Page 1 of 39
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1997
Commission File Number 1-13265
NorAm Energy Corp.*
(Formerly, HI Merger, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 76-0511406
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices)
(713) 207-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Outstanding Common Stock (Post-Merger) - 1000 Shares
Exhibit Index Appears on Page 38
* On August 6, 1997, NorAm Energy Corp. merged with and into HI Merger, Inc.,
a subsidiary of Houston Industries Incorporated. HI Merger, Inc. was
renamed NorAm Energy Corp. effective upon consummation of the merger.
INDEX
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1997 and 1996
and December 31, 1996 4
Consolidated Statement of Income - Three Months Ended
June 30, 1997 and 1996 and Six Months Ended
June 30, 1997 and 1996 6
Statement of Consolidated Cash Flows - Six Months Ended
June 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II. Other Information
Item 1. Legal Proceedings 37
Item 6. Exhibits and Reports on Form 8-K 38
Signature 39
Part I. Financial Information
Item 1. Financial Statements
The consolidated financial statements of NorAm Energy Corp. and
Subsidiaries ("NorAm" or "the Company") included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements and accompanying notes be read in conjunction with the
financial statements and the notes thereto included in the Company's Report on
Form 10-K for the year ended December 31, 1996, from which the accompanying
balance sheet information for December 31, 1996 was derived.
On August 6, 1997, the Company became a wholly-owned subsidiary of
Houston Industries Incorporated, see Note B of Notes to Consolidated Financial
Statements following.
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
ASSETS June 30 December 31 June 30
- ------
1997 1996 1996
------------------ ------------------- -------------------
Property, Plant and Equipment
Natural Gas Distribution $ 2,203,621 $ 2,158,013 $ 2,102,130
Interstate Pipelines 1,683,190 1,685,959 1,678,651
Energy Marketing and Gathering 262,519 252,509 232,713
Other 24,097 20,150 18,825
------------------ ------------------- -------------------
4,173,427 4,116,631 4,032,319
Less: Accumulated depreciation and amortization 1,731,486 1,675,576 1,626,415
------------------ ------------------- -------------------
2,441,941 2,441,055 2,405,904
Investments and Other Assets
Goodwill, net 459,845 466,938 474,032
Prepaid pension asset 50,623 45,390 48,916
Investment in Itron, Inc. 38,878 26,670 42,635
Regulatory asset for environmental costs 33,448 39,152 42,408
Gas purchased in advance of delivery 31,055 34,895 34,040
Other 33,953 32,200 16,742
------------------ ------------------- -------------------
647,802 645,245 658,773
Current Assets
Cash and cash equivalents 11,405 27,981 21,600
Accounts and notes receivable, principally
customer (Note F) 589,127 696,982 336,714
Deferred income taxes 24,136 10,495 12,628
Inventories
Gas in underground storage 55,153 70,651 48,364
Materials and supplies 31,539 30,595 31,407
Other 804 631 393
Deferred gas cost 2,680 231 (1,710)
Gas purchased in advance of delivery 6,200 6,200 6,200
Other current assets 13,895 14,561 14,840
------------------ ------------------- -------------------
734,939 858,327 470,436
Deferred Charges 56,816 72,850 61,214
------------------ ------------------- -------------------
TOTAL ASSETS $ 3,881,498 $ 4,017,477 $ 3,596,327
================== =================== ===================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY June 30 December 31 June 30
- ------------------------------------
1997 1996 1996
------------------- ------------------ -----------------
Stockholders' Equity
Common stock $ 86,447 $ 86,193 $ 85,590
Paid-in capital 1,004,889 1,001,053 991,637
Accumulated deficit (236,635) (286,703) (299,503)
Unrealized gain on investment, net of tax 7,797 5 10,171
------------------- ------------------ -----------------
Total Stockholders' Equity 862,498 800,548 787,895
Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities of Subsidiary
Trust Holding Solely $177.8 Million Principal
Amount of 6.25% Convertible Subordinated
Debentures Due 2026 of NorAm Energy Corp. (Note I) 164,428 167,768 167,762
Long-Term Debt, Less Current Maturities 1,169,469 1,054,221 1,106,969
Current Liabilities
Current maturities of long-term debt 81,000 277,000 280,250
Notes payable to banks 72,000 115,000 -
Receivables facility (Note F) 270,000 - -
Accounts payable, principally trade 458,155 762,164 421,652
Income taxes payable 18,303 11,684 20,810
Interest payable 30,107 31,928 34,188
General taxes 36,617 51,082 35,237
Customers' deposits 35,019 35,711 34,472
Other current liabilities 79,401 113,628 103,800
------------------- ------------------ -----------------
1,080,602 1,398,197 930,409
Other Liabilities and Deferred Credits
Accumulated deferred income taxes 355,621 320,506 313,296
Estimated environmental remediation costs 33,448 39,152 42,408
Payable under capacity lease agreement 41,000 41,000 41,000
Supplemental retirement and deferred compensation 40,036 39,640 40,555
Estimated obligations under indemnification
provisions of sales agreements 13,327 29,098 31,823
Refundable excess deferred income taxes 17,369 17,946 19,642
Other 103,700 109,401 114,568
------------------- ------------------ -----------------
604,501 596,743 603,292
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,881,498 $ 4,017,477 $ 3,596,327
=================== ================== =================
The Notes to Consolidated Financial Statements are an integral part of this
statement.
NorAm Energy Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in thousands of dollars except per share amounts)
(unaudited)
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------- --------------------------------
1997 1996 1997 1996
--------------- --------------- ---------------- ---------------
Operating Revenues $ 1,015,998 $ 891,325 $ 2,940,180 $ 2,308,988
Operating Expenses
Cost of natural gas purchased, net 787,046 684,997 2,366,224 1,712,539
Operating, maintenance, cost of sales & other 127,311 102,791 254,951 253,640
Depreciation and amortization 36,457 35,862 72,445 71,572
Taxes other than income taxes 28,568 28,002 64,723 62,638
Early retirement and severance (Note D) - - - 22,344
--------------- --------------- ---------------- ---------------
979,382 851,652 2,758,343 2,122,733
Operating Income 36,616 39,673 181,837 186,255
Other (Income) and Deductions
Interest expense, net (Note F) 32,523 34,537 67,995 70,707
Dividend requirement on preferred securities
of subsidiary trust 2,709 425 5,414 425
Other, net (Note D) 214 2,326 (6,095) 5,753
--------------- --------------- ---------------- ---------------
35,446 37,288 67,314 76,885
Income Before Income Taxes 1,170 2,385 114,523 109,370
Provision for Income Taxes 468 50 45,411 45,838
--------------- --------------- ---------------- ---------------
Income Before Extraordinary Item 702 2,335 69,112 63,532
Extraordinary gain (loss) on early
retirement of debt, less taxes - (4,455) 237 (4,733)
--------------- --------------- ---------------- ---------------
Net Income (Loss) 702 (2,120) 69,349 58,799
Preferred dividend requirement - 1,647 - 3,597
--------------- --------------- ---------------- ---------------
Earnings Available to Common Stock $ 702 $ (3,767) $ 69,349 $ 55,202
=============== =============== ================ ===============
Per Share Data:
Primary:
Before extraordinary item $ 0.01 $ 0.01 $ 0.50 $ 0.48
Extraordinary item, less taxes - (0.04) 0.00 (0.04)
--------------- --------------- ---------------- ---------------
Earnings per Common Share $ 0.01 $ (0.03) $ 0.50 $ 0.44
=============== =============== ================ ===============
Fully Diluted:
Before extraordinary item $ 0.01 $ 0.01 $ 0.48 $ 0.47
Extraordinary item, less taxes - (0.04) 0.00 (0.04)
--------------- --------------- ---------------- ---------------
Earnings per Common Share $ 0.01 $ (0.03) $ 0.48 $ 0.43
=============== =============== ================ ===============
Average Common Shares
Outstanding (in thousands)
Primary 138,253 127,006 138,105 125,995
Fully diluted 152,480 129,195 152,332 127,090
Cash Dividends per Common Share $ 0.07 $ 0.07 $ 0.14 $ 0.14
The Notes to Consolidated Financial Statements are an integral part of this
statement.
NorAm Energy Corp. and Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase(Decrease) in Cash and Cash Equivalents
(in thousands of dollars)
(unaudited)
Six Months
Ended June 30
------------------------------------
1997 1996
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69,349 $ 58,799
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 72,445 71,572
Early retirement and severance, less cash costs (Note D) - 12,941
Deferred income taxes 16,972 13,653
Extraordinary (gain) loss, less taxes (237) 4,733
Other 1,616 1,762
Changes in certain assets and liabilities, net of noncash transactions:
Accounts and notes receivable, principally customer (Note F) 342,855 19,065
Inventories 14,381 6,818
Deferred gas costs (2,449) 14,729
Other current assets 666 10,656
Accounts payable, principally trade (268,658) (58,419)
Income taxes payable 6,619 15,473
Interest payable (1,821) (4,542)
General taxes (14,465) (13,083)
Customers' deposits (692) (1,179)
Other current liabilities (34,227) 655
Recoveries under gas contract disputes 5,200 8,000
---------------- ----------------
Net cash provided by operating activities 207,554 161,633
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (67,400) (62,100)
Other, net (31,245) 2,021
---------------- ----------------
Net cash used in investing activities (98,645) (60,079)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements and reacquisitions of long-term debt (230,515) (341,188)
Issuance of bank term loan, due 1998 (Note G) 150,000 -
Public issuance of common stock - 108,963
Public issuance of convertible preferred securities
of subsidiary trust - 167,756
Other interim debt repayments (43,000) (10,000)
Increase in receivables facility (Note F) 35,000 -
Issuance of common stock under Direct Stock Purchase Plan - 5,246
Common and preferred stock dividends (Notes B and E) (19,281) (21,361)
Decrease in overdrafts (17,689) (2,681)
---------------- ----------------
Net cash used in financing activities (125,485) (93,265)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (16,576) 8,289
Cash and cash equivalents - beginning of period 27,981 13,311
---------------- ----------------
Cash and cash equivalents - end of period $ 11,405 $ 21,600
================ ================
For supplemental cash flow information, see Note C.
The Notes to Consolidated Financial Statements are an integral part of this
statement.
================================================================================
NorAm Energy Corp. and Subsidiaries
================================================================================
Notes to Consolidated Financial Statements
(unaudited)
A. In the opinion of Management, all adjustments (consisting solely of
normal recurring accruals, except as explicitly described herein)
necessary for a fair presentation of results of operations for the
periods presented have been included in the accompanying consolidated
financial statements. Because of the seasonal nature of the Company's
operations, among other factors, the results of operations for the
periods presented are not necessarily indicative of the results that
will be achieved in an entire year. The preparation of financial
statements requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
each reporting period. Actual results could differ from those
estimates. In the accompanying consolidated financial statements,
certain prior period amounts have been reclassified to conform to the
current presentation.
B. On August 6, 1997 ("the Effective Time"), pursuant to an Agreement and
Plan of Merger dated August 11, 1996 ("the Merger Agreement"), the
Company merged with and into a wholly-owned subsidiary of Houston
Industries Incorporated ("HI"), thereby becoming a wholly-owned
subsidiary of HI ("the Merger"). In accordance with the terms of the
Merger Agreement, each share of the Company's common stock outstanding
immediately prior to the Effective Time was converted, upon
consummation of the Merger, into the right to receive (i) 0.74963
shares of the common stock, without par value, of HI (including
associated stock preference rights, "Houston Common Stock") ("Stock
Consideration") or (ii) cash consideration of $16.3051, representing
cash consideration of $16.00 plus simple interest of two percent per
quarter from May 11, 1997 to August 6, 1997 ("Cash Consideration").
Under the terms of the Merger Agreement, the exchange ratio for the
Stock Consideration was based on (i) $16.00 per share without interest
and (ii) the average daily closing price on the New York Stock
Exchange of $21.3438 for the Houston Common Stock during the 20
consecutive trading days commencing on July 1, 1997. The Merger
Agreement also provides that each holder of an unexpired employee
stock option to purchase the NorAm Common Stock, together with any
tandem stock appreciation rights, outstanding at the Effective Time
was entitled to elect, upon consummation of the Merger, to have either
(i) all or any portion of his or her NorAm stock options canceled in
exchange for cash or (ii) all or any portion of such options assumed
by HI at a conversion rate specified in the Merger Agreement.
After the Merger, the Company's existing debentures and convertible
securities will remain outstanding as the securities of NorAm, a
wholly-owned subsidiary of HI (and will not be assumed by HI except
with respect to conversion into Houston Common Stock as described
below), and the Company will continue to be a reporting company under
the Securities Exchange Act of 1934. In particular, the Company's 6%
Convertible Subordinated Debentures due 2012 ("the Convertible
Debentures") will remain outstanding as debt securities of the Company.
The 6 1/4% Convertible Trust Originated Preferred Securities issued by
NorAm Financing I ("the Trust Securities" and, together with the
Convertible Debentures, "the Convertible Securities") will also remain
outstanding. A significant proportion of the Trust Securities have been
converted subsequent to announcement of the closing date of the Merger,
see Note I.
After the Merger, the Convertible Securities will be convertible into
(in lieu of NorAm Common Stock) the amount of Stock Consideration and
Cash Consideration that the holder of such security would have had the
right to receive (i) if such Convertible Securities had been converted
into NorAm Common Stock immediately prior to the Merger and (ii) if,
following conversion, the holder had received Stock Consideration with
respect to 50% of his or her shares of NorAm Common Stock and Cash
Consideration with respect to the remaining 50% of such holder's shares
of NorAm Common Stock.
Effective with the consummation of the Merger, all then-existing shares
of the NorAm Common Stock were canceled and no further dividends will
be paid. However, former NorAm common stockholders who received Houston
Common Stock in the Merger and continue to hold such stock on August 15
will be entitled to receive a regular quarterly dividend of $0.375 per
share of Houston Common Stock payable on September 10, 1997.
C. In the accompanying consolidated financial statements, all highly
liquid investments purchased with an original maturity of three months
or less are considered to be cash equivalents. Following is selected
supplemental cash flow information:
Six Months
Ended June 30
---------------------------------
1997 1996
-------------- ---------------
(millions of dollars)
Cash interest payments, net of capitalized interest $ 67.1 $ 75.3
Net income tax payments $ 20.9 $ 14.9
A significant proportion of the Company's Trust Securities have
recently been converted to NorAm Common Stock in a non-cash
transaction, see Note I.
D. Following are components of and information concerning certain line
items included in the accompanying consolidated financial statements:
Operating Revenues and Cost of Natural Gas Purchased, Net
---------------------------------------------------------
The significant increases in "Operating Revenues" and "Cost of natural
gas purchased, net" in the accompanying Consolidated Statement of
Income from the second quarter and first six months of 1996 to the
second quarter and first six months of 1997 are principally due to the
increased level of the Company's energy marketing activities, see
"Wholesale Energy Marketing" and "Retail Energy Marketing" under
"Material Changes in the Results of Continuing Operations" included
with "Management Analysis" in the Company's 1996 Report on Form 10-K
and "Energy Marketing and Gathering" under "Material Changes in the
Results of Operations" included with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" elsewhere
herein.
Early Retirement and Severance
------------------------------
During the first quarter of 1996, the Company instituted a
reorganization plan affecting its NorAm Gas Transmission Company
("NGT") and Mississippi River Transmission Corporation ("MRT")
subsidiaries, pursuant to which a total of approximately 275 positions
were eliminated, resulting in expense for severance payments and
enhanced retirement benefits. Also during the first quarter of 1996,
(1) the Company's Entex division instituted an early retirement program
which was accepted by approximately 100 employees and (2) the Company's
Minnegasco division reorganized certain functions, resulting in the
elimination of approximately 25 positions. Collectively, these programs
resulted in a pre-tax charge of approximately $22.3 million
(approximately $13.4 million or $0.10 per share after tax), which
pre-tax amount is reported in the accompanying Consolidated Statement
of Income as "Early retirement and severance".
Other, Net
----------
"Other, net" as presented in the accompanying Consolidated Statement of
Income for the six months ended June 30, 1997 includes the impact of
the close-out of certain interest rate swaps (see Note H), and the
comparison of "Other, net" between periods is affected by the adoption
of a new accounting standard (see Note F).
Provision for Income Taxes
--------------------------
"Provision for Income Taxes" in the accompanying Consolidated
Statement of Income includes the following:
Three Months Six Months
Ended June 30 Ended June 30
------------------------------- -------------------------------
1997 1996 1997 1996
------------- -------------- ------------- -------------
(millions of dollars)
Federal
Current $ (8.3) $ (4.7) $ 26.5 $ 28.6
Deferred 8.7 6.4 15.6 10.8
Investment tax credit (0.1) (0.2) (0.3) (0.3)
State
Current (0.7) (2.2) 2.2 3.9
Deferred 0.9 0.7 1.4 2.8
============= ============== ============= =============
$ 0.5 $ 0.0 $ 45.4 $ 45.8
============= ============== ============= =============
Extraordinary Gain(Loss) on Early Retirement of Debt, Less Taxes
----------------------------------------------------------------
Represents the gain or loss resulting from the retirement of debt in
advance of its maturity (see "Retirements and Reacquisitions of
Long-Term Debt" following) and is net of tax expense of $0.15 million
for the six months ended June 30, 1997 and tax benefit of $2.9 million
and $3.0 million for the three months and six months ended June 30,
1996, respectively.
Investments and Other Assets
----------------------------
At August 8, 1997, the market value of the Company's investment in
Itron, Inc. common stock had declined to $33.7 million and its
unrealized gain to $4.5 million (net of tax of $2.6 million). As
discussed in the Company's 1996 Report on Form 10-K, the market for
this security has limited liquidity.
Inventories
-----------
The decrease in "Gas in underground storage" from December 31, 1996 to
June 30, 1997 is principally a normal seasonal fluctuation.
Retirements and Reacquisitions of Long-Term Debt
------------------------------------------------
Six Months
Ended June 30
-------------------------------
1997 1996
-------------- -------------
(millions of dollars)
Reacquisition of 6% Debentures Due 2012 $ 5.7 -
Retirement, at maturity, of 9.875% Series Due 1997 225.0 -
Reacquisition of 9.875% Series Due 2018 - $ 7.4
Retirement, at maturity, of Medium-Term Notes,
weighted average interest rate of 9.27% - 70.0
Retirement of Bank Term Loan Due 2000 - 150.0
Retirement, prior to maturity, of 9.875% Series Due 2018 - 109.1
Net loss (gain) on reacquisition of debt, less taxes (0.2) 4.7
-------------- -------------
$ 230.5 $ 341.2
============== =============
E. Primary earnings per share is computed using the weighted average
number of shares of the Company's Common Stock ("Common Stock")
actually outstanding during each period presented. Outstanding options
for purchase of Common Stock, the Company's only "common stock
equivalent" as that term is defined in the currently applicable
authoritative accounting literature, have been excluded due to either
(1) the fact that the options would have been anti-dilutive if
exercised or (2) the immaterial impact which would result from the
exercise of those options which are currently exercisable and would be
dilutive if exercised. These options have been either (1) surrendered
for cash or (2) exchanged for HI options as a result of the merger
with HI, see Note B. Fully diluted earnings per share, in addition to
the actual weighted average common shares outstanding, assumes the
conversion, beginning with its issuance date of June 17, 1996, of the
3,450,000 shares of the Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities of Subsidiary Trust Holding Solely
$177.8 Million Principal Amount of 6.25% Convertible Subordinated
Debentures Due 2026 of NorAm Energy Corp. ("the Trust Preferred") at a
conversion rate of 4.1237 shares of Common Stock for each share of the
Trust Preferred (resulting in the assumed issuance of a total of
14,226,765 shares of Common Stock), and reflects the increase in
earnings from the cessation of the dividends on the Trust Preferred
(net of the related tax benefit) which would result from such assumed
conversion. For the three months and six months ended June 30, 1997
this assumed earnings increase was approximately $1.6 million and $3.2
million, net of related tax benefit of approximately $1.1 million and
$2.2 million, respectively. The assumed earnings increase was not
material for the three months or six months ended June 30, 1996. A
significant proportion of the Trust Preferred has recently been
converted and the future conversion of such securities has been
affected by the merger with HI, see Notes B and I. The Company's 6%
Convertible Subordinated Debentures due 2012 (the future conversion of
which has been affected by the merger with HI, see Note B) and the
Company's $3.00 Series A Preferred Stock (prior to its June 1996
exchange), due to their exchange rates, are anti-dilutive and are
therefore excluded from all earnings per share calculations. During
the periods in which the Company's $3.00 Convertible Exchangeable
Preferred Stock, Series A was outstanding, earnings per share from
continuing operations is calculated after reduction for the preferred
stock dividend requirement associated with such security. As discussed
in the Company's 1996 Report on Form 10-K, earnings per share
calculations would be affected by Statement of Financial Accounting
Standards No. 128, "Earnings per Share" which is required to be
implemented for fiscal years ending after December 15, 1997, although
the Company expects that it will no longer present earnings per share
data as a result of its merger with Houston Industries, see Note B.
F. As further discussed in the Company's 1996 Report on Form 10-K, under
an August 1996 agreement ("the Receivables Facility"), the Company
transfers (to a third party) an undivided interest in a pool of
accounts receivable, limited to a maximum of $300 million, with
limited recourse and subject to a floating interest rate provision.
The total interest in the Company's receivables transferred pursuant
to the Receivables Facility but not yet collected was approximately
$270.0 million, $235.0 million and $138.1 million at June 30, 1997,
December 31, 1996 and June 30, 1996, respectively. "Interest expense,
net" for the three months and six months ended June 30, 1997 includes
approximately $3.9 million and $6.9 million, respectively, of costs
associated with the Receivables Facility. Corresponding amounts
included in "Other, net" for the three months and six months ended
June 30, 1996 were $1.8 million and $4.8 million, respectively. At
June 30, 1997, approximately $39.9 million of the Company's
receivables were collateral for amounts received pursuant to the
Receivables Facility and, at July 31, 1997, an interest in $276.0
million of the Company's receivables had been transferred.
As further described in the Company's 1996 Report of Form 10-K, the
Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125") effective as of January 1,
1997 (SFAS 125 does not allow retroactive application). Therefore, for
periods prior to January 1, 1997, (1) amounts transferred pursuant to
the Receivables Facility are included with "Cash Flows From Operating
Activities" in the Company's Statement of Consolidated Cash Flows, (2)
receivables transferred pursuant to the Receivables Facility are
deducted from "Accounts and notes receivable, principally customer" in
the Company's Consolidated Balance Sheet and (3) the costs associated
with utilization of the Receivables Facility are reported as "Loss on
sale of accounts receivable", a component of "Other, net", included
under "Other (Income) and Deductions" in the Company's Statement of
Consolidated Income. Subsequent to January 1, 1997, (1) amounts
transferred pursuant to the Receivables Facility are included with
"Cash Flows from Financing Activities" in the Company's Statement of
Consolidated Cash Flows, (2) amounts received pursuant to the
Receivables Facility are not deducted from "Accounts and notes
receivable, principally customer" in the Company's Consolidated Balance
Sheet but, rather, such amounts are reported as a current liability,
and (3) the costs associated with utilization of the Receivables
Facility are included with "Interest expense, net" in the Company's
Statement of Consolidated Income.
Therefore, due to the different balance sheet classification of amounts
transferred pursuant to the Receivables Facility as described
preceding, the cash flow impacts reported as "Accounts and notes
receivable, principally customer" and "Decrease in receivables
facility" in the Company's Statement of Consolidated Cash Flows for the
six months ended June 30, 1997 are not equal to the changes in the
associated balance sheet captions from December 31, 1996 to June 30,
1997. Instead, such impacts have been calculated as if the change in
balance sheet classification had been in effect at the beginning of the
period, resulting in cash flow impacts which are not affected by the
change in classification.
G. On May 15, 1997, the Company obtained an unsecured, 18-month bank term
loan ("the Term Loan") in the amount of $150.0 million. The Term Loan
carries a floating interest rate based on three-month LIBOR
(approximately 6.78% at inception and subject to adjustment based on
the Company's credit rating) and allows prepayment without penalty.
Proceeds from the Term Loan were utilized in conjunction with a
refinancing associated with the Company's retirement of its 9.875%
Notes Due 1997, see Note D.
H. As discussed in the Company's 1996 Report on Form 10-K, in March 1997,
the Company closed out the $200.0 million of interest rate swaps which
had been serving as hedges of the anticipated debt refinancing
associated with the April 1997 maturity of the $225.0 million of the
Company's 9.875% Notes Due 1997, receiving cash proceeds of
approximately $8.7 million. As discussed in the Company's 1996 Report
on Form 10-K, based on the Company's utilization of a smaller,
shorter-term refinancing vehicle (see Note G), approximately $1.0
million of such proceeds is serving to reduce the effective interest
rate on the debt issued, and the balance was credited to earnings in
March 1997, reported as a component of "Other, net" in the
accompanying Statement of Consolidated Income.
I. After the July 31, 1997 announcement of the closing date of the Merger,
a significant proportion of the holders of the Trust Securities elected
to exercise their right to convert such securities into shares of NorAm
Common Stock, resulting in the issuance of approximately 11.4 million
incremental NorAm common shares. As of August 5, 1997, 611,385 shares
of the Trust Securities remained outstanding, representing
approximately $30.6 million of liquidation value.
J. In June 1997, the Financial Accounting Standards Board ("the FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
Company expects to adopt the provisions of SFAS 130 in fiscal 1998.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131") which is effective for periods
beginning after December 15, 1997. SFAS 131 establishes standards for
reporting information about operating segments in annual financial
statements and requires selected information about operating segments
in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company expects to
adopt the provisions of SFAS 131 in fiscal 1998.
K. As more fully described in the Company's 1996 Report on Form 10-K, the
Company is currently working with the Minnesota Pollution Control
Agency regarding the remediation of several sites on which gas was
manufactured from the late 1800's to approximately 1960. The Company
has made an accrual for its estimate of the costs of remediation
(undiscounted and without regard to potential third-party recoveries)
and, based upon discussions to date and prior decisions by regulators
in the relevant jurisdictions, the Company continues to believe that it
will be allowed substantial recovery of these costs through its
regulated rates.
In addition, the Company has identified sites with possible mercury
contamination based on the type of facilities located on these sites.
The Company has not confirmed the existence of contamination at these
sites, nor has any federal, state or local governmental agency imposed
on the Company an obligation to investigate or remediate existing or
potential mercury contamination. To the extent that any compliance
costs are ultimately identified and quantified, the Company will
provide an appropriate accrual and, to the extent justified based on
the circumstances within each of the Company's regulatory
jurisdictions, set up regulatory assets in anticipation of recovery
through the ratemaking process.
On June 18, 1997, the Mississippi Department of Environmental Quality
advised the Company that the Company, through its Entex Distribution
Division, had been identified as a potentially responsible party at a
former manufactured gas plant site in Biloxi, Mississippi, see Note L.
On October 24, 1994, the United States Environmental Protection Agency
advised MRT that it had been named a potentially responsible party
under federal law with respect to a landfill site in West Memphis,
Arkansas, see Note L.
On December 18, 1995, the Louisiana Department of Environmental Quality
advised the Company that it had been named a potentially responsible
party under state law with respect to a hazardous substance site in
Shreveport, Louisiana, see Note L.
While the nature of environmental contingencies makes complete
evaluation impractical, the Company is currently aware of no other
environmental matter which could reasonably be expected to have a
material impact on its results of operations, financial position or
cash flows.
L. On June 18, 1997, the Mississippi Department of Environmental Quality
advised the Company that the Company, through its Entex Distribution
Division, had been identified as a potentially responsible party at a
former manufactured gas plant site in Biloxi, Mississippi. Considering
the information currently known about the site, the Company does not
believe that the matter will have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
On August 14, 1996, an action styled Shaw vs. NorAm Energy Corp., et
al. was filed in the District Court of Harris County, Texas by a
purported NorAm stockholder against the Company, certain of its
officers and directors and HI to enjoin the merger between the Company
and HI (see Note B) or to rescind such merger and/or to recover damages
in the event that the HI merger transaction is consummated. The
complaint alleges, among other things, that the merger consideration is
inadequate, the Company's Board of Directors breached its fiduciary
duties and that HI aided and abetted such breaches of fiduciary duties.
In addition, the plaintiff seeks certification as a class action. The
Company believes that the claims are without merit and intends to
vigorously defend against the lawsuit. Management believes that the
effect on the Company's results of operations, financial position or
cash flows, if any, from the disposition of this matter will not be
material.
On October 24, 1994, the United States Environmental Protection Agency
advised MRT, a wholly-owned subsidiary of the Company, that MRT,
together with a number of other companies, had been named under federal
law as a potentially responsible party for a landfill site in West
Memphis, Arkansas and may be required to share in the cost of
remediation of this site. However, considering the information
currently known about the site and the involvement of MRT, the Company
does not believe that this matter will have a material adverse effect
on the financial position, results of operations or cash flows of the
Company.
On December 18, 1995, the Louisiana Department of Environmental Quality
advised the Company that the Company, through one of its subsidiaries
and together with several other unaffiliated entities, had been named
under state law as a potentially responsible party with respect to a
hazardous substance site in Shreveport, Louisiana and may be required
to share in the remediation cost, if any, of the site. However,
considering the information currently known about the site and the
involvement of the Company and its subsidiaries with respect to the
site, the Company does not believe that the matter will have a material
adverse effect on the financial position, results of operations or cash
flows of the Company.
The Company is a party to litigation (other than that specifically
noted) which arises in the normal course of business. Management
regularly analyzes current information and, as necessary, provides
accruals for probable liabilities on the eventual disposition of these
matters. Management believes that the effect on the Company's results
of operations, financial position or cash flows, if any, from the
disposition of these matters will not be material.
================================================================================
================================================================================
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
NorAm Energy Corp., referred to herein together with its consolidated
subsidiaries and divisions (all of which are wholly owned) as "NorAm" or "the
Company", principally conducts operations in the natural gas industry, including
gathering, transmission, marketing, storage and distribution which,
collectively, account for in excess of 90% of the Company's total revenues,
income or loss and identifiable assets. The Company also makes sales of
electricity, non-energy sales and provides certain non-energy services,
principally to certain of its retail gas distribution customers. The reader is
directed to the Company's 1996 Report on Form 10-K for additional information
concerning the Company's various business activities and a discussion of the
Company's significant accounting policies. Effective August 6, 1997, the Company
became a wholly-owned subsidiary of Houston Industries Incorporated, see "Merger
with Houston Industries Incorporated" under "Recent Developments" following.
Recent Developments
Merger With Houston Industries Incorporated
- -------------------------------------------
On August 6, 1997 ("the Effective Time"), pursuant to an Agreement and
Plan of Merger dated August 11, 1996 ("the Merger Agreement"), the Company
merged with and into a wholly-owned subsidiary of Houston Industries
Incorporated ("HI"), thereby becoming a wholly-owned subsidiary of HI ("the
Merger"). In accordance with the terms of the Merger Agreement, each share of
the Company's common stock outstanding immediately prior to the Effective Time
was converted, upon consummation of the Merger, into the right to receive (i)
0.74963 shares of the common stock, without par value, of HI (including
associated stock preference rights, "Houston Common Stock") ("Stock
Consideration") or (ii) cash consideration of $16.3051, representing cash
consideration of $16.00 plus simple interest of two percent per quarter from May
11, 1997 to August 6, 1997 ("Cash Consideration"). Under the terms of the Merger
Agreement, the exchange ratio for the Stock Consideration was based on (i)
$16.00 per share without interest and (ii) the average daily closing price on
the New York Stock Exchange of $21.3438 for the Houston Common Stock during the
20 consecutive trading days commencing on July 1, 1997. The Merger Agreement
also provides that each holder of an unexpired employee stock option to purchase
the NorAm Common Stock, together with any tandem stock appreciation rights,
outstanding at the Effective Time was entitled to elect, upon consummation of
the Merger, to have either (i) all or any portion of his or her NorAm stock
options canceled in exchange for cash or (ii) all or any portion of such options
assumed by HI at a conversion rate specified in the Merger Agreement.
After the Merger, the Company's existing debentures and convertible
securities will remain outstanding as the securities of NorAm, a wholly-owned
subsidiary of HI (and will not be assumed by HI except with respect to
conversion into Houston Common Stock as described below), and the Company will
continue to be a reporting company under the Securities Exchange Act of 1934. In
particular, the Company's 6% Convertible Subordinated Debentures due 2012 ("the
Convertible Debentures") will remain outstanding as debt securities of the
Company. The 6 1/4% Convertible Trust Originated Preferred Securities issued by
NorAm Financing I ("the Trust Securities" and, together with the Convertible
Debentures, "the Convertible Securities") will also remain outstanding. A
significant proportion of the Trust Securities have been converted subsequent to
announcement of the closing date of the merger, see "Long-Term Financing" under
"Net Cash Flows from Financing Activities" elsewhere herein.
After the Merger, the Convertible Securities will be convertible into
(in lieu of NorAm Common Stock) the amount of Stock Consideration and Cash
Consideration that the holder of such security would have had the right to
receive (i) if such Convertible Securities had been converted into NorAm Common
Stock immediately prior to the Merger and (ii) if, following conversion, the
holder had received Stock Consideration with respect to 50% of his or her shares
of NorAm Common Stock and Cash Consideration with respect to the remaining 50%
of such holder's shares of NorAm Common Stock.
Effective with the consummation of the Merger, all then-existing shares
of the NorAm Common Stock were canceled and no further dividends will be paid.
However, former NorAm common stockholders who received Houston Common Stock in
the Merger and continue to hold such stock on August 15 will be entitled to
receive a regular quarterly dividend of $0.375 per share of Houston Common Stock
payable on September 10, 1997.
Regulatory Proceedings
- ----------------------
There have been recent developments with respect to regulatory
proceedings, see "Regulatory Matters" following.
Dividend Declaration
- --------------------
On July 9, 1997, the Company's Board of Directors declared a dividend
of $0.07 per share on common stock, payable September 15, 1997 to owners of
record on August 15, 1997. As a result of the merger with HI, this dividend will
not be paid, see "Merger with Houston Industries" preceding.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1997, the Financial Accounting Standards Board ("the FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements. SFAS
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company expects to adopt the provisions of SFAS 130 in fiscal
1998.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131") which is effective for periods beginning after
December 15, 1997. SFAS 131 established standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company expects
to adopt the provisions of SFAS 131 in fiscal 1998.
Regulatory Matters
In August 1995, Minnegasco filed a rate case requesting an annual
increase of $24.3 million. In December 1996, the Minnesota Public Utilities
Commission ("the MPUC") granted Minnegasco an annual rate increase of $13.3
million compared to the $17.8 million that had been put into effect in October
1995 as an interim rate increase, subject to refund. Consistent with the
Minnesota Supreme Court's decision in June 1996, the MPUC decided that
Minnegasco's unregulated appliance sales and service operations were not
required to pay a fee for goodwill associated with its usage of the Minnegasco
name, even though the MPUC had imputed revenues associated with such goodwill in
Minnegasco's 1993 rate case. The MPUC did not, however, allow Minnegasco to
recover certain gas leak costs in rates. The MPUC interim rate order was stayed
pending appeal of the 1995 rate case gas leak cost issue.
On July 3, 1997, the Minnesota Supreme Court ruled that Minnegasco was
entitled to recover an amount equal to the goodwill revenues imputed as a result
of the 1993 rate case. On July 29, 1997, the Minnesota Court of Appeals ruled
that, in Minnegasco's 1995 rate case, the MPUC must give effect to the Minnesota
Supreme Court's decision that the cost of gas leak checks be included in rates.
The Court of Appeals remanded the case to the MPUC for further proceedings in
accordance with its decision. Minnegasco anticipates filing a motion in early
August to reaffirm the 1995 rate case settlement, increased by an amount equal
to the annual costs of performing gas leak checks. Minnegasco will ask the MPUC
to reduce the 1995 interim rate refund for the gas leak costs from October 1995
through the date of the final Commission Order, as well as the imputed goodwill
revenues from the 1993 rate case.
In April 1996, Mississippi River Transmission Corporation ("MRT") filed
a Federal Energy Regulatory Commission ("the FERC") Section 4 rate case (Docket
No. RP96-199) pursuant to the settlement entered into in MRT's last rate case
(Docket No. RP93-4). MRT's proposed tariff rates would increase revenues derived
from jurisdictional services by $14.7 million annually. Motion rates, subject to
refund, were implemented October 1, 1996. A tentative agreement has been reached
among all parties and a settlement stipulation and agreement was filed on July
25, 1997. The procedural schedule has been suspended pending FERC approval of
the stipulation and agreement.
Material Changes in the Results of Operations
The Company's results of operations are seasonal due to seasonal
fluctuations in the demand for and, to a lesser extent, the price of natural gas
and, accordingly, the results of operations for interim periods are not
necessarily indicative of the results to be expected for an entire year. As
discussed in the Company's 1996 Report on Form 10-K, however, (1) the Company's
regulated businesses have obtained rate design changes which have lessened the
seasonality of the Company's results of operations and further such changes may
occur and (2) the Company is seeking to derive a larger portion of its earnings
from businesses which exhibit less earnings seasonality. In addition to the
demand for and price of natural gas, the Company's results of operations are
significantly affected by regulatory actions (see the discussion of regulatory
matters in the Company's 1996 Report on Form 10-K and "Regulatory Matters"
elsewhere herein), competition and, below the operating income line, by (1) the
level of borrowings and interest rates thereon and (2) income tax expense, see
"Non-Operating Income and Expense" elsewhere herein.
Prior to 1997, for purposes of discussing its results of operations,
the Company segregated its business activities into (1) Natural Gas
Distribution, (2) Interstate Pipelines, (3) Wholesale Energy Marketing, (4)
Natural Gas Gathering, (5) Retail Energy Marketing and (6) Corporate and Other.
In recognition of emerging industry practice as well as (1) the increasing
convergence of the business activities of the Company's two energy marketing
units, (2) the size of the Company's natural gas gathering business relative to
the Company's overall level of business activities and to the Company's other
business units and (3) the significantly different risks, issues and targeted
customers associated with certain activities (principally home care services)
previously included with Retail Energy Marketing, the Company has determined
that its business activities are more appropriately reported and discussed
utilizing the following structure: (1) Natural Gas Distribution, (2) Interstate
Pipelines, (3) Energy Marketing and Gathering and (4) Corporate and Other. The
results of operations for Natural Gas Distribution and Interstate Pipelines have
not changed from previously reported amounts and, due to the relatively
immaterial earnings impact associated with the non-energy-marketing activities
which were previously reported with Retail Energy Marketing but have been
reclassified to Corporate and Other, the operating results for Energy Marketing
and Gathering do not differ materially from the sum of the operating results for
the three previously reported business units which are its principal components.
Following is certain information concerning the Company's operating
income by business unit, followed by detailed discussions of operating results
by individual business unit.
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------------- ---------------------------------------------
Increase Increase
Operating Income(Loss) 1997 1996 (Decrease) 1997 1996 (Decrease)
- ----------------------
--------- ---------- ------------------ --------- ------------ ------------------
(millions of dollars) ($/%) ($/%)
Natural Gas Distribution $ 5.7 $ 5.0 $0.7 / 14.0% $ 118.4 $ 127.4 (1) $(9.0) / (7.1)%
Interstate Pipelines 30.6 29.6 1.0 / 3.4% 69.4 60.4 (1) 9.0 / 14.9%
Energy Marketing and Gathering 6.5 10.1 (3.6) / (35.6)% 7.2 31.6 (24.4) / (77.2)%
Corporate and Other (2) (6.2) (5.1) (1.1) / (21.6)% (13.2) (10.9) (2.3) / (21.1)%
--------- ---------- --------- ------------
36.6 39.6 (3.0) / (7.6)% 181.8 208.5 (26.7) / (12.8)%
Early Retirement and Severance (3) - - - / - - (22.3) 22.3 / 100.0%
--------- ---------- --------- ------------
Consolidated $ 36.6 $ 39.6 $(3.0) / (7.6)% $ 181.8 $ 186.2 $(4.4) / (2.4)%
========= ========== ========= ============
(1) Before expenses for early retirement and severance, see (3) following.
(2) Includes approximately $3.6 million and $7.2 million of goodwill
amortization, respectively, in each quarter and six month period presented.
(3) During the first quarter of 1996, the Company recorded significant charges
associated with staffing reductions in "Natural Gas Distribution" and
"Interstate Pipelines", see the individual discussions of the results of
operations for these business units following.
NATURAL GAS DISTRIBUTION
As more fully described in the Company's 1996 Report on Form 10-K, the
Company's natural gas distribution business is conducted by its Entex,
Minnegasco and Arkla divisions, collectively referred to herein as
"Distribution" or "Natural Gas Distribution". Certain issues exist with respect
to environmental matters, see "Contingencies" elsewhere herein.
During the first quarter of 1996, approximately 100 employees of Entex
accepted an early retirement program and approximately 25 positions were
eliminated at Minnegasco as a result of the reorganization of certain functions,
resulting in a total pre-tax charge of approximately $5.8 million, which amount
is included under the caption "Early retirement and severance" in the
accompanying Consolidated Statement of Income and reported as "Early retirement
and severance" in the following table.
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------------------- ------------------------------------------------
Increase Increase
DISTRIBUTION 1997 1996 (Decrease) 1997 1996 (Decrease)
- ------------
----------- ----------- -------------------- ------------- ------------- -------------------
(millions of dollars) ($/%) ($/%)
FINANCIAL RESULTS
Natural gas sales $ 326.6 $ 335.4 $(8.8) / (2.6)% $1,195.1 $1,137.9 $57.2 / 5.0%
Transportation revenue 3.4 3.3 0.1 / 3.0% 7.9 9.8 (1.9) / (19.4)%
Other revenue 6.6 6.1 0.5 / 8.2% 14.8 13.3 1.5 / 11.3%
----------- ----------- ------------- -------------
Total operating revenues 336.6 344.8 (8.2) / (2.4)% 1,217.8 1,161.0 56.8 / 4.9%
Purchased gas cost
Unaffiliated 159.9 171.9 (12.0) / (7.0)% 659.7 563.9 95.8 / 17.0%
Affiliated 26.5 26.7 (0.2) / (0.7)% 143.1 176.0 (32.9) / (18.7)%
Operations and maintenance 96.2 94.5 1.7 / 1.8% 193.6 194.2 (0.6) / (0.3)%
Depreciation and amortization 24.4 23.6 0.8 / 3.4% 48.3 47.1 1.2 / 2.5%
Other operating expenses 23.9 23.1 0.8 / 3.5% 54.7 52.4 2.3 / 4.4%
----------- ----------- ------------- -------------
5.7 5.0 0.7 / 14.0% 118.4 127.4 (9.0) / (7.1)%
Early retirement and severance - - - / - - 5.8 (5.8) / (100.0)%
----------- ----------- ------------- -------------
Operating income $ 5.7 $ 5.0 $0.7 / 14.0% $ 118.4 $ 121.6 $(3.2) / (2.6)%
=========== =========== ============= =============
DISTRIBUTION
OPERATING STATISTICS
(billions of cubic feet)
Residential sales 27.2 26.7 0.5 / 1.9% 112.6 122.4 (9.8) / (8.0)%
Commercial sales 23.6 22.6 1.0 / 4.4% 75.4 76.8 (1.4) / (1.8)%
Industrial sales 13.3 13.5 (0.2) / (1.5)% 28.6 28.1 0.5 / 1.8%
Transportation 9.9 9.7 0.2 / 2.1% 21.9 23.0 (1.1) / (4.8)%
----------- ----------- ------------- -------------
Total throughput 74.0 72.5 1.5 / 2.1% 238.5 250.3 (11.8) / (4.7)%
=========== =========== ============= =============
Three Months Six Months
Ended June 30 Ended June 30
------------------------------------- ---------------------------------
DEGREE DAYS Normal 1997 1996 Normal 1997 1996
----------- ---------- --------- ---------- --------- ---------
Arkla 144 244 180 1,857 1,697 1,925
Entex 49 86 72 916 960 1,064
Minnegasco 770 963 1,037 4,641 4,904 5,313
Quarter Comparison
Distribution operating income improved from $5.0 million in the second
quarter of 1996 to $5.7 million in the second quarter of 1997, an increase of
$0.7 million (14.0%). This increased operating income reflected both decreased
operating revenues and decreased operating expenses as discussed following.
"Natural gas sales", representing in excess of 97% of Distribution's
total operating revenues in each quarter presented, decreased from $335.4
million in the second quarter of 1996 to $326.6 million in the second quarter of
1997, a decrease of $8.8 million (2.6%). This net decrease was composed of a
decrease of approximately $15.7 million attributable to a lower second-quarter
1997 average sales price, partially offset by an increase of approximately $6.9
million attributable to an increase in second-quarter 1997 sales volume. This
increase in sales volume was principally due to (1) slightly cooler
second-quarter 1997 weather; 1,289 total degree days in the second quarter of
1996 vs. 1,293 total degree days in the second quarter of 1997 and (2) a
favorable variance in usage per customer. The decrease in the average sales
price in the second quarter of 1997 was principally due to a decrease in the
average cost of gas (a component of the sales price) as discussed following.
"Purchased gas cost" decreased from $198.6 million in the second
quarter of 1996 to $186.4 million in the second quarter of 1997, a decrease of
$12.2 million (6.1%). This net decrease was composed of a decrease of
approximately $16.3 million attributable to a lower second-quarter 1997 average
cost of purchased gas, partially offset by an increase of approximately $4.1
million attributable to the increased second-quarter 1997 sales volume as
discussed preceding. The decrease in the weighted average cost of gas from
approximately $3.16 per Mcf in the second quarter of 1996 to approximately $2.91
per Mcf in the second quarter of 1997, a decrease of approximately $0.25 per Mcf
(7.9%), principally was reflective of an overall decrease in the market price of
gas.
The gross sales margin ("Natural gas sales" minus total purchased gas
cost) increased from $136.8 million in the second quarter of 1996 to $140.2
million in the second quarter of 1997, an increase of $3.4 million (2.5%). This
increase was principally due to the 1.5 Bcf increase in total residential and
commercial sales volume during the second quarter of 1997, resulting in an
increase of approximately $2.8 million and, to a lesser extent, a second-quarter
1997 margin increase of approximately $0.6 million attributable to an increase
in the average margin per unit of sales, largely due to increases in regulated
rates.
Operating expenses, exclusive of purchased gas cost, increased from
$141.2 million in the second quarter of 1996 to $144.5 million in the second
quarter of 1997, an increase of $3.3 million, principally due to (1) increased
operations and maintenance expense related to increased throughput and (2)
increased depreciation expense due to increased investment.
Year-to-Date Comparison
Distribution operating income decreased from $127.4 million (before the
charge for early retirement and severance as discussed preceding) in the first
six months of 1996 to $118.4 million in the first six months of 1997, a decrease
of $9.0 million (7.1%). This decrease in operating income reflected both
increased operating revenues and increased operating expenses as discussed
following.
"Natural gas sales", representing in excess of 98% of Distribution's
total operating revenues in each six-month period presented, increased from
$1,137.9 million in the first six months of 1996 to $1,195.1 million in the
first six months of 1997, an increase of $57.2 million (5.0%). This net increase
was composed of an increase of approximately $110.8 million attributable to a
higher 1997 average sales price, partially offset by a decrease of approximately
$53.6 million attributable to a decrease in 1997 sales volume. This decrease in
sales volume was principally due to warmer weather in the first six months of
1997; 8,302 total degree days in the first six months of 1996 vs. 7,561 in the
first six months of 1997, a decline of 8.9%. This decrease in degree days
reduced demand for space heating and was largely responsible for decreases of
9.8 Bcf (8.0%) and 1.4 Bcf (1.8%) in residential and commercial sales volumes,
respectively. The increase in the average sales price for the first six months
of 1997 was principally due to an increase in the average cost of gas (a
component of the sales price) as discussed following and, to a lesser extent,
rate increases obtained in certain jurisdictions.
"Purchased gas cost" increased from $739.9 million in the first six
months of 1996 to $802.8 million in the first six months of 1997, an increase of
$62.9 million (8.5%). This net increase was composed of an increase of
approximately $97.7 million attributable to a higher 1997 average cost of
purchased gas, partially offset by a decrease of approximately $34.8 million
attributable to the decreased 1997 sales volume as discussed preceding. The
increase in the weighted average cost of gas from approximately $3.26 per Mcf in
the first six months of 1996 to approximately $3.71 per Mcf in the first six
months of 1997, an increase of approximately $0.45 per Mcf (13.8%), principally
was reflective of an overall increase in the market price of gas.
The gross sales margin ("Natural gas sales" minus total purchased gas
cost) decreased from $398.0 million in the first six months of 1996 to $392.3
million in the first six months of 1997, a decrease of $5.7 million (1.4%). This
net decrease reflected (1) the largely weather-related 11.2 Bcf decrease in
total residential and commercial sales volume in the first six months of 1997
which, together with a minor increase in industrial sales volume, resulted in a
net margin decrease of approximately $18.7 million, partially offset by (2) a
1997 margin increase of approximately $13.0 million attributable to an increase
in the average margin per unit of sales, principally due to rate increases
obtained in certain jurisdictions.
Operating expenses, exclusive of purchased gas cost and the
first-quarter 1996 charge for early retirement and severance, increased from
$293.7 million in the first six months of 1996 to $296.6 million in the first
six months of 1997, an increase of $2.9 million (1.0%). The increases in
"Depreciation and amortization" and "Other operating expenses" were principally
due to increased investment, while the decrease in "Operations and maintenance"
was largely due to cost savings associated with increased operating efficiency.
INTERSTATE PIPELINES
As more fully described in the Company's 1996 Report on Form 10-K, the
Company's interstate pipeline business is conducted by NorAm Gas Transmission
Company ("NGT") and Mississippi River Transmission Corporation ("MRT"), together
with certain subsidiaries and affiliates, collectively referred to herein as
"Pipeline" or "Interstate Pipelines". The Company has a commitment to refund
certain amounts pursuant to a transportation agreement, is a party to certain
claims involving its gas purchase contracts and certain issues exist with
respect to environmental matters, see "Commitments" and "Contingencies"
elsewhere herein.
During the first quarter of 1996, the Company instituted a
reorganization plan affecting NGT and MRT. This reorganization plan, which
included the reorganization of a number of departments and the redesign of a
number of processes, was designed to allow Pipeline to operate more efficiently,
thus improving its ability to compete in its market areas. Approximately 275
positions were eliminated pursuant to the reorganization plan, resulting in a
pre-tax charge of approximately $16.5 million, included under the caption "Early
retirement and severance" in the accompanying Consolidated Statement of Income
and reported as "Early retirement and severance" in the following table.
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------------------- ---------------------------------------------
Increase Increase
INTERSTATE PIPELINES 1997 1996 (Decrease) 1997 1996 (Decrease)
- --------------------
---------- ---------- ---------------------- ---------- ---------- ---------------------
(millions of dollars) ($/%) ($/%)
FINANCIAL RESULTS
Natural gas sales
Sales to Distribution - $ 18.0 $(18.0) / (100.0)% - $ 45.0 $(45.0) / (100.0)%
Industrial and other $ 9.8 2.5 7.3 / 292.0% $ 23.4 8.2 15.2 / 185.4%
---------- ---------- ---------- ----------
Total gas sales revenue 9.8 20.5 (10.7) / (52.2)% 23.4 53.2 (29.8) / (56.0)%
Transportation revenue
Distribution 27.1 23.9 3.2 / 13.4% 61.5 49.1 12.4 / 25.3%
Unaffiliated 37.0 40.4 (3.4) / (8.4)% 73.2 80.3 (7.1) / (8.8)%
---------- ---------- ---------- ----------
Total transportation revenue 64.1 64.3 (0.2) / (0.3)% 134.7 129.4 5.3 / 4.1%
---------- ---------- ---------- ----------
Total operating revenues 73.9 84.8 (10.9) / (12.9)% 158.1 182.6 (24.5) / (13.4)%
Purchased gas cost 8.2 18.3 (10.1) / (55.2)% 19.2 45.7 (26.5) / (58.0)%
Operations and maintenance 10.8 12.0 (1.2) / (10.0)% 22.6 26.9 (4.3) / (16.0)%
Depreciation and amortization 7.5 7.5 - / - 14.8 15.1 (0.3) / (2.0)%
General, administrative and other 16.8 17.4 (0.6) / (3.4)% 32.1 34.5 (2.4) / (7.0)%
---------- ---------- ---------- ----------
30.6 29.6 1.0 / 3.4% 69.4 60.4 9.0 / 14.9%
Early retirement and severance - - - / - - 16.5 (16.5) / (100.0)%
---------- ---------- ---------- ----------
Operating income $ 30.6 $ 29.6 $1.0 / 3.4% $ 69.4 $ 43.9 $25.5 / 58.1%
========== ========== ========== ==========
INTERSTATE PIPELINES
OPERATING STATISTICS
(million MMBtu)
Natural gas sales
Sales to Distribution - 7.2 (7.2) / (100.0)% - 16.9 (16.9) / (100.0)%
Sales for resale and other 4.7 0.6 4.1 / 683.3% 9.4 3.4 6.0 / 176.5%
---------- ---------- ---------- ---------
Total sales 4.7 7.8 (3.1) / (39.7)% 9.4 20.3 (10.9) / (53.7)%
---------- ---------- ---------- ----------
Transportation
Distribution 18.1 18.3 (0.2) / (1.1)% 60.3 67.0 (6.7) / (10.0)%
Other 193.9 193.7 0.2 / 0.1% 401.6 448.8 (47.2) / (10.5)%
---------- ---------- ---------- ----------
Total transportation 212.0 212.0 - / - 461.9 515.8 (53.9) / (10.4)%
Elimination (1) (4.3) (7.3) 3.0 / 41.1% (8.7) (19.1) 10.4 / 54.5%
---------- ---------- ---------- ----------
Total throughput 212.4 212.5 (0.1) / (0.0)% 462.6 517.0 (54.4) / (10.5)%
========== ========== ========== ==========
(1) This elimination is made to prevent the overstatement of total throughput
which would otherwise occur due to physical volumes which were both sold
and transported by Pipeline and are therefore included in the above
volumetric data in both categories. No elimination is made for volumes of
51.9 million MMBtu, 101.4 million MMBtu, 47.4 million MMBtu and 108.1
million MMBtu in the three months and six months ended June 30, 1997 and
1996, respectively, which were transported on both the NGT and MRT
systems.
Quarter Comparison
Interstate Pipeline operating income for the second quarter of 1997 was
$30.6 million, an increase of $1.0 million (3.4%) from the second quarter of
1996. The increase was principally attributable to reduced operating expenses as
discussed following.
"Total gas sales revenue" decreased from $20.5 million in the second
quarter of 1996 to $9.8 million in the second quarter of 1997, a decrease of
$10.7 million (52.2%). The decrease is primarily attributable to the expiration
of certain sales contracts with Distribution, as further discussed in the
Company's 1996 Report on Form 10-K. This reduction in gas sales revenue was
partially offset by a $7.3 million increase in "Industrial and other sales"
primarily due to a 4.1 million MMBtu increase in sales volumes to a marketing
affiliate, (yielding a $17.1 million increase in revenues), partially offset by
a reduction in the 1997 average cost of gas (yielding a $9.8 million reduction
in revenues). Purchased gas cost decreased by $10.1 million (55.2%) from the
second quarter of 1996 to the second quarter of 1997 due to the reductions in
gas sales volume and the average cost of gas as discussed preceding, which were
responsible for $7.3 million (72.3%) and $2.8 million (27.7%), respectively, of
the total decrease.
"Transportation for Distribution" increased by $3.2 million (13.4%)
from the second quarter of 1996 to the second quarter of 1997 primarily due to
the expiration of contractual rate "cap" provisions in certain transportation
contracts. Unaffiliated transportation revenues decreased by $3.4 million (8.4%)
from the second quarter of 1996 to the second quarter of 1997 due to several
factors including (1) lower surcharges for Gas Supply Realignment ("GSR") cost
as discussed following, (2) reduced demand for gas utilized for electric
generation and (3) changes in the relative pricing of Mid-Continent gas. The
relative pricing of Mid-Continent gas supplies has an impact (positive or
negative) on Pipeline's transportation rates which are covered under contracts
with market sensitive pricing provisions. A decrease in the price of Gulf Coast
gas in relation to Mid-Continent gas (Pipeline's primary supply area) generally
results in a reduction in average transportation rates due to increased
competitive pressure. During the second quarter of 1996, the average natural gas
price differential between the Mid-Continent and the Gulf Coast was $0.27 per
MMBtu compared to an average differential of $0.08 per MMBtu in the second
quarter of 1997.
Transportation expense, a component of "Operations and maintenance",
decreased by $0.8 million (33.3%) from the second quarter of 1996 to the second
quarter of 1997 primarily due to a reduction in GSR-related revenues. GSR costs
result from Pipeline's buyout of certain gas supply contracts in order to
re-align its portfolio of contracts toward transportation services and away from
commodity sales. Pursuant to the terms of a FERC settlement, Pipeline is allowed
to obtain recovery of a portion of this cost through a transportation surcharge,
with the unrecoverable portion having been expensed. In order to match the GSR
recoveries with the associated cost, during 1996, Pipeline recognized a larger
amount of such costs (transportation expense) as recoveries were generated
through the surcharge.
"Operation and maintenance", apart from the decrease in transportation
expense as discussed preceding, decreased by $0.4 million (4.2%) from the second
quarter of 1996 to the second quarter of 1997 principally due to the
continuation of certain cost savings initiatives implemented subsequent to the
Pipeline reorganization in 1996 (see the discussion of year-to-date results
following).
"General, administrative and other" decreased by $0.6 million from the
second quarter of 1996 to the second quarter of 1997 primarily due to reductions
associated with outside consulting and legal services. During 1996, Pipeline
incurred higher than usual levels of outside consulting costs associated with
planning and implementation of the reorganization plan. Additionally, Pipeline
recognized cost reductions associated with charges from Corporate and legal
expenses which were partially offset by increases in regulatory cost associated
with the pending MRT rate case, see "Regulatory Matters" elsewhere herein.
Year-to-Date Comparison
Interstate Pipeline operating income for the first six months of 1997
was $69.4 million, $25.5 million (58.1%) higher than the corresponding period of
1996. This increase was primarily attributable to a reorganization plan (the
"Reorganization") implemented in the first quarter of 1996 which resulted in a
non-recurring pre-tax charge of $16.5 million (included in the preceding table
under the caption "Early retirement and severance") associated with severance
and increased costs for enhanced retirement benefits. The Reorganization, which
was intended to allow Pipeline to operate more efficiently, thereby improving
its ability to compete in its market areas, resulted in the elimination of
approximately 275 positions, the reorganization of several departments and the
redesign of many processes. Excluding the effect of this non-recurring charge,
Pipeline operating income for the first six months of 1997 was $9.0 million
(14.9%) higher than the corresponding period of 1996. Operating margins for 1997
were comparable to 1996 levels and consequently, the improvement in operating
income was primarily attributable to reduced 1997 operating expenses associated
with cost reduction initiatives implemented in conjunction with the
Reorganization, as well as the 1996 incurrence of certain consulting and other
non-recurring costs associated with the Reorganization.
"Total gas sales revenue" decreased from $53.2 million in the first six
months of 1996 to $23.4 million in the corresponding period of 1997, a decrease
of $29.8 million (56.0%). The decrease is primarily attributable to the
elimination of "Sales to Distribution" due to the expiration, in September 1996,
of certain contractual arrangements under which these sales were made. The
impact of lower Distribution sales was partially offset by a $15.2 million
increase in "Industrial and other" sales primarily due to increased sales to a
marketing affiliate. "Purchased gas cost" decreased by $26.5 million (58.0%)
from the first six months of 1996 to the first six months of 1997 principally
due to the expiration of the sales contract with Distribution, partially offset
by incremental purchase volumes associated with increased sales to the marketing
affiliate, each as discussed preceding.
"Transportation for Distribution" increased by $12.4 million (25.3%)
from the first six months of 1996 to the first six months of 1997 primarily due
to the adjustment of certain reserves in the first quarter of 1997. These
incremental revenues (approximately $7.3 million) were due to the completion of
settlement negotiations with a distribution affiliate related to service rates
charged in several states of operation. Also contributing to the increased
transportation for Distribution was the expiration, in September 1996, of
certain contractual pricing provisions which had placed a rate "cap" on
transportation rates for deliveries at certain points on Pipeline's system.
Unaffiliated transportation revenues decreased by $7.1 million (8.8%)
from the first six months of 1996 to the first six months of 1997 due to several
factors including (1) lower surcharges for GSR cost as discussed following, (2)
1996 penalty revenues related to customer demand for gas in excess of contract
or tariff provisions which were non-recurring in 1997, (3) reduced demand for
electric generation load in the second quarter of 1997 primarily due to lower
demand for cooling requirements in Pipeline's service area and (4) changes in
the relative pricing of Mid-Continent gas, see the comparison of quarterly
results preceding. For the first six months of 1996, the average price
differential between Mid-Continent and Gulf Coast gas was $0.58 per MMBtu
compared to $0.03 per MMBtu during the comparable period of 1997.
Transportation expense, a component of "Operations and maintenance",
decreased by $1.7 million (32.7%) from the first six months of 1996 to the first
six months of 1997 primarily due to a reduction in GSR surcharges, see the
comparison of quarterly results preceding. "Operation and maintenance", apart
from transportation expense as discussed preceding, decreased by $2.6 million
(12.0%) from the first six months of 1996 to the first six months of 1997 due to
cost savings (approximately $1.3 million of which was recorded in the first
quarter of 1997) related to the Reorganization discussed preceding. The
Reorganization was implemented in February 1996, however, certain positions were
not eliminated until after the first quarter of 1996 resulting in lower labor
cost for the first quarter of 1997 compared to 1996. The remainder of the
variance is primarily attributable to other cost saving initiatives related to
process redesign, more stringent cost control and increased accountability.
These initiatives helped to reduce 1997 operating supplies and expenses below
the 1996 level.
"General, administrative and other" decreased by $2.4 million (7.0%)
from the first six months of 1996 to the first six months of 1997 due to several
factors including (1) the impact of 1996 non-recurring costs and 1997 cost
reductions related to the Reorganization, (2) reductions in costs allocated from
Corporate, (3) reductions in payroll-related taxes associated with employee
headcount reductions due to the Reorganization and (4) a reduction in cost
associated with payments made to the Gas Research Institute ("GRI"). Payments to
GRI are recovered through a surcharge applied to transportation services. The
increased transportation revenue associated with the collection of the GRI
surcharge is offset by a comparable GRI expense, resulting in equal increases to
revenues and costs.
ENERGY MARKETING AND GATHERING
The Company's energy marketing and natural gas gathering activities are
carried out by NorAm Energy Services, Inc., NorAm Energy Management, Inc. and
NorAm Field Services Corp., together with certain subsidiaries and affiliates,
collectively referred to herein as "Energy Marketing and Gathering" or "EM&G".
This business unit is principally composed of the Company's previously reported
"Wholesale Energy Marketing", "Retail Energy Marketing" and "Natural Gas
Gathering" business units (see "General" elsewhere herein). A description of the
business activities conducted by each of these formerly separately-reported
business units is contained in the separate business unit discussions included
with "Material Changes in the Results of Continuing Operations" under
"Management Analysis" in the Company's 1996 Report on Form 10-K. The nature of
natural gas marketing activities is such that contractual disputes arise, see
"Contingencies" elsewhere herein.
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------------------- ----------------------------------------------
ENERGY MARKETING Increase Increase
- ----------------
AND GATHERING 1997 1996 (Decrease) 1997 1996 (Decrease)
-------------
---------- ---------- --------------------- ----------- ----------- --------------------
FINANCIAL AND OPERATING ($/%) ($/%)
RESULTS (millions of dollars)
Operating Revenues
Natural gas sales
Unaffiliated sales $ 519.7 $ 520.5 $(0.8) / (0.2)% $1,384.8 $1,036.2 $348.6 / 33.6%
Sales to Distribution 17.9 14.2 3.7 / 26.1% 71.7 58.0 13.7 / 23.6%
Sales to Pipeline - 10.1 (10.1) / (100.0)% - 30.4 (30.4) / (100.0)%
Other affiliated sales 0.2 - 0.2 / N/A 2.4 - 2.4 / N/A
---------- ---------- ----------- -----------
Total gas sales revenue 537.8 544.8 (7.0) / (1.3)% 1,458.9 1,124.6 334.3 / 29.7%
---------- ---------- ----------- -----------
Electricity sales 97.6 6.2 91.4 / 1,474.2% 208.5 10.6 197.9 / 1,867.0%
Transportation 0.7 0.8 (0.1) / (12.5)% 1.7 2.0 (0.3) / (15.0)%
Gathering 8.2 5.9 2.3 / 39.0% 15.8 12.2 3.6 / 29.5%
Products extraction 1.6 2.5 (0.9) / (36.0)% 3.4 4.6 (1.2) / (26.1)%
Other 1.5 1.1 0.4 / 36.4% 2.1 1.7 0.4 / 23.5%
---------- ---------- ----------- -----------
Total operating revenues 647.4 561.3 86.1 / 15.3% 1,690.4 1,155.7 534.7 / 46.3%
---------- ---------- ----------- -----------
Operating Expenses
Purchased gas costs
Unaffiliated 514.7 514.3 0.4 / 0.1% 1,411.4 1,048.5 362.9 / 34.6%
Affiliated 8.3 8.3 - / - 19.6 12.9 6.7 / 51.9%
---------- ---------- ----------- -----------
Total purchased gas cost 523.0 522.6 0.4 / 0.1% 1,431.0 1,061.4 369.6 / 34.8%
Transportation and
storage expense 5.0 11.0 (6.0) / (54.5)% 13.8 29.5 (15.7) / (53.2)%
Electricity purchases and
transmission costs 97.4 5.8 91.6 / 1,579.3% 208.9 9.9 199.0 / 2,010.1%
Cost of sales 2.1 1.3 0.8 / 61.5% 3.4 2.5 0.9 / 36.0%
Operation and maintenance 3.9 3.2 0.7 / 21.9% 7.3 6.8 0.5 / 7.4%
Depreciation 0.8 0.7 0.1 / 14.3% 1.7 1.5 0.2 / 13.3%
General and administrative 7.9 5.8 2.1 / 36.2% 15.5 11.0 4.5 / 40.9%
Taxes other than income 0.8 0.8 - / - 1.6 1.5 0.1 / 6.7%
---------- ---------- ----------- -----------
Operating income $ 6.5 $ 10.1 $(3.6) / (35.6)% $ 7.2 $ 31.6 $(24.4) / (77.2)%
========== ========== =========== ===========
Natural gas sales volume (Bcf) 265.7 241.7 24.0 / 9.9% 579.2 485.5 93.7 / 19.3%
Transportation volumes (Bcf) 5.0 6.2 (1.2) / (19.4)% 12.4 14.7 (2.3) / (15.6)%
Gathering volumes (Bcf) 62.3 56.2 6.1 / 10.9% 121.9 112.0 9.9 / 8.8%
Quarter Comparison
Operating income for EM&G in the second quarter of 1997 was $6.5
million, a decrease of $3.6 million (35.6%) from the $10.1 million earned in the
second quarter of 1996. This decrease reflected both increased operating
revenues and increased operating expenses. Significant variances in individual
income statement line items are discussed following.
"Total gas sales revenue" decreased from $544.8 million in the second
quarter of 1996 to $537.8 million in the second quarter of 1997, a decrease of
$7.0 million (1.3%). This decrease was attributable to a decrease of $61.1
million due to a decrease in the second-quarter 1997 average sales price,
partially offset by an increase of approximately $54.1 million attributable to
an increase in second-quarter 1997 natural gas sales volume. The decrease of
approximately $0.23 per Mcf (10.2%) in the average sales price of natural gas
from approximately $2.25/Mcf in the second quarter of 1996 to approximately
$2.02/Mcf in the second quarter of 1997 principally was reflective of a decrease
in the average cost of purchased gas during the second quarter of 1997 as
discussed following (the cost of gas is a component of the overall sales rate)
and, to a lesser extent, a decrease in the second-quarter 1997 average margin
per unit of sales. The increase of approximately 24.0 Bcf (9.9%) in
second-quarter 1997 natural gas sales volume was principally due to the
expansion of EM&G's marketing efforts. Utilizing an increased staff of marketers
and additional office locations as discussed in the Company's 1996 Report on
Form 10-K, EM&G has been successful in pursuit of its goal of becoming a
nationwide marketer with an emphasis on increasing market share, principally
targeting end-use customers in the industrial, local gas distribution and
electric generation sectors.
Revenues from natural gas gathering, products extraction and related
activities increased from approximately $9.2 million in the second quarter of
1996 to approximately $10.3 million in the second quarter of 1997, an increase
of approximately $1.1 million (12.0%). Approximately $1.0 million (90.9%) of
this increase was attributable to an increase in second-quarter 1997 volume and
the balance of approximately $0.1 million (9.1%) was attributable to an increase
in the second-quarter 1997 average unit revenue. The increase of approximately
6.1 Bcf (10.9%) in second-quarter 1997 gathering volume reflects new well
connects (in excess of depletion-related declines) and the addition of gathering
assets previously owned by Pipeline. The increase in the second-quarter 1997
average unit revenue was principally due to new compression, nomination and
balancing services provided to customers.
Total purchased gas costs were $523.0 million in the second quarter of
1997, an increase of $0.4 million (0.1%) from the second quarter of 1996, as an
increase of approximately $51.9 million attributable to the increased
second-quarter 1997 sales volume as discussed preceding was largely offset by a
decrease of approximately $0.19 per Mcf (9.0%) in the second-quarter 1997
average cost of purchased gas. The decrease in the second-quarter 1997 average
cost of purchased gas principally was reflective of a decrease in the spot
market price of natural gas.
"Transportation and storage expense" decreased from $11.0 million in
the second quarter of 1996 to $5.0 million in the second quarter of 1997, a
decrease of $6.0 million (54.5%). This net decrease was composed of a decrease
of approximately $0.027 per Mcf (58.7%) in the second-quarter 1997 unit cost of
transportation and storage, partially offset by an increase of approximately
$1.1 million due to the increased second-quarter 1997 sales volume as discussed
preceding. The decrease in the second-quarter 1997 unit cost of transportation
and storage was principally due to increased 1997 usage of interruptible and
capacity release transportation in lieu of firm transportation arrangements.
"Electricity sales" and "Electricity purchases and transmission costs"
of $97.6 million and $97.4 million, respectively, in the second quarter of 1997
represented significant increases over the corresponding amounts for 1996,
although there was no significant change in the gross margin from power
marketing as the impact of the significant increase in volume was offset by a
decrease in unit margins. During the latter part of 1996 and early 1997, EM&G
continued to increase both its emphasis on electricity sales and its electricity
marketing staff in anticipation of increased access to electric power markets.
The decrease in first-quarter 1997 unit margins from power marketing was
principally attributable to a lack of price volatility and milder weather across
much of the country.
The second-quarter 1997 margin on gas sales was $9.8 million, a
decrease of $1.4 million (12.5%) from the $11.2 million recorded in the second
quarter of 1996. This net decrease in gas sales margin was attributable to a
decrease of approximately $2.5 million due to an approximately $0.001 per Mcf
decrease in the second-quarter 1997 average margin per unit of sales, partially
offset by an increase of approximately $1.1 million associated with the
increased second-quarter 1997 sales volume as discussed preceding.
The margin from natural gas gathering and products extraction
activities increased from approximately $8.3 million in the second quarter of
1996 to approximately $10.6 million in the second quarter of 1997, an increase
of approximately $2.3 million (27.7%). Approximately $1.4 million (60.9%) of
this increase was attributable to an increase in the second-quarter 1997 average
margin per unit of throughput and the balance of approximately $0.9 million
(39.1%) was attributable to increased second-quarter 1997 gathering volume as
discussed preceding. The increased first-quarter 1997 average margin per unit of
throughput was principally due to new services provided to customers, partially
offset by decreased liquids margins.
Other operating expenses (exclusive of "Purchased gas costs",
"Transportation and storage expense", "Electricity purchases and transmission
costs" and "Cost of sales") increased from approximately $10.5 million in the
second quarter of 1996 to approximately $13.4 million in the second quarter of
1997, an increase of approximately $2.9 million (27.6%). This increase was
principally due to increased general and administrative costs (principally
payroll and benefits) associated with staffing increases made in support of the
increased sales and expanded marketing efforts as described preceding.
Year-to-Date Comparison
Operating income for EM&G in the first six months of 1997 was $7.2
million, a decrease of $24.4 million (77.2%) from the $31.6 million earned in
the first six months of 1996. This decrease principally was reflective of (1)
hedging losses associated with anticipated first-quarter 1997 sales under
peaking contracts and (2) losses from the sale of natural gas held in storage
and unhedged, in each case as described in the Company's 1996 Report on Form
10-K. In addition, (1) volatile and, in some cases, declining natural gas
prices, principally during the first quarter of 1997, had an unfavorable impact
on gas sales margins and (2) as described in the Company's 1996 Report on Form
10-K, first-quarter 1996 results reflected the favorable impact of relatively
colder weather. This colder weather resulted in shortages of pipeline capacity
at various locations, allowing EM&G to collect significant premiums from certain
customers who wished to avoid interruption of supply. Significant variances in
individual income statement line items are discussed following.
"Total gas sales revenue" increased from $1,124.6 million in the first
six months of 1996 to $1,458.9 million in the first six months of 1997, an
increase of $334.3 million (29.7%). Approximately $217.0 million (64.9%) of this
increase was attributable to an increase in natural gas sales volume during the
first six months of 1997 and the balance of approximately $117.3 million (35.1%)
was attributable to an increase in the average sales price during 1997. The
increase of approximately 93.7 Bcf (19.3%) in natural gas sales volume during
the first six months of 1997 was principally due to the expansion of EM&G's
marketing efforts. Utilizing an increased staff of marketers and additional
office locations as discussed in the Company's 1996 Report on Form 10-K, EM&G
has successful implemented its plans for becoming a nationwide marketer with an
emphasis on increasing market share, principally targeting end-use customers in
the industrial, local gas distribution and electric generation sectors. The
increase of approximately $0.20 per Mcf (8.6%) in the average sales price of
natural gas from approximately $2.32/Mcf in the first six months of 1996 to
approximately $2.52/Mcf in the first six months of 1997 principally was
reflective of an increase in the average cost of purchased gas during 1997 (the
cost of gas is a component of the overall sales rate), partially offset by a
decrease in the average margin per unit of sales, each as discussed following.
Revenues from natural gas gathering, products extraction and related
activities increased from approximately $18.2 million in the first six months of
1996 to approximately $20.3 million in the first six months of 1997, an increase
of approximately $2.1 million (11.5%). Approximately $1.6 million (76.2%) of
this increase was attributable to an increase in volume during the first six
months of 1997 and the balance of approximately $0.5 million (23.8%) was
attributable to an increase in the average unit revenue during 1997. The
increase of approximately 9.9 Bcf (8.8%) in gathering volume during the first
six months of 1997 reflects new well connects (in excess of depletion-related
declines) and the addition of gathering assets previously owned by Pipeline. The
increase in the second-quarter 1997 average unit revenue was principally due to
new compression, nomination and balancing services provided to customers.
Total purchased gas costs were $1,431.0 million in the first six months
of 1997, an increase of $369.6 million (34.8%) from the first six months of
1996. Approximately $204.8 million (55.4%) of this increase was attributable to
the increased sales volume during 1997 as discussed preceding and the balance of
approximately $164.8 million (44.6%) was attributable to an increase of
approximately $0.28 per Mcf (13.0%) in the average cost of purchased gas during
the first six months of 1997. The increase in the average cost of purchased gas
during the first six months of 1997 principally was reflective of an increase in
the spot market price of natural gas.
"Transportation and storage expense" decreased from $29.5 million in
the first six months of 1996 to $13.8 million in the first six months of 1997, a
decrease of $15.7 million (53.2%). This net decrease was attributable to a
decrease of approximately $21.4 million reflecting a decline of approximately
$0.037 per Mcf (60.8%) in the unit cost of transportation and storage during the
first six months of 1997, partially offset by an increase of approximately $5.7
million due to the increased 1997 sales volume as discussed preceding. The
decrease in the unit cost of transportation and storage during 1997 was
principally due to increased usage of interruptible and capacity release
transportation in lieu of firm transportation arrangements.
"Electricity sales" and "Electricity purchases and transmission costs"
of $208.5 million and $208.9 million, respectively, in the first six months of
1997 represented significant increases over the corresponding amounts for 1996,
although the gross margin from power marketing declined slightly, as the
significant increase in volume was more than offset by a decrease in unit
margins. During the latter part of 1996 and early 1997, NES continued to
increase both its emphasis on electricity sales and its electricity marketing
staff in anticipation of increased access to electric power markets. The
decrease in 1997 unit margins from power marketing was principally attributable
to the level of price volatility, relatively mild weather throughout much of the
country and limited liquidity in wholesale electric power markets which increase
the intra-month price risk associated with such activities.
The margin on gas sales during the first six months of 1997 was $14.1
million, a decrease of $19.6 million (58.2%) from the $33.7 million recorded in
the first six months of 1996. This net decrease in gas sales margin was
attributable to a decrease of approximately $26.1 million due to an
approximately $0.045 per Mcf decrease in the average margin per unit of sales
during the first six months of 1997, partially offset by an increase of
approximately $6.5 million associated with the increased 1997 sales volume as
discussed preceding. The decrease in the average margin per unit of sales during
1997 was principally due to the hedging losses, sales of unhedged gas in storage
and natural gas price volatility, each as discussed preceding.
The margin from natural gas gathering and products extraction
activities increased from approximately $16.3 million in the first six months of
1996 to approximately $20.5 million in the first six months of 1997, an increase
of approximately $4.2 million (25.8%). Approximately $2.8 million (66.7%) of
this increase was attributable to an increase in the average margin per unit of
throughput during the first six months of 1997 and the balance of approximately
$1.4 million (33.3%) was attributable to increased 1997 gathering volumes as
discussed preceding. The increased average margin per unit of throughput during
the first six months of 1997 was principally due to new services provided to
customers, partially offset by decreased liquids margins.
Other operating expenses (exclusive of "Purchased gas costs",
"Transportation and storage expense", "Electricity purchases and transmission
costs" and "Cost of sales") increased from approximately $20.8 million in the
first six months of 1996 to approximately $26.1 million in the first six months
of 1997, an increase of approximately $5.3 million (25.5%). This increase was
principally due to increased general and administrative costs (principally
payroll and benefits) associated with staffing increases made in support of the
increased sales and expanded marketing efforts as described preceding.
As further discussed in the Company's 1996 Report on Form 10-K, the
Company's earnings from its gas supply, marketing, gathering and transportation
activities are subject to variability based on fluctuations in both the price of
natural gas and the value of transportation as measured by changes in the
delivered price of natural gas at various points in the nation's natural gas
grid. In order to mitigate this financial risk both for itself and for certain
customers who have requested the Company's assistance in managing similar
exposures, the Company routinely enters into natural gas swaps, futures
contracts and options. In general, the Company's risk management policy requires
that these positions be offset by positions in physical transactions (actual or
anticipated) or in other derivatives.
In the table which follows, the term "notional amount" refers to the
contract unit price times the contract volume for the relevant derivative
category and, in general, such amounts are not indicative of the cash
requirements associated with these derivatives. The notional amount is intended
to be indicative of the Company's level of activity in such derivatives,
although the amounts at risk are significantly smaller because, in view of the
price movement correlation required for hedge accounting, changes in the market
value of these derivatives generally are offset by changes in the value
associated with the underlying physical transactions or in other derivatives.
When derivative positions are closed out in advance of the underlying commitment
or anticipated transaction, however, the market value changes may not offset due
to the fact that price movement correlation ceases to exist when the positions
are closed. Under such circumstances, gains or losses are deferred and
recognized when the underlying commitment or anticipated transaction was
scheduled to occur. Following is certain information concerning the Company's
derivative activities:
Natural Gas Swaps (1)(4)
(volumes in Bcf's, dollars in millions)
Volume
----------------------------------- Estimated
Fixed Price Fixed Price Mkt. Value
Payor Receiver Gain (2)
--------------- --------------- ----------------
June 30, 1997 119.1 41.6 $ 18.4
December 31, 1996 126.6 52.9 9.7
June 30, 1996 205.5 151.7 $ 7.3
Natural Gas Futures (3)(4)
(volumes in Bcf's, dollars in millions)
Purchased Sold Estimated
----------------------------------- --------------------------------
Notional Notional Mkt. Value
Volume Amount Volume Amount Gain (2)
--------------- ---------------- ------------- -------------- ----------------
June 30, 1997 15.5 $ 33.1 15.8 $ 33.4 $ 0.5
December 31, 1996 23.7 64.1 13.6 40.0 0.1
June 30, 1996 20.9 $ 52.8 26.9 $ 57.7 $ 0.8
(1) The financial impact of these natural gas swaps was to decrease earnings by
$(1.0) million, $(1.0) million and $(3.6) million during 1996 and the three
months and six months ended June 30, 1997, respectively. For the three
months and six months ended June 30, 1996, the financial impact was to
decrease earnings by $(0.7) million and $(6.8) million, respectively.
(2) Represents the amount which would have been realized upon termination of
the relevant derivative as of the date indicated. As more fully discussed
in the Company's 1996 Report on Form 10-K, in the case of swaps associated
with certain agreements pursuant to which the Company has committed to
supply gas to a distribution affiliate through April 1999, no earnings
impact is expected due to the existing accruals. Swaps associated with
these commitments and included above had a fair market value of $2.2
million at June 30, 1997.
(3) The financial impact of these natural gas futures was to increase(decrease)
earnings by $(9.3) million, $3.7 million and $(18.9) million during 1996
and the three months and six months ended June 30, 1997, respectively. For
the three months and six months ended June 30, 1996, the financial impact
was to increase(decrease) earnings by $2.4 million and $(2.9) million,
respectively.
(4) In general, the financial impacts of transactions involving these
derivatives are included with "Cost of natural gas purchased, net" in the
Company's Consolidated Statement of Income and with "Purchased gas cost" in
the preceding table of EM&G's financial and operating results.
At June 30, 1997, the Company held options covering the purchase of 6.7
Bcf of gas, principally in conjunction with the commitment to supply gas to a
distribution affiliate as discussed preceding. As described in the Company's
1996 Report on Form 10-K, the Company has provided an accrual for the expected
total costs associated with this commitment, including the market value of these
associated options.
CORPORATE AND OTHER
Quarter Comparison
The operating loss for "Corporate and Other" increased from $(5.1)
million in the second quarter of 1996 to $(6.2) million in the second quarter of
1997, an increase of approximately $1.1 million (21.6%). This increased loss was
principally due to 1997 development costs associated with the Company's utility
services (principally line locating) and consumer services (principally home
security) businesses, partially offset by favorable 1997 adjustments associated
with certain employee benefits.
Year-to-Date Comparison
The operating loss for "Corporate and Other" increased from $(10.9)
million in the first six months of 1996 to $(13.2) million in the first six
months of 1997, an increase of approximately $2.3 million (21.1%). This
increased loss was principally due to (i) 1997 development costs associated with
the Company's utility services (principally line locating) and consumer services
(principally home security) and (ii) increased 1997 costs associated with
international activities. These unfavorable impacts were partially offset by
favorable 1997 adjustments associated with certain employee benefits.
NON-OPERATING INCOME AND EXPENSE
Net income for the three months and six months ended June 30, 1997 was
$0.7 million and $69.3 million, respectively, representing increases of
approximately $2.8 million (133.3%) and $10.5 million (17.9%), respectively,
from the corresponding periods of 1996 while, as discussed preceding, operating
income decreased by approximately $3.0 million (7.6%) and $4.4 million (2.4%),
respectively, during the same periods. The components of these decreases of $5.8
million and $14.9 million in net expense below the operating income line were as
follows:
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------------------- ----------------------------------------------
Increase Increase
(millions of dollars) 1997 1996 (Decrease) 1997 1996 (Decrease)
---------- ----------- -------------------- --------- ---------- --------------------
($/%) ($/%)
Interest expense, net (1) $ 32.5 $ 34.5 $(2.0) / (5.8)% (2) $ 68.0 $ 70.7 (3) $(2.7) / (3.8)%
Dividend on Trust Preferred 2.7 0.4 2.3 / 575.0% 5.4 0.4 5.0 / 1,250.0%
Other, net (1) 0.2 2.3 (2.1) / (91.3)% (4) (6.1) 5.8 (5) (11.9) / (205.2)%
Provision for income taxes 0.5 0.0 0.5 / N/A (6) 45.4 45.8 (7) (0.4) / (0.9)%
Extraordinary items - 4.5 (4.5) / (100.0)% (0.2) 4.7 (4.9) / (104.3)%
========== =========== ========= ==========
$ 35.9 $ 41.7 $(5.8) / (13.9)% $ 112.5 $ 127.4 $(14.9) / (11.7)%
========== =========== ========= ==========
(1) The costs associated with the Company's Receivables Facility
(approximately $3.9 million and $6.9 million for the three months and six
months ended June 30, 1997, and $1.8 million and $4.8 million for the
three months and six months ended June 30, 1996, respectively) are
included with "Other, net" in 1996 and with "Interest expense, net" in
1997, see (2), (3), (4) and (5) following and "Net Cash Flows from
Financing Activities" under "Liquidity and Capital Resources" elsewhere
herein.
(2) After adjustment to add costs associated with the Receivables Facility to
second-quarter 1996 interest expense, interest expense decreased by
approximately $3.9 million from the second quarter of 1996 to the second
quarter of 1997. Approximately $2.8 million (71.8%) of this favorable
variance was attributable to a reduction in the average 1997 interest rate
and the balance of approximately $1.1 million (28.2%) was due to a reduced
level of debt in 1997.
(3) After adjustment to add costs associated with the Receivables Facility to
interest expense for the six months ended June 30, 1996, interest expense
decreased by approximately $7.5 million from the first six months of 1996
to the first six months of 1997. Approximately $4.3 million (57.3%) of
this favorable variance was attributable to a reduced level of debt in
1997 and the balance of approximately $3.2 million (42.7%) was due to a
reduction in the average 1997 interest rate.
(4) After adjustment to remove the second-quarter 1996 costs associated with
the Receivables Facility, "Other, net" improved from expense of
approximately $0.5 million in the second quarter of 1996 to expense of
approximately $0.2 million in the second quarter of 1997.
(5) After adjustment to remove the costs associated with the Receivables
Facility from the first six months of 1996, "Other, net" improved from
expense of $1.0 million in the first six months of 1996 to income of $6.1
million in the corresponding period of 1997. Substantially all of this
favorable variance was attributable to the close-out of certain interest
rate swaps, see "Net Cash Flows from Financing Activities" under
"Liquidity and Capital Resources" elsewhere herein.
(6) This unfavorable variance was principally attributable to an increase in
the second-quarter 1997 interim state effective tax rate, partially offset
by a decrease in the second-quarter 1997 interim federal effective tax
rate.
(7) This favorable variance reflects a $2.6 million reduction in income tax
expense attributable to a decrease in the 1997 interim state effective tax
rate, partially offset by a $2.2 million increase in income tax expense
due to an increase in pre-tax income during the first six months of 1997.
Liquidity and Capital Resources
The table below illustrates the sources of the Company's invested capital
during the last four years and at June 30, 1997 and 1996.
June 30, December 31,
-------------------------- ----------------------------------------------------
INVESTED CAPITAL 1997 1996 1996 1995 1994 1993
- -------------------------------------- ------------ ------------ ------------ ----------- ------------ ------------
(millions of dollars)
Long-Term Debt (1) $1,169.5 $1,107.0 $1,054.2 $1,474.9 $1,414.4 $1,629.4
Trust Preferred (2) 164.4 167.7 167.8 - - -
Common Equity (3) 862.5 787.9 800.5 637.3 587.4 578.0
Preferred Stock (4) - - - 130.0 130.0 130.0
------------ ------------ ------------ ----------- ------------ ------------
Total Capitalization 2,196.4 2,062.6 2,022.5 2,242.2 2,131.8 2,337.4
Short-Term Debt 423.0 280.3 392.0 128.8 274.6 192.4
------------ ------------ ------------ ----------- ------------ ------------
Total Invested Capital $2,619.4 $2,342.9 $2,414.5 $2,371.0 $2,406.4 $2,529.8
============ ============ ============ =========== ============ ============
Receivables Facility (5) $ 270.0 $ 138.1 $ 235.0 $ 235.0 $ 192.8 $ 226.4
============ ============ ============ =========== ============ ============
Total Capitalization:
Long-Term Debt 53.2% 53.7% 52.1% 65.8% 66.3% 69.7%
Trust Preferred (2) 7.5% 8.1% 8.3% - - -
Common Equity 39.3% 38.2% 39.6% 28.4% 27.6% 24.7%
Preferred Stock - - - 5.8% 6.1% 5.6%
Total Invested Capital:
Senior Debt (5)(6) 56.3% 56.2% 58.8% 70.6% 72.4% 74.3%
Total Debt (5) 60.8% 61.5% 63.5% 70.6% 72.4% 74.3%
(1) See "Long-Term Financing" under "Net Cash Flows from Financing Activities"
following for additions, retirements and reacquisitions.
(2) Company-Obligated Mandatorily Redeemable Convertible Preferred Securities
of Subsidiary Trust Holding Solely $177.8 Million Principal Amount of 6.25%
Convertible Subordinated Debentures due 2026 of NorAm Energy Corp. A
significant proportion of these securities were converted after
announcement of the closing date of the Merger, see "Long-Term Financing"
under "Net Cash Flows from Financing Activities" elsewhere herein.
(3) Includes unrealized gains on its investment in Itron, Inc. ("Itron"), net
of tax of $7.8 million, $10.2 million, $15.3 million and $2.6 million at
June 30, 1997 and 1996 and December 31, 1995 and 1994, respectively. The
unrealized gain at December 31, 1996 was not material. At August 8, 1997,
the Company's investment in Itron had declined to a market value of
approximately $33.7 million, representing an unrealized gain of
approximately $4.5 million, net of tax of approximately $2.6 million.
(4) Exchanged for the Company's 6% Convertible Subordinated Debentures due 2012
in June 1996.
(5) Proceeds received pursuant to the Company's Receivables Facility have been
included with "Senior Debt" and "Total Debt" for all periods presented for
purposes of calculating the ratios of "Senior Debt" and "Total Debt" to
"Total Invested Capital", although such proceeds are not included with
"Short-Term Debt" on the Company's Consolidated Balance Sheet (or in the
table preceding) prior to January 1, 1997, see "Receivables Facility" under
"Net Cash Flows from Financing Activities" elsewhere herein.
(6) Excludes the Company's 6% Convertible Subordinated Debentures due 2012
("the Subordinated Debentures"), outstanding beginning in June 1996. At
June 30, 1997, December 31, 1996 and June 30, 1996, $117.0 million, $122.7
million and $130.0 million, respectively, of the Subordinated Debentures
were outstanding.
CASH FLOW ANALYSIS
The Company's cash flows, like its results of operations, are seasonal
and, therefore, the cash flows experienced during an interim period are not
necessarily indicative of the results to be expected for an entire year. The
following discussion of cash flows should be read in conjunction with the
accompanying Statement of Consolidated Cash Flows and related supplemental cash
flow information, and with the cash flow information included in the Company's
1996 Report on Form 10-K.
Net Cash Flows from Operating Activities
As indicated in the accompanying Statement of Consolidated Cash Flows, "Net cash
provided by operating activities" increased from approximately $161.6 million in
the first six months of 1996 to approximately $207.6 million in the first six
months of 1997. This increase of approximately $46.0 million (28.5%) was
principally attributable to:
* An increase of approximately $113.5 million in cash provided by the net of
accounts receivable and accounts payable during the first six months of
1997, principally due to the relatively larger net asset balance existing
at December 31, 1996 (in comparison to December 31, 1995) which was
collected/paid during the first six months of 1997. In addition, cash used
for the net of accounts receivable and accounts payable for the first six
months of 1996 included a net cash outflow of approximately $96.9 million
associated with utilization of the Company's Receivables Facility, see
"Receivables Sales Facility" under "Net Cash Flows from Financing
Activities" following. Cash flows associated with utilization of this
facility are included with "Net Cash Flows from Financing Activities"
beginning with January 1, 1997, see the discussion following.
This favorable variance was partially offset by:
* A decrease of approximately $44.2 million in cash provided from
miscellaneous working capital items during the first six months of 1997,
principally "Other current assets", "Other current liabilities" and "Income
taxes payable". The increase of approximately $44.8 million in cash used
for the net of "Other current assets" and "Other current liabilities"
during the first six months of 1997 was principally due to the relatively
larger net liability balance existing at December 31, 1996 (in comparison
to December 31, 1995) which was paid/collected during the first six months
of 1997. The increase of approximately $8.9 million in cash used for
"Income taxes payable " during the first six months of 1997 was principally
due to increased 1997 income tax payments reflecting the relatively higher
December 31, 1996 balance in income taxes payable and increased 1997
pre-tax income. These unfavorable impacts were partially offset by a net
increase of $9.5 million associated with other working capital items,
principally inventories.
* A decrease of approximately $17.1 million in cash provided by deferred gas
costs during the first six months of 1997, principally due to (1) the
relatively larger December 31, 1995 balance (in comparison to December 31,
1996) which was collected during the first six months of 1996, and (2) the
relatively larger balance of refundable amounts built up during the first
six months of 1996.
* A decrease of approximately $3.4 million in cash provided from income
before non-cash charges and credits during the first six months of 1997,
see "Material Changes in the Results of Continuing Operations" elsewhere
herein.
* A decrease of approximately $2.8 million in recoveries under gas contract
settlements during the first six months of 1997 as the underlying
agreements continue to unwind.
As further described in the Company's 1996 Report on Form 10-K, the
Company has a Receivables Facility pursuant to which it transfers an interest in
a pool of accounts receivables to a third party in exchange for cash. Prior to
January 1, 1997, transfers of receivables under this facility were accounted for
as sales, with net cash inflows or outflows included with "Cash Flows from
Operating Activities" in the Company's Statement of Consolidated Cash Flows.
Subsequent to January 1, 1997 (in accordance with the provisions of Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" which does not allow
retroactive application), such cash flows are attributed to financing
activities, see "Net Cash Flows from Financing Activities" elsewhere herein.
Net Cash Flows from Investing Activities
The Company's capital expenditures by business unit for the six months
ended June 30, 1997 and 1996 were as follows:
Six Months
Ended June 30 Increase(Decrease)
--------------------------- ----------------------------
1997 1996 $ %
------------ ------------ ------------ -------------
(millions of dollars)
Natural Gas Distribution $ 52.4 $ 48.2 $ 4.2 8.7%
Interstate Pipelines 3.8 8.0 (4.2) (52.5)%
Energy Marketing and Gathering 8.7 5.4 3.3 61.1%
Corporate and Other 2.5 0.5 2.0 400.0%
------------ ------------ ------------
Consolidated $ 67.4 $ 62.1 $ 5.3 8.5%
============ ============ ============
As indicated in the preceding table, the Company's capital expenditures
increased from $62.1 million in the first six months of 1996 to $67.4 million in
the first six months of 1997, an increase of approximately $5.3 million (8.5%),
as increases in (i) Natural Gas Distribution, (ii) Energy Marketing and
Gathering and (iii) Corporate and Other were partially offset by a decrease in
Interstate Pipelines. The increase of approximately $4.2 million (8.7%) in
Natural Gas Distribution, which, as with the other variances discussed
following, is within the normal range of dollar variation in the Company's
capital spending program, was principally due to increased 1997 expenditures for
replacements, reinforcements and system extensions. The increase of $3.3 million
(61.1%) in 1997 spending for EM&G was principally associated with the Company's
natural gas gathering business for (1) increased compression and (2) new
facilities and expansion. The increase of approximately $2.0 million in
Corporate and Other was principally due to the acquisition, in March 1997, of
certain home security contracts in Little Rock, Arkansas by NorAm Consumer
Services. The decrease of approximately $4.2 million (52.5%) in Interstate
Pipelines, was principally due to decreased 1997 expenditures for compression
and new construction, partially offset by increased 1997 expenditures for
replacements and reinforcements.
The increase in cash used for "Other, net" in 1997 was principally due
to payments made under the indemnity provisions of sale agreements.
Net Cash Flows from Financing Activities
The reader is directed to the Company's 1996 Report on Form 10-K for
additional information concerning the Company's outstanding debt and equity
securities, financing facilities and recent financing transactions.
Short-Term Financing
As further discussed in the Company's 1996 Report on Form 10-K, the
Company's principal sources of short-term liquidity are (1) its unsecured Credit
Agreement ("the Credit Facility") with Citibank, N.A., as Agent and a group of
eighteen other commercial banks which provides a $400.0 million commitment to
the Company through December 11, 1998, (2) the Company's Receivables Facility
(as further described following) and (3) informal bank lines of credit.
Following is selected information concerning the Company's short-term bank
borrowings.
Short-Term Borrowings Three Months Six Months
Ended June 30 Ended June 30
-------------------------------- ----------------------------------
1997 1996 1997 1996
-------------- --------------- ---------------- ---------------
Weighted average amount borrowed (1) $ 99.5 $ 0.0 $ 102.4 $ 10.0
Maximum amount borrowed (1) $ 175.0 $ 0.0 $ 175.0 $ 51.0
Weighted average rate (1) 5.80% N/A 5.91% 6.28%
June 30 December 31
-------------------------------- ----------------
1997 1996 1996
-------------- --------------- ----------------
Amount Borrowed: (2)
The Facility $ 0.0 $ 0.0 $ 80.0
Informal lines of credit $ 72.0 $ 0.0 $ 35.0
Weighted average rate (1) 6.74% N/A 6.29%
(1) As applicable, includes both the Credit Facility and informal credit lines.
Weighted average amount borrowed and maximum amount borrowed are based on
week-end balances.
(2) The Company had no borrowings under the Credit Facility at July 31, 1997,
and therefore, had $400.0 million of remaining capacity under the Credit
Facility at July 31, 1997, which amount is expected to be adequate for the
Company's current and projected needs for short-term financing. In
addition, the Company had $72.5 million of borrowings under informal credit
lines at July 31, 1997.
As further described in the Company's 1996 Report on Form 10-K, under
an August 1996 agreement, the Company transfers, to a third party, an undivided
interest in a designated pool of accounts receivable (currently limited to a
maximum of $300.0 million) with limited recourse and subject to a floating
interest rate provision. Following is selected information concerning the
utilization of this facility.
Receivable Sales Facility
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------- ------------------------------------
1997 1996 1997 1996
--------------- -------------- ----------------- ----------------
(millions of dollars)
Net cash inflows (outflows) $ 45.0 $ (55.2) $ 35.0 $ (96.9)
Pre-tax loss on sale (1) 3.9 (1.8) 6.9 (4.8)
Average receivables sold (2) $ 269.2 $ 122.5 $ 240.4 $ 157.9
Weighted average rate (2) (3) 5.61% 5.32% 5.50% 5.47%
June 30 December 31
-------------------------------- -----------------
1997 1996 1996
--------------- -------------- -----------------
Receivables sold and uncollected (4) $ 270.0 $ 138.1 $ 235.0
Collateral for receivables sold $ 39.9 $ 18.6 $ 34.2
(1) See the discussion of financial statement classification following.
(2) Based on daily balances.
(3) Exclusive of a facility fee payable on the full commitment of $300.0
million which was 40 basis points through March 1, 1996 and currently is 17
basis points. The rate in effect at June 30, 1997 (exclusive of the
facility fee) was 5.66%.
(4) At July 31, 1997, an interest in $276.0 million of the Company's
receivables had been transferred pursuant to the Receivables Facility.
As further described in the Company's 1996 Report on Form 10-K, the
Company adopted Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS 125") effective as of January 1, 1997 (SFAS 125 does not
allow retroactive application). Therefore, for periods prior to January 1, 1997,
(1) amounts transferred pursuant to the Receivables Facility are included with
"Cash Flows From Operating Activities" in the Company's Statement of
Consolidated Cash Flows, (2) receivables transferred pursuant to the Receivables
Facility are deducted from "Accounts and notes receivable, principally customer"
in the Company's Consolidated Balance Sheet and (3) the costs associated with
utilization of the Receivables Facility are reported as "Loss on sale of
accounts receivable", a component of "Other, net", included under "Other
(Income) and Deductions" in the Company's Statement of Consolidated Income.
Subsequent to January 1, 1997, (1) amounts transferred pursuant to the
Receivables Facility are included with "Cash Flows from Financing Activities" in
the Company's Statement of Consolidated Cash Flows, (2) amounts received
pursuant to the facility are not deducted from "Accounts and notes receivable,
principally customer" in the Company's Consolidated Balance Sheet but, rather,
such amounts are reported as short-term debt, and (3) the costs associated with
utilization of the Receivables Facility are included with "Interest expense,
net" in the Company's Statement of Consolidated Income.
As described in the Company's 1996 Report on Form 10-K, certain of the
Company's cash balances reflect credit balances to the extent that checks
written have not yet been presented for payment. Such balances are included with
"Accounts payable, principally trade" in the Company's Consolidated Balance
Sheet, and changes in such balances are reported as "Increase (decrease) in
overdrafts" in the Company's Statement of Consolidated Cash Flows.
Long-Term Financing
As further discussed in the Company's 1996 Report on Form 10-K, the
Company's long-term financing historically has been obtained through the
issuance of common stock, preferred stock, unsecured debentures and notes (the
Company is precluded under an indenture from issuing mortgage debt), bank term
loans and, recently, Trust Preferred Securities.
Following is a discussion of recent financing activities.
The Company made debt reacquisitions and retirements totaling $230.5
million and $341.2 million in the first six months of 1997 and 1996,
respectively, see "Retirements and Reacquisitions of Long-Term Debt" included
under Note D of the accompanying Notes to Consolidated Financial Statements. In
April 1997, the Company retired, at maturity, the $225.0 million principal
amount of its 9.875% Notes Due 1997 then outstanding, principally utilizing
additional borrowings under the Company's Receivables Facility and its Credit
Facility (each as described elsewhere herein). As described in the Company's
1996 Report on Form 10-K, the Company elected to utilize a smaller, shorter-term
debt instrument for the refinancing associated with this debt maturity
principally due to the pending merger with Houston Industries Incorporated, see
"Merger With Houston Industries" elsewhere herein. On May 15, 1997, the Company
obtained an unsecured, 18-month bank term loan ("the Term Loan") in the amount
of $150.0 million. The Term Loan carries a floating interest rate based on
three-month LIBOR (approximately 6.78% at inception and subject to adjustment
based on the Company's credit rating) and allows prepayment without penalty.
As a result of the merger with Houston Industries Incorporated, the
Company's outstanding convertible securities became convertible into a
combination of cash and Houston Industries Common Stock, see "Merger with
Houston Industries Incorporated" under "Recent Developments" elsewhere herein.
After the July 31, 1997 announcement of the closing date of the Merger,
a significant proportion of the holders of the Trust Securities elected to
exercise their right to convert such securities into shares of NorAm Common
Stock, resulting in the issuance of approximately 11.4 million incremental NorAm
common shares. As of August 5, 1997, 611,385 shares of the Trust Securities
remained outstanding, representing approximately $30.6 million of liquidation
value.
As more fully discussed in the Company's 1996 report on Form 10-K, the
Company enters into interest rate swaps in which, in general, one party pays a
fixed rate on the notional amount while the other party pays a LIBOR-based rate
for the purposes of (1) effectively fixing the interest rate on debt expected to
be issued for refunding purposes and (2) adjusting the amount of its overall
debt portfolio which is exposed to market interest rate fluctuations. The effect
of these swaps (none of which are leveraged) was to decrease the Company's
interest expense by $0.3 million and $0.6 million for the three months and six
months ended June 30, 1997, respectively, and to decrease the Company's interest
expense by $0.6 million and $1.4 million for the three months and six months
ended June 30, 1996, respectively. Following is selected information on the
Company's portfolio of interest rate swaps at June 30, 1997:
Interest Rate Swap Portfolio at June 30, 1997 (1)
- -------------------------------------------------------------------- Estimated
(dollars in millions) Market
Notional Period Interest Rate Value (3)
Initiated Amount Covered Fixed/Floating (2) Gain(Loss)
- ----------------------- ------------ -------------------------- --------------------- ----------------
February 1996 $ 50.0 Mar. 1996 - Jan. 1998 4.76% / 5.84% $ 0.3
February 1996 50.0 Jun. 1996 - Dec. 1997 4.71% / 5.85% 0.3
March 1997 (4) 75.0 May 1997 - Dec. 1998 6.47% / 6.11% (0.4)
March 1997 (4) 75.0 May 1997 - Dec. 1998 6.43% / 6.11% (0.4)
------------ ----------------
Totals $ 250.0 $ (0.2)
============ ================
(1) All swaps outstanding at June 30, 1997 were entered into for the purpose of
reducing the Company's exposure to fluctuations in market interest rates.
(2) In each case, the Company is the fixed-price payor. The floating rate is
estimated as of June 30, 1997.
(3) Represents the estimated amount which would have been realized upon
termination of the swap at June 30, 1997.
(4) Due, in part, to the increase in floating interest rate exposure which was
expected to result from amounts outstanding under the Term Loan as
discussed preceding, in March 1997, the Company entered into incremental
interest rate swaps with a total notional amount of $150.0 million. These
swaps cover the period from May 1, 1997 to December 1, 1998 and require the
Company to pay an average fixed rate of approximately 6.45%, while the
counterparties (commercial banks) pay a rate based on 3-month LIBOR.
As discussed in the Company's 1996 Report on Form 10-K, in March 1997,
the Company closed out the $200.0 million of swaps which had been serving as
hedges of the anticipated refinancing associated with the April 1997 maturity of
the $225.0 million of the Company's 9.875% Notes Due 1997, receiving cash
proceeds of approximately $8.7 million. Approximately $1.0 million of such
proceeds is serving to reduce the effective interest rate on the Term Loan (as
described preceding), and the balance was credited to earnings in March 1997,
reported as a component of "Other, net" in the Company's Statement of
Consolidated Income.
Other Financing Activities
The Company received cash proceeds from sales of its common stock
pursuant to its Direct Stock Purchase Plan ("the DSPP") of approximately $5.2
million during the first six months of 1996. Sales of stock pursuant to the DSPP
were suspended as a result of the pending merger with Houston Industries and the
DSPP was canceled effective with consummation of the merger, see "Merger With
Houston Industries" under "Recent Developments" elsewhere herein. The Company
paid cash common dividends of $19.3 million and $17.5 million during the first
six months of 1997 and 1996, respectively, and declared an additional common
dividend in July 1997, see "Dividend Declaration" under "Recent Developments"
elsewhere herein. The Company paid cash preferred dividends of $3.9 million
during the first six months of 1996. As further discussed in the Company's 1996
Report on Form 10-K, the Company's $3.00 Convertible Exchangeable Preferred
Stock, Series A was exchanged in June 1996 for the Company's 6% Convertible
Subordinated Debentures due 2012.
Debt and Dividend Limitations
As further discussed in the Company's 1996 Report on Form 10-K, the
Credit Facility contains a provision which requires the Company to maintain a
minimum level of total stockholders' equity, as well as placing a limitation of
(1) $2,055 million on total debt (unless the ratio of total debt to
capitalization is less than or equal to 60%) and (2) $200.0 million on the
amount of outstanding long-term debt which may be retired in advance of its
maturity using funds borrowed under the Credit Facility. Certain of the
Company's other financial arrangements contain similar provisions. Based on
these restrictions, at June 30, 1997, the Company had incremental debt capacity
of $400.7 million and, while the Company is not required to calculate and apply
the stockholders' equity limitation on an interim basis, if it were applied at
June 30, 1997, the Company would have had incremental dividend capacity of
$244.3 million.
COMMITMENTS
Leases. As described in the Company's 1996 Report on Form 10-K, the
Company has commitments under certain of its leasing arrangements.
Capital Expenditures. The Company had capital commitments of less than
$20.0 million at June 30, 1997, which projects are expected to be funded through
cash provided by operations and/or incremental borrowings, see "Net Cash Flows
from Investing Activities" under "Liquidity and Capital Resources" elsewhere
herein. As described in the Company's 1996 Report on Form 10-K, the Company
expects to participate in the construction of several distribution systems in
Colombia. While construction of these facilities has not yet begun and contracts
for such construction have not been awarded, the Company will be required to
fund certain amounts in order to maintain its current ownership interest.
Transportation Agreement. As further discussed in the Company's 1996
Report on Form 10-K, the Company has an agreement with ANR Pipeline Company
("ANR") pursuant to which the Company (1) currently retains $41.0 million
previously advanced by ANR, (2) provides 130 MMcf/day of capacity in certain of
the Company's transportation facilities to ANR and (3) is committed to refund
$5.0 million and $36.0 million to ANR in 2003 and 2005, respectively, in
exchange for ANR's release of 30 MMcf/day and 100 MMcf/day, respectively, of
such capacity.
CONTINGENCIES
Letters of Credit. At June 30, 1997, the Company was obligated for
approximately $35.8 million under letters of credit which are incidental to its
ordinary business operations.
Indemnity Provisions. As discussed in the Company's 1996 Report on
Form 10-K, the Company has obligations under the indemnification provisions of
certain sale agreements.
Sale of Receivables. Certain of the Company's receivables are
collateral for amounts received pursuant to the Receivables Facility, see "Net
Cash Flows from Financing Activities" under "Liquidity and Capital Resources"
elsewhere herein.
Gas Contract Issues. As discussed in the Company's 1996 Report on Form
10-K, the Company is a party to certain claims involving, and has certain
commitments under, its gas purchase contracts. The nature of the Company's
natural gas marketing business is such that, in general, and particularly during
periods of production interruptions, delivery curtailments and shortages of
pipeline capacity, disputes arise as to compliance with terms of
purchase/delivery commitments and related pricing provisions. While certain of
these disputes are not resolved for extended periods of time, the Company
believes that it has adequately reserved for any such amounts in dispute which
may ultimately not be resolved in its favor.
Credit Risk and Off-Balance-Sheet Risk. As discussed in the Company's
1996 Report on Form 10-K, the Company has off-balance-sheet risk as a result of
(1) its interest rate swaps, see "Net Cash Flows from Financing Activities"
elsewhere herein and (2) its energy risk management activities, see "Energy
Marketing and Gathering" under "Material Changes in the Results of Operations"
elsewhere herein.
Litigation. The Company is a party to litigation which arises in
the normal course of business, see "Legal Proceedings" elsewhere herein.
Environmental. As more fully described in the Company's 1996 Report on
Form 10-K, the Company is currently working with the Minnesota Pollution Control
Agency regarding the remediation of several sites on which gas was manufactured
from the late 1800's to approximately 1960. The Company has made an accrual for
its estimate of the costs of remediation (undiscounted and without regard to
potential third-party recoveries) and, based upon discussions to date and prior
decisions by regulators in the relevant jurisdictions, the Company continues to
believe that it will be allowed substantial recovery of these costs through its
regulated rates.
In addition, the Company has identified sites with possible mercury
contamination based on the type of facilities located on these sites. The
Company has not confirmed the existence of contamination at these sites, nor has
any federal, state or local governmental agency imposed on the Company an
obligation to investigate or remediate existing or potential mercury
contamination. To the extent that any compliance costs are ultimately identified
and quantified, the Company will provide an appropriate accrual and, to the
extent justified based on the circumstances within each of the Company's
regulatory jurisdictions, set up regulatory assets in anticipation of recovery
through the ratemaking process.
On June 18, 1997, the Mississippi Department of Environmental Quality
advised the Company that the Company, through its Entex Distribution Division
had been identified as a potentially responsible party at a former manufactured
gas plant site in Biloxi, Mississippi, see "Legal Proceedings" following.
On October 24, 1994, the United States Environmental Protection Agency
advised MRT that it had been named a potentially responsible party under federal
law with respect to a landfill site in West Memphis, Arkansas, see "Legal
Proceedings" following.
On December 18, 1995, the Louisiana Department of Environmental Quality
advised the Company that it had been named a potentially responsible party under
state law with respect to a hazardous substance site in Shreveport, Louisiana,
see "Legal Proceedings" following.
While the nature of environmental contingencies makes complete
evaluation impractical, the Company is currently aware of no other environmental
matter which could reasonably be expected to have a material impact on its
results of operations, financial position or cash flows.
Part II. Other Information
Item 1. Legal Proceedings
On June 18, 1997, the Mississippi Department of Environmental Quality
advised the Company that the Company, through its Entex Distribution Division,
had been identified as a potentially responsible party at a former manufactured
gas plant site in Biloxi, Mississippi. Considering the information currently
known about the site, the Company does not believe that the matter will have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
On August 14, 1996, an action styled Shaw vs. NorAm Energy Corp., et
al. was filed in the District Court of Harris County, Texas by a purported NorAm
stockholder against the Company, certain of its officers and directors and
Houston Industries Incorporated ("HI") to enjoin the merger between the Company
and HI (see "Merger with Houston Industries Incorporated" under "Recent
Developments" elsewhere herein) or to rescind such merger and/or to recover
damages in the event that the merger transaction is consummated. The complaint
alleges, among other things, that the merger consideration is inadequate, the
Company's Board of Directors breached its fiduciary duties and that HI aided and
abetted such breaches of fiduciary duties. In addition, the plaintiff seeks
certification as a class action. The Company believes that the claims are
without merit and intends to vigorously defend against the lawsuit. Management
believes that the effect on the Company's results of operations, financial
position or cash flows, if any, from the disposition of this matter will not be
material.
On October 24, 1994, the United States Environmental Protection Agency
advised MRT, a wholly-owned subsidiary of the Company, that MRT, together with a
number of other companies, had been named under federal law as a potentially
responsible party for a landfill site in West Memphis, Arkansas and may be
required to share in the cost of remediation of this site. However, considering
the information currently known about the site and the involvement of MRT, the
Company does not believe that this matter will have a material adverse effect on
the financial position, results of operations or cash flows of the Company.
On December 18, 1995, the Louisiana Department of Environmental Quality
advised the Company that the Company, through one of its subsidiaries and
together with several other unaffiliated entities, had been named under state
law as a potentially responsible party with respect to a hazardous substance
site in Shreveport, Louisiana and may be required to share in the remediation
cost, if any, of the site. However, considering the information currently known
about the site and the involvement of the Company and its subsidiaries with
respect to the site, the Company does not believe that the matter will have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
The Company is a party to litigation (other than that specifically
noted) which arises in the normal course of business. Management regularly
analyzes current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. Management believes
that the effect on the Company's results of operations, financial position or
cash flows, if any, from the disposition of these matters will not be material.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27, Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
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.
NorAm Energy Corp.
(Registrant)
By: /s/Mary P. Ricciardello
Mary P. Ricciardello
Vice President & Comptroller
(Principal Accounting Officer)
Dated: August 14, 1997
UT
6-MOS
DEC-31-1997
JUN-30-1997
PER-BOOK
2,441,941
647,802
734,939
56,816
0
3,881,498
86,447
1,004,889
(236,635)
862,498
0
0
1,169,469
72,000
0
0
81,000
0
0
0
1,696,531
3,881,498
2,940,180
45,411
0
2,758,343
181,837
681
182,518
67,995
69,349
0
69,349
19,281
17,183
207,554
0.50
0.48
