Pennsylvania Public Utility Commission (PaPUC) issued a policy statement on the recovery of transition costs. The policy statement permits local distribution companies, such as Distribution Corporation, the opportunity for full recovery of GSR and stranded costs from customers through a separate surcharge, and recovery of under-recovered purchased gas costs (Account 191 costs) and costs related to new facilities from sales customers through gas cost recovery rates. Effective August 1, 1993, Distribution Corporation began recovering Account 191 transition costs from its Pennsylvania sales customers in connection with its annual purchased gas cost filing. On December 1, 1993, the PaPUC issued an order on certain issues concerning recovery of GSR and stranded costs by Distribution Corporation in connection with its March 31, 1993 rate filing with the PaPUC. Under this order, Distribution Corporation began collecting, effective December 1, 1993, approximately $4,000,000 of GSR and stranded costs from its customers. Distribution Corporation is also allowed quarterly updates for transition cost recovery and has implemented the first two such updates for an additional net $1,166,000, effective as of February 1 and May 1, 1994. In its August 27, 1993 rate filing with the State of New York Public Service Commission (PSC), Distribution Corporation filed for recovery of an initial annual amount of $24,900,000 of estimated transition costs. Currently, total estimated transition costs for the New York jurisdiction are approximately $96,400,000. The PSC has not determined its policy with respect to the recovery of transition costs. However, on October 28, 1993, the PSC instituted a state-wide proceeding to review the issues associated with Order 636 restructuring. The PSC staff, in connection with this state-wide proceeding, has recently recommended that transition costs, exclusive of Account 191 costs, be allocated between sales and transportation customers. The PSC currently expects to have this proceeding concluded before the 1994-1995 heating season. Distribution Corporation is actively participating in this state-wide proceeding. While the state-wide proceeding is continuing, the PSC staff, in connection with the above-noted and on-going rate case, has proposed that transition costs allocable to sales customers be recovered from such customers through the monthly Gas Adjustment Clause (GAC). Distribution Corporation has accepted the PSC staff's proposal and, effective February 1, 1994, began recovering such costs from sales customers through the GAC. As with all costs included in the GAC mechanism, the ultimate recovery of transition costs is subject to final approval by the PSC. Since recovery of transition costs from transportation customers is still being contested in this rate case, Distribution Corporation will continue to defer amounts relating to those customers until the PSC reaches a decision on this matter. Item 1. Financial Statements (cont.) In his April 19, 1994 recommended decision in Distribution Corporation's August 27, 1993 rate filing, the Administrative Law Judge recommended that all transition costs be collected from sales customers through the monthly GAC. Distribution Corporation is contesting this methodology and believes that a portion of transition costs should be recovered from transportation customers. Management believes that any transition costs resulting from the implementation of Orders 636, 636-A and 636-B should be fully recoverable from the respective customers of Supply Corporation and Distribution Corporation to the extent such costs are prudently incurred. NOTE 3 - Corporate Realignment Penn-York/Supply Corporation Merger. On January 19, 1994, the FERC issued an order approving the merger of Penn-York into Supply Corporation. After the merger, Supply Corporation will continue to provide all the services Penn-York currently provides under the same rates, terms and conditions. On March 4, 1994, the SEC approved the merger. The expected date of the Penn-York/Supply Corporation merger is July 1, 1994. Empire/Seneca Merger. On April 26, 1994, the Company received SEC approval to combine its Appalachian, Gulf Coast and West Coast exploration and production operations under Seneca through the merger of Empire into Seneca. Supply Corporation's exploration and production activities have already been transferred to Empire, effective January 1, 1994. The expected date of the Empire/Seneca merger is July 1, 1994. These mergers, which will combine all of the Company's natural gas storage services into Supply Corporation and all of the Company's exploration and production operations into Seneca, should serve to provide operational efficiencies. NOTE 4 - Income Taxes On October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method to an asset and liability approach. Previously, deferred taxes were provided for the tax effects of timing differences between financial reporting purposes and tax reporting purposes. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their tax bases. In addition, such deferred tax assets and liabilities will be adjusted for the effects of enacted changes in tax laws and rates. The cumulative effect of this change increased net income by $3,826,000 as a result of the reduction in deferred income taxes associated with the Company's nonregulated operations. A reduction in recorded deferred income taxes associated with rate-regulated activities of $31,985,000 has been reclassified to a regulatory liability since such amounts are expected to be refundable to customers under regulatory procedures. Item 1. Financial Statements (cont.) In addition, under SFAS 109, the Company is required to recognize additional deferred tax liabilities and assets for timing differences on which deferred tax treatment was not permitted by regulatory authorities. The recognition of these deferred tax balances had no effect on earnings due to the recording of corresponding regulatory assets representing future amounts collectible from customers in the rate-making process. Upon adoption of SFAS 109, the additional deferred taxes amounted to $104,156,000. At March 31, 1994, the deferred tax liabilities (assets) were comprised of the following (in thousands): Accumulated Deferred Deferred Income Taxes Income Taxes Current* Deferred Tax Liabilities: Excess of tax over book depreciation $176,839 $ - Exploration and intangible well drilling costs 73,188 - Other 65,404 - Total Deferred Tax Liabilities 315,431 - Deferred Tax Assets: Deferred investment tax credits (8,793) - Overheads capitalized for tax purposes (8,697) - Tax credit carryforwards (5,106) - Provisions for rate contingencies and refunds - (621) Unrecovered purchased gas costs - (1,951) Other (19,239) - Total Deferred Tax Assets (41,835) (2,572) Total Net Deferred Income Taxes $273,596 $(2,572) * Included on the Consolidated Balance Sheet in "Other Accruals and Current Liabilities." The components of federal and state income taxes included in the Consolidated Statement of Income are as follows (in thousands): Six Months Ended March 31, 1994 1993 Operating Expenses: Current Income Taxes - Federal $37,756 $33,942 State 5,180 3,713 Deferred Income Taxes 2,031 113 44,967 37,768 Other Income Deferred Investment Tax Credit (343) (350) Cumulative effect prior to October 1, 1993 of applying SFAS No. 109 (3,826) - Total Income Taxes $40,798 $37,418 Item 1. Financial Statements (cont.) 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): Six Months Ended March 31, 1994 1993 Net income available for common stock $75,465 $71,102 Total income taxes 40,798 37,418 Income before income taxes 116,263 108,520 Income tax expense, computed at statutory rate of 35% in 1994 and 34% in 1993 40,692 36,897 Increase (reduction) in taxes resulting from: Current state income taxes 3,366 2,451 Depreciation 1,128 1,342 Production tax credits (751) (1,265) Miscellaneous 189 (2,007) Income taxes before cumulative effect 44,624 37,418 Cumulative effect prior to October 1, 1993 of applying SFAS No. 109 (3,826) - Total Income Taxes $40,798 $37,418 NOTE 5 - Capitalization Common Stock. During the six months ended March 31, 1994, the Company issued 123,022 shares of common stock under the Company's Customer Stock Purchase Plan and 59,600 shares to participants in the Company's section 401(k) plans. In December 1993, 121,494 shares of restricted stock were awarded under the 1993 Award and Option Plan. Restrictions on 113,494 shares will lapse respecting approximately one-sixth of such shares on each January 2, 1996 through 2001. Restrictions on 8,000 shares will lapse respecting approximately one-fourth of such shares on each January 2, 2001 through 2004. In December 1993, the Company issued 108,396 shares of common stock to Empire, which in turn exchanged those shares for approximately $3,200,000 of natural gas production assets. The Company has $19,917,000 remaining outstanding principal amount of 9-1/2% debentures due July 1, 2019, which it intends to call on July 1, 1994 in anticipation of refinancing with lower cost debt. Item 1. Financial Statements (cont.) NOTE 6 - Other Post-Retirement Benefits In addition to providing retirement plan benefits, the Company currently provides health care and life insurance benefits for substantially all retired employees under a post-retirement benefit plan (Post-Retirement Plan). The Company has adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), effective October 1, 1993. This statement required the Company to change its accounting for these post-retirement benefits from the "pay-as-you-go" (cash) basis to the accrual basis. The Company has established Voluntary Employees' Beneficiary Association (VEBA) trusts for collectively bargained employees and non-bargaining employees. The VEBA trusts are similar to the Company's Retirement Plan trust. Contributions to the VEBA trusts are tax deductible, subject to limitations contained in the Internal Revenue Code and regulations. Contributions to the VEBA trusts are made to fund employees' post-retirement health care and life insurance benefits, as well as benefits as they are paid to current retirees. The Company has elected to amortize the initial accumulated liability (transition obligation) to net periodic post-retirement benefit cost on a straight-line basis over a 20-year period. The following table sets forth the Post-Retirement Plan's funded status, as determined by its consulting actuary, as of October 1, 1993: (in thousands) Accumulated Post-Retirement Benefit Obligation $179,742 Fair Value of Post-Retirement Plan Assets 7,185 Transition Obligation $172,557 Service Cost $ 3,974 Interest Cost 13,714 Expected Return on Post-Retirement Plan Assets (1,035) Amortization of Transition Obligation 8,628 Post-Retirement Benefit Cost for Fiscal 1994 $ 25,281 Approximately $16,560,000 of post-retirement benefit cost has been recorded for the six months ended March 31, 1994. Of this amount, $1,073,000 has been deferred for regulatory purposes and $15,487,000 has been recognized in the Consolidated Statement of Income. The weighted-average assumed discount rate used in determining the accumulated post-retirement benefit obligation was 7.75% at the beginning and end of the fiscal year. The average assumed annual rate of salary increase for the applicable life insurance plans was 5%. The annual rate of increase in the per capita cost of covered medical care benefits for the active participants and medical plans available to new retirees was assumed to be 13% for 1994; this rate was assumed to decrease Item 1. Financial Statements (Concl.) gradually to 5.5% by the year 2002 and remain at that level thereafter. The annual rate of increase in the per capita cost of covered medical care benefits for the medical plans not available to new retirees was assumed to be 8% for 1994, 7% for 1995, 6% for 1996 and 5.5% for each year after 1996. The annual rate of increase in the per capita cost of covered prescription drug benefits was assumed to be 14% for 1994. This rate was assumed to decrease gradually to 5.5% by the year 2003 and remain level thereafter. The health care cost trend rate assumptions used to calculate the per capita cost of covered medical care benefits have a significant effect on the amounts reported. If the health care cost trend rates were increased by 1% in each year, the accumulated post-retirement benefit obligation as of October 1, 1993, would be increased by $26.6 million. This 1% change would also increase the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for 1994 by $3.1 million. Distribution Corporation, Supply Corporation and Penn-York represent virtually all of the Company's total post-retirement benefit costs. The PSC, PaPUC and the FERC have each issued a generic policy statement on SFAS 106. These policy statements essentially allow for the full recovery of post-retirement benefit costs provided amounts collected are funded. Distribution Corporation, Supply Corporation and Penn-York are fully recovering their net periodic post-retirement benefit costs. The Company's current policy is to invest Post-Retirement Plan assets primarily in equity securities and municipal bonds. NOTE 7 - Commitments and Contingencies In addition to the litigation discussed in Part II, Item 1 of this report, 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 in the year of resolution, 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. Net income available for common stock for the quarter ended March 31, 1994 was $43.8 million, or $1.18 per common share. This compares with $45.2 million or $1.33 per common share, for the quarter ended March 31, 1993. Net income available for common stock for the six months ended March 31, 1994 was $75.5 million, or $2.05 per common share. This includes $3.8 million of earnings, or $.10 per common share, related to the cumulative effect of a required change in accounting for income taxes adopted October 1, 1993, in accordance with the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Income before the cumulative effect of the change in accounting for income taxes amounted to $71.6 million, or $1.95 per common share. Net income available for common stock for the six months ended March 31, 1993 was $71.1 million, or $2.09 per common share. Per share amounts reflect a greater number of weighted average shares outstanding in the current periods resulting mainly from the sale of 2.5 million shares of common stock on May 20, 1993. The decrease in earnings for the quarter ended March 31, 1994, compared with the same quarter of the prior year, is attributable mainly to lower earnings of the Company's Pipeline and Storage segment. This resulted primarily from the Federal Energy Regulatory Commission's (FERC) mandated change, under Order 636, in Supply Corporation's rate design which reduces the seasonality of its annual revenues. This was partially offset by an increase in rates for both Supply Corporation and the Utility Operation in New York and Pennsylvania. The Company's nonregulated operations showed mixed results for the quarter. The Exploration and Production segment's earnings were down despite increased oil and gas production and higher gas prices, as greater income tax expense resulted partly from a decline in the Section 29 tight sands tax credit. The earnings of the Other Nonregulated segment increased because of higher earnings from the Company's gas marketing subsidiary and timber operations. In addition, the Company's pipeline construction subsidiary incurred a smaller loss this year compared with last year's second quarter. The increase in net income, before the cumulative effect of the change in accounting for income taxes, for the six month's ended March 31, 1994, compared with the same period of last year, is attributable mainly to increased rates in the Company's regulated operations, partially offset by the change in rate design of Supply Corporation, discussed above, and higher earnings of the Company's nonregulated operations. 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.) Financial Information by Business Segment. The following tables compare System Throughput, Production Volumes, Operating Revenues and Operating Income Before Income Taxes by business segment, with the corresponding prior periods: SYSTEM THROUGHPUT (millions of cubic feet-MMcf) Three Months Ended Six Months Ended March 31, March 31, 1994 1993 %Change 1994 1993 %Change Utility Operation Retail Sales: Residential 42,627 40,095 6.3 69,624 66,732 4.3 Commercial 13,318 12,060 10.4 21,040 19,867 5.9 Industrial 3,129 2,044 53.1 4,845 4,912 (1.4) 59,074 54,199 9.0 95,509 91,511 4.4 Transportation 16,719 15,573 7.4 28,977 26,738 8.4 75,793 69,772 8.6 124,486 118,249 5.3 Pipeline and Storage Wholesale Sales* - 58,238(100.0) - 100,158(100.0) Transportation 109,053 37,789 188.6 188,824 74,387 153.8 109,053 96,027 13.6 188,824 174,545 8.2 Less-Intersegment Throughput: Sales - 55,073(100.0) - 94,138(100.0) Transportation 71,425 10,461 582.8 121,546 18,543 555.5 71,425 65,534 9.0 121,546 112,681 7.9 Total System Throughput 113,421 100,265 13.1 191,764 180,113 6.5 * Effective August 1, 1993, sales contracts were converted to transportation and storage arrangements as a result of restructuring under FERC Order 636. PRODUCTION VOLUMES Exploration and Production Three Months Ended Six Months Ended March 31, March 31, 1994 1993 %Change 1994 1993 %Change Gas Production - (MMcf) Gulf Coast 4,439 3,658 21.4 7,516 5,450 37.9 West Coast 174 284 (38.7) 381 582 (34.5) Appalachia 1,537 1,646 (6.6) 3,123 3,321 (6.0) 6,150 5,588 10.1 11,020 9,353 17.8 Oil Production - (Thousands of Barrels) Gulf Coast 153 114 34.2 252 167 51.0 West Coast 92 106 (13.2) 194 219 (11.4) Appalachia 2 2 - 6 7 (14.3) 247 222 11.3 452 393 15.0 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) OPERATING REVENUES (in thousands) Three Months Ended Six Months Ended March 31, March 31, 1994 1993 % Change 1994 1993 %Change Regulated Utility Operation Retail Revenues: Residential $297,836 $254,936 16.8 $494,496 $439,490 12.5 Commercial 85,117 68,997 23.4 135,478 116,585 16.2 Industrial 15,611 9,964 56.7 24,005 23,148 3.7 398,564 333,897 19.4 653,979 579,223 12.9 Off-System Sales 1,757 - - 1,757 - - Transportation 13,026 10,926 19.2 21,238 17,661 20.3 Other 1,121 966 16.0 2,192 1,699 29.0 414,468 345,789 19.9 679,166 598,583 13.5 Pipeline and Storage Wholesale Revenues* - 174,338(100.0) - 332,361(100.0) Storage Service 15,100 9,671 56.1 29,653 18,623 59.2 Transportation 23,295 10,218 128.0 45,977 19,469 136.2 Other 1,064 578 84.1 1,945 1,370 42.0 39,459 194,805 (79.7) 77,575 371,823 (79.1) Nonregulated Exploration and Production 18,656 15,790 18.2 32,988 27,758 18.8 Other 23,174 10,052 130.5 37,960 19,083 98.9 41,830 25,842 61.9 70,948 46,841 51.5 Less-Intersegment Revenues 22,035 174,646 (87.4) 43,835 331,237 (86.8) $473,722 $391,790 20.9 $783,854 $686,010 14.3 * Effective August 1, 1993, sales contracts were converted to transportation and storage arrangements as a result of restructuring under FERC Order 636. OPERATING INCOME BEFORE INCOME TAXES (in thousands) Three Months Ended Six Months Ended March 31, March 31, 1994 1993 % Change 1994 1993 %Change Regulated Utility Operation $61,289 $56,829 7.8 $ 94,921 $ 92,409 2.7 Pipeline and Storage 16,553 21,588 (23.3) 33,281 35,534 (6.3) Nonregulated Exploration and Production 6,380 5,126 24.5 9,964 8,338 19.5 Other 1,203 (747)261.0 1,838 (1,769)203.9 7,583 4,379 73.2 11,802 6,569 79.7 Corporate (869) (618)(40.6) (1,606) (1,097)(46.4) $84,556 $82,178 2.9 $138,398 $133,415 3.7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) Utility Operation. Operating income before income taxes for the Utility Operation for the quarter and six months ended March 31, 1994, increased $4.5 million and $2.5 million, respectively, as compared with the same periods a year ago. Total throughput for the Utility Operation increased 6 billion cubic feet (Bcf) and 6.2 Bcf for the quarter and six month period, respectively, mainly as a result of colder weather in the Company's service territory. The increase in operating revenues for this segment reflects increased gas costs due to higher throughput and higher average prices of gas as well as general rate increases effective July 23, 1993 in the New York jurisdiction and December 1, 1993 in the Pennsylvania jurisdiction. However, the earnings impact of colder weather experienced by the Utility Operation's New York jurisdiction was tempered by its weather normalization clause (WNC), which serves to diminish the impact on earnings of deviations from normal weather. For the quarter and six months ended March 31, 1994, Distribution Corporation's WNC resulted in a benefit to its customers of $5.3 million and $6.5 million, respectively. In addition, the severe cold weather during January and February 1994 caused an unusually high number of repairs of line leaks thus increasing operation and maintenance expense for the quarter by approximately $1.7 million. Degree Days Three Months Ended March 31: Percent Colder Than Normal 1994 1993 Normal Last Year Buffalo 3,345 3,622 3,383 8.3 7.1 Erie 3,189 3,554 3,164 11.4 12.3 Six Months Ended March 31: Buffalo 5,606 5,949 5,667 6.1 5.0 Erie 5,226 5,737 5,188 9.8 10.6 Rate Matters - Utility Operation. New York Jurisdiction: In August 1993, Distribution Corporation filed in its New York jurisdiction a request for an annual rate increase of $55.4 million, or 8.5%, with a return on equity of 12.16%. Included in the requested rate increase was an initial amount of $24.9 million for the recovery of transition costs arising from FERC Order 636. This represented 3.8% out of the total 8.5% requested increase. The State of New York Public Service Commission (PSC) has not determined its policy with respect to the recovery of transition costs. However, on October 28, 1993, the PSC instituted a state-wide proceeding to review the issues associated with Order 636 restructuring. The PSC staff, in connection with this state-wide proceeding, has recently recommended that transition costs, exclusive of under-recovered purchased gas costs, be allocated between Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) sales and transportation customers. The PSC currently expects to have this proceeding concluded before the 1994-1995 heating season. Distribution Corporation is actively participating in this state-wide proceeding. While the state-wide proceeding is continuing, the PSC staff, in connection with the above-noted and on-going rate case, has proposed that transition costs allocable to sales customers be recovered from such customers through the monthly Gas Adjustment Clause (GAC). Distribution Corporation has accepted the PSC staff's proposal and, effective February 1, 1994, began recovering such costs from sales customers through the GAC. As with all costs included in the GAC mechanism, the ultimate recovery of transition costs is subject to final approval by the PSC. Since recovery of transition costs from transportation customers is still being contested in this rate case, Distribution Corporation will continue to defer amounts relating to those customers until the PSC reaches a decision on this matter. On April 19, 1994, the Administrative Law Judge (ALJ) issued his recommendation to the PSC in this New York rate case. The recommended decision was for an annual base rate increase of $9.8 million, or 1.5%, exclusive of transition costs, with a return on common equity of 10.4%. In addition, the ALJ recommended that all transition costs be collected from sales customers through the monthly GAC. Among other issues, Distribution Corporation is contesting the recommended return on equity and transition cost recovery methodology and has filed its exceptions to the ALJ's decision. After a final decision by the PSC, new rates are expected to become effective in late July 1994. In July 1993, in connection with a previously approved two-year settlement, Distribution Corporation received PSC approval for the second year of this settlement. The approval was for a rate increase of $13.3 million, or 2.1%, for the 12-month period ending July 31, 1994. This rate increase went into effect on July 23, 1993. Pennsylvania Jurisdiction: In March 1993, Distribution Corporation filed with the Pennsylvania Public Utility Commission (PaPUC) for an annual rate increase in its Pennsylvania jurisdiction of $33.4 million, or approximately 16.2%, with a return on equity of 12.4%. Included in the requested rate increase was an initial amount of $8.2 million for the recovery of transition costs arising from FERC Order 636. On December 1, 1993, an order was issued by the PaPUC authorizing an annual rate increase of $11.4 million, or 4.9%, exclusive of transition costs. The new rates became effective as of December 1, 1993. The PaPUC's December 1 order also addressed certain issues concerning recovery of gas supply realignment (GSR) costs and stranded costs resulting from the implementation of FERC Order 636. Under this order, Distribution Corporation began collecting, effective December 1, 1993, approximately $4 million of GSR and stranded costs from its customers. Distribution Corporation is also allowed quarterly updates for transition cost recovery and has implemented the first two such updates for an additional net $1.2 million, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) effective as of February 1 and May 1, 1994. In addition, in connection with its annual purchased gas cost filing, effective August 1, 1993, Distribution Corporation began recovering estimated transition costs from its Pennsylvania customers related to its upstream pipeline suppliers' balances of under-recovered purchased gas costs to be billed to Distribution Corporation as a result of their restructuring under Order 636. On March 8, 1994, Distribution Corporation filed in its Pennsylvania jurisdiction a request for an annual rate increase of $16 million, with a return on common equity of 12.25%. A proposal for a WNC was included in this filing. New rates are expected to become effective in December 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. Operating income before income taxes for the Pipeline and Storage segment for the quarter and six months ended March 31, 1994, decreased $5 million and $2.3 million, respectively, compared with the same periods a year ago. The most significant impact on pretax operating income for this segment was the effect of Supply Corporation's Straight Fixed-Variable (SFV) rate design under FERC Order 636, which became effective August 1, 1993. Under SFV, substantially all fixed costs are recovered in the demand or reservation charge, removing the seasonality in the revenue stream and making monthly operating income relatively flat. The rate design that Supply Corporation was under prior to adopting Order 636 allowed for recovery of approximately 50% of fixed costs in the demand charge and 50% in the commodity charge. Under this prior rate design, more revenue was recognized in periods of high throughput (i.e., winter months). Change to the SFV rate design accounted for an approximate $6.1 million and $8.6 million decrease in revenues and pretax operating income for the three and six months ended March 31, 1994, respectively, compared with the same periods of the prior year. While the SFV rate design negatively impacted the first and second quarters, the impact on the third and fourth quarters should create a positive variance relative to the prior year. This decrease in pretax operating income for the quarter and six months ended March 31, 1994 was partially offset by a favorable rate settlement approved by the FERC in October 1993. Revenues for the quarter and six months ended March 31, 1993 were based upon rates that were in effect, subject to refund. Management reduced those revenues by recording an estimated refund provision accrual. Based upon settlement of these rate proceedings in October 1993, it was determined that the estimated refund provision was too high and revenues were understated for the quarter and six months ended March 31, 1993, by approximately $1.8 million and $5.5 million, respectively. This revenue was recognized in the fourth quarter of fiscal 1993. In addition, for the three and six months ended March 31, 1994, Supply Corporation recorded the receipt of approximately $.4 million and $1.7 million, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) respectively, from upstream pipeline companies related to prior period joint storage operations. Rate Matters - Pipeline and Storage. For a discussion of the Penn-York and Supply Corporation merger, refer to Note 3 - Corporate Realignment. On December 30, 1993, the FERC issued an order approving, with slight modification, an Offer of Settlement (the Settlement), which was filed with the FERC on October 15, 1993, respecting two Supply Corporation rate proceedings. As modified, the Settlement provided for rates that produced annual revenues of approximately $125 million between July 1, 1992 and July 31, 1993. Rates for the period beginning August 1, 1993 reflect reduced costs after restructuring plus certain settlement concessions and provide for rates that will produce revenues of approximately $121 million annually. Supply Corporation expects to file for new rates in September 1994, for rates that will become effective in April 1995. Exploration and Production. Operating income before income taxes from the Company's Exploration and Production operations for the quarter and six months ended March 31, 1994, increased $1.3 million and $1.6 million, respectively, compared with the same periods a year ago mainly because of increased natural gas production combined with a higher weighted average price received for gas. System natural gas production increased 10% and 18%, respectively, for the quarter and six months ended March 31, 1994. The production increase came from this segment's Gulf Coast operations and reflects its success both offshore and with its horizontal drilling program in central Texas. Production increases in the Gulf coast operations more than offset production declines in the Appalachian and West Coast operations. System weighted average gas prices increased $.38 per Mcf and $.18 per Mcf for the quarter and six months ended March 31, 1994, respectively. Other Nonregulated. Operating income before income taxes associated with this segment for the quarter and six months ended March 31, 1994, increased $2 million and $3.6 million, respectively, compared with the same periods a year ago. The increases in both periods reflect improved performance by the Company's pipeline construction subsidiary, its gas marketing operations and its timber operations. UCI, the Company's pipeline construction subsidiary, incurred a smaller loss in this year's quarter and six month period. NFR, the Company's gas marketing subsidiary, improved its performance as a result of an increase in volumes of gas marketed. Timber operations reflect increased log sales and higher average prices. Income Taxes. Income taxes increased $4.9 million and $7.2 million, respectively, for the quarter and six months ended March 31, 1994, mainly because of an increase in pretax income. The increase in income taxes also reflects the increase in the Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) federal tax rate from 34% to 35% and lower Section 29 tight sands tax credits. These credits, which relate to production from qualified gas wells, decreased approximately $.6 million for the quarter and $.5 million for the six months ended March 31, 1994, as the production from qualified gas wells declined. Interest Charges. Total interest charges decreased $1.6 million and $3.6 million, respectively, for the quarter and six months ended March 31, 1994. Interest on long-term debt decreased $.7 million and $1.8 million, respectively, for the quarter and six month period, mainly because of lower interest rates due to the refinancing activities that have occurred since November 1992. Other interest decreased $.9 million and $1.8 million for the quarter and six month period, respectively, as a result of decreased interest on short-term debt because of lower interest rates coupled with lower average amounts outstanding. In addition, both the quarter and six month period ended March 31, 1993, reflected interest on Supply Corporation's balance of over-recovered purchased gas costs. In connection with Supply Corporation's restructured under FERC Order 636, the balance of Supply Corporation's over-recovered purchased gas costs was refunded to its customers on September 30, 1993, thus the quarter and six months ended March 31, 1994 reflect no interest charges related to purchased gas costs. CAPITAL RESOURCES AND LIQUIDITY The Company's primary sources of cash during the six month period consisted of cash provided by operating activities 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 and section 401(K) Plans. 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. For the six months ended March 31, 1994, a noncash income item also included the cumulative effect of a required change in accounting for income taxes in accordance with SFAS 109. Cash provided by operating activities in the Utility Operation and the Pipeline and Storage segments may vary substantially from period to period because of fluctuations in weather, over/under-recovered purchased gas costs, supplier refunds and the impact of rate cases. The impact of weather in the Utility Operation's New York rate jurisdiction is tempered by its WNC. In addition, effective August 1, 1993, under FERC Order 636, Supply Corporation no longer incurs over/under-recovered purchased gas costs. Also, Supply Corporation's SFV rate design reduces the impact of weather on its cash flow. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) Because of the seasonal nature of the Company's heating business, revenues are relatively high during the six months ended March 31, and the Consolidated Balance Sheet at the end of March usually shows an increase in cash and temporary cash investments over balances at the end of September. Receivables and unbilled utility revenue historically increase from September to March 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. Under the last-in, first-out (LIFO) method of accounting, 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 $100.6 million for the six months ended March 31, 1994, an increase of $9.9 million compared with the same period of the prior year. This increase mainly reflects the exploration and production segment's higher operating revenues and lower receivable balances. Investing Cash Flow Capital Expenditures The Company's capital expenditures totaled $60.4 million during the six months ended March 31, 1994. This total includes $3.2 million of gas production assets acquired in exchange for Company common stock. Total expenditures for the six month period represent 41% of the total current capital expenditure budget for fiscal 1994 of $147.2 million. The following table presents capital expenditures for the six months ended March 31, 1994, by business segment: (in thousands) Percentage Regulated Utility Operation $25,108 41.6 % Pipeline and Storage 7,787 12.9 Nonregulated Exploration and Production 25,561 42.3 Other 1,925 3.2 27,486 45.5 $60,381 100.0% The bulk of the Utility Operation's capital expenditures were made for replacement of mains and main extensions, as well as for the replacement of service lines and the installation of new services. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) Pipeline and Storage capital expenditures included approximately $2 million to increase compression at two locations. In addition, capital expenditures were made for additions, improvements, and replacements to this segment's transmission and storage systems. Significant capital expenditures related to Supply Corporation's Laurel Fields Storage Project are not expected to be incurred until 1996. Filings with the FERC are expected to be made by early summer to implement this project. Laurel Fields is a 19 Bcf underground natural gas storage development project. Approximately 81% of the Exploration and Production segment's capital expenditures were made by Seneca for the exploration and development of oil and gas properties, specifically offshore in the Gulf of Mexico and in the Austin Chalk formation in the Northeast Clay field in central Texas. In addition, Empire acquired $3.2 million of natural gas production assets in exchange for Company common stock. This acquisition added approximately 3 Bcf of gas reserves. Other Nonregulated capital expenditures included expenditures by UCI for the acquisition of equipment. 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. The magnitude of future capital expenditures in the regulated segments depends, to a large degree, upon market conditions coupled with adequate rate relief. Other Cash received on the sale of the Company's investment in property, plant and equipment is reflected as a cash flow from investing activities. Approximately $2.3 million of cash was received in the first quarter of fiscal 1994, related to the sale of Seneca's interest in its Alberta, Canada gas reserves. Financing Cash Flows Consolidated short-term debt decreased by $17.2 million during the first six months of fiscal 1994. 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, through Seneca and NFR, is engaged in the gas futures market and in certain natural gas price swap agreements as a means of managing a portion of the market risk associated with fluctuations in the market price of natural gas. In addition, the Company has SEC authority to enter into interest rate swaps associated with short-term borrowings. For further discussion, see disclosure under "Financial Instruments" in Note 1, "Summary of Significant Accounting Policies." Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) The Company has $19.9 million remaining outstanding principal amount of 9-1/2% debentures due July 1, 2019, which it intends to call on July 1, 1994 in anticipation of refinancing with lower cost debt. At March 31, 1994, the Company had SEC authority remaining under a shelf registration filed in March 1993 to issue and sell up to $320 million of debentures and/or medium-term notes. Depending on market conditions and the requirements of the Company, the Company may issue and sell approximately $100 million of the debentures and/or medium-term notes within the remainder of fiscal 1994. The proceeds of such sales would be used to replace outstanding short-term borrowings, to redeem or discharge higher cost long-term debt, to finance a portion of the Company's capital expenditures and/or for other general corporate purposes. In addition to the litigation discussed in Part II, Item 1, of this report, 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 in the year of resolution, none of this other litigation and none of these other regulatory matters are expected to change materially the Company's present liquidity position. The Company's present liquidity position is believed to be adequate to satisfy known demands. Under the Company's covenants of its indenture covering long-term debt, at March 31, 1994, the Company would have been permitted to issue up to a maximum of $694 million in additional long-term unsecured indebtedness, subject to maturity and long-term interest rates. In addition, at March 31, 1994, the Company had regulatory authorizations and unused short-term credit lines that would have permitted it to borrow an additional $220.4 million of short-term debt. Part II. Other Information Item 1. Legal Proceedings Paragon/TGX Litigation A. New York Litigation On November 30, 1984, Distribution Corporation commenced an action against Paragon Resources, Inc. (Paragon) and TGX Corp. (collectively Paragon/TGX), in the United States District Court for the Western District of New York (the District Court) seeking a declaratory judgment concerning the contract effect of a December 20, 1983 PSC order (the Disapproval Order) which, among other things, disapproved a 1974 gas purchase agreement between Distribution Corporation's predecessor in interest, Iroquois Gas Corporation, and Paragon (the "Paragon Contract"). Paragon/TGX counterclaimed for (i) a declaration that the Disapproval Order did not affect the Paragon Contract in any way, whatsoever, (ii) approximately $4,400,000 in respect of take-or-pay claims, and (iii) unquantified amounts in respect of other alleged breaches of the Paragon Contract. Commencing with its payment for production received in September 1984, Distribution Corporation has paid Paragon/TGX for Paragon Contract gas at prices below those developed by the Paragon Contract's price formula, as the same have been impacted, from time to time, by the Natural Gas Policy Act of 1978 (NGPA). On the basis of a Memorandum and Order dated December 10, 1988, the District Court in January 1991 issued a partial summary judgment which declared that, whereas the Disapproval Order abrogated only the Paragon Contract's price term, the legal consequence of such abrogation was to render the Paragon Contract "void and no longer of any force or effect" as of December 20, 1983. On December 3, 1991 the U. S. Court of Appeals for the Second Circuit (the Second Circuit) reversed the District Court's partial summary judgment and remanded the case to the District Court for further proceedings. The Second Circuit agreed with the District Court that the Disapproval Order had "voided the Contract's price term," but did not agree that the Paragon Contract as a whole was "voided by the cancellation of the price term." Rather, the Second Circuit found that Paragon/TGX had elected an option available to it under the Paragon Contract to continue that contract, in the aftermath of the Disapproval Order, at "a price consistent with" that order. In a letter dated December 13, 1991, TGX demanded that Distribution Corporation pay it $21,874,042 (including interest), alleged to represent the difference between the amount received by Paragon/TGX in respect of Paragon Contract gas delivered during the period September 1984 through October 1991, and the amount allegedly due TGX in respect of such gas during such period. Distribution Corporation rejected TGX's demand. By Order entered March 23, 1992, the District Court granted Distribution Corporation permission to amend its reply to Paragon/TGX's counterclaims to allege, among other things, (i) Distribution Corporation's "termination" of the Paragon Contract by letter effective February 1, 1988; (ii) Paragon's pre- September 1984 repudiation of the Paragon Contract; and (iii) the PSC's "primary jurisdiction" to interpret the Disapproval Order as respects "a price consistent" therewith. With respect to (iii) above, Distribution Corporation Item 1. Legal Proceedings - (Cont.) notes that the New York State Public Service Law provides that no charge for gas made pursuant to a contract with a New York gas utility shall exceed the "just and reasonable charge" for such gas. In response to Distribution Corporation's motion for partial summary judgment in respect of the defense denominated (ii) above, the District Court, in a Memorandum and Order entered July 10, 1992, as revised by a Memorandum and Order entered March 1, 1993, denied Distribution Corporation's summary judgment motion (due to a perceived question of fact as to the occurrence of a condition precedent to Paragon's pre-September 1984 contract repudiation), but confirmed Distribution Corporation's right to assert the repudiation defense upon the trial of the action. On January 4, 1993, the District Court entered a non-final order purportedly responsive to a February 13, 1992 Paragon/TGX motion. The order purports to declare that, by voiding the Paragon Contract price escalation mechanism effective December 31, 1983, the PSC's 1983 Disapproval Order effectively capped the Paragon Contract price, at the lesser, from time to time, of (i) the 1983 Paragon Contract summer/winter "base prices," or (ii) the applicable "Natural Gas Ceiling Prices" set forth in 18 CFR paragraph 271.101 Table I. Under date of January 19, 1993 Distribution Corporation sought rehearing, reargument, reconsideration and clarification of the January 4, 1993 order. On July 12, 1993, the District Court filed a Memorandum and Order granting in part the January 19, 1993 motion. The July 12, 1993 Order stated that, while the January 4, 1993 Memorandum and Order did determine that an obligation on Distribution Corporation's part to pay for gas purchased pursuant to the gas purchase agreement at the applicable NGPA ceiling price arose out of the conduct of the parties after the NGPA became effective and that the Disapproval Order did not relieve Distribution Corporation of such obligation, it did not determine the just and reasonable price for the gas pursuant to Public Service Law section 110(4), set a contract price for the duration of the contract, resolve any defenses presented by Distribution Corporation, determine whether such obligation continues until the present time, or rule on any deregulation issues. Other motions are pending before the District Court regarding the amendment of the pleadings of the parties and a request by TGX that Distribution Corporation be required to pay a higher price for Paragon Contract gas. B. Louisiana Litigation On February 22, 1990, TGX, the purported assignee of the Paragon Contract, filed a voluntary petition pursuant to Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Louisiana (the Bankruptcy Court). Thereafter TGX commenced a "turnover" proceeding against Distribution Corporation, premised upon TGX's December 13, 1991 payment demand described above under "New York Litigation." Pursuant to a partial settlement agreement between TGX and Distribution Corporation, approved by the Bankruptcy Court in August 1992, TGX has withdrawn the "turnover" proceeding and Distribution Corporation has paid to TGX $2,940,000 in consideration of, among other things, TGX's release of Distribution Corporation from the cause of action asserted in the "turnover" proceeding. TGX is still Item 1. Legal Proceedings - (Concl.) free to pursue its breach of contract counterclaims in the New York Litigation. However, the $2,940,000 paid by Distribution Corporation to TGX will be credited against the amount, if any, which is ultimately adjudged due TGX and/or Paragon in the New York Litigation. C. State Commission Proceedings By its "Order Instituting Proceeding," issued in Case 93-G-0352, et al., and effective April 28, 1993, the PSC granted Distribution Corporation deferral authority in respect of the New York allocable share ($2,006,000) of the partial settlement payment described above under "Louisiana Litigation" and instituted a proceeding designed to address Distribution Corporation's request for recovery authority in respect of that amount. Distribution Corporation has received authority to treat the Pennsylvania allocable share ($934,000) of the partial settlement payment as a gas cost experienced during the twelve (12) month period ending November 30, 1992. The PSC proceeding is also expected to address Distribution Corporation's recovery in New York of gas costs incurred in respect of the Paragon Contract during the reconciliation period September 1, 1991 through August 30, 1992. Finally, the PSC proceeding is expected to include the review of the Paragon Contract in light of the "just and reasonable" standard of the New York Public Service Law. The parties to the PSC proceeding have submitted testimony and briefs to the Administrative Law Judge. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of National Fuel Gas Company was held on February 16, 1994. At that meeting, in addition to electing directors and appointing independent accountants, the shareholders disapproved a shareholders' resolution requesting the Board of Directors to take the steps necessary for the adoption of cumulative voting rights.
The total votes were as follows: Against Broker For or Withheld Abstain Non-Votes (i) Election of directors to serve for a three-year term: - David N. Campbell 29,916,375 451,416 - - - Eugene T. Mann 29,848,025 519,766 - - - George H. Schofield 29,957,499 410,292 - - (ii) Appointment of Price Waterhouse as independent accountants 29,882,549 244,718 240,523 - (iii) Shareholders' resolution requesting the Board of Directors to take steps necessary for the adoption of cumulative voting rights. 4,948,647 19,756,098 997,177 4,665,869
Item 5. Other Information Louis R. Reif retired from the Company's Board of Directors effective February 16, 1994. Sister M. Lawreace Antoun, a member of the Company's Board of Directors since 1980, passed away on March 9, 1994. On March 16, 1994, at a regular meeting of the Board of Directors, Mr. Philip C. Ackerman was elected a director to serve until the 1995 Annual Meeting when he is expected to stand for reelection. 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 March 31, 1994 and the fiscal years ended September 30, 1989 through 1993. (99) National Fuel Gas Company and Subsidiaries Consolidated Statement of Income for the Twelve Months Ended March 31, 1994 and 1993. (b) Reports on Form 8-K None 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 under-signed thereunto duly authorized. NATIONAL FUEL GAS COMPANY (Registrant) /s/Joseph P. Pawlowski Joseph P. Pawlowski Treasurer and Principal Accounting Officer Date: May 12, 1994 EX-12 2
EXHIBIT 12 NATIONAL FUEL GAS COMPANY COMPUTATION OF ACTUAL RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED) (Thousands of Dollars) Twelve Months Ended Year Ended September 30 03/31/94 1993 1992 1991 1990 1989 EARNINGS: Income Before Interest Charges(1) $122,465 $125,742 $118,222 $110,240 $109,781 $104,065 Allowance for Borrowed Funds Used in Construction 112 174 1,088 2,278 1,273 775 Federal Income Tax 24,963 21,148 17,680 (3,929) 17,435 18,085 State Income Tax 4,446 2,979 3,426 342 2,419 4,168 Deferred Income Taxes - Net(3) 18,841 16,923 14,130 26,880 7,657 3,624 Investment Tax Credit - Net (691) (698) (711) (746) (798) (890) Rentals(2) 5,700 5,621 5,857 4,915 4,915 4,915 $175,836 $171,889 $159,692 $139,980 $142,682 $134,742 FIXED CHARGES: Interest and Amortization of Premium and Discount on Funded Debt $ 36,668 $ 38,507 $ 39,949 $ 41,916 $ 37,236 $ 29,949 Interest on Commercial Paper and Short-Term Notes Payable 6,177 7,465 12,093 11,933 12,521 15,339 Other Interest(1) 3,979 4,727 6,958 9,679 9,298 7,132 Rentals(2) 5,700 5,621 5,857 4,915 4,915 4,915 $ 52,524 $ 56,320 $ 64,857 $ 68,443 $ 63,970 $ 57,335 Ratio of Earnings to Fixed Charges 3.35 3.05 2.46 2.05 2.23 2.35 Note: (1) For the twelve months ended March 31, 1994, and the fiscal years ended September 30, 1993 and 1992, $1,565,000, $1,374,000, and $1,129,000, representing the amortization of loss on reacquired debt each period, respectively, has been excluded from "Other Interest" and included as a componenet of "Income Before Interest Charges." (2) Rentals shown above represent the portion of all rentals (other than delay rentals) deemed representative of the interest factor. (3) For the twelve months ended March 31, 1994, excludes the cumulative effect of change in accounting for income taxes in the amount of ($3,826,000).
EX-99 3 EXHIBIT 99 NATIONAL FUEL GAS COMPANY CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Twelve Months Ended March 31, 1994 1993 (Thousands of Dollars) INCOME Operating Revenues $1,118,226 $987,764 Operating Expenses Purchased Gas 482,416 410,814 Operation Expense 267,770 247,998 Maintenance 27,045 23,197 Property, Franchise and Other Taxes 101,218 92,710 Depreciation, Depletion and Amortization 71,465 62,431 Income Taxes - Net 48,245 35,117 998,159 872,267 Operating Income 120,067 115,497 Other Income 3,963 5,159 Income Before Interest Charges 124,030 120,656 Interest Charges Interest on Long-Term Debt 36,668 39,018 Other Interest 11,608 17,253 48,276 56,271 Income Before Cumulative Effect 75,754 64,385 Cumulative Effect of Change in Accounting for Income Taxes 3,826 - Net Income Available for Common Stock $ 79,580 $ 64,385 Earnings Per Common Share Income Before Cumulative Effect $2.08 $1.98 Cumulative Effect of Change in Accounting for Income Taxes .11 - Net Income Available for Common Stock $2.19 $1.98 Weighted Average Common Shares Outstanding 36,410,456 32,594,174 EX-27 4
5 6-MOS SEP-30-1994 MAR-31-1994 19,713 0 220,240 9,371 26,283 337,467 2,070,661 571,864 2,049,202 424,714 478,417 37,097 0 0 756,888 2,049,202 783,854 785,669 645,456 645,456 0 0 23,607 116,606 44,967 71,639 0 0 3,826 75,465 2.05 2.05
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