- -------------------------------------------------------------------------------
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,June 30, 1998
---------------------------
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,July 31, 1998:
38,351,53938,446,311 shares.
- -------------------------------------------------------------------------------
Company or Group of Companies for which Report is Filed:
- -------------------------------------------------------
NATIONAL FUEL GAS COMPANY (Company or Registrant)
DIRECT
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)
NiagaraUpstate Energy Trading Inc. (NET)(Upstate)
Niagara Independence Marketing Company (NIM)
Seneca Independence Pipeline Company (SIP)
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
SixNine Months Ended March 31,June 30, 1998 and 1997 4 - 5
b. Consolidated Balance Sheets - March 31,June 30, 1998 and
September 30, 1997 6 - 7
c. Consolidated Statement of Cash Flows - SixNine
Months Ended March 31,June 30, 1998 and 1997 8
d. Notes to Consolidated Financial Statements 9 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19 - 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
Part II. Other Information
--------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities 4241
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 42*
Item 5. Other Information *41
Item 6. Exhibits and Reports on Form 8-K 4342
Signature 4443
* 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,June 30,
------------------
1998 1997
---- ----
(Thousands of Dollars)Dollars, Except Per Share Amounts)
INCOME
Operating Revenues $462,648 $498,704$242,447 $246,051
-------- --------
Operating Expenses
Purchased Gas 188,874 251,57365,088 82,954
Fuel Used in Heat and Electric Generation 12,887 5788,789 245
Operation 93,819 70,27264,792 59,448
Maintenance 6,561 6,4956,440 6,334
Property, Franchise and Other Taxes 30,680 35,67620,716 23,194
Depreciation, Depletion and Amortization 26,798 29,096
Impairment of Oil and Gas Producing Properties 128,996 -31,019 29,286
Income Taxes - Net (9,739) 34,20211,877 13,307
-------- --------
478,876 427,892
-------- --------208,721 214,768
Operating Income (Loss) (16,228) 70,81233,726 31,283
Other Income 25,594 5845,651 1,275
-------- --------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 9,366 71,39639,377 32,558
-------- --------
Interest Charges
Interest on Long-Term Debt 11,115 10,17814,636 10,418
Other Interest 17,111 4,1095,427 3,235
-------- --------
28,226 14,287
-------- --------20,063 13,653
Minority Interest in Foreign Subsidiaries (2,402)(207) -
----------------- --------
Net Income (Loss) Available for Common Stock (21,262) 57,10919,107 18,905
EARNINGS REINVESTED IN THE BUSINESS
Balance at JanuaryApril 1 (1998, as restated) 484,431 445,554446,565 486,696
-------- --------
463,169 502,663465,672 505,601
Dividends on Common Stock
(1998 - $.435;$.45; 1997 - $.42) 16,604 15,967$.435) 17,224 16,541
-------- --------
Balance at March 31 $446,565 $486,696June 30 $448,448 $489,060
======== ========
Earnings (Loss) Per Common Share:
Basic $(0.56) $1.50
======$0.50 $0.50
===== =====
Diluted N/A $1.48
======$0.49 $0.49
===== =====
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,263,632 38,090,43538,358,065 38,141,019
========== ==========
Used Inin Diluted Calculation N/A 38,463,70038,719,074 38,485,420
========== ==========
N/A - Not applicable due to antidilution
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)
-----------
SixNine Months Ended
March 31,
------------------June 30,
-----------------
(Thousands of Dollars, Except Per Share Amounts) 1998 1997
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $833,669 $862,196
-------- --------$1,076,116 $1,108,247
---------- ----------
Operating Expenses
Purchased Gas 353,141 415,664418,228 498,617
Fuel Used in Heat and Electric Generation 17,221 1,11826,010 1,363
Operation 159,333 138,155224,128 197,603
Maintenance 12,907 11,96619,347 18,300
Property, Franchise and Other Taxes 54,891 60,23375,607 83,427
Depreciation, Depletion and Amortization 57,918 55,68588,936 84,971
Impairment of Oil and Gas Producing Properties 128,996 -
Income Taxes - Net 13,210 56,411
-------- --------
797,617 739,232
-------- --------25,085 69,719
---------- ----------
1,006,337 954,000
---------- ----------
Operating Income 36,052 122,96469,779 154,247
Other Income 26,762 1,322
-------- --------32,413 2,598
---------- ----------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 62,814 124,286
-------- --------102,192 156,845
---------- ----------
Interest Charges
Interest on Long-Term Debt 22,562 20,35737,517 30,882
Other Interest 21,151 8,230
-------- --------
43,713 28,587
-------- --------26,260 11,358
---------- ----------
63,777 42,240
---------- ----------
Minority Interest in Foreign Subsidiaries (2,829)(3,036) -
-------- ------------------ ----------
Income Before Cumulative Effect 16,272 95,69935,379 114,605
Cumulative Effect of Change in
Accounting for Depletion (9,116) -
-------- ------------------ ----------
Net Income Available for Common Stock 7,156 95,69926,263 114,605
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 472,595 422,874
-------- --------
479,751 518,573---------- ----------
498,858 537,479
Dividends on Common Stock
(1998 - $.87;$1.32; 1997 - $.84) 33,186 31,877
-------- --------$1.275) 50,410 48,419
---------- ----------
Balance at March 31 $446,565 $486,696
======== ========June 30 $448,448 $489,060
========== ==========
Basic Earnings Per Common Share:
Income Before Cumulative Effect $0.43 $2.52$0.93 $3.01
Cumulative Effect of Change in Accounting for Depletion (0.24) -
----- -----
Net Income Available for Common Stock $0.19 $2.52$0.69 $3.01
===== =====
Diluted Earnings Per Common Share:
Income Before Cumulative Effect $0.42 $2.49$0.92 $2.98
Cumulative Effect of Change in Accounting for Depletion (0.24) -
----- -----
Net Income Available for Common Stock $0.18 $2.49$0.68 $2.98
===== =====
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,230,331 38,020,55538,272,907 38,060,709
========== ==========
Used in Diluted Calculation 38,673,312 38,369,70138,688,564 38,408,273
========== ==========
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
- -------------------------------------------------------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
March 31,June 30,
1998 September 30,
(Unaudited) 1997
----------- -------------
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,881,283$3,082,496 $2,668,478
Less - Accumulated Depreciation, Depletion
and Amortization 869,214910,642 849,112
---------- ----------
2,012,0692,171,854 1,819,366
---------- ----------
Current Assets
Cash and Temporary Cash Investments 38,72338,910 14,039
Receivables - Net 206,004138,402 107,417
Unbilled Utility Revenue 38,01313,444 20,433
Gas Stored Underground 7,74117,133 29,856
Materials and Supplies - at average cost 22,91923,134 19,115
Unrecovered Purchased Gas Costs 340 -
Prepayments 37,64030,080 17,807
---------- ----------
351,380261,103 208,667
---------- ----------
Other Assets
Recoverable Future Taxes 91,011 91,011
Unamortized Debt Expense 22,20122,878 23,394
Other Regulatory Assets 46,61949,981 48,350
Investment in Unconsolidated Foreign Subsidiary - 18,887
Deferred Charges 6,9129,521 12,025
Other 76,34773,869 45,631
---------- ----------
243,090247,260 239,298
---------- ----------
$2,606,539$2,680,217 $2,267,331
========== ==========
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
- -------------------------------------------------------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
March 31,June 30,
1998 September 30,
(Unaudited) 1997
----------- -------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 100,000,000200,000,000 Shares; Issued
and Outstanding - 38,297,67238,388,902 Shares and
38,165,888 Shares, Respectively $ 38,29838,389 $ 38,166
Paid in Capital 408,703412,925 405,028
Earnings Reinvested in the Business 446,565448,448 472,595
Cumulative Translation Adjustment (1,175)(1,059) (2,085)
--------------------- ----------
Total Common Stock Equity 892,391898,703 913,704
Long-Term Debt, Net of Current Portion 543,410795,968 581,640
---------- ----------
Total Capitalization 1,435,8011,694,671 1,495,344
---------- ----------
Minority Interest in Foreign Subsidiaries 34,82523,902 -
---------- ----------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 378,235201,900 92,400
Current Portion of Long-Term Debt 153,572153,437 103,359
Accounts Payable 63,31670,189 74,105
Amounts Payable to Customers 3,70415,519 10,516
Other Accruals and Current Liabilities 175,588146,659 83,793
---------- ----------
774,415587,704 364,173
---------- ----------
Deferred Credits
Accumulated Deferred Income Taxes 234,131241,059 288,555
Taxes Refundable to Customers 19,427 19,427
Unamortized Investment Tax Credit 11,73611,584 12,041
Other Deferred Credits 96,204101,870 87,791
---------- ----------
361,498373,940 407,814
---------- ----------
Commitments and Contingencies - -
---------- ----------
$2,606,539$2,680,217 $2,267,331
========== ==========
See Notes to Consolidated Financial Statements
Item 1. - Financial Statements (Cont.)
- --------------------------------------
National Fuel Gas Company
-------------------------
Consolidated Statement of Cash Flows
------------------------------------
(Unaudited)
-----------
SixNine Months Ended
March 31,
------------------June 30,
-----------------
(Thousands of Dollars) 1998 1997
---- ----
(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $ 7,156 $ 95,69926,263 $114,605
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Cumulative Effect of Change in Accounting
for Depletion 9,116 -
Impairment of Oil and Gas Producing Properties 128,996 -
Depreciation, Depletion and Amortization 57,918 55,68588,936 84,971
Deferred Income Taxes (48,890) 2,948(44,829) 3,909
Minority Interest in Foreign Subsidiaries 2,8293,036 -
Other (1,074) 5,322(215) 4,540
Change in:
Receivables and Unbilled Utility Revenue (100,862) (157,544)(6,357) (62,034)
Gas Stored Underground and Materials and
Supplies 23,518 31,47814,422 26,116
Unrecovered Purchased Gas Costs (340) (8,443)- (233)
Prepayments (19,134) 12,075(8,930) 13,907
Accounts Payable (18,249) (4,184)(14,237) (10,245)
Amounts Payable to Customers (6,812) 3,1525,003 2,170
Other Accruals and Current Liabilities 84,603 83,84340,088 61,629
Other Assets and Liabilities - Net 3,882 25,7081,332 31,539
-------- --------
Net Cash Provided by
Operating Activities 122,657 145,739242,624 270,874
-------- --------
INVESTING ACTIVITIES
Capital Expenditures (220,889) (84,644)(315,223) (134,292)
Investment in Foreign Subsidiaries, Net of Cash
Acquired (75,963) -(111,179) (21,605)
Other 353 2632,065 243
-------- --------
Net Cash Used in Investing Activities (296,499) (84,381)(424,337) (155,654)
-------- --------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper 281,593 (26,500)105,187 (67,600)
Proceeds from Issuance of Long-Term Debt 198,750 -
Reduction of Long-Term Debt (52,323) (367)(53,048) (785)
Dividends Paid on Common Stock (33,131) (31,752)(49,734) (47,718)
Proceeds from Issuance of Common Stock 2,387 6,9655,429 6,930
-------- --------
Net Cash Provided by (Used in)
Financing Activities 198,526 (51,654)
---------206,584 (109,173)
-------- --------
Net Increase in Cash and
Temporary Cash Investments 24,684 9,70424,871 6,047
Cash and Temporary Cash Investments
at October 1 14,039 19,320
-------- --------
Cash and Temporary Cash Investments at March 31June 30 $ 38,72338,910 $ 29,02425,367
======== ========
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
Principles of Consolidation. During the quarter ended March 31,June 30, 1998, Horizon's
wholly-owned subsidiary, Horizon Energy Development B.V. (Horizon B.V.) (name
changed from Beheer-En-Beleggingsmaatschappij Bruwabel, B.V. in April 1998)
acquired a 75.3%increased its ownership interest in Prvni severozapadni teplarenska, a.s. (PSZT). PSZT is a wholesale power and district heating company located in the
northern Bohemia region of the Czech Republic. The Company consolidates PSZT
into its accounts.
During the quarter ended December
from 75.3% at March 31, 1997,1998 to 85.9% at June 30, 1998. Horizon B.V. also
increased its ownership interest in Severoceske Teplarny, a.s. and its
subsidiaries (SCT) from 36.8% at September 30, 1997 to 70.8% at December 31, 1997. A tender offer
to SCT's minority shareholders completed in April 1998 has increased Horizon
B.V.'s ownership interest to 82.6% (75.2%75.2% at March 31, 1998).1998 to 82.7% at June 30, 1998. The
Company consolidates both PSZT and SCT into its accounts. The equity method was
used to account for Horizon B.V.'s investmentminority ownership interest in SCT during
fiscal 1997.
The acquisitions of SCT and PSZT have been accounted for in
accordance with the purchase method as specified by Accounting Principles Board
Opinion Number 16, "Business Combinations" (APB 16). The acquisitions resulted
in approximately $23.2$20.6 million of goodwill, which is being amortized over a
twenty year period. This goodwill ($22.920.1 million at March 31,June 30, 1998) is recorded
in Other Assets in the Company's Consolidated Balance Sheet at March 31,June 30, 1998.
The final amount of goodwill ismay be subject to further purchase price
adjustments.
"Minority Interest in Foreign Subsidiaries" represents the minority
stockholders' share of the equity and net income of SCT and PSZT.
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
reported 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, 1997, 1996 and 1995 that are included in
the Company's combined Annual Report to Shareholders/Form 10-K for 1997. The
fiscal 1998 consolidated financial statements will be examined by the Company's
independent accountants after the end of the fiscal year.
The earnings for the sixnine months ended March 31,June 30, 1998 (exclusive of
the cumulative effect of a change in accounting for depletion and the impairment
of oil and gas producing properties, both of which are discussed below) should
not be taken as a prediction of earnings for the entire fiscal year ending
September 30, 1998. Most of the Company's business is seasonal in nature and is
influenced by weather conditions. Because of the seasonal nature of the
Company's heating business, earnings during the winter months normally represent
a substantial part of earnings for the entire fiscal year. Earnings during the
summer months tend to decline and may reach a point where expenses exceed
revenues. The impact of abnormal weather on earnings during the heating season
is partially reduced by the operation of a weather normalization clause (WNC)
included in Distribution Corporation's New York tariff. The weather normalization clauseWNC is effective for
October through May billings. Distribution Corporation's
Item 1. Financial Statements (Cont.)
- -------------------------------------
tariff for its
Pennsylvania jurisdiction does not have a weather normalization
clause.WNC. In addition, Supply Corporation's
straight fixed-variable rate design, which allows for recovery of substantially
Item 1. Financial Statements (Cont.)
- -------------------------------------
all fixed costs in the demand or reservation charge, reduces the earnings
impact of weather.weather fluctuations.
Cumulative Effect of Change in Accounting. Effective October 1, 1997, Seneca
changed its method of depletion for oil and gas properties from the gross
revenue method to the units of production method. The new method was adopted
because it provides a better measure of depletion expense and is the preferable
method used by oil and gas producing companies. Seneca's recent acquisition
activities will increasehave increased its size and scope of operations in relation to those
of the Company, making now the appropriate time forCompany. Consequently, the change in depletion
methods.method was warranted at such time.
(See further discussion of acquisitions in Note 6 - Acquisition of HarCor Energy
Inc. (HarCor) and in Item 2, Management's Discussion and Analysis under
"Exploration and Production".) The units of production method has been applied
retroactively to prior years to determine the cumulative effect through October
1, 1997. This cumulative effect reduced earnings for the nine months ended June
30, 1998, by $9.1 million, net of income tax. Depletion of oil and gas
properties for the quarter and sixnine months ended March 31,June 30, 1998, has been
computed under the newly adopted units of production method. The effect of the change from the
gross revenue method to the units of production method increased net income for
the quarter ended March 31,June 30, 1998 by $130,000.$879,000 ($0.02 per common share, basic and
diluted). For the sixnine months ended March 31,June 30, 1998, the effect of the change
increased income before cumulative effect and net income by $837,000$1,716,000 ($0.020.04
per common share, basic and diluted).
Since the Company changed its method of depletion for oil and gas
producing properties in the second quarter of its fiscal year, the first quarter
ended December 31, 1997, is restated as follows:
Three Months Ended
December 31, 1997
--------------------
Original Restated
-------- --------
(Thousands of Dollars, except per share amounts)
Income Before Cumulative Effect $36,827 $37,534
Cumulative Effect of Change in Accounting - (9,116)
------- -------
Net Income Available for Common Stock $36,827 $28,418
======= =======
Basic Earnings Per Common Share:
Income Before Cumulative Effect $0.96 $0.98
Cumulative Effect of Change in Accounting - (0.24)
----- -----
Net Income Available for Common Stock $0.96 $0.74
===== =====
Diluted Earnings Per Common Share:
Income Before Cumulative Effect $0.95 $0.97
Cumulative Effect of Change in Accounting - (0.24)
----- ------
Net Income Available for Common Stock $0.95 $0.73
===== =====
Item 1. Financial Statements (Cont.)
- -------------------------------------
Pro forma amounts for the three months ended June 30, 1997 and the nine months
ended June 30, 1998 and 1997 shown below, assume the retroactive application of
the new depletion method:
Three Months Three Months Six Months
Ended Ended Ended
December 31, March 31, March 31,
-------------- ------------- -------------
1997 1996 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Pro Forma Amounts:
(Thousands of Dollars,
except per share amounts)
Net Income (Loss)
Available for
Common Stock $37,534 $37,960 $(21,262) $ 57,637 $16,272 $95,597
======= ======= ======== ======== ======= =======
Earnings (Loss)
Per Common Share:
Basic $ 0.98 $ 1.00 $ (0.56) $ 1.51 $ 0.43 $ 2.51
======= ======= ======== ======== ======= =======
Diluted $ 0.97 $ 0.99 $ N/A $ 1.50 $ 0.42 $ 2.49
======= ======= ========= ========method. Actual amounts for the three months ended June 30 1998
are also shown for comparative purposes.
Three Months Nine Months
Ended Ended
June 30, June 30,
--------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of Dollars,
except per share amounts)
Net Income
Available for
Common Stock $19,107 $19,007 $35,379 $114,604
======= =======
N/A - Not applicable due to antidilution======= ========
Earnings
Per Common Share:
Basic $0.50 $0.50 $0.93 $3.01
===== ===== ===== =====
Diluted $0.49 $0.49 $0.92 $2.98
===== ===== ===== =====
Oil and Gas Exploration and Development Costs. Oil and Gas property acquisition,
exploration and development costs are capitalized under the full-cost method of
accounting as prescribed by the Securities and Exchange Commission (SEC). All
costs directly associated with property acquisition, exploration and development
activities are capitalized, with the principal limitation that such capitalized
amounts not exceed the present value of estimated future net revenues
(discounted at 10%) from production of proved gas and oil reserves plus the
lower of cost or market of unevaluated Item 1. Financial Statements (Cont.)
Item 1. Financial Statements (Cont.)
- ------------------------------------
properties, net of related income tax effect (the full-cost ceiling). Future net
revenue is estimated based on end-of-quarter prices adjusted for contracted
price changes. If capitalized costs exceed the full-cost ceiling at the end of
any quarter, a permanent impairment is required to be charged to earnings in
that quarter. Such a charge has no effect on the Company's cash flow.
The surplus of crude oil world-wide has caused oil prices to drop to
their lowest level in recent years, and gas prices have beencontinue to be negatively
impacted by athe warmer than normal 1997/1998 winter. Due to these price
declines, Seneca's capitalized costs under the full-cost method of accounting
exceeded the full-cost ceiling at March 31, 1998. Seneca was required to
recognize an impairment of its oil and gas producing properties.properties in the quarter
ended March 31, 1998. This charge amounted to $129.0 million (pretax) and
reduced net income for the quarter and sixnine months ended March 31,June 30, 1998 by $79.1 million
($2.07 per common share, basic; $2.05$2.04 per common share, diluted). No impairment
charge was required for the six monthsquarter ended March 31, 1998, on a diluted basis).June 30, 1998.
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 sixnine months ended March 31,June 30, 1998
and 1997 amounted to $30.5$38.0 million and $26.7$35.0 million, respectively. Net income
taxes paid during the sixnine months ended March 31,June 30, 1998 and 1997 amounted to $20.4$33.0
million and $40.9$55.2 million, respectively.
Item 1. Financial Statements (Cont.)
- -------------------------------------
Details of the SCT, PSZT and PSZTHarCor stock acquisitions during the
sixnine months ended March 31,June 30, 1998, are as follows (dollars in millions):
SCT PSZT Total
--- ---- -----
Assets acquired $74.4 $144.4 $218.8
Liabilities assumed (32.3) (84.4) (116.7)
Existing investment at acquisition (18.9) - (18.9)
Cash acquired at acquisition (6.3) (0.9) (7.2)
----- ------ ------
Cash paid, net of cash acquired $16.9 $ 59.1 $ 76.0SCT PSZT HarCor Total
Assets acquired $71.0 $143.5 $104.5 $319.0
Liabilities assumed (27.2) (79.6) (72.1) (178.9)
Existing investment at acquisition (18.9) - - (18.9)
Cash acquired at acquisition (6.3) (0.9) (2.8) (10.0)
----- ----- ----- ------
Cash paid, net of cash acquired $18.6 $63.0 $29.6 $111.2
===== ===== ===== ====== ======
Reclassification. Certain prior year amounts have been reclassified to conform
with current year presentation.
Earnings per Common Share. Basic earnings per common share is computed by
dividing income available for common stock by the weighted average number of
common shares outstanding for the period. Diluted earnings per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Such additional shares are added to the denominator of the basic earnings per
common share calculation in order to calculate diluted earnings per common
share. The only potentially dilutive securities the Company has outstanding are
stock options. The diluted weighted average shares outstanding shown on the
Consolidated Statement of Income reflects the potential dilution as a result of
these stock options. Such dilution was determined using the Treasury Stock
Method as required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
Item 1. Financial Statements (Cont.)
- -------------------------------------
New Accounting Pronouncements:
Employers' Disclosures about Pensions and Other Postretirement Benefits. In
February 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). SFAS 132 supersedes the
disclosure requirements in SFAS 87, "Employers' Accounting for Pensions", SFAS
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". SFAS 132 does not
change the measurement or recognition of the Company's pension or other
postretirement benefit plans. SFAS 132 standardizes the disclosure requirements
for pension and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis and eliminates
certain disclosures that are no longer useful under SFAS 87, 88 and 106. The
Statement is effective for fiscal year 1999. Earlier application is encouraged.
SFAS 132 requires restatement of disclosures for prior periods for comparative
purposes.
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the
FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The intended use
of the derivative and its designation as either (1) hedging the exposure to
changes in the fair value of a recognized asset or liability or a firm
commitment, (2) hedging the exposure to variable cash flows of a forecasted
transaction, or (3) hedging the foreign currency exposure of a net investment in
a foreign operation, will determine when the gains or losses on the derivatives
are to be reported in earnings and when they are to be reported as a component
of comprehensive income.
The Company is required to adopt SFAS 133 in the first quarter of
fiscal 2000. However, earlier application is permitted. Initial application of
SFAS 133 should be as of the beginning of a fiscal quarter, at which time
hedging relationships must be designated and documented in accordance with the
provisions of SFAS 133. SFAS 133 is not to be applied retroactively to financial
statements of prior periods. Management is currently in the process of
determining the impact on the Company of adopting SFAS 133.
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):
SixNine Months Ended
March 31,
----------------June 30,
-----------------
1998 1997
---- ----
Operating Expenses:
Current Income Taxes -
Federal $52,235 $48,590$59,208 $59,199
State 5,242 4,8736,814 6,611
Foreign 4,6233,892 -
Deferred Income Taxes (48,890) 2,948(44,829) 3,909
-------- -------
-------
13,210 56,41125,085 69,719
Other Income:
Deferred Investment Tax Credit (305) (335)(457) (502)
Minority Interest in Foreign Subsidiaries (1,457)(1,576) -
Cumulative Effect of Change in Accounting (5,736)(5,737) -
--------------- -------
Total Income Taxes $ 5,712 $56,076$17,315 $69,217
======= =======
Item 1. Financial Statements (Cont.)
- -------------------------------------
Total income taxes as reported differ from the amounts that were
computed by applying the federal income tax rate to income before income taxes.
The following is a reconciliation of this difference (in thousands):
SixNine Months Ended
March 31,
----------------June 30,
-----------------
1998 1997
---- ----
Net income available for common stock $ 7,156 $ 95,69926,263 $114,605
Total income taxes 5,712 56,07617,315 69,217
-------- --------
Income before income taxes $ 12,868 $151,77543,578 $183,822
======== ========
Income tax expense, computed at
statutory rate of 35% $ 4,50415,252 $ 53,12164,338
Increase (reduction) in taxes resulting from:
Current state income taxes, net of federal
income tax benefit 3,407 3,1654,429 4,165
Depreciation 1,225 8511,738 1,972
Miscellaneous (3,424) (1,061)
--------(4,104) (1,258)
--------- --------
Total Income Taxes $ 5,71217,315 $ 56,07669,217
======== ========
Item 1. Financial Statements (Cont.)
- ------------------------------------
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
At March 31,June 30, 1998 At September 30, 1997
----------------------------------------- -----------------------
Deferred Tax Liabilities:
Excess of tax over book
depreciation $135,569$137,207 $190,913
Exploration and
intangible well
drilling costs 127,898135,481 117,759
Other 61,78652,161 62,189
-------- --------
Total Deferred Tax
Liabilities 325,253324,849 370,861
-------- --------
Deferred Tax Assets:
Overheads capitalized
for tax purposes (20,998)(21,768) (19,406)
Other (70,124)(62,022) (62,900)
--------- --------
Total Deferred Tax
Assets (91,122)(83,790) (82,306)
----------------- --------
Total Net Deferred
Income Taxes $234,131$241,059 $288,555
======== ========
The primary issues related to Internal Revenue Service audits of the
Company for the years 1977 - 1994 were settled early in calendar year 1998. Net
income for the quarter and sixnine months ended March 31,June 30, 1998 was increased by approximately $5
million as a result of interest, net of tax and other adjustments, related to
this settlement.
Item 1. Financial Statements (Cont.)
- -------------------------------------
Note 3 - Capitalization
Common Stock. During the nine months ended June 30, 1998, the Company issued
22,194 shares of common stock under the Company's section 401(k) Plans, 28,796
shares to participants in the Company's Dividend Reinvestment Plan and 9,334
shares to participants in the Company's Customer Stock Purchase Plan.
Additionally, 162,690 shares of common stock were issued under the Company's
stock option and stock award plans.
On December 11, 1997, 658,500 stock options were granted at an
exercise price of $44.875 per share. On June 18, 1998, 111,500 stock options
were granted at an exercise price of $41.875.
At the Annual Meeting of Shareholders in February 1998, the Company's
shareholders voted to increase the number of shares of authorized Company common
stock from 100,000,000 shares to 200,000,000 shares. This change became
effective April 3, 1998, upon the filing of a certificate of amendment with the
Secretary of State of the State of New Jersey.
During the six months ended March 31, 1998, the Company issued
131,784 shares of common stock under the Company's stock award and option plans
including 7,609 shares of restricted stock.
On December 11, 1997, 658,500 stock options were granted under the
stock award and option plans at an exercise price of $44.875 per share.
Effective April 1, 1998, the Company's section 401(k) Plans, Dividend
Reinvestment Plan and Customer Stock Purchase Plan began utilizing original
issue shares of Company common stock.
Preferred Stock. At the Annual Meeting of Shareholders in February 1998, the
Company's shareholders voted to eliminate the Company's authorized 3,200,000
shares of $25 par value preferred stock and replace it with an authorized amount
of 10,000,000 shares of $1 par value preferred stock. This change became
effective April 3, 1998, upon the filing of a certificate of amendment
Item 1. Financial Statements (Cont.)
- -----------------------------------
with the Secretary of State of the State of New Jersey. The Company does not
have any preferred stock outstanding at this time.
Long-Term Debt. In May 1998, the Company issued $200.0 million of 6.303%
medium-term notes due to mature in May 2008. After deducting underwriting
discounts and commission, the net proceeds to the Company amounted to $198.8
million.
SCT has a term loan in the amount of 145loans amounting to 153.2 million Czech Koruna (CZK),
which translates to $4.3$4.6 million as of March 31,June 30, 1998. The principal will
be paid in quarterly installments over the term of the loan, which matures in
June 2006. The interest rate on this loan is set at the six month PRIBOR (Prague
Interbank Offered Rate) rate plus 1%, which was 16.77% as of March 31, 1998. Two
additional SCT loans, in the aggregate amount of CZK 13.6 million ($0.4
million), are outstanding. Each of these loans has an interest rate set at the
Komercni Banka, a.s. rate plus 1.5%, which was 17.3% as of March 31, 1998. The
principal on these two additional
loans will be paid in quarterly installments over the term of the loans, onethe
last of which matures in December 1999 and the other
in December 2000.June 2006. The interest rates on these loans ranged
from 16.03% to 16.95% at June 30, 1998.
PSZT has U.S. dollar denominated debt in the amount of $50.6 million
as of March 31,June 30, 1998. The functional currency of PSZT is the Czech Koruna. Since
this debt must be repaid in U.S. dollars, a change in exchange rates between the
Czech Koruna and the U.S. dollar may increase or decrease the amount of Czech
Koruna required to repay the debt, resulting in a corresponding gain or loss to
be recognized in the income statement. During the quarter ended March 31,June 30, 1998, the Czech Koruna
increased in value in relation to the U.S. dollar. Accordingly, PSZT recognized
a pretax gain of approximately $2.3$1.2 million, which is included in Other Income
in the Consolidated Statement of Income. Since acquiring PSZT in February 1998,
an exchange rate gain of $3.4 million (pretax) has been recorded concerning
PSZT's U.S. dollar denominated debt. Subsequent exchange rate changes over the
term of the loan may result in the recognition of additional gains or losses.
The principal of this debt will be paid in quarterly installments over the
period of March 2000 - December 2004. The interest rate on this debt is setwas 7.98%
at the six month LIBOR (London Interbank Offered Rates) rate
plus 2.2%, which was 8.04% as of March 31,June 30, 1998.
Item 1. Financial Statements (Cont.)
- -------------------------------------
PSZT also has long-term debentures in the amount of CZK 300 million
($8.99.1 million). The debentures mature in December 1999 and bear an interest rate
of 13%.
As a result of the acquisition of HarCor, the Consolidated Balance
Sheet at June 30, 1998, includes approximately $53 million of HarCor's senior
secured debt (See note 6 for further discussion).
Note 4 - Derivative Financial Instruments
The Company, in its Exploration and Production operations,Seneca 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 CompanySeneca 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 CompanySeneca for its natural gas and crude oil production.
The following summarizes the Company'sSeneca's activity under price swap
agreements for the quarter and six-monthnine-month periods ended March 31,June 30, 1998 and 1997,
respectively:
Item 1. Financial Statements (Cont.)
- ------------------------------------
Quarter Ended Quarter Ended
March 31,June 30, 1998 March 31,June 30, 1997
-------------- --------------------------- -------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Billion
Cubic Feet (Bcf) 5.7 5.96.0 6.3
Range of Fixed Prices per Thousand Cubic
Feet (Mcf) $2.00 - $2.55$2.84 $1.77 - $2.06
Weighted Average Fixed Price per Mcf $2.20$2.25 $1.90
Range of Variable Prices per Mcf $2.01$2.06 - $2.35 $1.77$2.41 $1.84 - $4.08$2.41
Weighted Average Variable Price per Mcf $2.22 $2.87$2.27 $2.13
Loss $(136,000) $(5,714,000)$($82,000) $(1,421,000)
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent
Barrels (bbl) 219,000 360,000360,500
Range of Fixed Prices per bbl $17.50 - $20.56 $17.40 - $18.71
Weighted Average Fixed Price per bbl $19.04 $18.02
Range of Variable Prices per bbl $15.04$13.67 - $16.73 $20.97$15.47 $19.22 - $25.18$20.87
Weighted Average Variable Price per bbl $15.95 $22.78$14.69 $19.94
Gain (Loss) $677,000 $(1,713,000)
Item 1. Financial Statements (Cont.)
- -------------------------------------
Six$982,000 $(692,000)
Nine Months Ended SixNine Months Ended
March 31,June 30, 1998 March 31,June 30, 1997
---------------- --------------------------------- -----------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Bcf 13.1 12.419.1 18.7
Range of Fixed Prices per Mcf $1.77 - $2.55$2.84 $1.71 - $2.10
Weighted Average Fixed Price per Mcf $2.07 $1.93$2.13 $1.92
Range of Variable Prices per Mcf $2.01 - $3.44 $1.77 - $4.11
Weighted Average Variable Price per Mcf $2.68 $2.91$2.55 $2.65
Loss $(8,085,000) $(12,176,000)$(8,167,000) $(13,597,000)
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent bbl 453,000 670,000672,000 1,030,500
Range of Fixed Prices per bbl $17.50 - $20.56 $17.40 - $18.71
Weighted Average Fixed Price per bbl $18.62 $17.97$18.76 $17.99
Range of Variable Prices per bbl $15.04$13.67 - $21.28 $20.97$19.22 - $25.18
Weighted Average Variable Price per bbl $18.01 $23.59$16.93 $22.31
Gain (Loss) $239,000 $(3,806,000)
The Company$1,221,000 $(4,498,000)
Seneca had the following price swap agreements outstanding at March 31,June
30, 1998.
Natural Gas Price Swap Agreements:
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 11.47.3 $2.00 - $2.35 $2.17$2.84 $2.28
1999 14.017.5 $2.00 - $2.47 $2.28$2.50 $2.31
2000 2.43.1 $2.29 - $2.47 $2.37
----
27.827.9
====
Item 1. Financial Statements (Cont.)
- ------------------------------------
Crude Oil Price Swap Agreements:
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent bbl) Prices Per bbl Fixed Price Per bbl
- ----------- ---------------- -------------- -------------------
1998 438,000219,000 $17.50 - $20.56 $19.04
1999 135,000 $19.30 - $20.56 $19.86
-------
573,000354,000
=======
Gains or losses from these price swap agreements are accrued in
operating revenues on the Consolidated Statement of Income at the contract
settlement dates. At March 31,June 30, 1998, the CompanySeneca had an unrecognized lossgain of
approximately $7.1$0.1 million related to the price swap agreements which are offset
by corresponding unrecognized gainslosses from the Company'sSeneca's anticipated natural gas and
crude oil production over the terms of the price swap agreements.
The Company, through its natural gas marketing operations,NFR participates in the natural gas futures market to manage a
portion of the market risk associated with fluctuations in the price of natural
gas. Such futures are not held for trading purposes. At March 31,June 30, 1998, the CompanyNFR had
the following futures contracts outstanding:
Item 1. Financial Statements (Cont.)
- -------------------------------------
Long "Buy" Positions
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 5.03.7 $2.04 - $2.60 $2.37$2.70 $2.33
1999 2.24.6 $2.04 - $2.75 $2.50$2.96 $2.57
2000 1.0 $2.45 - $2.74 $2.66
---
7.29.3
===
Short "Sell" Positions
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 3.9 $2.202.2 $2.11 - $2.63 $2.45$2.76 $2.46
1999 .20.7 $2.38 - $2.42 $2.41$2.77 $2.67
---
4.12.9
===
Gains or losses from natural gas futures are recorded in Other
Deferred Credits on the Consolidated Balance Sheet until the hedged commodity
transaction occurs, at which point they are reflected in operating revenues in
the Consolidated Statement of Income. At March 31,June 30, 1998, the CompanyNFR had unrealized gains
of approximately $1.4$1.7 million related to these futures contracts. The Company recordedNFR had a
loss of approximately $0.1 million duringminimal gain for the quarter ended March 31,June 30, 1998 and a gainrecorded losses of
approximately $1.7$0.3 million duringfor the quarter ended March 31,June 30, 1997. The CompanyNFR recorded
gains of approximately $1.2$1.3 million and $1.7$1.2 million for the sixnine months ended
March 31,June 30, 1998 and 1997, respectively. Since these futures contracts qualify and
have been designated as hedges, any gains or losses resulting from market price
changes are substantially offset by the related commodity transaction.
Item 1. Financial Statements (Cont.)
- ------------------------------------
The Company has SEC authority to enter into hedging transactions
related to all or a portion of its existing or anticipated debt. The notional
amounts of the hedging instruments may not exceed the amount of the Company's
outstanding debt. No such hedging transactions were entered into during the
quarter ended March 31,June 30, 1998 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 and futures
contracts 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 and futures contracts 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 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.
Item 1. Financial Statements (Cont.)
- -------------------------------------
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 may range from $14.0$13.7 million to
$15.0$14.7 million. At March 31,June 30, 1998, Distribution Corporation has recorded the
minimum liability of $14.0$13.7 million. The approximate 50% increase in the
liability since September 30, 1997 mainly relates to changing circumstances and
revised estimates for one particular former manufactured gas plant site. The
ultimate cost to Distribution Corporation with respect to the remediation of all
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,June 30, 1998 includes related regulatory assets in the amount
of approximately $13.3$13.0 million. For further discussion, see
Item 1. Financial Statements (Cont.)
- -----------------------------------
disclosure in Note H
- - Commitments and Contingencies under the heading
"Environmental Matters" in Item 8 of the Company's 1997 Form 10-K.
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.
Note 6 - Acquisition of HarCor Energy, Inc.
In May 1998, Seneca West Corporation (Seneca West), a wholly-owned
subsidiary of Seneca, completed a tender offer (an offer of $2.00 per share) for
the outstanding shares of HarCor Energy, Inc. (HarCor). Preliminary information
supplied by the depository for the offer indicate that approximately 95% of the
outstanding shares of HarCor common stock were tendered in accordance with the
tender offer. Seneca West gave notice to the depository that Seneca West
accepted for payment all of the shares of HarCor common stock. The cost of
acquiring these shares is approximately $31 million.
Item 1. Financial Statements (Cont.)
- -------------------------------------HarCor. The tender offer was commenced pursuant to the
terms of an Agreement and Plan of Merger among HarCor, Seneca and Seneca West
which providesprovided for the merger of Seneca West with and into HarCor following the
successful consummation of the tender offer. Accordingly, allApproximately 95% of the
outstanding shares of HarCor common stock were tendered in accordance with the
tender offer. Accordingly, Seneca West has been merged with and into HarCor and
the common stock that werewas not purchased pursuant to the tender offer will bewas
converted in the merger into the right to receive $2.00 per share. Seneca West intends to consummateThe cost of
the merger before the end of 1998. Thetender offer and subsequent conversion of the remaining shares would cost
Seneca Westof HarCor was
approximately $1.6$32.4 million.
Seneca West'sThe acquisition of HarCor will bewas accounted for in accordance with the
purchase method as specified by APB 16. HarCor's results of operations will bewere
incorporated into the Company's consolidated financial statements for the period
subsequent to the completion of the tender offer in May 1998.
The HarCor oil and gas properties are located on the west sideAs a result of the San Joaquin Basin in California. These properties are unique for California in
that they produce higher gravity oil than is generally found in this area, as
well as producing natural gas. Included in this acquisition, isthe Consolidated Balance Sheet at
June 30, 1998 includes approximately $54$53 million of 14 7/8%HarCor's senior secured
debt. This debt is payable semi-annually on January 15 and other liabilitiesJuly 15 of HarCor.each year.
The debt is redeemable, in whole or in part, at the option of HarCor at any time
on or after July 15, 1999 at the following redemption prices: 1999 - 110% of the
principal amount; 2000 - 107% of the principal amount; 2001 and thereafter -
100% of the principal amount. An opening balance sheet adjustment has been made
such that the effective interest rate recognized by the Company regarding this
debt will be approximately 5.875%.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------- ------------------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
Earnings.
The Company experienced a loss of $21.3earnings were $19.1 million, or $0.56$0.50 per common share
($0.49 per share on a diluted basis), for the quarter ended March 31,June 30, 1998. This
losscompares with earnings of $18.9 million, or $.50 per common share ($0.49 per
common share on a diluted basis), for the quarter ended June 30, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The Company's earnings were $26.3 million, or $0.69 per common share
($0.68 per common share on a diluted basis), for the nine months ended June 30,
1998. This includes athe non-cash impairment of Seneca's oil and gas assets, in
the amount of $79.1 million (after-tax). Without this item, the quarter's earnings would have been $57.8
million, or $1.51 per common share ($1.49 per common share on a diluted basis).
This compares with earnings of $57.1 million, or $1.50 per common share ($1.48
per common share on a diluted basis), for the quarter ended March 31, 1997.
The Company's earnings were $7.2 million, or $0.19 per common share
($0.18 per common share on a diluted basis), for the six months ended March 31,
1998. This includes the non-cash impairment of Seneca's oil and gas assets,
noted above,(after tax) as well as the cumulative effect through
October 1, 1997, of a change in depletion methods for Seneca's oil and gas
assets in the amount of $9.1 million, or $0.24 per common share. Without these
two non-cash items, earnings for the sixnine months ended March 31,June 30, 1998, would have
been $95.4$114.5 million, or $2.50$3.00 per common share ($2.472.96 per common share on a
diluted
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
basis). This compares with earnings of $95.7$114.6 million, or $2.52$3.01 per
common share ($2.492.98 per common share on a diluted basis), for the sixnine months
ended March 31,June 30, 1997. The slight increase inearnings for the nine months ended June 30, 1998 also
reflect $5.0 million of after tax income from the settlement of the primary
issues relating to IRS audits of years 1977-1994.
Discussion of Quarter Results.
Overall, earnings for the quarter (exclusive of the
asset impairment noted above) aswere basically flat when compared
with the prior year's quarter, resulted
from higherwith increases in earnings inof the Exploration and Production, International, and Pipeline and
Storage segmentssegment and a lower loss experienced in the International segment,
offset in part by lower earnings in the Utility, segment.
In the Exploration and Production and Other
Nonregulated segments.
In the Pipeline and Storage segment, earnings arewere up (exclusivedue mainly to
lower operation and maintenance (O&M) expense and a buyout of a firm
transportation agreement by a customer in the asset impairment noted above) due to Seneca's portionamount of interest income
related to$2.5 million which was
received during the recent settlement of the primary issues of IRS audits for the
years 1977 - 1994.quarter. Partly offsetting this increase wasthese positive impacts to
earnings were lower incomerevenue from operations mainly because of lower productionunbundled pipeline sales and prices of both oil and gas.open access
transportation.
The International segment has experiencedis realizing increases in earnings
resulting from Horizon's share
of earnings from its two main investments in district heating and power
generation operations located in the Czech Republic. InHorizon initially acquired
36.8% of Severoceske Teplarny, a.s. (SCT) in fiscal 1997, and increased its
ownership during fiscal 1998 to 82.7% by June 30, 1998. Also in this fiscal
year, Horizon invested in Prvni severozapadni teplarenska, a.s. (PSZT), and
owned an 85.9% interest at June 30, 1998. However, the Pipeline and Storage segment, earnings are up dueadditional cost of debt
to Supply
Corporation's portion of interest income relatedfund these acquisitions has reduced results for the quarter to the previously mentioned
recent settlement of IRS audits. Additional income taxes related to certain
unsettled issues were also recorded. Mostly offsetting the net increase related
to the IRS audits was lower revenue from unbundled pipeline sales and open
access transportation and reserves established for preliminary costs incurred to
date related to proposed pipeline projects. Certain of these costs for which
reserves were established may be recovered at a future date.
Inslight loss
position.
Although the Utility segment earnings are downcontinues to benefit from the prior year mainly
because oflower O&M
expense, the impact of warmer than normal weather induring the Pennsylvania jurisdictionquarter, and the
consequent overall lower normalized gas usage per customer account.account, has again taken its toll on the
earnings of this segment. In addition,
the UtilityNew York jurisdiction, the Weather
Normalization Clause (WNC) is not available to mitigate weather impacts
subsequent to the May billing cycle. In the Pennyslvania jurisdiction, there is
no WNC.
In the Exploration and Production segment, incurredearnings are down mainly
because of low oil prices and additional expenses of operating the properties
acquired in the Whittier, HarCor Energy Inc. (HarCor) and Bakersfield Energy
Resources (BER) acquisitions, as well as higher interest expense, net of related rate recovery,costs related to these
acquisition activities. These factors more than offset the previously mentioned recent settlementpositive
Item 2. Management's Discussion and Analysis of IRS audits.Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
contribution to earnings that resulted from higher production of both oil and
gas and higher gas prices. The slight decrease inproduction increases are mainly attributable to
the properties acquired as noted above.
The Other Nonregulated segment's earnings are down mainly because of
lower margins and higher expenses of the natural gas marketing operations and
lower earnings of the timber operations.
Discussion Of Nine-Months Results.
Earnings for the sixnine months ended March 31,June 30, 1998 (exclusive of the asset impairment and cumulative effect of a change in
depletion methodstwo
nonrecurring items noted above) aswere also basically flat when compared with the
prior year's six month
period, reflects loweryear. Lower earnings of the Utility and the Exploration and
Production segments, mostly offset by higher earnings in the International and
Pipeline and Storage segments. Both the Utility and Exploration and Production
segments were negatively impactedoffset by higher earnings of the International and Pipeline and
Storage segments. The Utility segment showed lower year-to-date earnings because
of warmer than normal weather which reduced
demand and prices.lower gas usage. The Exploration and Production segment
had lower year-to-date earnings mainly because of lower overall production and
prices and higher expenses. The International segment's earnings increased
because of its share of earnings from its investments in the Czech Republic. Consistent with
the discussion above concerning quarterly earnings, the impact of theThe
settlement of the primary issues relating to IRS audits contributedprovided a positive
contribution to higher earnings in the Pipeline and Storage segment and partially offset the decreased earnings inas well as the
Exploration and Production segment, while reducing the earnings of the Utility
segment. A more detailed discussion of current period results can be found inIn addition, the business segment information that follows.
Item 2. Management's DiscussionPipeline and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------Storage segment's year-to-date earnings
also benefited from the previously mentioned customer contract buyout.
Discussion Of Asset Impairment And Cumulative Effect Of A Change In Depletion
Method.
Seneca follows the full-cost method of accounting for its oil and gas
operations. Under this method, capitalized costs are limited by a present worth
calculation of future revenues from oil and gas assets (full-cost ceiling). The
surplus of crude oil world-wide has caused oil prices to drop to their lowest
level in recent years, and gas prices have beencontinue to be negatively impacted by athe
warmer than normal 1997/1998 winter. As a result of these lower prices, a
non-cash asset impairment of $129 million (pretax) was recorded as of March 31,
1998. No impairment charge was required for the quarter ended June 30, 1998.
Effective October 1, 1997, Seneca changed its method of depletion for
oil and gas properties from the gross revenue method to the units of production
method. The new method was adopted because it provides a better measure of
depletion expense and is the preferable method used by oil and gas producing
companies. Seneca's recent acquisition activities will increasehave increased its size and
scope of operations in relation to those of the Company1 making now the
appropriate time forCompany. Consequently, the
change in depletion methods.method was warranted at such time. The units of production method has
been applied retroactively to prior years to determine the cumulative effect
through October 1, 1997. This cumulative effect reduced earnings for the nine
months ended June 30, 1998, by $9.1 million, net of income taxes. Depletion of
oil and gas properties for the quarter and sixnine months ended March 31,June 30, 1998, has
been computed under the newly
adopted units of production method. Since Seneca changed its method of depletion
for its oil and gas producing properties in the second quarter of its fiscal
year, the first quarter financial results of the Company have been restated.
This restatement, as well as additionalAdditional discussion of
this accounting change is included in Note 1 "Summary of Significant Accounting
Policies."
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
OPERATING REVENUES
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility
Retail Revenues:
Residential $243,398 $301,632 (19.3) $453,134 $515,258 (12.1)
Commercial 51,480 74,959 (31.3) 96,681 125,614 (23.0)
Industrial 5,247 8,980 (41.6) 11,659 15,209 (23.3)
-------- -------- -------- --------
300,125 385,571 (22.2) 561,474 656,081 (14.4)
Off-System Sales 16,021 15,818 1.3 30,771 30,676 0.3
Transportation 22,337 16,946 31.8 37,514 28,188 33.1
Other 3,887 (374) 11.4 3,452 635 NM
-------- -------- -------- --------
342,370 417,961 (18.1) 633,211 715,580 (11.5)
-------- -------- -------- --------
Pipeline and Storage
Storage Service 15,984 16,304 (2.0) 32,469 32,691 (0.7)
Transportation 24,695 24,397 1.2 48,463 48,579 (0.2)
Other 1,653 2,960 (44.2) 7,257 6,885 5.4
-------- -------- -------- --------
42,332 43,661 (3.0) 88,189 88,155 -
-------- -------- -------- --------
Exploration and
Production 24,819 32,297 (23.2) 49,528 62,379 (20.6)
-------- -------- -------- --------
International 42,558 796 NM 54,147 1,524 NM
-------- -------- -------- --------
Other Nonregulated 37,149 35,794 3.8 61,326 51,540 19.0
-------- -------- -------- --------
Less-Intersegment
Revenues 26,580 31,805 (16.4) 52,732 56,982 (7.5)
-------- -------- -------- --------
$462,648 $498,704 (7.2) $833,669 $862,196 (3.3)----------------------------
OPERATING REVENUES
(in thousands) Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility
Retail Revenues:
Residential $100,816 $126,809 (20.5) $553,950 $642,067 (13.7)
Commercial 17,831 29,085 (38.7) 114,512 154,699 (26.0)
Industrial 3,478 3,901 (10.8) 15,137 19,110 (20.8)
-------- -------- -------- --------
122,125 159,795 (23.6) 683,599 815,876 (16.2)
Off-System Sales 9,201 6,661 38.1 39,972 37,337 7.1
Transportation 15,196 13,242 14.8 52,710 41,430 27.2
Other (618) 723 (185.5) 2,834 1,358 108.7
--------- -------- -------- --------
145,904 180,421 (19.1) 779,115 896,001 (13.0)
-------- -------- -------- --------
Pipeline and Storage
Storage Service 15,315 15,711 (2.5) 47,785 48,402 (1.3)
Transportation 22,756 22,479 1.2 71,218 71,058 0.2
Other 3,252 4,924 (34.0) 10,509 11,809 (11.0)
-------- -------- -------- --------
41,323 43,114 (4.2) 129,512 131,269 (1.3)
-------- -------- -------- --------
Exploration and
Production 36,802 27,842 32.2 86,330 90,220 (4.3)
-------- -------- -------- --------
International 18,639 321 NM 72,786 1,845 NM
-------- -------- -------- --------
Other Nonregulated 24,054 18,462 30.3 85,380 70,002 22.0
-------- -------- -------- --------
Less-Intersegment
Revenues 24,275 24,109 0.7 77,007 81,090 (5.0)
-------- -------- -------- --------
$242,447 $246,051 (1.5) $1,076,116 $1,108,247 (2.9)
======== ======== ========== ==========
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands) Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility $ 12,956 $ 15,750 (17.7) $132,810 $134,774 (1.5)
Pipeline and Storage 19,960 20,404 (2.2) 56,976 58,188 (2.1)
Exploration and
Production* 11,859 8,369 41.7 (104,507) 32,815 NM
International 794 (782) 201.5 7,704 (2,369) NM
Other Nonregulated 124 1,269 (90.2) 3,063 2,458 24.6
Corporate (90) (420) 78.6 (1,182) (1,900) 37.8
-------- ------- --------- --------
$ 45,603 $ 44,590 2.3 $ 94,864 $223,966 (57.6)
======== ======== ======== ========
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -----------------*Nine months ended June 30, 1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility $ 72,378 $ 73,299 (1.3) $119,854 $119,023 0.7
Pipeline and Storage 14,166 18,320 (22.7) 37,016 37,783 (2.0)
Exploration and
Production* (119,815) 11,870 NM (116,368) 24,446 NM
International 6,024 1,504 NM 6,909 (1,587) NM
Other Nonregulated 1,870 790 136.7 2,943 1,189 147.5
Corporate (590) (769) 23.3 (1,092) (1,479) 26.2
-------- -------- --------- --------
$(25,967) $105,014 (124.7) $ 49,262 $179,375 (72.5)
======== ======== ======== ========
*1998 includes non-cash impairment charge of
$128,996,000.
NM = Not meaningful.
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 Six Months Ended
March 31, March 31,
------------------------ -------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility Gas Sales
Residential 31,221 37,720 (17.2) 56,010 63,524 (11.8)
Commercial 7,273 10,153 (28.4) 13,187 16,989 (22.4)
Industrial 1,227 1,725 (28.9) 2,469 3,023 (18.3)
Off-System 6,470 4,381 47.7 10,948 8,428 29.9
------- ------ ------- -------
46,191 53,979 (14.4) 82,614 91,964 (10.2)
------- ------ ------- -------
Non-Utility Gas Sales
Production(in
equivalent MMcf) 9,563 12,284 (22.2) 20,453 24,652 (17.0)
------- ------- ------- -------
Total Gas Sales 55,754 66,263 (15.9) 103,067 116,616 (11.6)
------- ------- ------- -------
Transportation
Utility 20,682 19,149 8.0 35,332 33,036 6.9
Pipeline and Storage 101,490 109,093 (7.0) 195,893 195,093 0.4
Nonregulated - 60 NM 276 60 NM
------- ------- ------- -------
122,172 128,302 (4.8) 231,501 228,189 1.5
------- ------- ------- -------
Marketing Volumes 9,339 7,304 27.9 14,520 11,820 22.8
------- ------- ------- -------
Less-Inter and
Intrasegment Volumes:
Transportation 58,351 66,982 (12.9) 102,743 110,665 (7.2)
Production 1,064 1,038 2.5 2,058 2,154 (4.5)
------- ------- ------- -------
59,415 68,020 (12.7) 104,801 112,819 (7.1)
------- ------- ------- -------
Total System Natural Gas
Volumes 127,850 133,849 (4.5) 244,287 243,806 0.2----------------------------
SYSTEM NATURAL GAS VOLUMES
(millions of cubic feet-MMcf)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility Gas Sales
Residential 10,739 15,954 (32.7) 66,749 79,478 (16.0)
Commercial 2,219 4,189 (47.0) 15,406 21,178 (27.3)
Industrial 884 1,059 (16.5) 3,353 4,082 (17.9)
Off-System 3,484 3,041 14.6 14,432 11,469 25.8
------- ------ ------ -------
17,326 24,243 (28.5) 99,940 116,207 (14.0)
------- ------ ------ -------
Non-Utility Gas Sales
Production(in
equivalent MMcf) 15,840 12,395 27.8 36,293 37,048 (2.0)
------- ------- ------ -------
Total Gas Sales 33,166 36,638 (9.5) 136,233 153,255 (11.1)
------- ------- ------- -------
Transportation
Utility 14,690 15,270 (3.8) 50,022 48,306 3.6
Pipeline and Storage 59,281 59,443 (0.3) 255,174 254,537 0.3
Nonregulated 262 260 0.8 538 320 68.1
------- ------- ------- -------
74,233 74,973 (1.0) 305,734 303,163 0.8
------ ------ ------- -------
Marketing Volumes 6,176 5,854 5.5 20,696 17,674 17.1
------- ------- ------- -------
Less-Inter and
Intrasegment Volumes:
Transportation 22,796 27,553 (17.3) 125,539 138,218 (9.2)
Production 1,001 1,072 (6.6) 3,059 3,225 (5.1)
------- ------- ------- -------
23,797 28,625 (16.9) 128,598 141,443 (9.1)
------- ------- ------- -------
Total System Natural Gas
Volumes 89,778 88,840 1.1 334,065 332,649 0.4
======= ====== ======= ======= ======= =======
NM = Not meaningful.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Utility.
Operating revenues for the Utility segment decreased $75.6$34.5 million
and $82.4$116.9 million for the quarter and sixnine months ended March 31,June 30, 1998,
respectively, as compared with the same periods a year ago. These decreases
primarily reflect the recovery of lower gas costs which resulted from a decrease
in gas sales (a 7.86.9 billion cubic feet (Bcf) decrease and a 9.416.3 Bcf decrease
for the quarter and sixnine months ended March 31,June 30, 1998, respectively), and a decrease
in the average cost of purchased gas ($3.77 per thousand cubic feet (Mcf) and
$4.47 per Mcf during the quarters ended March 31, 1998 and 1997, respectively,
and $4.11 per Mcf and $4.57 per Mcf during the six months ended March 31, 1998
and 1997, respectively). While the
decrease in gas sales also reflects, in part, the migration of certain retail
customers to transportation service in both the New York and Pennsylvania
jurisdictions, as a result of new aggregator services, the major reason for the
decrease stems from warmer weather and lower normalized
gas usage per customer account.(see Degree Days table below). The switch to
new aggregator services is discussed further in the "Rate Matters" section that
follows.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
The impact on operating revenue of a general base rate increase in
the New York jurisdiction effective October 1, 1997 ($7.2 million on an annual
basis) was mostly mitigated by the recognition of a refund provision of $2.0$1.8
million for the quarter and $3.1$4.9 million year-to-date to the Utility's customers
for a 50% sharing of earnings over a predetermined amountlevel in accordance with the
New York rate settlement of July 1996. The cumulative estimated refund provision
liability, including amounts accrued in fiscal 1997, is $6.1$7.9 million. The final
amount owed to customers, if any, will not be known until after September 30,
1998, which is the conclusion of the settlement period. In addition, operating
revenues in the quarter and year-to-date period ended March 31,June 30, 1998, include $6.0 million of
revenue recorded by the Utility segment's New York jurisdiction related to the
previously mentioned recent settlement of IRS audits. This $6.0 million
represents the rate recovery of interest expense as allowed by the New York rate
settlement of July 1996. Both this revenue and the refund provision are included
in the "Other" category in the Utility section of the Operating Revenues table
above.
Operating income before income taxes for the Utility segment decreased
$0.9$2.8 million and $2.0 million for the quarter ended March 31, 1998, and increased $0.8 million
for the sixnine months ended March 31,June 30,
1998, respectively, as compared to the same periods a year ago. Excluding the $6
million of rate recovery of interest expense related to the IRS audits, as noted
above (this rate recovery is offset 100% by interest expense, included below the
operating income line), the Utility segment's pretax operating income decreased
$6.9$8.0 million and $5.2 millionfor the nine months ended June 30, 1998. The decrease in operating
income before income taxes for the quarter and sixnine months ended March 31,June 30, 1998, respectively. This decrease
resulted primarily from the negative impact of warmer weather and the related
decrease in normalized gas usage per customer account. Partly offsetting this
decrease in operating income before income taxes, the Utility segment continues
to experience decreases in operationO&M expense (a 8.4% and maintenance expense ( a 3.4%
and 4.6%5.7% decline for the quarter
and sixnine months ended March 31,June 30, 1998, respectively) relating primarily to
benefit, labor and laboroutside services expense reduction.
The negative impact of warmer weather was greatest indirectly impacts the operating
income of the Pennsylvania jurisdiction since Pennsylvania does not have a weather normalization clause (WNC).WNC.
The impact of the warmer weather experienced by the New York jurisdiction was
tempered by the WNC which preserved pretaxthrough May billing cycles each year. Thus, about half of
May's sales, as well as June's sales are not covered by the WNC. During the
prior year this segment benefited during the non-weather normalized period as a
result of the colder weather, while this year the warmer weather negatively
impacted the Utility's operating income of $9.8 million and $8.4
million for the quarter and sixresults.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
months ended March 31, 1998, respectively. For the quarter and six months ended
March 31, 1997, the WNC preserved pretax operating income of $4.4 million and
$3.5 million, respectively.----------------------------
Degree Days
Three Months Ended March 31:
---------------------------June 30:
- --------------------------
Percent (Warmer) Colder
in 1998 Than
Normal 1998 1997 Normal 1997
- -------------------------------------------------------------------------------------------------------------------------------------
Buffalo 3,344 2,785 3,194 (16.7) (12.8)919 738 1,151 (19.7) (35.9)
Erie 3,198 2,547 2,996 (20.4) (15.0)
Six880 695 1,125 (21.0) (38.2)
Nine Months Ended March 31:June 30:
- -------------------------
Buffalo 5,606 5,079 5,450 (9.4) (6.8)6,525 5,817 6,601 (10.9) (11.9)
Erie 5,243 4,643 5,123 (11.4) (9.4)6,123 5,338 6,248 (12.8) (14.6)
- --------------------------------------------------------------------------------------------------------------------------------------
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage
segment decreased $4.2$0.4 million and $0.8$1.2 million for the quarter and sixnine months
ended March 31,June 30, 1998, respectively, as compared with the same periods a year ago.
For both the quarter and nine months ended, the decrease is primarily
attributable to the
establishment of reserves for preliminary survey and investigation costs
associated with the Niagara Expansion and Green Canyon projects. (The Niagara
Expansion and Green Canyon projects are discussed further under "Investing Cash
Flow", subheading "Pipeline and Storage.") Certain of these costs for which
reserves were established may be recovered at a future date.1 In addition,
Supply Corporation recognized a base gas loss at its Zoar storage field. In
total, these three items amounted to $3.7 million, pretax. Also during the
quarter, Supply Corporation had lower revenue from unbundled pipeline sales and open access
transportation.transportation, offset in part by lower O&M expense. The decrease in O&M expense
for the sixquarter is primarily the result of lower employee benefits and outside
service costs. The decrease in O&M expense for the nine months ended March 31,June 30,
1998, is primarily attributable to the reservesresult of lower employee benefits, labor and base gas loss discussed above, offset in part
byoutside
service costs, as well as the reversal of a portion of a reserve set up in a
prior period for the Laurel Fields Storage Project. The Pipeline and Storage
segment was able to recapture approximately $1.0 million by selling preliminary
engineering, survey, environmental and archeological information from the Laurel
Fields Project to the Independence Pipeline Company, which intends to build a
370-mile interstate pipeline system designed to transport aboutapproximately 900,000
dekatherms (Dth) per day of natural gas from Defiance, Ohio to Leidy,
Pennsylvania (the Independence Pipeline project is discussed further under
"Investing Cash Flow", subheading "Pipeline and Storage."Storage")
Item 2. Management's Discussion. Partially offsetting
these decreases in O&M expense, was the establishment of reserves for
preliminary survey and Analysisinvestigation costs associated with the Niagara Expansion
and Green Canyon projects. (The Niagara Expansion and Green Canyon projects are
discussed further under "Investing Cash Flow", subheading "Pipeline and
Storage"). Certain of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------these costs for which reserves have been established may
be recovered at a future date.1 In addition, Supply Corporation recognized a
base gas loss at its Zoar Storage Field. In total, these three items amounted to
$3.7 million, pretax.
While transportation volumes in this segment decreased 7.60.2 Bcf and
increased 0.80.6 Bcf, respectively, for the quarter and sixnine months ended March 31,June 30,
1998, the change in volumes did not have a significant impact on earnings as a
result of Supply Corporation's straight fixed-variable (SFV) rate design.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
Exploration and Production.
Operating income before income taxes from the Company's Exploration and
Production segment decreased $131.7increased $3.5 million for the quarter ended March 31,June 30, 1998,
compared with the same period a year ago. Excluding the $129 million
non-cash impairment of this segment's oil and gas assets, as discussed
previously, operating income before income taxes decreased $2.7 million as
compared with the prior year's quarter. This decreaseincrease resulted from lowerhigher oil
and gas revenues during the quarter, offset in part by a net gain on hedging activities (versus a
loss in the prior year) and by lower depletion expense. The oilThese items were partly
offset by higher lease operating expense. Oil and gas revenues declinedincreased mainly
as a result of lowerWest Coast production from the properties acquired in the
Whittier, HarCor and BER acquisitions. Increases in Gulf Coast gas production as
well as higher overall gas prices also helped increase revenues for the quarter
ended March 31, 1998
compared to March 31, 1997while significantly lower oil prices reduced the current quarter's revenues (see
tables below). The expected decline inbelow for production of West Cameron 552 and delays in drilling due to rig unavailability
were the major causes of the production decline.price information). The decrease in depletion
expense resulted mainlyis the result of a lower depletion rate, determined under the units of
production method, because of the significant addition to reserves resulting
from lower oilthe Whittier, HarCor and gas production.BER acquisitions, as well as the continued success
in adding new reserves from exploratory drilling. The change in depletion
method, made effective October 1, 1997, to change from the gross revenue method to the
units of production method, also lowered depletion expense for the quarter. See
further discussion of this change in accounting method in Note 1 - "Summary of
Significant Accounting Policies." Lease operating expense increased mainly
because of the additional expenses of operating the newly acquired properties.
For the sixnine months ended March 31,June 30, 1998, operating income before income
taxes for the Exploration and Production segment decreased $140.8$137.3 million,
compared with the same period a year ago. Excluding the $129 million non-cash
impairment of this segment's oil and gas assets, as discussed previously,
operating income before income taxes decreased $11.8$8.3 million as compared with the
prior year's quarter.period. This decrease onresulted from lower oil and gas revenues and
higher lease operating expense offset in part by lower depletion expense and
lower hedging losses. Gas revenues are lower as a year-to-date basis,result of lower prices and
overall production in the Gulf Coast, offset in part by increased prices and
production in the West Coast. Oil revenues are down overall primarily as a
result of the significant decrease in prices. The decrease in depletion expense
and increase in lease operating expense was mainly caused by the same reasons discussed above fornoted
in the quarter except that on a
year-to-date basis net hedging gains were not experienced, but rather, lower net
hedging losses.discussion above.
Hedging activities resulted in a net pretax gain of $0.5$0.9 million and a
net pretax loss of $7.8$6.9 million for the threequarter and sixnine months ended March 31,June 30,
1998, respectively. For the quarter and sixnine months ended March 31,June 30, 1997, hedging
activities resulted in pretax losses of $7.4$2.1 million and $16.0$18.1 million,
respectively. Refer to 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 SixNine Months Ended
March 31, March 31,
----------------------- -----------------------June 30, June 30,
------------------ -----------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Gas Production - (MMcf)
Gulf Coast 5,860 7,719 (24.1) 12,701 15,520 (18.2)8,552 8,137 5.1 21,253 23,658 (10.2)
West Coast 157 337 (53.4) 412 551 (25.2)697 293 137.9 1,109 844 31.4
Appalachia 1,276 1,293 (1.3) 2,484 2,574 (3.5)1,193 1,246 (4.3) 3,677 3,820 (3.7)
----- ----- ------ ------
7,293 9,349 (22.0) 15,597 18,645 (16.3)
=====10,442 9,676 7.9 26,039 28,322 (8.1)
====== ===== ====== ======
Oil Production - (Thousands of Barrels)
Gulf Coast 296 362 (18.2) 610 746 (18.2)312 327 (4.6) 921 1,073 (14.2)
West Coast 80586 124 (35.5) 194 250 (22.4)372.6 780 374 108.6
Appalachia 2 3 (33.3) 5 52 - 8 7 14.3
--- --- ------- -----
378 489 (22.7) 809 1,001 (19.2)900 453 98.7 1,709 1,454 17.5
=== === ======== =====
WEIGHTED AVERAGE PRICES
Exploration and Production.
Three Months Ended SixNine Months Ended
March 31, March 31,
----------------------- -----------------------June 30, June 30,
------------------ -----------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Weighted Avg. Gas Price/Mcf
Gulf Coast $2.27 $2.96 (23.3)$2.29 $2.19 4.6 $2.52 $2.68 $2.95 (9.2)(6.0)
West Coast $1.69 $2.18 (22.5) $2.13 $1.96 8.7$2.19 $1.53 43.1 $2.17 $1.81 19.9
Appalachia $3.10 $3.97 (21.9) $3.06 $3.22 (5.0)$2.72 $2.30 18.3 $2.95 $2.92 1.0
Weighted Average $2.40 $3.07 (21.8) $2.73 $2.95 (7.5)$2.33 $2.18 6.9 $2.57 $2.69 (4.5)
Weighted Average After
Hedging $2.38 $2.46 (3.3)$2.32 $2.03 14.3 $2.25 $2.21 $2.30 (3.9)1.8
Weighted Avg. Oil Price/bbl
Gulf Coast $14.83 $22.44 (33.9) $16.98 $23.39 (27.4)$12.70 $19.36 (34.4) $15.54 $22.16 (29.9)
West Coast $11.81 $19.97 (40.9) $14.20 $20.41 (30.4)$ 8.75 $16.79 (47.9) $10.10 $19.21 (47.4)
Appalachia $15.80 $23.16 (31.8) $17.93 $23.05 (22.2)$14.85 $19.61 (24.3) $17.00 $22.03 (22.8)
Weighted Average $14.19 $21.82 (35.0) $16.32 $22.64 (27.9)$10.13 $18.66 (45.7) $13.06 $21.40 (39.0)
Weighted Average After
Hedging $15.98 $18.32 (12.8) $16.62 $18.84 (11.8)
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
International$11.22 $17.13 (34.5) $13.78 $18.31 (24.7)
International.
Operating income before income taxes for the International segment increased
$4.5$1.6 million and $8.5$10.1 million for the quarter and the six-monthsnine-months ended March 31,June
30, 1998, respectively, compared with the same periods a year ago. This
increase, as well as the significant revenue increase shown onin the "Operating
Revenue" table above, reflects current quarter and year-to-date results
including 100% of the revenues and pretax operating income of SCT, as well as
100% of the revenues and pretax operating income of PSZT for February and Marchthrough
June 1998. Both SCT and PSZT have district heating and power generation
operations located in the northern part of the Czech Republic. Horizon first
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
acquired a 34% interest in SCT in April 1997 and increased its ownership to
75.2%82.7% as of March 31, 1998 (Horizon's
ownership interest increased to 82.6% in April 1998, upon completion of a tender
offer for minority owned shares).June 30, 1998. In January 1998, Horizon signed an agreement to
acquire 75.3% of the outstanding shares of PSZT. Except for some outstanding
closing requirements, theThe acquisition was completed
in February 1998 and Horizon owned 85.9% of PSZT as of June 30, 1998. The
minority interests in SCT and PSZT are shown separately on the Consolidated
Statement of Income after operating results. The prior year's MarchJune quarter
reflected no operating income from SCT or PSZT. The following table summarizes
the heating sales and electricity sales of SCT and PSZT but includedfor the positive impactquarter and
fiscal year ended June 30, 1998:
Three Months Ended June 30:
Heating Sales 1,442,736 Gigajoules* (1.4 Bcf Equivalent)
Electricity Sales 252,931 Megawatts
Nine Months Ended June 30:
Heating Sales 6,139,033 Gigajoules*(5.8 Bcf Equivalent)
Electricity Sales 496,331 Megawatts
*Gigajoules = one billion joules. A joule is a unit of the sale of Horizon's rights in a Pakistan power project. For the six months
ended March 31, 1997, this positive impact was mostly offset by nonrecurring
expenses associated with the dissolution of Sceptre Power Company, which were
incurred in the first quarter of 1997.energy.
Because of the change in the nature of operations of the International
segment during the past year, operating income comparisons between the current
period and prior periods may not be meaningful. Future revenues from district
heating operations are expected to fluctuate with changes in weather. The
Company expects that rates charged for heating operations in the Czech Republic
will continue to be monitored by the Czech Ministry of Finance.1
Other Nonregulated.
Operating income before income taxes associated with this segment
increaseddecreased $1.1 million and $1.8 million, respectively, for the quarter ended June 30, 1998 and six-monthsincreased $0.6
million for the nine-months ended March 31,June 30, 1998, compared with the same periods
a year ago. The increasesdecrease for the quarter can be primarily attributed primarily to
improved performanceincreased operating expenses in the Company's timber operations.operations, as well as
decreased margin and increased operating expense for NFR, the Company's gas
marketing subsidiary. The increase for the nine-months ended can be primarily
attributed to increased performance by the Company's timber operations offset by
decreased margin and increased O&M for NFR.
Income Taxes.
Income taxes decreased $43.9$1.4 million and $43.2$44.6 million, respectively,
for the quarter and sixnine months ended March 31,June 30, 1998, primarily as a result of a
decrease in pretax income (pretax income before cumulative effect, for the sixnine
months ended March 31,June 30, 1998).
Other Income.
Other income increased $25.0$4.4 million and $25.4$29.8 million, respectively,
for the quarter and sixnine months ended March 31, 1998, mainly due to $18.5 million
of interestJune 30, 1998. The increase in other
income resulting from the previously mentioned recent settlement of
IRS audits. In addition, Other Income for the quarter resulted from a buyout of a firm transportation agreement
by a Pipeline and six month period
includes a gainStorage segment customer in the amount of approximately $2.3$2.5 million (pretax) associatedwhich
was received by Supply Corporation during the quarter. In addition, other income
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------- -----------------------------------------------------------------------
Results of Operations (Cont.)
---------------------------------------------------------
for the quarter includes a gain of approximately $1.2 million associated with
U.S. dollar denominated debt carried on the balance sheet of PSZT. SeePSZT (see further
discussion regarding this PSZT debt in Item 1, Note 3 - Capitalization.3- Capitalization), as well
as interest income on temporary cash investments of SCT and PSZT. The increase
for the nine months is due to the same reasons noted in the quarter (the gain on
U.S. dollar denominated debt was $3.4 million for the nine month period), as
well as $18.5 million of interest income which resulted from the recent
settlement of IRS audits.
Interest Charges.
Total interest charges increased $13.9$6.4 million and $15.1$21.5 million for the
quarter and sixnine months ended March 31,June 30, 1998, respectively. Other interest
increased $13.0$2.2 million and $12.9$14.9 million for the quarter and six-monthnine-month period,
respectively, mainly asrespectively. The increase for both the quarter and nine-month period relates
primarily to an increase in the average amount of short-term debt outstanding.
Short-term debt was utilized to fund the acquisition activities in the
International and Exploration and Production segments, until a result ofportion was
replaced with long-term debt in May 1998 (see below). In addition, the increase
in other interest for the nine months resulted from interest expense related to
the previously mentioned settlement of IRS audits (total interest expense
related to the IRS audits amounted to $11.7 million).
Interest on long-term debt increased $0.9$4.2 million and $2.2$6.6 million for
the quarter and six-monthnine-month period, respectively, mainly because of a higher
average amount of long-term debt outstanding compared to the same periods a year
ago. Contributing to the higher outstanding debt balance was the issuance of the
$200.0 million of medium-term notes in May 1998. Also contributing to the higher
outstanding debt balance was the borrowings of Horizon's subsidiaries, PSZT and
SCT, as well as approximately $53 million of HarCor's senior secured debt. (See
further discussion regarding HarCor debt in Item 1, Note 3-Capitalization and
Note 6-Acquisition of HarCor Energy, Inc.).
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the six-monthnine-month period
consisted of cash provided by operating activities and short-term bank loans and
commercial paper.
Operating Cash FlowFlow.
Internally generated cash from operating activities consists of net
income available for common stock, adjusted for non-cash expenses, non-cash
income and changes in operating assets and liabilities. Non-cash items include
the cumulative effect of a change in accounting for depletion, the impairment of
oil and gas producing properties, depreciation, depletion and amortization,
deferred income taxes, minority interest in foreign subsidiaries 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
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
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 sixnine months ended March 31June 30 and
receivables and unbilled utility revenue historically increase from September to MarchJune 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
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
under
the caption "Other Accruals and Current Liabilities." Such reserve is reduced as
the inventory is replenished.
Net cash provided by operating activities totaled $122.7$242.6 million for
the sixnine months ended March 31,June 30, 1998, a decrease of $23.0$28.3 million compared with
$145.7$270.9 million provided by operating activities for the sixnine months ended March
31,June
30, 1997. The majority of this decrease occurred in the Utility segment and the
Exploration and Production segment. The
Utility segment experienced a decrease in cash receipts from gas sales and
transportation service (sales were down mainly due to warmer weather), a decrease in cash refunds received from upstream
pipelines and an
increase in cash payments for property, franchise and other taxes (primarily due
to timing) and an increase in interest payments (primarily related to the recent
settlement of IRS audits). These decreases to cash were partially offset by
lower cash payments for gas purchases.
Partly offsetting the decreases experienced by the Utility segment was
an increase in cash provided by operating activities of the Pipeline and
Storage, Exploration and Production and International segments. The Pipeline and
Storage segment experienced an increase in cash provided by operating activities
primarily because of interest income resulting from the recent settlement of IRS
audits combined with cash received from a customer resulting from a buyout of a
firm transportation agreement. The Exploration and Production segment
experienced loweran increase in cash receiptsprovided from operations primarily because of
interest income resulting from the sale of oil and gas as well as higher
operation costs. The impact of lower cash receipts from the sale of oil and gas
was partially mitigated byaforementioned IRS settlement, a decrease in
cash outlays for hedging transactions as well as a decrease in cash outlays for
federal taxes. Partly offsettingThese increases to cash were partly offset by lower cash receipts
from the net decreases experienced bysale of oil and gas combined with higher operating costs (primarily due
to the UtilityWhittier, HarCor and Exploration and Production
segments, the International segment experienced anBER acquisitions). The increase into cash provided by
operating activities asin the International segment is a result of the operations
of SCT and PSZT.
Also, the
Corporate segment experienced an increase in cash provided by operating
activities primarily because of approximately $6 million received from the
Internal Revenue Service associated with the resolution of certain issues
related to the audits of 1977 - 1994.
Investing Cash FlowFlow.
Capital Expenditures and Other Investing Activities
- ---------------------------------------------------
Capital expenditures represent the Company's additions to property,
plant and equipment and are exclusive of other investments in corporations
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
(stock acquisitions) and/or partnerships. Such investments are treated
separately in the Statement of Cash Flows and further discussed in the segment
discussion below.
The Company's actual capital expenditures and other investments totaled $220.9$441.6
million during the sixnine months ended March 31,June 30, 1998. Total expenditures for the six-month period
represent 104% of the total original capital expenditure budget for fiscal 1998
of $212.4 million. The following table
summarizes the Company's capital expenditures and other investments by business
segment:
(in millions)
- -------------
Actual
OriginalOther Total
Capital EstimatedInvestments Capital
Expenditures Capital
Expenditure through Expenditures1
Budget 3/31/98 4/1/98 - 9/Expenditures and
through 6/30/98 ------ ------- ----------------6/30/98 Other Investments
--------------- ----------- -----------------
Utility $ 51.936.3 $ 25.2- $ 26.736.3
Pipeline and Storage 28.0 9.6 18.415.2 5.2 20.4
Exploration and Production 132.2 179.4 98.6249.6 32.4 282.0
International - 5.2 18.09.4 88.8 98.2
Other Nonregulated 0.3 1.5 1.84.7 - 4.7
------ ------ ------
$212.4 $220.9 $163.5$315.2 $126.4 $441.6
====== ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Utility
- -------
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.
Pipeline and Storage
- --------------------
The bulk of the Pipeline and Storage capital expenditures were made
for additions, improvements, and replacements to this segment's transmission and
storage systems. Approximately $1.6$2.3 million was spent on the 1998 Niagara
Expansion Project. As part of this expansion, Supply Corporation began
transportation service for an additional 25,000 Dth per day in November 1997. In
April 1998, Supply Corporation received Federal Energy Regulatory Commission
(FERC) approval concerning an additional 23,000 Dth per day expansion of firm
winter only capacity. Supply Corporation anticipates beginning transportation
service for the additional 23,000 Dth per day in November 1998.1 As there has
not been much interest in further expansion in this area at this time, the
Company established a reserve in March 1998 for approximately $1.7 million
(pretax) related to preliminary survey and investigation costs associated with
the proposed 1999 Niagara Expansion Project.
In June 1997, the Company announced its intention to join as an equal
partner in the Independence Pipeline Project, which is designed to bring gas
from Defiance, Ohio to Leidy, Pennsylvania and is expected to cost $675
million.1 The Independence Pipeline Project as filed with the FERC will consist
of approximately 370 miles of 36-inch diameter pipe with an initial capacity of
approximately 900,000 Dth per day. In September 1997, the Company formed a new
subsidiary, Seneca Independence Pipeline Company (SIP), which agreed to
purchase, upon receipt of regulatory approval, has made a $5.2 million
investment in 1998 representing a one-third general partnership interest, in
Independence Pipeline Company, a Delaware general partnership. The
Company received Securities and Exchange Commission (SEC) approval in March 1998
and made an initial investment in Independence Pipeline Company of $3.9 million
in March 1998. This investment
was financed with short-term borrowings. Independence Pipeline Company intends
to build a 370 mile natural gas Pipeline from Defiance, Ohio to Leidy,
Pennsylvania at an estimated cost of $675 million.1 If the Independence Pipeline
Project is not constructed, SIP's share of the development costs (including
SIP's investment in Independence Pipeline Company) is estimated not to exceed
$6.0 million to $8.0 million.1
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
In November 1996, Supply Corporation entered into a Memorandum of
Understanding (the MOU) with Green Canyon Gathering Company, 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,
at an estimated total cost of approximately $200 million.1 The MOU has been
amended several times since then. In April 1998, Green Canyon Gathering Company
notified Supply Corporation that it wished to withdraw from the project. Based
on a lack of shippers willing to contract for this service, the Company had
already decided that it would be prudent to establish a reserve of approximately
$1.0 million (pretax) for preliminary survey and investigation costs incurred on
the project. This reserve was recorded in March 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Exploration and Production
- --------------------------
In March 1998, Seneca acquired properties in the Midway-Sunset and
North Lost Hills field in the San Joaquin Basin of California from the Whittier
Trust Company for approximately $140 million. Short-term borrowings were used to
finance this acquisition. This acquisition will provideis included in
the Exploration and Production segment withcapital expenditure amount in the opportunity to continue its focus on growth by
increasing its activities in domestic onshore areas.1 The acquisitiontable above.
In June 1998, Seneca acquired the oil and gas assets of the Whittier properties was not includedBER,
which are located in the original capital expenditure budget
shown above, butSouth Lost Hills Field in the San Joaquin Valley near
Bakersfield, California. The purchase price was approximately $30.0 million for
BER's 25% ownership. These properties produce gas and high gravity oil, include
a gas processing plant and associated pipelines, and provide opportunities for
additional drilling and development.1 This acquisition is included in the
actualExploration and Production capital expenditures through March
31, 1998.expenditure amount in the table above.
Other Exploration and Production segment capital expenditures
included approximately $29.7$63.2 million on the offshore program in the Gulf of
Mexico, including offshore drilling expenditures, offshore construction, lease
acqusition costs and geological and geophysical expenditures. Offshore
exploratory drilling was concentrated on High Island 179, and High Island A356.A356,
Vermilion 309 and South March Island 122. Offshore construction occurred
primarily at West Cameron 540 and Vermilion 309. Lease acquisition costs
resulted from successful bidding on fourteen state of Texas and two federal
lease tracts in the Gulf of Mexico. Offshore geological and geophysical
expenditures were made for purchases of 3-D seismic data.
The remaining $9.7$16.4 million capital expenditures included onshore
drilling and construction costs for wells located in Louisiana, Texas and
Texas,California as well as onshore geological and geophysical costs, including the
purchase of certain 3-D seismic data.
In May 1998, Seneca West Corporation (Seneca West), a wholly-owned
subsidiary of Seneca, completed a tender offer (an offer of $2.00 per share) for
the outstanding shares of HarCor Energy, Inc. (HarCor). Preliminary information
supplied by the depository for the offer indicate that approximately 95% of the
outstanding shares of HarCor common stock were tendered in accordance with the
tender offer. Seneca West gave notice to the depository for the offer that
Seneca West accepted for payment all of the shares of HarCor common stock prior
to the expiration of the tender offer. The cost of acquiring these shares is
approximately $31 million. As this is a stock acquisition, no amounts are
included in any capital expenditure data shown in the tables above.HarCor. The tender offer was commenced pursuant to the
terms of an Agreement and Plan of Merger among HarCor, Seneca and Seneca West
which providesprovided for the merger of Seneca West with and into HarCor following the
successful consummation of the tender offer. Accordingly, allApproximately 95% of the
outstanding shares of HarCor common stock were tendered in accordance with the
tender offer. Accordingly, Seneca West has been merged with and into HarCor and
the common stock that werewas not purchased pursuant to the tender offer will bewas
converted in the merger into the right to receive $2.00 per share.
Seneca West intends to consummate
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
The cost of the merger before the end of 1998.1 Thetender offer and subsequent conversion of the remaining shares
would
cost Seneca Westof HarCor was approximately $1.6$32.4 million.
1As a result of this acquisition, the Consolidated Balance Sheet at June
30, 1998 includes approximately $53 million of HarCor's senior secured debt.
This debt is payable semi-annually on January 15 and July 15 of each year. The
debt is redeemable, in whole or in part, at the option of HarCor at any time on
or after July 15, 1999 at the following redemption prices: 1999-110% of the
principal amount; 2000-107% of the principal amount; 2001 and thereafter - 100%
of the principal amount. An opening balance sheet adjustment has been made such
that the effective interest rate recognized by the Company regarding this debt
will be approximately 5.875%.
The HarCor oil and gas properties are the remaining 75% ownership of
the same properties as the BER acquisition discussed above, located on the west
side of the San Joaquin Basin in California.
These properties are unique for California in
that they produce higher gravity oil than is generally found in this area, as
well as producing natural gas. Included in this acquisition isThe acquisitions of Whittier, HarCor and BER were initially financed
using short-term borrowings. Subsequently, approximately $54$120 million of
14 7/8% senior secured debt and other liabilities of HarCor.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
In April 1998, Seneca announced the signing of a Letter of Intent to
acquire the oil and gas assets of the Bakersfield Energy Group, which are
located in the Lost Hills Field in the San Joaquin Valley near Bakersfield,
California. The purchase price is estimated to be approximately $30.0 million.1short-term borrowings were replaced with long-term borrowings. These
properties, which Bakersfield Energy operates, produce gas and high
gravity oil, include a gas processing plant and associated pipelines, and
provide opportunities for additional drilling and development.1 The assets are
jointly owned by Bakersfield Energy and HarCor. The sale is subject to
preparation and execution of a definitive agreement, obtaining all required
approvals, and completion of a satisfactory due diligence review of Bakersfield
Energy's assets, liabilities and business. Closing of the proposed sale is
expected to occur by June 1, 1998.1 The estimated acquisition price of
approximately $30.0 million is included in the estimated capital expenditures
budget for April 1 through September 30, 1998.
These acquisitions (Whittier and HarCor) and pending acquisition
(Bakersfield) will complement the Exploration and Production segment's reserve mix,
bringing its new reserve base to approximately 710712 Bcf equivalent, of which 58%55%
is oil and 42%45% is gas.1gas.
Capital expenditures for the quarter ended September 30, 1998 in the
Exploration and Production segment are expected to be approximately $40.0
million with approximately 84% being spent in the Gulf Coast region.1
International
- -------------
In Fiscal 1998, Horizon B.V. acquired additional shares of SCT
thereby increasing its equity interest in SCT to 82.7% as of June 30, 1998. The
Company intendscost of acquiring these additional shares was approximately $24.9 million.
In February 1998, Horizon B.V. acquired a 75.3% equity interest in
PSZT and subsequently increased its ownership interest to issue long-term debt to replace85.9% as of June 30,
1998. The cost of acquiring the short-termshares of PSZT was approximately $63.9 million.
Short-term borrowings were initially used to finance the acquisition
costs associatedof SCT and PSZT. Subsequently, approximately $80 million of short-term
borrowings were replaced with the Whittier
Trust Company properties and to finance most of the acquisition costs for the
HarCor common stock and the Bakersfield Energy oil and gas assets.1
International
- -------------
In February 1998, Horizon B.V. completed the acquisition of 75.3% of
the outstanding shares of PSZT, a company with district heating and wholesale
power generation operations located in Komorany, Czech Republic. The operations
of PSZT are in close proximity to SCT in the northern part of the Czech
Republic. For calendar 1996, PSZT reported profits of approximately $3.0
million. The purchase price was approximately $60 million and was financed with
short-termlong-term borrowings. The Czech Commercial Code requires that a shareholder
that achieves certain ownership interests in a company (50%, 66.66%, or 75%)
must extend a tender offer to the remaining minority shareholders of that
company. In April 1998, Horizon B.V. issued such a tender offer for the
remaining shares of PSZT which will remain open through the beginning of June
1998. If Horizon B.V. were to acquire the remaining 24.7% equity interest in
PSZT as a result of this tender offer, the maximum additional investment in PSZT
would be approximately 299 million Czech Koruna, which translates to
approximately $8.8 million at the March 31, 1998 exchange rate. Any shares
acquired through this tender offer would be financed with short-term borrowings.
As these are stock acquisitions, no amounts are included in any capital
expenditure data shown on the tables above.
The bulk of the International segment capital expenditures were made
by PSZT for the reconstruction of boilers at its heating plant to comply with
stricter clean air standards. Short-term borrowings and cash from operations
were used to finance these capital expenditures. Going forward, it is
anticipated that up to an additional $38 million (approximately $15$6 million for
the remaining sixthree months of 1998) will be spent on this reconstruction
project, which will extend into fiscal 2000.1 The Company anticipates financing
these expenditures with short-term borrowings.1
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
In December 1997, Horizon B.V. acquired an additional 34% equity
interest in SCT for $22.3 million, including legal and finders fees, thus
raising its total ownership to 70.8%. The acquisition was financed with
short-term borrowings. Horizon B.V. recently completed a tender offer in April
1998, increasing its ownership interest to 82.6% (75.2% at March 31, 1998). The
cost of this tender offer was approximately $2.5 million ($0.9 million through
March 31, 1998) and was financed with short-term borrowings. As these are stock
acquisitions, no amounts are included in any capital expenditure data shown in
the tables above.
Horizon B.V.'s investment in the Czech Republic is valued in Czech
Korunas, and as such, this investment is subject to currency exchange risk when
the Czech Korunas are translated into U.S. Dollars. During the sixnine months ended
March 31,June 30, 1998, the Czech Koruna increased in value in relation to
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
the U.S. dollar, resulting in a $0.9$1.0 million positive adjustment to the
Cumulative Translation Adjustment. Further valuation changes to the Czech Koruna
would result in corresponding positive or negative adjustments to the Cumulative
Translation Adjustment. Management cannot predict whether the Czech Koruna will
increase or decrease in value against the U.S. Dollar.1
Other Nonregulated
- ------------------
Other Nonregulated capital expenditures consisted primarily of
equipment and timber purchases for the Company'sHighland's existing sawmill and kiln
operations in
Pennsylvania as well as timber purchases.the purchase of a new sawmill in Brookville, Pennsylvania.
The capital expenditures also included the purchase of furniture, equipment and
computer hardware and software for the office location of the Company'sNFR's gas
marketing operation.
Other
- -----
Other cash provided by or used in investing activities primarily
reflects cash received on the sale of the Company's investmentvarious subsidiaries investments in
property, plant and equipment, cash received on the sale of the Company's
interest in Enerchange, L.L.C., a natural gas hub partnership, and cash used to
make an initial investment in Independence Pipeline Company.
The Company's capital expenditure program isprograms of the Company's subsidiaries are
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
Financing Cash Flow.
Consolidated short-term debt increased by $285.8$109.5 million during the
first sixnine months of fiscal 1998. The Company continues to consider short-term
bank loans and commercial paper important sources of cash for temporarily
financing capital expenditures and investments in corporations and/or
partnerships, 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
At March 31,June 30, 1998, the Company had authorization from the SEC under a
shelf registration filed pursuant to the Securities Act of 1933, to issue and
sell up to $400$200.0 million of debentures and/or medium-term notes. In March 1998,
the Company obtained authorization from the SEC, under the Public Utility
Holding Company Act of 1935, to issue, in the aggregate, long-term debt
securities and equity securities amounting to $2.0 billion during the order's
authorization period, which extends from March 1998 to December 31, 2002.
In May 1998, the Company issued $200.0 million of 6.303% medium-term
notes due to mature in May 2008. After deducting underwriting discounts and
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
commissions, the net proceeds to the Company amounted to $198.8 million. The
Company intends to issue approximately $200 million in medium-term notes in May
1998 and useused the proceeds to repayreduce short-term debt.1debt which resulted from
acquisition activities in the International and Exploration and Production
segments.
The Company's indenture contains covenants which limit, among other
things, the incurrence of funded debt. Funded debt basically is indebtedness
maturing more than one year after the date of issuance. Because of the
impairment of oil and gas properties recorded by the Company in March 1998,
these covenants will restrict the Company's ability to issue substantial amounts
of additional funded debt, with certain exceptions, subsequent to the planned
May 1998 debt issuance, until the third quarter of
fiscal 1999. This will not, however, limit the Company's issuance of funded debt
to refund existing funded debt.
The Company has adequate financing resources available to meet
expected operating and capital requirements.1 At March 31,June 30, 1998, the Company had
regulatory authorizations and unused short-term credit lines that would have
permitted it to borrow an additional $371.8$548.1 million of short-term debt.
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 March 31,June 30, 1998, Seneca utilized natural gas
and crude oil swap agreements with notional amounts of 5.76.0 equivalent Bcf and
219,000 equivalent bbl, respectively. These hedging activities resulted in the
recognition of a pretax gain of approximately $0.5$0.9 million. For the sixnine months
ended March 31,June 30, 1998, Seneca utilized natural gas and crude oil swap agreements
with notional amounts of 13.119.1 equivalent Bcf and 453,000672,000 equivalent bbl,
respectively. These hedging activities resulted in the recognition of a pretax
loss of approximately $7.8$6.9 million. These hedging gains or losses are offset by
lower or higher prices received for actual natural gas and crude oil production.
At March 31,June 30, 1998, Seneca had natural gas swap agreements outstanding
with a notional amount of approximately 27.827.9 equivalent Bcf at prices ranging
from $2.00 per Mcf to $2.47$2.84 per Mcf. The weighted average fixed price of these
swap agreements is approximately $2.24$2.31 per Mcf.
Seneca also had crude oil swap agreements outstanding at March 31,June 30,
1998 with a notional amount of 573,000354,000 equivalent bbl at prices ranging from
$17.50 per bbl to $20.56 per bbl. The weighted average fixed price of these swap
agreements is approximately $19.23$19.35 per bbl.
The Company, through
NFR participates in the natural gas futures market to manage a
portion of the market risk associated with fluctuations in the price of natural
gas. Such futures are not held for trading purposes. During the quarter ended
March 31,June 30, 1998, NFR recognized a minimal pretax loss of approximately
$0.1 milliongain related to such futures
contracts. For the sixnine months ended March
31,June 30, 1998, NFR recorded a pretax gain
of approximately $1.2
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------$1.3 million. Since these futures contracts qualify and have
been designated as hedges, any gains or losses resulting from market price
changes are substantially offset by the related commodity transaction.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
At March 31,June 30, 1998, NFR had long positions in the futures market
amounting to a notional amount of 7.29.3 Bcf at prices ranging from $2.04 per Mcf
to $2.75$2.96 per Mcf. The weighted average contract price of these futures contracts
is approximately $2.41$2.48 per Mcf. NFR had short positions in the futures market
amounting to a notional amount of 4.12.9 Bcf at prices ranging from $2.20$2.11 per Mcf
to $2.63$2.77 per Mcf. The weighted average contract price of these futures contracts
is approximately $2.45$2.51 per Mcf.
In addition, the Company has SEC authority to enter into certain
hedging transactions related to its borrowings. 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 OperationOperation.
New York Jurisdiction
- ---------------------
In November 1995, Distribution Corporation filed in its New York jurisdiction a
request for an annual 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 and October 1, 1997, Distribution Corporation received
annual base rate increases of $7.2 million. 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. As a result of this sharing mechanism, Distribution Corporation
recorded an estimated cumulative refund provision to its customers of $3.0
million ($2.0 million after-tax)
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
during the fourth quarter of 1997. An
additional $3.1$4.9 million ($2.03.2 million after-tax) was accrued during the sixnine
months ended March 31,June 30, 1998. The final amount owed to customers, if any, will not
be known until the conclusion of the settlement period. In June 1997,Recently, management has
been meeting with the PSC issued an order requiring jurisdictional
utilities to file plans to offer heating customers a fixed price service option
forstaff and other interested parties on modifying and/or
extending the 1997-1998 winter heating season.current
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
two-year rate settlement that ends on September 30, 1998. The order also directedCompany cannot
predict the utilities
to submit proposals for increased supply diversity with a view toward fostering
price stability. Distribution Corporation's fixed price service option that was
approved by the PSC gave heating customers the opportunity to be guaranteed a
fixed unit price for natural gas during the billing period of December 1997
through April 1998. Approximately 11,000 heating customers chose the fixed price
service option. These customers ended up paying more for their gas than
customers who did not electoutcome at this option.
At a regular session on April 29, 1998, the PSC adopted an order
permitting the state's local distribution companies (LDCs) to offer the fixed
price option for winter 1998-99. The written order will be issued at a later
date. At this time, and pending an analysis of the written order, Distribution
Corporation has no plans to offer the fixed price option in the 1998-1999 winter
season.1 In the same docket, the PSC issued a Statement of Policy Regarding Gas
Purchasing Practices on April 28, 1998 ("Policy Statement"). The Policy
Statement directs LDCs to, among other things, consider "all the available
options for purchasing gas and assess the benefits of each approach." The intent
of the Policy Statement is to promote supply diversification, including "the use
of financial hedges," without "directing any particular mix of portfolio
options." Consistent with the regulatory theme underlying the fixed price
option, the Policy Statement further provides that "volatility of customer bills
is one of the [supply option] criteria, along with other factors such as cost
and reliability, that LDCs should consider in their supply purchasing
strategies."time.
By an order issued on September 4, 1997, the PSC directed the state's
LDCslocal distribution companies (LDCs) to file a "plan for competition" addressing
issues relating to disposition of upstream assets in light of anticipated growth
in small volume transportation conversions. On April 1, 1998, Distribution
Corporation filed its plan. Distribution Corporation's plan responds to
questions posed by the PSC on such issues as upstream capacity contracts,
encouraging competition, assessing strandable costs and designing remedies, if
necessary. In addition, Distribution Corporation explained that, in order to
assure reliability, maintain operational flexibility and avoid stranded costs,
upstream capacity currently held for sales obligations should be allocated to
marketers serving customers converting to transportation service. This
proceeding remains pending before the PSC.
On April 3, 1998, Distribution Corporation filed comments in a PSC
generic proceeding addressing gas transportation rates for electric generators.
This case arose in response to concerns by the PSC regarding the effects of gas
transportation costs on electric rates ultimately paid by retail customers.
Distribution Corporation argued, among other things, that the current rate
setting policy, established in 1991, should remain unchanged for LDCs facing
competitive bypass threats. Distribution Corporation believes
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
that the PSC may
be focusing its attention on transfer pricing arrangements between gas and
electric divisions of combination utilities. Staff for the PSC has informally
expressed that existing generation and co-generation contracts will not be
disturbed by the outcome of this proceeding.
The PSC issued a notice on April 7, 1998 that it is considering the
revision of its regulations governing the operation of the Gas Adjustment Clause
(GAC). As revised, the rules would, as described by the PSC, the revised rules would allow the GAC to more
accurately reflect gas prices. The revised rules would also allow LDCs to
recover risk management costs through the GAC. Management is currently analyzing
the impact of those and other changes proposedOn June 5, 1998, Distribution
Corporation filed comments in the rule making. Distribution
Corporation plans to file comments in June 1998.1GAC docket raising several concerns with the
PSC's proposed revisions.
New York's gas industry restructuring effort continues to develop at a
slow pace. As of April 8,July 15, 1998, 27,07635,811 small volume customers across the state
chose aggregator services over their utility. In Distribution Corporation's
service territory, 3,5954,572 small volume customers (out of over 500,000) are
purchasing gas from fourteenfifteen aggregators, for a total annual load of just over
33.6 Bcf. The Company'sDistribution Corporation's marketing affiliate, NFR, is one of the
participating aggregators. At the urging of the PSC, Distribution Corporation began to offer
storage release service to aggregators on June 27, 1997. Currently, Distribution
Corporation's is the only actual release storage service available in New York
State. Whether aggregators find the service attractive enough to increase
marketing activity remains to be seen.
On March 9, 1998, the PSC approved a new service classification,
effective April 1, 1998, designed to extend the benefits of transportation
service to social services recipients located in Erie and Chautauqua counties,
New York. The program, a two-year pilot, enables the counties to buy gas supply
from marketers on a competitive basis. Distribution Corporation will transport
the supplies to social services recipients enrolled in the program and receive
payment from the counties under a pre-established "voucher" protocol. The
program is designed so that if enrollment increases above current levels,
Distribution Corporation may experience a reduction in uncollectible accounts.
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.
Effective October 1, 1997, Distribution Corporation commenced a PaPUC
approved customer choice pilot program called Energy Select. Energy Select,
which will last one and one-half years (untiluntil April 1, 1999),1999, allows approximately 19,000 small
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
commercial and residential customers of Distribution Corporation in the greater
Sharon, Pennsylvania area to purchase gas supplies from qualified, participating
non-utility suppliers (or marketers) of gas. Distribution Corporation is not a
supplier of gas in this pilot. Under Energy Select, Distribution Corporation
will continue to deliver the gas to the customer's home or business and will
remain responsible for reading customer meters, the safety and maintenance of
its pipeline system and responding to gas emergencies. NFR is a participating
supplier in Energy Select.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
A gas restructuring bill (Senate Bill No. 943) was introduced in the
Pennsylvania General Assembly proposing to amend the Public Utility Code to
allow all retail customers, including residential, the ability to choose their
own gas supplier. Senate Bill No. 943 was not enacted into law in 1997. However,
in December 1997, the Chairman of the PaPUC convened a collaborative of gas
industry interests to develop a consensus bill using Senate Bill No. 943 as the
starting point. As a member of the utility interest group, Distribution
Corporation is and will continue to be an active participant in the
collaborative. The Company is not able to predict the outcome of the bill.
GeneralBase rate increasesadjustments 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. Supply Corporation currently does not have a rate case on
file with the FERC. Its last case was settled with the FERC in February 1996. As
part of that settlement, Supply Corporation agreed not to seek recovery of
revenues related to certain terminated service from 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
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 may be in the range of $14.0$13.7
million to $15.0$14.7 million.1 At March 31,June 30, 1998, Distribution Corporation has
recorded the minimum liability of $14.0$13.7 million. The approximate 50% increase in
the liability since September 30, 1997 mainly relates to changing circumstances
and revised estimates for one particular former manufactured gas plant site. The
ultimate cost to Distribution Corporation with respect to the remediation of all
sites will depend on such factors as the remediation plan selected, the extent
of the site contamination, the number of additional
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
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.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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 1997 Form 10-K.
New Accounting Pronouncements. In 1998, the Financial Accounting Standards Board
issued new pronouncements that will impact the Company: Statement of Financial
Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" and SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." For further discussion refer to Note 1 -
"Summary of Significant Accounting Policies."
Year 2000. The Company is in the process of preparing all of its computer
systems to be Year 2000 compliant. Management has completed a detailed analysis
of its computer systems to identify the systems that could be affected and has
developed a conversion plan to resolve the issue. For various vendor supplied
software, the Company is in the process of obtaining upgrades that are Year 2000
compliant. For internally developed software, changes to such software are being
made and tested. The cost of upgrading both vendor supplied and internally
developed systems is being expensed as incurred. Management estimates that such
cost will total approximately $1.3$2.2 million, of which approximately one-half$1.0 million
has been incurred to date and one-half$1.2 million remains to be spent.1 The Company's
goal is to have its computer systems Year 2000 compliant early in calendar
1999.1 However, the Company has no control over the systems of third parties
with whom it interfaces. While major third parties have been put on notice that
the Company expects their products and services to perform as expected after
January 1, 2000, the Company cannot predict the potential adverse consequences
to the Company that could result if such third parties are not Year 2000
compliant.compliant.1
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
Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
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
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Concl.)
------------------------------
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 instrumentsinstrument
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
Item 2. Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
16. Changes in accounting principles and/or the application of such principles
to the Company
17. Unanticipated problems related to the Company's internal Year 2000
initiative as well as potential adverse consequences related to third party
Year 2000 compliance.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Not applicable.
Part II. Other Information
- ---------------------------
Item 2. Changes in Securities
- ------------------------------
On JanuaryApril 1, 1998, the Company issued 723700 unregistered shares of Company
common stock to the seven non-employee directors of the Company. These shares
were issued as partial consideration for the directors' service as directors
during the quarter ended March 31,June 30, 1998, 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. Submission5. Other Information
- --------------------------
Rule 14a-4(c) of Mattersthe Securities and Exchange Commission's proxy rules
allows the Company to use discretionary voting authority to vote on a Votematter
coming before an annual meeting of Security Holders
- ------------------------------------------------------------
Thestockholders which is not included in the
Company's proxy statement, if the Company does not have notice of the matter at
least 45 days before the date on which the Company first mailed its proxy
materials for the prior year's annual meeting of stockholders. In addition,
discretionary voting authority may generally also be used if the Company
receives timely notice of such matter (as described in the preceeding sentence)
and if, in the proxy statement, the Company describes the nature of such matter
and how the Company intends to exercise its discretion to vote on such matter.
Accordingly, for the 1999 Annual Meeting of Shareholders of National Fuel Gas Company wasStockholders, which is scheduled to
be held on or about February 26, 1998. At that meeting,18, 1999, any such notice must be submitted to 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:
- Philip C. Ackerman 31,829,812 575,100 - -
- James V. Glynn 31,718,115 686,797 - -
- Bernard S. Lee 31,847,790 557,122 - -
(ii) Appointment of Price
Waterhouse LLP as
independent accountants 31,951,312 222,582 231,018 -
(iii) Approval of AmendmentCompany at the principal offices of the Restated
CertificateCompany on or before November 16, 1998.
This requirement is separate and apart from the Securities and Exchange
Commission's requirements that a stockholder must meet in order to have a
stockholder proposal included in the Company's proxy statement and form of
Incorporationproxy. As described in the Company's proxy statement for its 1998 Annual
Meeting, specific proposals of stockholders intended to increasebe presented at the amount1999
Annual Meeting of authorized Common
Stock 29,700,741 2,265,428 438,743 -
(iv) Approval of AmendmentStockholders must be received at the principal offices of the
Restated
Certificate of
IncorporationCompany no later than September 2, 1998 in order to revise provisions
relatedbe considered for inclusion
in the Company's proxy materials relating to Preferred
Stock 18,323,995 8,874,937 729,062 4,476,918that meeting.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------------- ----------------------
(3i) Certificate of Amendment of Restated
Certificate of Incorporation dated April 2, 1998
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended March 31,June 30, 1998 and the
Fiscal Years Ended September 30, 1993
through 1997.
(18) Letter regarding Change in Accounting
Principle
(27.1) Financial Data Schedule for the SixNine Months Ended
March 31,June 30, 1998.
(27.2) Financial Data Schedule, as Restated, for
the Three Months Ended December 31, 1997.
(99) National Fuel Gas Company Consolidated Statement
of Income for the Twelve Months Ended March 31,June 30,
1998 and 1997.
(b) Reports on Form 8-K
NoneReport on Form 8-K was filed on May 1, 1998.
Date of Report - April 29, 1998
Item 7 - Financial Statements and Exhibits
Exhibit - News Release of the Company Dated
April 29, 1998
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: MayAugust 14, 1998
------------
EXHIBIT INDEX
(Form 10Q)
Exhibit 3(i) Certificate of Ammendment of Restated
Certificate of Incorporation dated April 2, 1998
Exhibit 12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve
Months Ended March 31,June 30, 1998 and the Fiscal Years Ended
September 30, 1993 through 1997.
Exhibit 18 Letter regarding Change in Accounting Principle
Exhibit 27-127 Financial Data Schedule for the SixNine Months Ended March 31,June 30, 1998.
Exhibit 27-2 Financial Data Schedule, as Restated, for the Three
Months Ended December 31, 1997.
Exhibit 99 National Fuel Gas Company Consolidated Statement of Income for
the Twelve Months Ended March 31,June 30, 1998 and 1997.