-----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, TiQn4dgHHJsZGAvN9UexxCGdC0WoiEzCtuT0aiUCzuEndrIW3anvvWL66vh5xID1 3yWGr/bbK8Iq9NAr8jACyg== 0000070145-97-000036.txt : 19970520 0000070145-97-000036.hdr.sgml : 19970520 ACCESSION NUMBER: 0000070145-97-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97608119 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 March 31, 1997 -------------- 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 April 30, 1997: 38,139,715 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 and Six Months Ended March 31, 1997 and 1996 3 - 4 b. Consolidated Balance Sheets - March 31, 1997 and September 30, 1996 5 - 6 c. Consolidated Statement of Cash Flows - Six Months Ended March 31, 1997 and 1996 7 d. Notes to Consolidated Financial Statements 8 - 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 29 Part II. Other Information -------------------------- Item 1. Legal Proceedings * Item 2. Changes in Securities 29 Item 3. Defaults Upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders 29 - 30 Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K 30 Signature 31 * 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 March 31, ----------------------- 1997 1996 ---- ---- (Thousands of Dollars) INCOME Operating Revenues $498,704 $492,376 -------- -------- Operating Expenses Purchased Gas 251,573 246,984 Operation 70,850 75,061 Maintenance 6,495 7,441 Property, Franchise and Other Taxes 35,676 35,556 Depreciation, Depletion and Amortization 29,096 23,960 Income Taxes - Net 34,202 33,743 -------- -------- 427,892 422,745 -------- -------- Operating Income 70,812 69,631 Other Income 584 863 -------- -------- Income Before Interest Charges 71,396 70,494 -------- -------- Interest Charges Interest on Long-Term Debt 10,178 9,587 Other Interest 4,109 5,215 -------- -------- 14,287 14,802 -------- -------- Net Income Available for Common Stock 57,109 55,692 EARNINGS REINVESTED IN THE BUSINESS Balance at January 1 445,554 397,398 -------- -------- 502,663 453,090 Dividends on Common Stock (1997 - $.42; 1996 - $.405) 15,967 15,177 -------- -------- Balance at March 31 $486,696 $437,913 ======== ======== Earnings Per Common Share $1.50 $1.48 ====== ===== Weighted Average Common Shares Outstanding 38,090,435 37,551,990 ========== ========== See Notes to Consolidated Financial Statements Item 1. - Financial Statements (Cont.) - -------------------------------------- National Fuel Gas Company ------------------------- Consolidated Statements of Income and Earnings ---------------------------------------------- Reinvested in the Business -------------------------- (Unaudited) ----------- Six Months Ended March 31, ----------------------- 1997 1996 ---- ---- (Thousands of Dollars) INCOME Operating Revenues $862,196 $808,704 -------- -------- Operating Expenses Purchased Gas 415,664 379,942 Operation 139,273 141,468 Maintenance 11,966 13,725 Property, Franchise and Other Taxes 60,233 59,458 Depreciation, Depletion and Amortization 55,685 45,553 Income Taxes - Net 56,411 52,584 -------- -------- 739,232 692,730 -------- -------- Operating Income 122,964 115,974 Other Income 1,322 1,806 -------- -------- Income Before Interest Charges 124,286 117,780 -------- -------- Interest Charges Interest on Long-Term Debt 20,357 19,874 Other Interest 8,230 9,823 -------- -------- 28,587 29,697 -------- -------- Net Income Available for Common Stock 95,699 88,083 EARNINGS REINVESTED IN THE BUSINESS Balance at October 1 422,874 380,123 -------- -------- 518,573 468,206 Dividends on Common Stock (1997 - $.84; 1996 - $.81) 31,877 30,293 -------- -------- Balance at March 31 $486,696 $437,913 ======== ======== Earnings Per Common Share $2.52 $2.35 ===== ===== Weighted Average Common Shares Outstanding 38,020,555 37,496,080 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- March 31, 1997 September 30, (Unaudited) 1996 ----------- ------------- (Thousands of Dollars) ASSETS Property, Plant and Equipment $2,554,709 $2,471,063 Less - Accumulated Depreciation, Depletion and Amortization 808,257 761,457 ---------- ---------- 1,746,452 1,709,606 ---------- ---------- Current Assets Cash and Temporary Cash Investments 29,024 19,320 Receivables - Net 228,151 96,740 Unbilled Utility Revenue 45,943 20,778 Gas Stored Underground 4,312 34,727 Materials and Supplies - at average cost 20,481 21,544 Unrecovered Purchased Gas Costs 8,443 - Prepayments 16,765 27,872 ---------- ---------- 353,119 220,981 ---------- ---------- Other Assets Recoverable Future Taxes 87,240 88,832 Unamortized Debt Expense 24,092 25,193 Other Regulatory Assets 51,764 57,086 Deferred Charges 9,464 7,377 Other 41,590 40,697 ---------- ---------- 214,150 219,185 ---------- ---------- $2,313,721 $2,149,772 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- March 31, 1997 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 - 38,137,921 Shares and 37,851,655 Shares, Respectively $ 38,138 $ 37,852 Paid in Capital 404,889 395,272 Earnings Reinvested in the Business 486,696 422,874 --------- ---------- Total Common Stock Equity 929,723 855,998 Long-Term Debt, Net of Current Portion 531,739 574,000 --------- ---------- Total Capitalization 1,461,462 1,429,998 ---------- ---------- Current and Accrued Liabilities Notes Payable to Banks and Commercial Paper 173,200 199,700 Current Portion of Long-Term Debt 52,628 - Accounts Payable 60,426 64,610 Amounts Payable to Customers 7,770 4,618 Other Accruals and Current Liabilities 167,284 82,520 ---------- ---------- 461,308 351,448 ---------- ---------- Deferred Credits Accumulated Deferred Income Taxes 282,563 281,207 Taxes Refundable to Customers 21,005 21,005 Unamortized Investment Tax Credit 12,375 12,711 Other Deferred Credits 75,008 53,403 ---------- ---------- 390,951 368,326 ---------- ---------- Commitments and Contingencies - - ---------- ---------- $2,313,721 $2,149,772 ========== ========== 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, ---------------------- 1997 1996 ---- ---- (Thousands of Dollars) OPERATING ACTIVITIES Net Income Available for Common Stock $ 95,699 $ 88,083 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation, Depletion and Amortization 55,685 45,553 Deferred Income Taxes 2,948 1,199 Other 5,322 5,274 Change in: Receivables and Unbilled Utility Revenue (156,576) (191,226) Gas Stored Underground and Materials and Supplies 31,478 21,767 Unrecovered Purchased Gas Costs (8,443) - Prepayments 11,107 4,007 Accounts Payable (4,184) 44,454 Amounts Payable to Customers 3,152 (15,621) Other Accruals and Current Liabilities 83,047 98,135 Other Assets and Liabilities - Net 26,504 (1,637) -------- -------- Net Cash Provided by Operating Activities 145,739 99,988 -------- -------- INVESTING ACTIVITIES Capital Expenditures (84,644) (70,674) Other 263 (340) -------- -------- Net Cash Used in Investing Activities (84,381) (71,014) -------- -------- FINANCING ACTIVITIES Change in Notes Payable to Banks and Commercial Paper (26,500) (37,100) Net Proceeds from Issuance of Long-Term Debt - 99,650 Reduction of Long-Term Debt (367) (58,500) Proceeds from Issuance of Common Stock 6,965 3,226 Dividends Paid on Common Stock (31,752) (30,219) --------- -------- Net Cash Used in Financing Activities (51,654) (22,943) --------- -------- Net Increase in Cash and Temporary Cash Investments 9,704 6,031 Cash and Temporary Cash Investments at October 1 19,320 12,757 -------- -------- Cash and Temporary Cash Investments at March 31 $ 29,024 $ 18,788 ======== ======== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) - ------------------------------------- National Fuel Gas Company ------------------------- Notes to Consolidated Financial Statements ------------------------------------------ Note 1 - Summary of Significant Accounting Policies Quarterly Earnings. The Company, in its opinion, has included all adjustments that are necessary for a fair statement of the results of operations for the periods. The consolidated financial statements and notes thereto, included herein, should be read in conjunction with the financial statements and notes for the years ended September 30, 1996, 1995 and 1994, that are included in the Company's combined Annual Report to Shareholders/Form 10-K for 1996. The fiscal 1997 consolidated financial statements will be examined by the Company's independent accountants after the end of the fiscal year. The earnings for the six months ended March 31, 1997 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 tariff for its 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 six months ended March 31, 1997 and 1996, amounted to $26.7 million and $28.8 million, respectively. Net income taxes paid during the six months ended March 31, 1997 and 1996 amounted to $40.9 million and $32.0 million, respectively. In January 1997, Seneca entered into a non-cash investing activity whereby it issued notes to third parties totaling $10.7 million in connection with the acquisition of timber properties. For further discussion, refer to Note 3 - Capitalization. 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): Six Months Ended March 31, ---------------- 1997 1996 ---- ---- Operating Expenses: Current Income Taxes - Federal $48,590 $46,696 State 4,873 4,689 Deferred Income Taxes 2,948 1,199 ------- ------- 56,411 52,584 Other Income: Deferred Investment Tax Credit (335) (334) ------- ------- Total Income Taxes $56,076 $52,250 ======= ======= 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, ---------------- 1997 1996 ---- ---- Net income available for common stock $ 95,699 $ 88,083 Total income taxes 56,076 52,250 -------- -------- Income before income taxes $151,775 $140,333 ======== ======== Income tax expense, computed at statutory rate of 35% $ 53,121 $ 49,117 Increase (reduction) in taxes resulting from: Current state income taxes, net of federal income tax benefit 3,165 3,048 Depreciation 851 1,215 Production tax credits (214) (278) Miscellaneous (847) (852) -------- -------- Total Income Taxes $ 56,076 $ 52,250 ======== ======== Item 1. Financial Statements (Cont.) - ------------------------------------- Significant components of the Company's deferred tax liabilities (assets) were as follows (in thousands): At March 31, 1997 At September 30, 1996 ----------------- --------------------- Deferred Tax Liabilities: Excess of tax over book depreciation $180,925 $182,271 Exploration and intangible well drilling costs 105,180 98,293 Other 69,225 67,030 -------- -------- Total Deferred Tax Liabilities 355,330 347,594 -------- -------- Deferred Tax Assets: Overheads capitalized for tax purposes (17,881) (16,289) Other (54,886) (50,098) -------- -------- Total Deferred Tax Assets (72,767) (66,387) -------- -------- Total Net Deferred Income Taxes $282,563 $281,207 ======== ======== Note 3 - Capitalization Common Stock. During the six months ended March 31, 1997, the Company issued 53,300 shares of common stock under the Company's section 401(k) Plans, 72,154 shares to participants in the Company's Dividend Reinvestment Plan, and 23,050 shares to participants in the Company's Customer Stock Purchase Plan. Additionally, 137,062 shares of common stock were issued under the Company's stock option and stock award plans and 700 shares were issued under the Retainer Policy for Non-Employee Directors. Effective March 1, 1997, the Company's section 401(k) Plans, Dividend Reinvestment Plan and Customer Stock Purchase Plan began purchasing shares of Company common stock on the open market. On April 4, 1997, 398,750 stock options were granted at an exercise price of $41.625 per share. Long-Term Debt. In January 1997, Seneca issued notes to third parties for $8.6 million and $2.1 million in connection with its acquisition of timber properties. Both notes have an interest rate of 6.75%. On the $8.6 million note, Seneca will pay interest and principal on a monthly basis over the period of January 1997 through June 2001. On the $2.1 million note, Seneca will pay interest on a monthly basis over the period of February 1997 through January 1999. The principal amount will be repaid in two equal installments in January 1998 and January 1999. 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 Item 1. Financial Statements (Cont.) - -------------------------------------- segment. These agreements are not held for trading purposes. The price swap agreements call for the Company to receive monthly payments from (or make payments to) other parties based upon the difference between a fixed and a variable price as specified by the agreement. The variable price is either a crude oil price quoted on the New York Mercantile Exchange or a quoted natural gas price in "Inside FERC." These variable prices are highly correlated with the market prices received by the Company for its natural gas and crude oil production. The following summarizes the Company's activity under price swap agreements for the quarter and six-month periods ended March 31, 1997 and 1996, respectively: Quarter Ended Quarter Ended March 31, 1997 March 31, 1996 -------------- -------------- Natural Gas Price Swap Agreements: Notional Amount - Equivalent Billion Cubic Feet (Bcf) 5.9 6.5 Range of Fixed Prices per Thousand Cubic Feet (Mcf) $1.77 - $2.06 $1.71 - $3.05 Weighted Average Fixed Price per Mcf $1.90 $1.92 Range of Variable Prices per Mcf $1.77 - $4.08 $1.96 - $3.43 Weighted Average Variable Price per Mcf $2.87 $2.50 Loss $(5,714,000) $(3,649,000) Crude Oil Price Swap Agreements: Notional Amount - Equivalent Barrels (bbl) 360,000 204,000 Range of Fixed Prices per bbl $17.40 - $18.71 $17.40 - $18.50 Weighted Average Fixed Price per bbl $18.02 $18.08 Range of Variable Prices per bbl $20.97 - $25.18 $18.70 - $21.18 Weighted Average Variable Price per bbl $22.78 $19.55 Loss $(1,713,000) $(220,000) Six Months Ended Six Months Ended March 31, 1997 March 31, 1996 ---------------- ---------------- Natural Gas Price Swap Agreements: Notional Amount - Equivalent Bcf 12.4 11.9 Range of Fixed Prices per Mcf $1.71 - $2.10 $1.71 - $3.05 Weighted Average Fixed Price per Mcf $1.93 $1.96 Range of Variable Prices per Mcf $1.77 - $4.11 $1.67 - $3.43 Weighted Average Variable Price per Mcf $2.91 $2.24 Loss $(12,176,000) $(3,291,000) Crude Oil Price Swap Agreements: Notional Amount - Equivalent bbl 670,000 418,000 Range of Fixed Prices per bbl $17.40 - $18.71 $17.40 - $19.00 Weighted Average Fixed Price per bbl $17.97 $18.11 Range of Variable Prices per bbl $20.97 - $25.18 $17.40 - $21.18 Weighted Average Variable Price per bbl $23.59 $18.82 Loss $(3,806,000) $(216,000) Item 1. Financial Statements (Cont.) - ------------------------------------- The Company had the following price swap agreements outstanding at March 31, 1997. Natural Gas Price Swap Agreements: Notional Amount Range of Fixed Weighted Average Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf - ----------- ---------------- -------------- ------------------- 1997 12.5 $1.77 - $2.06 $1.90 1998 17.4 $1.77 - $2.22 $2.04 1999 6.1 $2.00 - $2.29 $2.20 2000 1.3 $2.29 $2.29 ---- 37.3 ==== Crude Oil Price Swap Agreements: Notional Amount Range of Fixed Weighted Average Fiscal Year (Equivalent bbl) Prices Per bbl Fixed Price Per bbl - ----------- ---------------- -------------- ------------------- 1997 702,000 $17.40 - $18.71 $18.04 1998 600,000 $17.50 - $19.30 $18.19 1999 51,000 $19.30 $19.30 --------- 1,353,000 Gains or losses from these price swap agreements are reflected in operating revenues on the Consolidated Statement of Income at the time of settlement with the other parties. At March 31, 1997, the Company had unrecognized losses of approximately $6.1 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. 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 or six months ended March 31, 1997 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 Item 1. Financial Statements (Concl.) - -------------------------------------- from the parent company of the counterparty that has issued the price swap agreements. 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 $8.3 million to $9.7 million. At March 31, 1997, Distribution Corporation has recorded the minimum liability of $8.3 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 March 31, 1997 includes related regulatory assets in the amount of approximately $7.9 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 $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 of the Project (offshore gas producers) will not be ready to use the natural gas gathering and processing facilities in 1997. Such prospective customers are more likely to use the Project facilities in 1998 or 1999. The Federal Energy Regulatory Commission ruled in March 1997 that most of the Project would be jurisdictional, so the parties are preparing the Item 1. Financial Statements (Concl.) - -------------------------------------- necessary regulatory filings seeking authorization to construct facilities and place them in 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 March 31, 1997, Supply Corporation has paid approximately $0.7 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 $57.1 million, or $1.50 per common share, during the quarter ended March 31, 1997. This compares with earnings of $55.7 million, or $1.48 per common share, during the quarter ended March 31, 1996. The Company's earnings were $95.7 million, or $2.52 per common share, during the six months ended March 31, 1997. This compares with earnings of $88.1 million, or $2.35 per common share during the six months ended March 31, 1996. The increase in earnings for the quarter ended March 31, 1997 is primarily attributable to the higher earnings of the Company's Utility and Other Nonregulated segments. The earnings of the Utility segment reflect the positive impact of lower operation and maintenance (O&M) expense combined with a rate increase effective in October 1996 in the New York jurisdiction. The earnings of the Other Nonregulated segment increased primarily because of developments in Horizon, the Company's foreign and domestic energy projects subsidiary. Partly offsetting the increases discussed above, the Pipeline and Storage and Exploration and Production segments experienced decreases in earnings for the quarter ended March 31, 1997. Decreased earnings in the Pipeline and Storage segment reflect amounts recorded in the quarter ended March 31, 1996 to reflect a rate increase that became effective April 1, 1996, retroactive to June 1, 1995. The earnings of the Exploration and Production segment decreased as higher expenses, especially depletion expense, more than offset higher oil and gas revenues for the quarter. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Contd.) ------------------------------ The increase in earnings for the six months ended March 31, 1997 is primarily the result of higher earnings of the Utility and Exploration and Production segments. The earnings of the Utility segment reflect the positive impact of lower O&M expense combined with the rate increase discussed above for the quarter. The higher earnings of the Exploration and Production segment resulted from higher total natural gas and oil production and higher prices, offset in part by increased depletion expense. The earnings of the Pipeline and Storage segment and the net loss of the Other Nonregulated segment did not change significantly from the six months ended March 31, 1996. A more detailed discussion of current period results can be found in the business segment information that follows. OPERATING REVENUES (in thousands) Three Months Ended Six Months Ended March 31, March 31, ------------------------- ----------------- 1997 1996 % Change 1997 1996 % Change ---- ---- -------- ---- ---- -------- Regulated Utility Retail Revenues: Residential $301,632 $299,236 0.8 $515,258 $491,476 4.8 Commercial 74,959 79,855 (6.1) 125,614 125,651 - Industrial 8,980 11,317 (20.7) 15,209 16,609 (8.4) -------- -------- -------- -------- 385,571 390,408 (1.2) 656,081 633,736 3.5 Off-System Sales 15,818 9,625 64.3 30,676 19,297 59.0 Transportation 16,946 15,359 10.3 28,188 26,209 7.6 Other (374) 1,026 (136.5) 635 1,833 (65.4) -------- -------- -------- -------- 417,961 416,418 0.4 715,580 681,075 5.1 -------- -------- -------- -------- Pipeline and Storage Storage Service 16,304 20,130 (19.0) 32,691 35,023 (6.7) Transportation 24,397 23,606 3.4 48,579 46,651 4.1 Other 2,960 5,894 (49.8) 6,885 8,192 (16.0) -------- -------- -------- -------- 43,661 49,630 (12.0) 88,155 89,866 (1.9) -------- -------- -------- -------- Exploration and Production 32,297 30,172 7.0 62,379 53,145 17.4 Other Nonregulated 36,590 27,745 31.9 53,064 40,082 32.4 -------- -------- -------- -------- 68,887 57,917 18.9 115,443 93,227 23.8 -------- -------- -------- -------- Less-Intersegment Revenues 31,805 31,589 0.7 56,982 55,464 2.7 -------- -------- -------- -------- $498,704 $492,376 1.3 $862,196 $808,704 6.6 ======== ======== ======== ======== Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- OPERATING INCOME (LOSS) BEFORE INCOME TAXES (in thousands) Three Months Ended Six Months Ended March 31, March 31, ------------------------ ------------------------- 1997 1996 % Change 1997 1996 % Change ---- ---- -------- ---- ---- -------- Utility $ 73,299 $ 68,721 6.7 $119,023 $109,353 8.8 Pipeline and Storage 18,320 23,246 (21.2) 37,783 39,451 (4.2) Exploration and Production 11,870 12,825 (7.4) 24,446 22,329 9.5 Other Nonregulated 2,294 (844) NM (398) (1,298) 69.3 Corporate (769) (574) (34.0) (1,479) (1,277) (15.8) -------- ------- -------- -------- $105,014 $103,374 1.6 $179,375 $168,558 6.4 ======== ======== ======== ======== SYSTEM NATURAL GAS VOLUMES (millions of cubic feet-MMcf) Three Months Ended Six Months Ended March 31, March 31, ------------------------- ----------------- 1997 1996 % Change 1997 1996 % Change ---- ---- -------- ---- ---- -------- Utility Gas Sales Residential 37,720 41,904 (10.0) 63,524 69,375 (8.4) Commercial 10,153 12,183 (16.7) 16,989 19,539 (13.1) Industrial 1,725 2,426 (28.9) 3,023 3,697 (18.2) Off-System 4,381 2,273 92.7 8,428 6,410 31.5 ------- ------- ------- ------- 53,979 58,786 (8.2) 91,964 99,021 (7.1) ------- ------- ------- ------- Non-Utility Gas Sales Production(in equivalent MMcf) 12,284 12,535 (2.0) 24,652 23,254 6.0 ------- ------- ------- ------- Total Gas Sales 66,263 71,321 (7.1) 116,616 122,275 (4.6) ------- ------- ------- ------- Transportation Utility 19,469 19,229 1.2 33,356 32,787 1.7 Pipeline and Storage 109,093 124,459 (12.3) 195,093 217,900 (10.5) Nonregulated 60 163 (63.2) 60 468 (87.2) ------- ------- ------- ------- 128,622 143,851 (10.6) 228,509 251,155 (9.0) ------- ------- ------- ------- Marketing Volumes 7,304 7,837 (6.8) 11,820 12,617 (6.3) ------- ------- ------- ------- Less-Inter and Intrasegment Volumes: Transportation 66,982 72,038 (7.0) 110,665 122,557 (9.7) Production 1,038 1,183 (12.3) 2,154 2,475 (13.0) Gas Sales - 443 NM - 814 NM Marketing - 20 NM - 95 NM ------- ------- ------- ------- 68,020 73,684 (7.7) 112,819 125,941 (10.4) ------- ------- ------- ------- Total System Natural Gas Volumes 134,169 149,325 (10.1) 244,126 260,106 (6.1) ======= ======= ======= ======= NM = Not meaningful. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Utility. Despite warmer weather and lower residential, commercial and industrial sales volumes, operating revenues for the Utility segment increased $1.5 million and $34.5 million, respectively, for the quarter and six months ended March 31, 1997, as compared with the same periods a year ago. These increases reflect the recovery of increased gas costs mainly because of an increase in the average cost of purchased gas ($4.47 per thousand cubic feet (Mcf) and $4.06 per Mcf during the quarters ended March 31, 1997 and 1996, respectively, and $4.57 per Mcf and $3.77 per Mcf during the six months ended March 31, 1997 and 1996, respectively). Higher off-system sales volumes also contributed to the revenue increase, as did higher transportation volumes. The increase in off-system sales reflects increased gas sales utilizing Distribution Corporation's available capacity on various upstream pipelines. Margins on such sales are minimal. The Utility segment's operating revenues also benefitted from a general base rate increase in the New York rate jurisdiction, which became effective on October 1, 1996. On an annual basis, this rate increase amounts to $7.2 million. Operating income before income taxes for the Utility segment increased $4.6 million and $9.7 million, respectively, for the quarter and six months ended March 31, 1997, as compared with the same periods 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. The negative impact of warmer weather on operating results was greatest in the Pennsylvania jurisdiction since Pennsylvania does not have a weather normalization clause (WNC). As a result of weather, the Pennsylvania jurisdiction experienced a reduction in pretax operating income of approximately $3.7 million and $3.6 million, respectively, for the quarter and six months ended March 31, 1997, as compared with the same periods a year ago. The impact of warmer weather experienced by the New York jurisdiction was tempered by the WNC, which preserved pretax operating income of $4.4 million and $3.5 million, respectively, for the quarter and six months ended March 31, 1997. For the quarter and six months ended March 31, 1996, the WNC resulted in a reduction to pre-tax operating income of $5.0 million and $7.0 million, respectively, as weather was colder than normal. Degree Days Three Months Ended March 31: - ---------------------------- Percent (Warmer) Colder in 1997 Than Normal 1997 1996 Normal 1996 - ----------------------------------------------------------------------- Buffalo 3,337 3,194 3,595 (4.3) (11.2) Erie 3,198 2,996 3,450 (6.3) (13.2) Six Months Ended March 31: - --------------------------- Buffalo 5,601 5,450 6,025 (2.7) (9.5) Erie 5,243 5,123 5,691 (2.3) (10.0) - ----------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Pipeline and Storage. Operating income before income taxes for the Pipeline and Storage segment decreased $4.9 million for the quarter ended March 31, 1997, as compared with the same period a year ago. The decrease is attributable primarily to the February 1996 FERC approval of Supply Corporation's rate case. With this approval, new rates became effective on April 1, 1996 retroactive to June 1, 1995. Operating income before income taxes for the quarter ended March 31, 1996 included approximately $3.3 million related to the period of June 1, 1995 to December 31, 1995. The remaining decrease in operating income before income taxes related mainly to lower revenue related to unbundled pipeline sales and open access transportation. For the six months ended March 31, 1997, operating income before income taxes decreased $1.7 million compared with the same period a year ago. The decrease is attributable primarily to the March 1996 recording of the retroactive rate increase discussed above for the period of June 1, 1995 to September 30, 1995. While transportation volumes in this segment decreased 15.4 billion cubic feet (Bcf) and 22.8 Bcf, respectively, for the quarter and six months ended March 31, 1997, 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 decreased $1.0 million for the quarter ended March 31, 1997, compared with the same period a year ago, mainly because of higher depletion expense, which more than offset higher natural gas and oil revenues. The current quarter's oil and gas revenues increased substantially over the prior year's quarter because of higher oil and gas prices while total production decreased slightly from 12.5 Bcf equivalent to 12.3 Bcf equivalent. This decrease was attributable to a 62% decline in the production of onshore horizontal wells, which resulted from the typical Austin Chalk high rate of decline. The offshore program (where the majority of this segment's capital expenditures are being made - see further discussion under "Investing Cash Flow") experienced an increase in total production of 17% compared with the prior year's quarter. Total oil production was up 119,000 barrels (bbls) (0.7 Bcf equivalent) from the prior year's quarter which mostly offset the drop in natural gas production of about 1 Bcf. The weighted average price received for oil production increased $3.09 per bbl and the weighted average price received for gas production increased $0.49 per Mcf. Higher natural gas and oil revenues for the second quarter of 1997 coupled with declining prices throughout that quarter to a weighted average of $2.76 per Mcf for natural gas and $18.91 per bbl for oil at March 31, 1997, adversely affected the depletion expense due to the use of the unit of revenue depletion method. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- For the six months ended March 31, 1997, operating income before income taxes for the Exploration and Production segment increased $2.1 million, compared with the same period a year ago, mainly because of higher natural gas and oil revenues, offset in part by higher depletion expense. Total production was up from 23.3 Bcf equivalent to 24.7 Bcf equivalent. The decline in natural gas production of 0.6 Bcf for the six-month period was more than offset by increased oil production of 335,000 bbls (2 Bcf equivalent). In addition, weighted average prices received for gas and oil production increased $0.67 per Mcf and $4.94 per bbl, respectively. Looking ahead, the Company expects that natural gas and oil production volumes will be flat compared to the prior year.1 Factors contributing to this include a very tight offshore rig market, which has delayed drilling plans by six months, combined with a reduction in production volumes on Vermillion 252. The fluctuation in prices denoted above does not reflect gains and losses from hedging activities. These hedging activities resulted in pretax losses of $7.4 million and $16.0 million, respectively, for the quarter and six months ended March 31, 1997. For the quarter and six months ended March 31, 1996, hedging activities resulted in pretax losses of $3.9 million and $3.5 million, respectively. Refer to further discussion of the Company's hedging activities under "Financing Cash Flow" and in Note 4 - Derivative Financial Instruments. PRODUCTION VOLUMES Exploration and Production. Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- 1997 1996 % Change 1997 1996 % Change ---- ---- -------- ---- ---- -------- Gas Production - (MMcf) Gulf Coast 7,719 8,703 (11.3) 15,520 15,999 (3.0) West Coast 337 248 35.9 551 505 9.1 Appalachia 1,293 1,363 (5.1) 2,574 2,756 (6.6) ------ ------ ------ ------ 9,349 10,314 (9.4) 18,645 19,260 (3.2) ====== ====== ====== ====== Oil Production - (Thousands of Barrels) Gulf Coast 362 239 51.5 746 408 82.8 West Coast 124 126 (1.6) 250 250 - Appalachia 3 5 (40.0) 5 8 (37.5) --- --- ----- --- 489 370 32.2 1,001 666 50.3 === === ===== === Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- WEIGHTED AVERAGE PRICES* Exploration and Production. Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- 1997 1996 % Change 1997 1996 % Change ---- ---- -------- ---- ---- -------- Weighted Avg. Gas Price/Mcf Gulf Coast $2.96 $2.55 16.1 $2.95 $2.28 29.4 West Coast $2.18 $1.18 84.7 $1.96 $1.19 64.7 Appalachia $3.97 $2.97 33.7 $3.22 $2.51 28.3 Weighted Average Price $3.07 $2.58 19.0 $2.95 $2.28 29.4 Weighted Avg. Oil Price/bbl Gulf Coast $22.44 $19.66 14.1 $23.39 $18.78 24.5 West Coast $19.97 $17.03 17.3 $20.41 $15.96 27.9 Appalachia $23.16 $17.17 34.9 $23.05 $16.84 36.9 Weighted Average Price $21.82 $18.73 16.5 $22.64 $17.70 27.9 *Weighted average prices do not reflect gains or losses from hedging activities. Other Nonregulated. Operating income before income taxes associated with this segment increased $3.1 million and $0.9 million, respectively, for the quarter and six-month period, compared with the same periods a year ago. The increases can be attributed primarily to developments in Horizon. Horizon was formed in 1995 to engage in the development and acquisition of foreign and domestic energy projects, including foreign utility companies and wholesale generators of electricity. Last year's second quarter included approximately $2.6 million of development costs associated with a power project in Pakistan (Kabirwala Project). Horizon subsequently withdrew from participation in the Kabirwala Project during the fourth quarter of fiscal 1996 and sold its rights in that project to El Paso Energy during the quarter ended March 31, 1997. Approximately $2.3 million was recorded during the current quarter reflecting the proceeds from the sale and the assumption of certain liabilities by El Paso Energy. For the six months ended March 31, 1997, the contribution from the Kabirwala Project sale was partly offset by expenses associated with the dissolution of the Horizon partnership known as Sceptre Power Company. In addition, for both the quarter and six months ended March 31, 1997, an increase in depletion expense in this segment's timber operations related to cutting timber with a higher cost partly offset the contribution associated with Horizon's activities. Income Taxes. Income taxes increased $0.5 million and $3.8 million, respectively, for the quarter and six months ended March 31, 1997, 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 $0.5 million and $1.1 million, respectively, for the quarter and six months ended March 31, 1997. Other interest decreased $1.1 million and $1.6 million for the quarter and six-month period, respectively, mainly as a result of lower interest expense on Amounts Payable to Customers. Interest on long-term debt increased $0.6 million and $0.5 million, respectively, for the quarter and six-month period, mainly because of a higher average amount of long-term debt compared to the same periods a year ago. 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, Dividend Reinvestment Plan, section 401(k) Plans, and stock option and stock award plans. Effective March 1, 1997, the Company's Customer Stock Purchase Plan, Dividend Reinvestment Plan and section 401(k) Plans began 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 WNC 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 six months ended March 31 and 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. For storage gas inventory accounted for under the last-in, first-out (LIFO) method, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statement of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheet and is included under the caption "Other Accruals and Current Liabilities." Such reserve is reduced as the inventory is replenished. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- Net cash provided by operating activities totaled $145.7 million for the six months ended March 31, 1997, an increase of $45.7 million compared with $100.0 million provided by operating activities for the six months ended March 31, 1996. The majority of this increase occurred in the Utility segment as an increase in cash receipts from gas sales and transportation service combined with a net increase in cash received as refunds from upstream pipelines more than offset the increase in cash paid for gas purchases. The Pipeline and Storage segment also experienced an increase in net cash provided by operating activities as a result of an increase in cash receipts from transportation and storage service combined with a reduction in federal tax payments. Investing Cash Flow Capital Expenditures - -------------------- The Company's cash outlay for capital expenditures totaled $84.7 million during the six months ended March 31, 1997. Noncash capital expenditures totaled $10.7 million and related to Seneca's issuance of long-term notes to third parties in exchange for land and timber. Total capital expenditures of $95.4 million for the six-month period represent 45% of the total current capital expenditure budget for fiscal 1997 of $214.0 million. The following table presents capital expenditures for the six months ended March 31, 1997, by business segment: (in thousands) -------------- Utility $30,291 Pipeline and Storage 6,678 Exploration and Production 45,781 Other Nonregulated 12,627 ------- $95,377 ======= The bulk of the Utility segment's capital expenditures were made for replacement of mains and main extensions, as well as for the replacement of service lines. The bulk of the Pipeline and Storage segment's capital expenditures were made for additions, improvements and replacements to this segment's transmission and storage systems. The proposed 1997 Niagara Expansion Project, which has been amended to provide approximately 34.0 MMcf per day of firm winter capacity and 21.0 MMcf per day of firm year-round capacity from the Niagara Falls, New York import point to an interconnection at Leidy, Pennsylvania, is currently awaiting FERC approval.1 It is anticipated that such approval will be received in the third quarter of fiscal 1997.1 Supply Corporation intends to seek FERC approval for its 1998/1999 Niagara Expansion Project as two independent projects. 1 The first project (the 1998 Expansion) encompasses the transportation of 100 MMcf per day from the Canadian border at Niagara Falls, New York, to Leidy, Pennsylvania and is expected to cost approximately $50 million. 1 Supply Corporation intends to file for FERC approval of the first project in the third quarter of fiscal 1997.1 Upon receipt of FERC approval, Supply Corporation intends to initiate construction Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- in the spring of 1998 with service to commence in November 1998.1 The second project (the 1999 Expansion) would provide additional transportation capacity from the Canadian border at Niagara Falls, New York, to Leidy, Pennsylvania beginning in late 1999.1 An Open Season for the 1999 Expansion commenced on May 1, 1997 and will be held for thirty days. The volume and cost of the 1999 Expansion will be determined by the result of the open season. No amount has been included in the budget for either the 1998 Expansion or the 1999 Expansion as the timing of the "go ahead" will depend on several factors, including FERC approval.1 The Exploration and Production segment spent approximately $38.4 million on its offshore program in the Gulf of Mexico during the six months ended March 31, 1997, including offshore drilling expenditures, geological expenditures and lease acquisitions. Offshore exploratory and development drilling was concentrated on West Cameron 182, High Island 194, Galveston 210, Galveston 316 and Main Pass 257. Offshore lease acquisitions included Mustang Island 796 and 818 in Texas state waters and Eugene Island 9 in Louisiana state waters. Approximately $7.4 million was spent on the Exploration and Production segment's onshore program during the six months ended March 31, 1997, including horizontal onshore drilling in central Texas and Seneca's development drilling program in California. Other Nonregulated capital expenditures consisted primarily of timber property purchases. Such purchases included Seneca's issuance of notes to third parties totaling $10.7 million in connection with the acquisition of timber properties. For further discussion, refer to Note 3 - Capitalization. The Company's capital expenditure program is under continuous review. The amounts are subject to modification for opportunities in the natural gas industry such as the acquisition of attractive oil and gas properties or storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures in the Company's other business segments depends, to a large degree, upon market conditions. 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 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 $200 million.1 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 of the Project (offshore gas producers) will not be ready to use the natural gas gathering and processing facilities in 1997. Such prospective customers are more likely to use the Project facilities in 1998 or 1999.1 Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- The Federal Energy Regulatory Commission ruled in March 1997 that most of the Project would be jurisdictional, so the parties are preparing the necessary regulatory filings seeking authorization to construct facilities and place them in 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.1 As of March 31, 1997, Supply Corporation has paid approximately $0.7 million of such development costs. Supply Corporation is currently using short-term borrowings to finance the development costs of the Project. International Investment In April 1997, Horizon's wholly owned subsidiary, Beheer-En Beleggingsmaatschappij Bruwabel, B.V. (Bruwabel), acquired a 34% interest in Severoceske Teplarny, a.s., (SCT). SCT is a power and heating utility located in the northern part of the Czech Republic. Bruwabel paid $20.6 million for these shares of SCT. Owners of an additional 34% of the shares of SCT have an option to sell these shares to Bruwabel through April 1998. If this put option is not exercised, Bruwabel has an option to purchase these shares during the period from April 1998 to April 1999. The consideration to be paid with respect to these options, if any, is expected to be approximately $21 - $24 million. Consequently, 34% of the outstanding shares of SCT subject to these options have been pledged to Bruwabel through April 1999. Bruwabel nominees have been elected to the board of directors of SCT so that Bruwabel has majority representation on the board. Bruwabel will be entitled to any dividends declared by SCT with respect to both the shares it owns and the shares pledged to Bruwabel, while they remain pledged. Financing Cash Flow Consolidated short-term debt decreased by $26.5 million during the first six months of fiscal 1997. 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 March 31, 1997, the Company would have been permitted to issue up to a maximum of $709 million in additional long-term unsecured indebtedness, in light of then current long-term interest rates. In addition, at March 31, 1997, the Company had regulatory authorizations and unused short-term credit lines that would have permitted it to borrow an additional $426.8 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 medium- Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- 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, is engaged in certain price swap agreements as a means of managing a portion of the market risk associated with fluctuations in the market price of natural gas and crude oil. These price swap agreements are not held for trading purposes. During the quarter ended March 31, 1997, Seneca utilized natural gas and crude oil price swap agreements with notional amounts of 5.9 equivalent Bcf and 360,000 equivalent bbl, respectively. These hedging activities resulted in the recognition of a pretax loss of approximately $7.4 million. For the six months ended March 31, 1997, Seneca utilized natural gas and crude oil price swap agreements with notional amounts of 12.4 equivalent Bcf and 670,000 equivalent bbl, respectively. These hedging activities resulted in the recognition of a pretax loss of approximately $16.0 million. These losses were offset by higher prices received for actual natural gas and crude oil production. At March 31, 1997, Seneca had natural gas price swap agreements outstanding with a notional amount of 37.3 equivalent Bcf at prices ranging from $1.77 per Mcf to $2.29 per Mcf. The weighted average fixed price of these swap agreements is approximately $2.03 per Mcf. Seneca also had crude oil price swap agreements outstanding at March 31, 1997 with a notional amount of 1,353,000 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 $18.15 per bbl. In addition, the Company has Securities and Exchange Commission (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 materially change the Company's present liquidity position, nor have a material adverse effect on the financial condition of the Company at this time.1 Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- RATE MATTERS Utility New York Jurisdiction - --------------------- In November 1995, Distribution Corporation filed in its New York jurisdiction a request for an annual base rate increase of $28.9 million with a requested return on equity of 11.5%. A two-year settlement with the parties in this rate proceeding was approved by the Public Service Commission of the State of New York (PSC). Effective October 1, 1996, Distribution Corporation received an annual base rate increase of $7.2 million. The settlement calls for an additional annual base rate increase of $7.2 million on October 1, 1997. Distribution Corporation will be filing tariff amendments no later than August 1997 designed to provide that increase. The settlement did not specify a 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 could 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. On April 2, 1997, Distribution Corporation filed a proposal for a customer choice pilot program, called Energy Select, with the PaPUC. The PaPUC is expected to address this proposal in the third quarter of fiscal 1997. Under this proposal, approximately 19,000 small commercial and residential customers in Sharon, Farrell, Hermitage, Sharpsville, Shenango, West Middlesex and Wheatland, Pennsylvania, would be able to purchase gas supplies from qualified, participating non-utility suppliers (or marketers) of gas.1 Under the proposed plan, Distribution Corporation would continue to deliver the gas to the customer's home or business and would remain responsible for reading customer meters, the safety and maintenance of its pipeline system and responding to gas emergencies. Energy Select would last about one and one-half years. 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. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- 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-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 $8.3 million to $9.7 million.1 At March 31, 1997, Distribution Corporation has recorded the minimum liability of $8.3 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 Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- 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 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 Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations (Cont.) ----------------------------- 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 2. Changes in Securities - ------------------------------ On March 7, 1997, the Company issued 700 unregistered shares of Company common stock to the seven non-employee directors of the Company, 100 shares to each such director. These shares were issued as partial consideration for the directors' service as directors during the quarter ended March 31, 1997, pursuant to the Company's Retainer Policy for Non-Employee Directors. These transactions were exempt from registration by Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving any public offering. 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 20, 1997. At that meeting, the shareholders elected directors and appointed independent accountants. 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: - Eugene T. Mann 31,976,107 932,956 - - - George L. Mazanec 32,064,528 844,535 - - - George H. Schofield 32,045,797 863,266 - - (ii) Appointment of Price Waterhouse LLP as independent accountants 32,379,598 282,478 246,987 - Item 4. Submission of Matters to a Vote of Security Holders (Cont.) - -------------------------------------------------------------------- Against Broker For or Withheld Abstain Non-Votes ---------- ----------- ---------- --------- (iii) Approval of the 1997 Award and Option Plan 23,613,902 3,388,519 1,020,940 4,885,702 (iv) Approval of Certain Amendments to the 1984 Stock Plan and the 1993 Award and Option Plan 24,566,914 2,185,937 1,067,737 5,088,475 (v) Approval of the Retainer Policy for Non-Employee Directors 20,081,453 6,813,255 1,128,654 4,885,701 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, 1997 and the fiscal years ended September 30, 1992 through 1996. (27) Financial Data Schedule (99) National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended March 31, 1997 and 1996. (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: May 15, 1997 ------------ EXHIBIT INDEX (Form 10Q) Exhibit 12 Ratio of Earnings to Fixed Charges for the Twelve Months Ended March 31, 1997 and the Fiscal Year Ended September 30, 1992 through 1996 Exhibit 27 Summary Financial Information Extracted from National Fuel Gas Company's Consolidated Financial Statements Six Months ending March 31, 1997 Exhibit 27-2 Summary Financial Information Extracted from National Fuel Gas Company's Consolidated Financial Statements Six Months ending March 31, 1996 Exhibit 99 Consolidated Statement of Income of National Fuel Gas Company for the Twelve Months Ended March 31, 1997 and March 31, 1996 EX-12 2
COMPUTATION OF RATIO OF EXHIBIT 12 EARNINGS TO FIXED CHARGES UNAUDITED Fiscal Year Ended September 30 Twelve Months ----------------------------------------------------------- Ended March 31, 1997 1996 1995 1994 1993 1992 ---------------------------------------------------------------------------- EARNINGS: Income Before Interest Charges (2) $166,105 $159,599 $128,061 $127,885 $125,742 $118,222 Allowance for Borrowed Funds Used in Construction 285 205 195 209 174 1,088 Federal Income Tax 57,041 55,148 30,522 36,630 21,148 17,680 State Income Tax 7,451 7,266 4,905 6,309 2,979 3,426 Deferred Inc. Taxes - Net (3) 5,660 3,907 8,452 4,853 16,919 14,125 Investment Tax Credit - Net (670) (665) (672) (682) (693) (706) Rentals (1) 5,545 5,640 5,422 5,730 5,621 5,857 ----------------------------------------------------------------------------- $241,417 $231,100 $176,885 $180,934 $171,890 $159,692 ============================================================================= FIXED CHARGES: Interest & Amortization of Premium and Discount of Funded Debt $41,354 $40,872 $40,896 $36,699 $38,507 $39,949 Interest on Commercial Paper and Short-Term Notes Payable 8,043 7,872 6,745 5,599 7,465 12,093 Other Interest (2) 4,706 6,389 4,721 3,361 4,727 6,958 Rentals (1) 5,545 5,640 5,422 5,730 5,621 5,857 ----------------------------------------------------------------------------- $59,648 $60,773 $57,784 $51,389 $56,320 $64,857 ============================================================================= RATIO OF EARNINGS TO FIXED CHARGES 4.05 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 March 1997, Fiscal 1996, 1995, 1994, 1993 and 1992 reflect the reclassification of $1,716, $1,716, $1,716, $1,674, $1,374 and $1,129, respectively, 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 3 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 06-MOS SEP-30-1997 OCT-01-1996 MAR-31-1997 PER-BOOK 1,746,452 0 353,119 9,464 204,686 2,313,721 38,138 404,889 486,696 929,723 0 0 531,739 153,200 0 20,000 52,628 0 0 0 626,431 2,313,721 862,196 56,411 682,821 739,232 122,964 1,322 124,286 28,587 95,699 0 95,699 31,877 0 145,739 2.52 2.52
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 AND SCHEDULES. 1,000 06-MOS SEP-30-1996 OCT-01-1995 MAR-31-1996 PER-BOOK 1,657,350 0 360,727 9,774 207,849 2,235,700 37,599 388,042 437,913 863,554 0 0 574,000 40,500 0 70,000 30,000 0 0 0 657,646 2,235,700 808,704 52,584 640,146 692,730 115,974 1,806 117,780 29,697 88,083 0 88,083 30,293 0 99,988 2.35 2.35
EX-99 5 EXHIBIT 99 NATIONAL FUEL GAS COMPANY CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Twelve Months Ended March 31, 1997 1996 (Thousands of Dollars) INCOME Operating Revenues $1,261,509 $1,126,105 ---------- ---------- Operating Expenses Purchased Gas 513,078 461,831 Operation 280,600 266,457 Maintenance 24,653 27,912 Property, Franchise and Other Taxes 100,231 96,429 Depreciation, Depletion and Amortization 108,363 81,478 Income Taxes - Net 70,148 51,369 ---------- ---------- 1,097,073 985,476 ---------- ---------- Operating Income 164,436 140,629 Other Income 3,385 5,708 ----------- ---------- Income Before Interest Charges 167,821 146,337 ---------- ---------- Interest Charges Interest on Long-Term Debt 41,354 40,001 Other Interest 14,180 16,237 ---------- ---------- 55,534 56,238 ---------- ---------- Net Income Available for Common Stock $ 112,287 $ 90,099 ========== ========== Earnings Per Common Share Net Income Available for Common Stock $2.96 $2.41 ===== ===== Weighted Average Common Shares Outstanding 37,875,142 37,461,235 ========== ========== -----END PRIVACY-ENHANCED MESSAGE-----