-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QiehLCoJvIFW9ZKrg8dxz34mTsXcvjFcdRbQA5vJnS9iyivrhZg121bWLjBtu5dM /ohZvjJbHF7qo9Pl1Du8Vg== 0000070145-97-000015.txt : 19970222 0000070145-97-000015.hdr.sgml : 19970222 ACCESSION NUMBER: 0000070145-97-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL FUEL GAS CO CENTRAL INDEX KEY: 0000070145 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [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: 97534202 BUSINESS ADDRESS: STREET 1: 10 LAFAYETTE SQ CITY: BUFFALO STATE: NY ZIP: 14203 BUSINESS PHONE: 7168576980 MAIL ADDRESS: STREET 1: 10 LAFAYETTE SQ STREET 2: 10 LAFAYETTE SQ CITY: BUFFALO STATE: NY ZIP: 14203 10-Q 1 - ------------------------------------------------------------------------------- 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 December 31, 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 January 31, 1997: 38,073,815 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) Leidy Hub, Inc. (Leidy Hub) Data-Track Account Services, Inc. (Data-Track) National Fuel Resources, Inc. (NFR) Horizon Energy Development, Inc. (Horizon) 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 Ended December 31, 1996 and 1995 3 b. Consolidated Balance Sheets - December 31, 1996 and September 30, 1996 4 - 5 c. Consolidated Statement of Cash Flows - Three Months Ended December 31, 1996 and 1995 6 d. Notes to Consolidated Financial Statements 7 - 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 23 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 23 - 24 Signature 25 * The Company has nothing to report under this item. This Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements should be read with the cautionary statements included in this Form 10-Q at Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), under the heading "Safe Harbor for Forward-Looking Statements." Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those statements that are designated with a "1" following the statement, as well as those statements that are identified by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions. 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 December 31, ------------------------ 1996 1995 ---- ---- (Thousands of Dollars) INCOME Operating Revenues $363,492 $316,328 -------- -------- Operating Expenses Purchased Gas 164,091 132,958 Operation 68,663 66,666 Maintenance 5,231 6,024 Property, Franchise and Other Taxes 24,556 23,902 Depreciation, Depletion and Amortization 26,589 21,593 Income Taxes - Net 22,209 18,841 -------- -------- 311,339 269,984 -------- -------- Operating Income 52,153 46,344 Other Income 737 943 -------- -------- Income Before Interest Charges 52,890 47,287 -------- -------- Interest Charges Interest on Long-Term Debt 10,178 10,287 Other Interest 4,122 4,608 -------- -------- 14,300 14,895 -------- -------- Net Income Available for Common Stock 38,590 32,392 EARNINGS REINVESTED IN THE BUSINESS Balance at October 1 422,874 380,123 -------- -------- 461,464 412,515 Dividends on Common Stock (1996 - $.42; 1995 - $.405) 15,910 15,117 -------- -------- Balance at December 31 $445,554 $397,398 ======== ======== Earnings Per Common Share $1.02 $ .87 ===== ===== Weighted Average Common Shares Outstanding 37,952,194 37,440,778 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- December 31, 1996 September 30, (Unaudited) 1996 ------------ ------------- (Thousands of Dollars) ASSETS Property, Plant and Equipment $2,500,545 $2,471,063 Less - Accumulated Depreciation, Depletion and Amortization 783,957 761,457 ---------- ---------- 1,716,588 1,709,606 ---------- ---------- Current Assets Cash and Temporary Cash Investments 33,956 19,320 Receivables - Net 183,450 96,740 Unbilled Utility Revenue 70,853 20,778 Gas Stored Underground 18,005 34,727 Materials and Supplies - at average cost 20,423 21,544 Unrecovered Purchased Gas Costs 10,848 - Prepayments 18,476 27,872 ---------- ---------- 356,011 220,981 ---------- ---------- Other Assets Recoverable Future Taxes 88,036 88,832 Unamortized Debt Expense 24,634 25,193 Other Regulatory Assets 57,644 57,086 Deferred Charges 13,254 7,377 Other 41,132 40,697 ---------- ---------- 224,700 219,185 ---------- ---------- $2,297,299 $2,149,772 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- December 31, 1996 September 30, (Unaudited) 1996 ------------ ------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES Capitalization: Common Stock Equity Common Stock, $1 Par Value Authorized - 100,000,000 Shares; Issued and Outstanding - 38,023,304 Shares and 37,851,655 Shares, Respectively $ 38,023 $ 37,852 Paid in Capital 400,807 395,272 Earnings Reinvested in the Business 445,554 422,874 ---------- ---------- Total Common Stock Equity 884,384 855,998 Long-Term Debt, Net of Current Portion 524,000 574,000 ---------- ---------- Total Capitalization 1,408,384 1,429,998 ---------- ---------- Current and Accrued Liabilities Notes Payable to Banks and Commercial Paper 252,300 199,700 Current Portion of Long-Term Debt 50,000 - Accounts Payable 84,268 64,610 Amounts Payable to Customers 2,423 4,618 Other Accruals and Current Liabilities 114,376 82,520 ---------- ---------- 503,367 351,448 ---------- ---------- Deferred Credits Accumulated Deferred Income Taxes 285,888 281,207 Taxes Refundable to Customers 21,005 21,005 Unamortized Investment Tax Credit 12,543 12,711 Other Deferred Credits 66,112 53,403 ---------- ---------- 385,548 368,326 ---------- ---------- Commitments and Contingencies - - ---------- ---------- $2,297,299 $2,149,772 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Consolidated Statement of Cash Flows ------------------------------------ (Unaudited) ----------- Three Months Ended December 31, ------------------ 1996 1995 ---- ---- (Thousands of Dollars) OPERATING ACTIVITIES Net Income Available for Common Stock $ 38,590 $ 32,392 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation, Depletion and Amortization 26,589 21,593 Deferred Income Taxes 5,476 3,377 Other 3,475 (581) Change in: Receivables and Unbilled Utility Revenue (136,785) (116,992) Gas Stored Underground and Materials and Supplies 17,843 12,348 Unrecovered Purchased Gas Costs (10,848) (187) Prepayments 9,396 9,105 Accounts Payable 19,658 13,045 Amounts Payable to Customers (2,195) (9,513) Other Accruals and Current Liabilities 30,991 29,532 Other Assets and Liabilities - Net 6,419 (2,906) -------- -------- Net Cash Provided by (Used in) Operating Activities 8,609 (8,787) -------- -------- INVESTING ACTIVITIES Capital Expenditures (34,695) (34,038) Other 239 (539) -------- -------- Net Cash Used in Investing Activities (34,456) (34,577) -------- -------- FINANCING ACTIVITIES Change in Notes Payable to Banks and Commercial Paper 52,600 121,100 Reduction of Long-Term Debt - (58,500) Proceeds from Issuance of Common Stock 3,724 474 Dividends Paid on Common Stock (15,841) (15,102) -------- -------- Net Cash Provided by Financing Activities 40,483 47,972 -------- -------- Net Increase in Cash and Temporary Cash Investments 14,636 4,608 Cash and Temporary Cash Investments at October 1 19,320 12,757 -------- -------- Cash and Temporary Cash Investments at December 31 $ 33,956 $ 17,365 ======== ======== 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 presented. The fiscal 1997 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, 1996, 1995 and 1994, that are included in the Company's combined Annual Report to Shareholders / Form 10-K for 1996. The earnings for the quarter ended December 31, 1996, should not be taken as a prediction for the fiscal year ending September 30, 1997, 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. Distribution Corporation's Pennsylvania jurisdiction does not have a weather normalization clause. 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 three months ended December 31, 1996 and 1995, amounted to $8.6 million and $11.4 million, respectively. Income taxes paid during the three months ended December 31, 1996 and 1995 amounted to $6.0 million and $12.0 million, respectively. Reclassification. Certain prior year amounts have been reclassified to conform with current year presentation. Item 1. Financial Statements (Cont.) - ------------------------------------- NOTE 2 - Income Taxes The components of federal and state income taxes included in the Consolidated Statement of Income are as follows (in thousands): Three Months Ended December 31, ------------------ 1996 1995 ---- ---- Operating Expenses: Current Income Taxes - Federal $15,140 $14,086 State 1,593 1,378 Deferred Income Taxes 5,476 3,377 ------- ------- 22,209 18,841 Other Income: Deferred Investment Tax Credit (167) (167) ------- ------- Total Income Taxes $22,042 $18,674 ======= ======= 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): Three Months Ended December 31, ------------------ 1996 1995 ---- ---- Net income available for common stock $38,590 $32,392 Total income taxes 22,042 18,674 ------- ------- Income before income taxes $60,632 $51,066 ======= ======= Income tax expense, computed at federal statutory rate of 35% 21,222 17,873 Increase (reduction) in taxes resulting from: Current state income taxes, net of federal income tax benefit 1,035 896 Depreciation 415 523 Production tax credits (107) (146) Miscellaneous (523) (472) ------- ------- Total Income Taxes $22,042 $18,674 ======= ======= Item 1. Financial Statements (Cont.) - ------------------------------------- Significant components of the Company's deferred tax liabilities and assets were as follows (in thousands): At December 31, 1996 At September 30, 1996 -------------------- --------------------- Deferred Tax Liabilities: Excess of tax over book depreciation $181,958 $182,271 Exploration and intangible well drilling costs 101,526 98,293 Other 69,015 67,030 -------- -------- Total Deferred Tax Liabilities 352,499 347,594 -------- -------- Deferred Tax Assets: Overheads capitalized for tax purposes (16,995) (16,289) Other (49,616) (50,098) -------- -------- Total Deferred Tax Assets (66,611) (66,387) -------- -------- Total Net Deferred Income Taxes $285,888 $281,207 ======== ======== NOTE 3 - Capitalization Common Stock. During the three months ended December 31, 1996, the Company issued 31,500 shares of common stock under the Company's Section 401(k) plans, 39,907 shares to participants in the Company's Dividend Reinvestment Plan, and 12,714 shares to participants in the Company's Customer Stock Purchase Plan. Additionally, 87,528 shares of common stock were issued under the Company's stock option and stock award plans, including 6,300 shares of restricted stock, which were awarded under the 1993 Award and Option Plan in December 1996. NOTE 4 - Derivative Financial Instruments The Company, in its Exploration and Production operations, has entered into certain price swap agreements to manage a portion of the market risk associated with fluctuations in the price of natural gas and crude oil, thereby providing more stability to the operating results of that business segment. These agreements are not held for trading purposes. The price swap agreements call for the Company to receive monthly payments from (or make payment 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 are highly correlated with the market prices received by the Company for its natural gas and crude oil production. Item 1. Financial Statements (Cont.) - ------------------------------------- The following summarizes the Company's activity under swap agreements for the quarters ended December 31, 1996 and 1995, respectively: Quarter Ended Quarter Ended December 31, 1996 December 31, 1995 ----------------- ----------------- Natural Gas Swap Agreements: Notional Amount - Equivalent Billion Cubic Feet (Bcf) 6.5 5.4 Range of Fixed Prices per Thousand Cubic Feet (Mcf) $1.71 - $2.10 $1.75 - $2.17 Weighted Average Fixed Price per Mcf $1.96 $2.00 Range of Variable Prices per Mcf $1.86 - $4.11 $1.67 - $2.34 Weighted Average Variable Price per Mcf $2.95 $1.94 Gain (Loss) $(6,462,000) $358,000 Crude Oil Swap Agreements: Notional Amount - Equivalent Barrels (bbl) 310,000 214,000 Range of Fixed Prices per bbl $17.40 - $18.33 $17.40 - $19.00 Weighted Average Fixed Price per bbl $17.91 $18.13 Range of Variable Prices per bbl $23.55 - $25.12 $17.40 - $19.04 Weighted Average Variable Price per bbl $24.52 $18.11 Gain (Loss) $(2,093,000) $4,000 The Company had the following swap agreements outstanding at December 31, 1996: Natural Gas Swap Agreements: Notional Amount Range of Fixed Weighted Average Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf - ----------- ---------------- -------------- ------------------- 1997 18.4 $1.77 - $2.06 $1.90 1998 14.0 $1.77 - $2.22 $2.02 1999 1.1 $2.00 $2.00 ---- 33.5 ==== Crude Oil Swap Agreements: Notional Amount Range of Fixed Weighted Average Fiscal Year (Equivalent bbl) Prices Per bbl Fixed Price Per bbl - ----------- ---------------- -------------- ------------------- 1997 1,064,500 $17.40 - $18.71 $18.03 1998 600,000 $17.50 - $19.30 $18.19 1999 51,000 $19.30 $19.30 --------- 1,715,500 ========= In January 1997, the Company entered into additional natural gas swap agreements covering the period of January 1999 - December 1999. The notional amount for the period is 5.1 equivalent Bcf at a fixed price of $2.29 per Mcf. 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 December 31, 1996, the Company had an unrecognized loss of approximately $19.8 million related to price swap agreements which are offset by corresponding unrecognized revenues from the Company's anticipated natural gas and crude oil production over the terms of the price swap agreements. Item 1. Financial Statements (Concl.) - -------------------------------------- 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. 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 ended December 31, 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 under the price swap agreements they have issued. The Company is exposed to such credit risk when fluctuations in natural gas and crude oil market prices result in the Company recognizing gains on the price swap agreements that it has entered into. When credit risk arises, such risk to the Company is mitigated by the fact that the counterparties, or the parent companies of such counterparties, are investment grade financial institutions. In those instances where the Company is not dealing directly with the parent company, the Company has obtained guarantees from the parent company of the counterparty that has issued the price swap agreement. 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. NOTE 5 - 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 $8.6 million to $10.0 million. At December 31, 1996, Distribution Corporation has recorded the minimum liability of $8.6 million. The ultimate cost to Distribution Corporation with respect to the remediation of these sites will depend on such factors as the remediation plan selected, the extent of the site contamination, the number of additional potentially responsible parties at each site and the portion, if any, attributed to Distribution Corporation. 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 and Pennsylvania, Distribution Corporation is recovering site investigation and remediation costs in rates. Accordingly, the Consolidated Balance Sheet at December 31, 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 1996 Form 10-K. Memorandum of Understanding - Green Canyon Project. In November 1996, Supply Corporation entered into a Memorandum of Understanding (the MOU) with Green Canyon Gathering Company (Green Canyon), a subsidiary of El Paso Energy, regarding a project to develop, construct, finance, own and operate natural gas gathering and processing facilities offshore and onshore Louisiana (the Project). The total cost of the Project is estimated at approximately Item 1. Financial Statements (Concl.) - -------------------------------------- $200 million. The MOU provides for the parties to (i) share equally past and future development costs for the Project through June 1, 1997, and thereafter as agreed by the parties, (ii) negotiate toward definitive agreements to be signed about June 1, 1997, to form one or more 50%/50% partnerships, and (iii) negotiate toward definitive agreements to finance, develop, build, own and operate the Project. The original date established for signing of the definitive agreements discussed above was January 1, 1997. The date has since been changed to June 1, 1997 because the parties concluded that the prospective customers (offshore gas producers) will not be ready to put gas into the system in 1997, and that those producers' development plans are more likely to result in gas being available in 1998 or 1999. This additional time should enable the parties to finalize definitive agreements after the Federal Energy Regulatory Commission rules on the jurisdictional status (or not) of the project, while maintaining a schedule which would put the project into service in 1998 if justified by demand at that time. If the definitive agreements are not executed, or if the Project is not constructed, Supply Corporation's share of the past and future development costs through June 1, 1997 is estimated to not exceed $2 million, for which it is unlikely Supply Corporation would be reimbursed. As of December 31, 1996, Supply Corporation has paid $0.3 million of such development costs. Supply Corporation is currently using short-term borrowings to finance the development costs of the Project. Other. The Company is involved in litigation arising in the normal course of business. The Company is involved in 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 regulatory matters could have a material effect on earnings and cash flows, none of this litigation, and none of these 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 $38.6 million, or $1.02 per common share, during the quarter ended December 31, 1996. This compares with earnings of $32.4 million, or $0.87 per common share, during the quarter ended December 31, 1995. The $0.15 per common share increase in earnings resulted from an increase in earnings of the Company's Exploration and Production, Utility and Pipeline and Storage segments, which outweighed the higher losses experienced by its Other Nonregulated segment. 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 increased because of lower operation and maintenance (O&M) expense combined with a rate increase effective in October 1996 in the New York jurisdiction. The higher earnings of the Pipeline and Storage segment include the impact of the February 1996 Federal Energy Regulatory Commission (FERC) approval of a settlement of Supply Corporation's rate case that became effective on April 1, 1996. This segment also realized an increase in revenues associated with unbundled pipeline sales and the addition of new customers. The Other Nonregulated segment experienced a greater loss during the quarter ended December 31, 1996 than the quarter ended December 31, 1995 primarily because of expenses associated with the dissolution of the Horizon partnership known as Sceptre Power Company. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- OPERATING REVENUES (in thousands) Three Months Ended December 31, ----------------------------- 1996 1995 % Change ---- ---- -------- Utility Retail Revenues: Residential $213,626 $192,240 11.1 Commercial 50,655 45,796 10.6 Industrial 6,229 5,292 17.7 -------- -------- 270,510 243,328 11.2 Off-System Sales 14,858 9,672 53.6 Transportation 11,242 10,850 3.6 Other 1,009 808 24.9 -------- -------- 297,619 264,658 12.5 -------- -------- Pipeline and Storage Storage Service 16,387 14,893 10.0 Transportation 24,182 23,046 4.9 Other 3,925 2,297 70.9 -------- -------- 44,494 40,236 10.6 -------- -------- Exploration and Production 30,082 22,973 30.9 Other Nonregulated 16,474 12,336 33.5 -------- -------- 46,556 35,309 31.9 -------- -------- Less-Intersegment Revenues 25,177 23,875 5.5 -------- -------- $363,492 $316,328 14.9 ======== ======== OPERATING INCOME (LOSS) BEFORE INCOME TAXES (in thousands) Three Months Ended December 31, ---------------------------- 1996 1995 % Change ---- ---- -------- Utility $45,725 $40,632 12.5 Pipeline and Storage 19,463 16,206 20.1 Exploration and Production 12,576 9,504 32.3 Other Nonregulated (2,691) (454) (492.7) Corporate (711) (703) (1.1) ------- ------- $74,362 $65,185 14.1 ======= ======= Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- SYSTEM NATURAL GAS VOLUMES (millions of cubic feet-MMcf) Three Months Ended December 31, -------------------------- 1996 1995 % Change ---- ---- -------- Utility Gas Sales Residential 25,804 27,471 (6.1) Commercial 6,836 7,356 (7.1) Industrial 1,298 1,271 2.1 Off-System 3,838 4,137 (7.2) ------- ------- 37,776 40,235 (6.1) ------- ------- Non-Utility Gas Sales Production(in equivalent MMcf) 12,368 10,719 15.4 ------- ------- Total Gas Sales 50,144 50,954 (1.6) ------- ------- Transportation Utility 13,887 13,558 2.4 Pipeline and Storage 86,000 93,441 (8.0) Nonregulated - 305 NM ------- ------- 99,887 107,304 (6.9) ------- ------- Marketing Volumes 4,516 4,780 (5.5) ------- ------- Less-Intersegment Volumes: Transportation 43,456 50,200 (13.4) Production 1,116 1,292 (13.6) Marketing - 75 NM Gas Sales - 371 NM ------- ------- 44,572 51,938 (14.2) ------- ------- Total System Natural Gas Volumes 109,975 111,100 (1.0) ======= ======= NM = Not meaningful. Utility. Operating revenues for the Utility segment increased $33.0 million for the quarter ended December 31, 1996, compared with the same period a year ago. This increase reflects the recovery of increased gas costs mainly because of an increase in the average cost of purchased gas ($4.69 per Mcf and $3.42 per Mcf during the quarters ended December 31, 1996 and 1995, respectively). This increase more than compensated for a 2.5 billion cubic feet (Bcf) decrease in gas sales. The decrease in gas sales, exclusive of industrial sales which were up slightly, resulted primarily from weather that was warmer than last year in both the New York and Pennsylvania jurisdictions. The increase in operating revenues also reflects the first quarter impact of a general base rate increase of $7.2 million in the New York rate jurisdiction, which became effective on October 1, 1996. Operating income before income taxes for the Utility segment increased $5.1 million for the quarter ended December 31, 1996, compared with the same period a year ago. This resulted primarily from the rate increase discussed above combined with lower O&M expenses resulting, in part, from the labor savings generated by the special early retirement offer to certain salaried, non-union hourly and union employees in the fourth quarter of fiscal 1996. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Degree Days. Three Months Ended December 31: - ------------------------------- Percent (Warmer) Colder in 1996 Than Normal 1996 1995 Normal 1995 - ------------------------------------------------------------------------- Buffalo 2,264 2,256 2,430 (0.4) (7.2) Erie 2,045 2,128 2,241 4.1 (5.0) - ------------------------------------------------------------------------- Pipeline and Storage. Operating income before income taxes for the Pipeline and Storage segment increased $3.3 million for the quarter ended December 31, 1996, as compared with the same period a year ago. This increase reflects the impact of the February 1996 FERC approval of a settlement of Supply Corporation's rate case that became effective on April 1, 1996. This segment also realized an increase in revenues associated with unbundled pipeline sales and the addition of new customers. While transportation volumes for the current quarter decreased 7.4 Bcf from the quarter ended December 31, 1995, largely due to warmer weather, the decrease in volumes did not have a significant impact on earnings as a result of Supply Corporation's straight fixed-variable (SFV) rate design. Exploration and Production. Operating income before income taxes from the Company's Exploration and Production segment increased $3.1 million compared with the same period a year ago, mainly because of higher weighted average prices for natural gas and oil combined with increased natural gas and oil production. Natural gas production increased 0.4 Bcf, or 3.9%, compared with the same period a year ago, and the weighted average price received for natural gas increased $0.89 per Mcf. Significant contributors to this increase were West Cameron 552, Vermilion 252 and West Delta 17 in the Gulf Coast region. Oil and condensate production increased 217,000 barrels (bbls), or 73.6%, and the weighted average price received for oil increased $7.03 per bbl. A significant contributor to this increase in production was Vermilion 252 in the Gulf Coast region. The fluctuations in prices denoted above do not reflect gains and losses from hedging activities. During the quarter ended December 31, 1996, this segment recognized a pre-tax loss on hedging of approximately $8.6 million compared with a pre-tax gain of $0.4 million during the quarter ended December 31, 1995. See further discussion of the Company's hedging activities under "Financing Cash Flow" and in Note 4 - 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 December 31, ------------------------- 1996 1995 % Change ---- ---- -------- Gas Production - (MMcf) Gulf Coast 7,801 7,296 6.9 West Coast 214 257 (16.7) Appalachia 1,281 1,393 (8.0) ----- ----- 9,296 8,946 3.9 ===== ===== Oil Production - (Thousands of Barrels) Gulf Coast 384 169 127.2 West Coast 126 123 2.4 Appalachia 2 3 (33.3) --- ----- 512 295 73.6 === ===== WEIGHTED AVERAGE PRICES* Exploration and Production. Three Months Ended December 31, ------------------------- 1996 1995 % Change ---- ---- -------- Weighted Avg. Gas Price/Mcf Gulf Coast $2.93 $1.96 49.5 West Coast $1.62 $1.19 36.1 Appalachia $2.46 $2.05 20.0 Weighted Average Price $2.84 $1.95 45.6 Weighted Avg. Oil Price/bbl Gulf Coast $24.28 $17.53 38.5 West Coast $20.84 $14.86 40.2 Appalachia $22.89 $16.28 40.6 Weighted Average Price $23.43 $16.40 42.9 * Weighted average prices do not reflect gains or losses from hedging activities. Other Nonregulated. The Other Nonregulated operations experienced operating losses before income taxes of $2.7 million and $0.5 million for the quarters ended December 31, 1996 and December 31, 1995, respectively. The higher loss in the current quarter was mainly due to expenses associated with the dissolution of the Horizon partnership known as Sceptre Power Company, the partnership principally engaged in the development of foreign electric power projects. The dissolution of the partnership does not affect Horizon's commitment to evaluate opportunities in the international arena, currently with significant interest in Eastern Europe.1 Income Taxes. Income taxes increased $3.4 million for the current quarter mainly because of an increase in pretax income. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Interest Charges. Total interest charges decreased $0.6 million for the quarter ended December 31, 1996, compared with the same period a year ago: other interest decreased $0.5 million and interest on long-term debt decreased $0.1 million. The decrease in other interest primarily reflects lower interest expense on Amounts Payable to Customers. The decrease in interest on long-term debt can be attributed primarily to a lower average interest rate offset partly by a higher average amount of long-term debt. CAPITAL RESOURCES AND LIQUIDITY The Company's primary sources of cash during the three 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, Dividend Reinvestment Plan, section 401(k) Plans, and stock option and stock award plans. Beginning March 1, 1997, the Company's Customer Stock Purchase Plan, Dividend Reinvestment Plan and section 401(k) Plans will begin purchasing shares of Company common stock on the open market. 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 the impact of rate cases. In the Utility segment, supplier refunds, over- or under-recovered purchased gas costs and weather also significantly impact cash flow. The Company considers supplier refunds and over-recovered purchased gas costs as a substitute for short-term borrowings. The impact of weather on cash flow is tempered in the Utility segment's New York rate jurisdiction by its weather normalization clause and in the Pipeline and Storage segment by Supply Corporation's SFV rate design. Because of the seasonal nature of the Company's heating business, revenues are relatively high during the quarter ended December 31 and receivables and unbilled utility revenue historically increase from September to December with the beginning 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 $8.6 million for the quarter ended December 31, 1996, compared with $8.8 million used in operating activities in the quarter ended December 31, 1995. This shift in cash flow can be attributed primarily to an increase in net income, adjusted for non-cash items, combined with higher payable balances in the Utility segment offset partly by an increase in receivable balances and unrecovered purchased gas costs in the Utility segment. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Investing Cash Flow. Capital Expenditures - -------------------- The Company's capital expenditures totaled $34.7 million during the three month period. Total expenditures for the quarter represent 16% of the total capital expenditure budget for fiscal 1997 of $214.0 million. The following table presents first quarter capital expenditures by business segment: (in thousands) -------------- Utility $16,165 Pipeline and Storage 2,229 Exploration and Production 16,030 Other Nonregulated 271 ------- $34,695 ======= The bulk of the Utility capital expenditures were made for replacement of mains and main extensions, as well as for the replacement of service lines. The bulk of the Pipeline and Storage capital expenditures were made for additions, improvements, and replacements to this segment's transmission and storage systems. The proposed 1997 Niagara Expansion Project, which would provide approximately 47.3 MMcf per day of firm winter capacity and 21.0 MMcf per day of firm non-winter capacity from the Niagara Falls, New York import point to interconnections at Leidy and Wharton, Pennsylvania, is currently awaiting FERC approval.1 It is anticipated that such approval will be received in the spring of 1997.1 As to the proposed 1998/1999 Niagara Expansion Project, Supply Corporation has received signed offers from customers for 514 MMcf per day of transportation capacity from the Canadian border at Niagara Falls, New York, to Leidy, Pennsylvania. At this expansion level, the total cost is estimated to be approximately $248 million over a two-year period.1 However, no amount has been included in the budget for this proposed project as the timing of the "go ahead" will depend on several factors, including FERC approval.1 Supply Corporation anticipates filing for FERC approval of this project in March 1997.1 If the project proceeds, the first phase would involve 300 MMcf per day of capacity and could be in service in November 1998.1 The second phase, with associated capacity of 214 MMcf per day, could be in service by the end of calendar year 1999.1 The Exploration and Production segment spent approximately $13.3 million on its offshore program in the Gulf of Mexico, including offshore drilling expenditures and lease acquisitions. Offshore exploratory and development drilling was concentrated on West Cameron 182 and High Island 194. Offshore lease acquisitions included Mustang Island 796 and 818 in Texas state waters and Eugene Island 9 in Louisiana state waters. Approximately $2.7 million was spent on the Exploration and Production segment's onshore program, including horizontal onshore drilling in central Texas and Seneca's development drilling program in California. Other Nonregulated capital expenditures consisted of equipment purchases for the Company's sawmill operation. The Company's capital expenditure program is under continuous review. The amounts are subject to modification for opportunities in the natural gas Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- 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.1 Other - ----- In November 1996, Supply Corporation entered into a Memorandum of Understanding (the MOU) with Green Canyon Gathering Company (Green Canyon), a subsidiary of Tenneco Energy, regarding a project to develop, construct, finance, own and operate natural gas gathering and processing facilities offshore and onshore Louisiana (the Project). The total cost of the Project is estimated at approximately $200 million. The MOU provides for the parties to (i) share past and future development costs for the Project through June 1, 1997, and thereafter as agreed by the parties, (ii) negotiate toward definitive agreements to be signed about June 1, 1997, to form one or more 50%/50% partnerships, and (iii) negotiate toward definitive agreements to finance, develop, build, own and operate the Project. The original date established for signing of the definitive agreements discussed above was January 1, 1997. The date has since been changed because the parties concluded that the prospective customers (offshore gas producers) will not be ready to put gas into the system in 1997, and that those producers' development plans are more likely to result in gas being available in 1998 or 1999.1 This additional time should enable the parties to finalize definitive agreements after the Federal Energy Regulatory Commission rules on the jurisdictional status (or not) of the project, while maintaining a schedule which would put the project into service in 1998 if justified by demand at that time.1 If the definitive agreements are not executed, or if the Project is not constructed, Supply Corporation's share of the past and future development costs through June 1, 1997 is estimated to not exceed $2 million, for which it is unlikely Supply Corporation would be reimbursed.1 As of December 31, 1996, Supply Corporation has paid $0.3 million of such development costs. Supply Corporation is currently using short-term borrowings to finance the development costs of the Project. Financing Cash Flow. Consolidated short-term debt increased by $52.6 million during the first quarter. The Company continues to consider short-term bank loans and commercial paper important sources of cash for temporarily financing capital expenditures, gas-in-storage inventory, unrecovered purchased gas costs, exploration and development expenditures and other working capital needs. In addition, the Company considers supplier refunds and over-recovered purchased gas costs as a substitute for short-term debt. Fluctuations in these items can have a significant impact on the amount and timing of short-term debt. The Company's present liquidity position is believed to be adequate to satisfy known demands.1 Under the Company's covenants contained in its indenture covering long-term debt, at December 31, 1996, the Company would have been permitted to issue up to a maximum of $648.0 million in additional long-term unsecured indebtedness, in light of then current long-term interest rates. In addition, at December 31, 1996, the Company had regulatory authorizations and unused short-term credit lines that would have permitted it to borrow an additional $347.7 million of short-term debt. The Company currently has authorization from the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, as amended, to issue and sell up to $150.0 million of debentures and/or Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- medium-term notes. The amounts and timing of the issuance and sale of these debentures and/or medium-term notes will depend on market conditions and the requirements of the Company.1 The Company expects that it will issue new debentures and/or medium-term notes late in calendar 1997 to retire $50.0 million of 6.42% medium-term notes maturing in November 1997.1 The Company, through Seneca, has entered into certain price swap agreements to manage 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 December 31, 1996, Seneca utilized natural gas and crude oil swap agreements with notional amounts of 6.5 equivalent Bcf and 310,000 equivalent bbl, respectively. These hedging activities resulted in the recognition of a pre-tax loss of approximately $8.6 million. This loss was offset by higher prices received for actual natural gas and crude oil production. At December 31, 1996, Seneca had natural gas swap agreements outstanding with a notional amount of approximately 33.5 equivalent Bcf at prices ranging from $1.77 per Mcf to $2.22 per Mcf. The weighted average fixed price of these swap agreements is approximately $1.96 per Mcf. In January 1997, the Company entered into additional natural gas swap agreements covering the period of January 1999 - December 1999. The notional amount is 5.1 equivalent Bcf for the period at a fixed price of $2.29 per Mcf. Seneca also had crude oil swap agreements outstanding at December 31, 1996 with a notional amount of 1,715,500 equivalent bbl at prices ranging from $17.40 per bbl to $19.30 per bbl. The weighted average fixed price of these swap agreements is approximately $18.13 per bbl. In addition, the Company has SEC authority to enter into certain interest rate swap agreements. For further discussion, refer to Note 4 - Derivative Financial Instruments. The Company's credit risk is the risk of loss that the Company would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations related to derivative financial instruments. 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.1 For further discussion, refer to Note 4 - Derivative Financial Instruments. The Company is involved in litigation arising in the normal course of business. The Company is involved in 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 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 regulatory matters are expected to change materially the Company's present liquidity position, nor have a material adverse effect on the financial condition of the Company at this time.1 RATE MATTERS Utility Operation 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 Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ---------------------------- a requested return on equity of 11.5%. A two-year settlement with the parties in this rate proceeding has been approved by the Public Service Commission of the State of New York (PSC). The settlement calls for annual base rate increases of $7.2 million in each of fiscal years beginning October 1, 1996 and 1997 with no specified rate of return on equity. Generally, earnings above a 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 ratepayers. However, the settlement includes a number of incentives which would impact return on equity. Distribution Corporation may earn a maximum of 25 basis points or incur a penalty of 50 basis points on common equity based on its customer service. The incentives relate to customer satisfaction, customer complaints, appointments, new service installations, telephone response, adjusted bills and estimated meter readings. In addition, there is a gas cost incentive mechanism designed to compare Distribution's spot gas purchases to monthly gas cost targets. Certain costs above the targets and savings below the targets will be shared equally between Distribution Corporation and its customers. Pennsylvania Jurisdiction - ------------------------- Distribution Corporation currently does not have a rate case on file with the Pennsylvania Public Utility Commission (PaPUC). Management will continue to monitor its financial position in the Pennsylvania jurisdiction to determine the necessity of filing a rate case in the future. General rate increases in both the New York and Pennsylvania jurisdictions 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. 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. Supply Corporation also agreed not to seek recovery of revenues related to certain terminated service from other storage customers until April 1, 2000, as long as the terminations were not greater than approximately 30% of the terminable service. Management has been successful in marketing and obtaining executed contracts for such terminated storage service and does not anticipate a problem in obtaining executed contracts for additional terminated storage service as it arises.1 A Stipulation and Agreement approved by the FERC in February 1996 permits Supply Corporation to fully recover its net investment in production and gathering plant, as well as its production and gathering cost of service. OTHER MATTERS 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-u costs when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. Distribution Corporation Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- 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 $8.6 million to $10.0 million.1 At December 31, 1996, Distribution Corporation has recorded the minimum liability of $8.6 million. The ultimate cost to Distribution Corporation with respect to the remediation of these sites will depend on such factors as the remediation plan selected, the extent of the site contamination, the number of additional potentially responsible parties at each site and the portion, if any, attributed to Distribution Corporation.1 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 and Pennsylvania, Distribution Corporation is recovering site investigation and remediation costs in rates. For further discussion, see disclosure in Note H - Commitments and Contingencies under the heading "Environmental Matters" in Item 8 of the Company's 1996 Form 10-K. Safe Harbor for Forward-Looking Statements. The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein, including those which are designated with a "1", are forward-looking statements and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statement: 1. Changes in economic conditions, demographic patterns and weather conditions 2. Changes in the availability and/or price of natural gas and oil 3. Inability to obtain new customers or retain existing ones 4. Significant changes in competitive factors affecting the Company 5. Governmental/regulatory actions and initiatives, including those affecting financings, allowed rates of return, industry and rate structure, franchise renewal, and environmental/safety requirements Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Concl.) ------------------------------ 6. Unanticipated impacts of restructuring initiatives in the natural gas and electric industries 7. Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays 8. Occurrences affecting the Company's ability to obtain funds from operations, debt or equity to finance needed capital expenditures and other investments 9. Ability to successfully identify and finance oil and gas property acquisitions and ability to operate existing and any subsequently acquired properties 10. Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves 11. Changes in the availability and/or price of derivative financial instruments 12. Inability of the various counterparties to meet their obligations with respect to the Company's financial instruments 13. Regarding foreign operations - changes in foreign trade and monetary policies, laws and regulations related to foreign operations, political and governmental changes, inflation and exchange rates, taxes and operating conditions 14. Significant changes in tax rates or policies or in rates of inflation or interest 15. Significant changes in the Company's relationship with its employees and the potential adverse effects if labor disputes or grievances were to occur 16. Changes in accounting principles and/or the application of such principles to the Company The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof. Part II. Other Information - --------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits Exhibit Number Description of Exhibit ------- ---------------------- (10) Amendment to National Fuel Gas Company 1993 Award and Option Plan (12) Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the Twelve Months Ended December 31, 1996. Item 6. Exhibits and Reports on Form 8-K (Concl.) - -------------------------------------------------- (27) Financial Data Schedule (99) National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended December 31, 1996 and 1995. (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 undersigned thereunto duly authorized. NATIONAL FUEL GAS COMPANY ------------------------- (Registrant) /s/ Joseph P. Pawlowski ------------------------ Joseph P. Pawlowski Treasurer and Principal Accounting Officer Date: February 14, 1997 ----------------- EX-10 2 AMENDMENT TO NATIONAL FUEL GAS COMPANY 1993 AWARD AND OPTION PLAN I, Bernard J. Kennedy, pursuant to authorization granted by the National Fuel Gas Company Board of Directors on December 13, 1996, do hereby execute the following amendment to the National Fuel Gas Company 1993 Award and Option Plan (the "1993 Plan"), effective December 2, 1996. 1. Section 5 is amended so that the second sentence thereof shall read as follows: Awards covering no more than 325,000 shares of Common Stock (subject to adjustment as provided in paragraph 18) may be granted to any Participant in any fiscal year of the Company. NATIONAL FUEL GAS COMPANY Dec. 18, 1996 /s/ Bernard J. Kennedy - ------------- ----------------------------------------- Dated Bernard J. Kennedy President, Chief Executive Officer and Chairman of the Board of Directors EX-12 3
COMPUTATION OF RATIO OF EXHIBIT 12 EARNINGS TO FIXED CHARGES UNAUDITED Fiscal Year Ended September 30 Twelve Months ----------------------------------------------------------- Ended December 31, 1996 1996 1995 1994 1993 1992 ---------------------------------------------------------------------------- EARNINGS: Income Before Interest Charges (2) $165,203 $159,599 $128,061 $127,885 $125,742 $118,222 Allowance for Borrowed Funds Used in Construction 209 205 195 209 174 1,088 Federal Income Tax 56,202 55,148 30,522 36,630 21,148 17,680 State Income Tax 7,481 7,266 4,905 6,309 2,979 3,426 Deferred Inc. Taxes - Net (3) 6,010 3,907 8,452 4,853 16,919 14,125 Investment Tax Credit - Net (670) (665) (672) (682) (693) (706) Rentals (1) 5,745 5,640 5,422 5,730 5,621 5,857 ----------------------------------------------------------------------------- $240,180 $231,100 $176,885 $180,934 $171,890 $159,692 ============================================================================= FIXED CHARGES: Interest & Amortization of Premium and Discount of Funded Debt $40,763 $40,872 $40,896 $36,699 $38,507 $39,949 Interest on Commercial Paper and Short-Term Notes Payable 8,121 7,872 6,745 5,599 7,465 12,093 Other Interest (2) 5,657 6,389 4,721 3,361 4,727 6,958 Rentals (1) 5,745 5,640 5,422 5,730 5,621 5,857 ----------------------------------------------------------------------------- $60,286 $60,773 $57,784 $51,389 $56,320 $64,857 ============================================================================= RATIO OF EARNINGS TO FIXED CHARGES 3.98 3.80 3.06 3.52 3.05 2.46
Notes: (1) Rentals shown above represent the portion of all rentals (other than delay rentals) deemed representative of the interest factor. (2) Twelve months ended December 1996, Fiscal 1996, 1995, 1994, 1993 and 1992 reflect the reclassification of $1,716, $1,716, $1,716, $1,674, $1,374 and $1,129, respectivley, representing the loss on reacquired debt amortized during each period, from Other Interest Charges to Operation Expense. (3) Deferred Income Taxes - Net for fiscal 1994 excludes the cumulative effect of changes in accounting. EX-27 4 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 03-MOS SEP-30-1997 OCT-01-1996 DEC-31-1996 PER-BOOK 1,716,588 0 356,011 13,254 211,446 2,297,299 38,023 400,807 445,554 884,384 0 0 524,000 147,300 0 105,000 50,000 0 0 0 586,615 2,297,299 363,492 22,209 289,130 311,339 52,153 737 52,890 14,300 38,590 0 38,590 15,910 0 8,609 1.02 1.02
EX-27 5 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND SCHEDULES. 1,000 03-MOS SEP-30-1996 OCT-01-1995 DEC-31-1995 PER-BOOK 1,663,143 0 289,578 9,594 196,906 2,159,221 37,471 383,932 397,398 818,801 0 0 474,000 163,700 0 105,000 30,000 0 0 0 567,720 2,159,221 316,328 18,841 251,143 269,984 46,344 943 47,287 14,895 32,392 0 32,392 15,117 0 (8,787) .87 .87
EX-99 6 Exhibit 99 Form 10-Q December 31, 1996 NATIONAL FUEL GAS CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Twelve Months Ecded December 31, -------------------------------- 1996 1995 (Thousands of Dollars) INCOME Operating Revenues $1,255,181 $1,012,491 ---------- ---------- Operating Expenses Purchased Gas 508,489 380,645 Operation 285,841 266,609 Maintenance 24,569 25,851 Property, Franchise and Other Taxes 100,111 92,640 Depreciation, Depletion and Amortization 103,227 75,046 Income Taxes - Net 69,689 44,245 ---------- ---------- 1,091,926 885,036 ---------- ---------- Operation Income 163,255 127,455 Other Income 3,664 5,477 ---------- ---------- Income Before Interest Charges 166,919 132,932 ---------- ---------- Interest Charges Interest on Long-Term Debt 40,763 40,810 Other Interest 15,286 14,407 ---------- ---------- 56,049 55,217 ---------- ---------- Net Income Available for Common Stock $ 110,870 $ 77,715 ========== ========== Earnings Per Common Share Net Income Available for Common Stock $2.94 $2.08 ========== ========== Weighted Average Common Shares Outstanding 37,741,855 37,425,797 ========== ========== -----END PRIVACY-ENHANCED MESSAGE-----