Item 1. Business
NUI Corporation ("NUI" or the "Company") was incorporated in New Jersey in 1969, and is engaged primarily in the sale and transportation of natural gas. The Company serves more than 359,000 utility customers in six states through its Northern and Southern operating divisions. The Northern Division operates in New Jersey as Elizabethtown Gas Company. The Southern Division was formed effective April 1, 1995 through the consolidation of the Company's City Gas Company of Florida and Pennsylvania & Southern Gas Company ("PSGS") operations (see Note 3 of the Notes to the Consolidated Financial Statements). PSGS, which operated as North Carolina Gas Service, Elkton Gas Service (Maryland), Valley Cities Gas Service (Pennsylvania) and Waverly Gas Service (New York), was acquired by the Company on April 19, 1994 (see Note 2 of the Notes to the Consolidated Financial Statements).
In addition to gas distribution operations, the Company provides retail gas sales and related services through its NUI Energy, Inc. subsidiary (formerly Natural Gas Services, Inc.); bill processing and related customer services for utilities and municipalities through its Utility Business Services, Inc. subsidiary (formerly Utility Billing Services, Inc.); and wholesale energy brokerage and related services through its NUI Energy Brokers, Inc. subsidiary.
The principal executive offices of the Company are located at 550 Route 202-206, Box 760, Bedminster, NJ 07921-0760; telephone: (908) 781-0500.
Territory and Customers Served
See Item 6 - "Selected Financial Data-Summary Consolidated Operating Data" for summary information by customer class with respect to operating revenues, gas volumes sold or transported and average utility customers served. The Company's utility operations serve more than 359,000 customers, of which approximately 67% are in New Jersey and 33% are in the Southern Division states. Approximately 54% of the Company's utility customers are residential and commercial customers that purchase gas primarily for space heating. The Company's operating revenues for fiscal 1996 amounted to $469 million, of which approximately 66% was generated by utility operations in the Northern Division, 22% was generated by utility operations in the Southern Division states and 12% by the Company's unregulated activities. Gas volumes sold or transported in fiscal 1996 amounted to 105.7 million Mcf, of which approximately 65% was sold or transported in New Jersey, 17% was sold or transported in the Southern Division states and 18% represented unregulated sales. An Mcf is a basic unit of measurement for natural gas comprising 1,000 cubic feet of gas.
Northern Division The Company, through its Northern Division, provides gas service to approximately 239,000 customers in franchised territories within seven counties in central and northwestern New Jersey. The Northern Division's 1,300 square-mile service territory has a total population of approximately 950,000. Most of the Northern Division's customers are located in densely-populated central New Jersey, where increases in the number of customers are primarily from conversions to gas heating from alternative forms of heating.
The Northern Division's gas volumes sold or transported and customers served for the past three fiscal years were as follows:
Gas Volumes Sold or Transported (in thousands of Mcf)
1996 1995 1994 Firm Sales: Residential 20,862 17,855 20,315 Commercial 11,337 10,275 11,528 Industrial 4,709 4,595 5,025 Interruptible Sales 11,885 15,440 14,156 Unregulated Sales 7,062 1,044 -- Transportation Sales 19,793 17,202 14,367 ------ ------ ------ Total 75,648 66,411 65,391 ====== ====== ======
Utility Customers Served (twelve-month average)
1996 1995 1994 Firm Sales: Residential - 162,156 159,164 155,317 Heating Residential - 58,558 59,586 60,951 Non-heating Commercial 17,232 17,359 16,966 Industrial 291 387 360 Interruptible Sales 72 75 74 Transportation Services 600 130 94 ------- ------- ------- Total 238,909 236,701 233,762 ======= ======= =======
Gas volumes sold to the Company's firm customers are sensitive to the weather in New Jersey. In fiscal 1996, the weather in New Jersey was 7% colder than normal and 23% colder than the prior year, thereby increasing gas sales. Weather in fiscal 1995 contributed to lower gas sales as compared with fiscal 1994, as the weather was 13% warmer than normal and 12% warmer than fiscal 1994. The Northern Division's tariff contains a weather normalization clause that is designed to help stabilize the Company's results by increasing amounts charged to customers when weather has been warmer than normal and decreasing amounts charged when weather has been colder than normal. For a further discussion on variations in revenues, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The growth in the number of residential heating customers principally reflects the Company's marketing emphasis to convert residential non- heating customers to full gas heating service. Approximately 70% of the residential heating customers added in New Jersey since 1991 represented homes that were converted to gas heating from other forms of space heating and the remainder consisted of new homes. Approximately 40 new residential developments are at various stages of the approval process before municipal planning boards throughout the Northern Division's service territory.
Effective January 1, 1995, the New Jersey Board of Public Utilities (the "NJBPU") authorized new tariffs designed to provide for the unbundling of natural gas transportation and sales service to commercial and industrial customers. As of September 30, 1996, 845 commercial sales customers had switched to transportation-only service under the new tariff. Despite the transfer to transportation service, the commercial sales market continues to grow. In fiscal 1996, 27 schools and 490 businesses converted to gas heating systems with the Company or switched from interruptible service to commercial firm service. The Company also has an economic development program to help spur economic growth and jobs creation which provides grants and reduced rates for qualifying businesses that start up, relocate or expand within designated areas.
The Company's industrial customers also have the ability to switch to transportation service and purchase their gas from other suppliers. The rate charged to transportation customers is less than the rate charged to firm industrial and commercial sales customers because the transportation customer rate does not include any cost of gas component. However, the operating margins from both rates are substantially the same.
The Northern Division's "interruptible" customers have alternative energy sources and use gas on an "as available" basis. Variations in the volume of gas sold or transported to these customers do not have a significant effect on the Company's earnings because, in accordance with New Jersey regulatory requirements, 90% to 95% of the margins that otherwise would be realized on gas sold or transported to interruptible customers are used to reduce gas costs charged to firm sales customers.
The Company provides gas sales and transportation services comprising twenty percent of the primary fuel requirements of a 614 megawatt cogeneration facility that began commercial operation in New Jersey in July 1992 to supply electric power to New York City. In fiscal 1996, sales and transportation of gas to this customer accounted for approximately 5% of the Company's operating revenues and approximately 7% of total gas sold or transported. The Company was authorized by the NJBPU to retain a total of approximately $2.3 million of the operating margins realized from these sales. The Company reached this maximum during fiscal 1995 and, therefore, all margins realized from the sale of gas to this customer in fiscal 1996 were used to reduce gas costs charged to firm customers.
In order to maximize the value of the Company's gas supply portfolio, in fiscal 1995 the Company began selling available gas supply and excess interstate pipeline capacity to other gas service companies and to customers located outside of the Company's service territories. The price of gas sold to these customers is not regulated by the NJBPU, however the NJBPU has authorized the Company to retain 20% of the margins realized from these sales. The remaining 80% of these margins is used to reduce gas costs charged to firm customers.
Southern Division
City Gas Company of Florida ("CGF"). CGF is the second largest natural gas utility in Florida, supplying gas to over 97,000 customers in Dade and Broward Counties in south Florida, and in Brevard, Indian River and St. Lucie Counties in central Florida. CGF's service areas cover approximately 3,000 square miles and have a population of approximately 1.7 million.
CGF's gas volumes sold or transported and customers served for the past three fiscal years were as follows:
Gas Volumes Sold or Transported (in thousands of Mcf)
1996 1995 1994 Firm Sales: Residential 2,130 1,982 1,983 Commercial 4,096 4,198 4,439 Interruptible Sales 1,259 1,533 1,958 Unregulated Sales 1,779 -- -- Transportation Sales 884 1,313 1,063 ----- ----- ----- Total 10,148 9,026 9,443 ====== ===== =====
Utility Customers Served (twelve-month average)
1996 1995 1994 Firm Sales: Residential 92,179 90,960 87,194 Commercial 4,629 4,615 4,539 Interruptible Sales 18 20 28 Transportation Services 36 24 8 ------ ------ ------ Total 96,862 95,619 91,769 ====== ====== ======
CGF's residential customers purchase gas primarily for water heating, clothes drying and cooking. Some customers, principally in central Florida, also purchase gas to provide space heating during the relatively mild winter season. Year-to-year growth in the average number of residential customers primarily reflects new construction. The rate of residential market growth was lower in fiscal 1996 as compared with fiscal 1995 reflecting the application of more selective investment feasibility standards. The rate of residential market growth is expected to increase in fiscal 1997 as more central Florida residential projects have qualified for main extensions under the Company's investment feasibility standards, principally reflecting lower Company costs to complete projects and more effective marketing practices.
CGF's commercial business consists primarily of schools, businesses and public facilities, of which the number of customers tends to increase concurrently with the continuing growth in population within its service areas. As with its residential markets, the Company is seeking to maximize the utilization of its existing mains by emphasizing marketing efforts toward potential commercial business along these lines.
CGF's industrial customers and certain commercial customers, are served under tariffs applicable to "interruptible" customers. Unlike the Company's Northern Division, CGF's interruptible customers do not generally have alternative energy sources, although their service is on an "as available" basis. The Company retains all of the operating margins from sales to these customers.
Certain commercial and industrial customers have converted their natural gas service from a sales basis to a transportation basis. CGF's transportation tariff provides margins on transportation services that are substantially the same as margins earned on gas sales. The Company intends to submit a proposal in fiscal 1997 to the Florida Public Service Commission ("FPSC") to offer unbundled gas service to all of its commercial customers, in a manner similar to that currently in place in the Company's Northern Division.
The Company initiated natural gas service to St. Lucie County in fiscal 1993 through the construction of a gate station interconnection with the interstate pipeline system, acquisition and conversion of an existing underground propane system and the extension of mains to potential growth areas within the city of Port St. Lucie. The Company substantially completed expansion of its mains in fiscal 1994. The net investment in utility plant in the city as of September 30, 1996 was $3.8 million and planned additional investment in fiscal 1997 will be $1.0 million. All of the Company's net investment in utility plant in St. Lucie County has been included in determining the rates authorized by the FPSC in November 1996 (see "Regulation"), including portions previously excluded in determining rates authorized by the FPSC in November 1994.
During fiscal 1996, the Company began selling available gas supply and excess interstate pipeline capacity to other gas service companies and to customers located outside of the Company's service territories. The price of gas sold to these customers is not regulated by the FPSC; however, the FPSC has ordered that 50% of the margins realized from these sales be used to reduce gas costs charged to firm customers.
North Carolina Gas Service ("NCGS"). The Company, through NCGS, provides gas service to approximately 13,100 customers in Rockingham and Stokes Counties in North Carolina, which territories comprise approximately 560 square miles. During fiscal 1996, NCGS sold or transported approximately 3.9 million Mcf of gas as follows: 24% sold to residential customers, 14% sold to commercial customers, 44% sold to industrial customers and 18% transported to commercial and industrial customers.
Elkton Gas Service ("Elkton"). The Company, through Elkton, provides gas service to approximately 3,400 customers in franchised territories comprising approximately 14 square miles within Cecil County, Maryland. During fiscal 1996, Elkton sold approximately 603,000 Mcf of gas as follows: 34% sold to residential customers, 38% sold to commercial customers and 28% sold to industrial customers.
Valley Cities Gas Service ("VCGS") and Waverly Gas Service ("WGS"). VCGS and WGS provide gas service to approximately 6,100 customers in franchised territories comprising 104 square miles within Bradford County, Pennsylvania and the Village of Waverly, New York and surrounding areas, respectively. During fiscal 1996, VCGS and WGS sold or transported approximately 3.9 million Mcf of gas as follows: 15% sold to residential customers, 8% sold to commercial customers, 9% sold to industrial customers and 68% transported to commercial and industrial customers.
Gas Supply and Operations
In recent years, the gas industry has been undergoing structural changes in response to policies of the Federal Energy Regulatory Commission (the "FERC") and local regulatory commissions designed to increase competition. Traditionally, interstate pipelines were wholesalers of
natural gas to local distribution companies and generally did not provide separate transportation or other services for specific customers. In 1985, the FERC adopted Order No. 436 that encouraged interstate pipelines to make transportation of gas available to customers on a non-discriminatory basis. Such voluntary "open access" by certain interstate pipelines enhanced the opportunity for local gas distribution companies and industrial customers to purchase natural gas directly from gas producers and others. In 1992, the FERC issued Order No. 636 that, among other things, mandated the separation or "unbundling" of interstate pipeline sales, transportation and storage services and established guidelines for capacity management effective in 1993. In fiscal 1995, the NJBPU unbundled the services provided and the rates charged to New Jersey commercial and small industrial customers as well. The transition to more competitive rates and services has the effect of increasing the opportunity for local gas distribution companies, and industrial and commercial customers to purchase natural gas from alternative sources, while increasing the potential business and regulatory risk borne by a local gas distribution company with respect to the acquisition and management of natural gas services.
Under Order No. 636 the pipeline companies are passing through to their customers transition costs associated with mandated restructuring, such as costs resulting from buying out unmarketable gas purchase contracts. The Company has been charged approximately $11 million of such costs through September 30, 1996. All of such costs, except for costs incurred by the Company's Pennsylvania operation, have been authorized for recovery through the Company's purchased gas adjustment clauses. The Company has recently filed for and expects full recovery of such costs in Pennsylvania. The Company currently estimates that its remaining Order No. 636 transition obligation will be approximately $7 million, which it expects also to recover through its purchased gas adjustment clauses as these costs are incurred. This transition obligation is subject to change based upon future FERC filings by the Company's pipeline suppliers.
The Company endeavors to utilize its pipeline capacity efficiently by matching capacity to its load profile to the extent feasible. To this end, the Company has had a broad unbundled service tariff for certain of its customers since 1987. The Company continues to avail itself of opportunities to improve the utilization of its pipeline capacity by pursuing broad based customer growth, including off-peak markets and utilizing capacity release and off-system sales opportunities afforded by Order No. 636 when operationally feasible.
The Company's gas supply during fiscal 1996 came from the following sources: approximately 5% from purchases under contracts with primary pipeline suppliers and additional purchases under their filed tariffs; approximately 95% from purchases from various producers and gas marketers, and purchases under long-term contracts with independent producers and less than 1% from propane and liquefied natural gas ("LNG"). The Company manages its gas supply portfolio to assure a diverse, reliable and secure supply of natural gas at the lowest reasonable cost. In fiscal 1996, the Company's largest single supplier accounted for 13% of the Company's total gas purchases.
The Company has long-term gas delivery contracts with seven interstate pipeline companies. Under these contracts, the Company has a right to delivery, on a firm year-round basis, of up to 92.2 million Mcf of natural gas annually with a maximum of approximately 273,000 Mcf per day. Both the price and conditions of service under these contracts are regulated by the FERC.
The Company has long-term gas purchase contracts for the supply of natural gas for its system with eight suppliers, including two interstate pipeline companies, three gas marketers and three independent producers. The Company also has a long-term supply and delivery contract with an interstate pipeline. Under these contracts, the Company has a right to purchase, on a firm year-round basis, up to 37.9 million Mcf of natural gas annually with a maximum of approximately 112,000 Mcf per day. In order to achieve greater supply flexibility, the Company recently allowed three long-term gas supply contracts to expire at the conclusion of their primary terms. As a result, the Company has reduced its fixed gas cost obligations. The Company has replaced these supplies with both spot market gas and shorter-term, seasonal firm supply, thus reducing the average term of its long-term obligations. In addition, the Company has access to spot market gas through the interstate pipeline system to supplement or replace, on a short-term basis, portions of its long-term gas purchase contracts when such actions can reduce overall gas costs or are necessary to supply interruptible customers. In fiscal 1995, the Company, along with seven other Northeastern and Mid-Atlantic gas distribution companies, formed the East Coast Natural Gas Cooperative LLC (the "Co-op"). The Co-op was formed with the goal of jointly managing certain portions of the members' gas supply portfolios, to increase reliability and reduce costs of service to customers, and to improve the competitive position of the member companies. Participation in and reliance upon certain contractual arrangements among Co-op members has allowed the Company to reduce costs associated with winter services.
In order to have available sufficient quantities of gas during the heating season, the Company stores gas during non-peak periods and purchases supplemental gas, including propane, LNG and gas available under contracts with certain large cogeneration customers, as it deems necessary. The storage contracts provide the Company with an aggregate of 15.4 million Mcf of natural gas storage capacity and provide the Company with the right to receive a maximum daily quantity of 176,100 Mcf. The contracts with cogeneration customers provide 35,800 Mcf of daily gas supply to meet peak loads by allowing the Company to take back capacity and supply that otherwise is dedicated to serve those customers.
The Company's peak load facilities in New Jersey include a propane-air plant with a daily production capacity of 27,400 Mcf, fixed propane storage totaling 674,000 gallons and rail car sidings capable of storing an additional 300,000 gallons. The Company has an LNG storage and vaporization facility with a daily delivery capacity of 24,300 Mcf and storage capacity of 131,000 Mcf.
The Company's maximum daily sendout in fiscal 1996 was approximately 370,600 Mcf in its Northern Division and 93,000 Mcf in the Southern Division states combined. The Company maintains sufficient gas supply and delivery capacity for a maximum daily sendout capacity for the Northern Division of approximately 392,750 Mcf and approximately 119,800 Mcf for the Southern Division states combined.
Certain of the Company's long-term contracts for the supply, storage and delivery of natural gas include fixed charges that amount to approximately $75 million annually. The Company currently recovers, and expects to continue to recover, such fixed charges through its purchased gas adjustment clauses. The Company also is committed to purchase, at market-related prices, minimum quantities of gas that, in the aggregate, are approximately 10 billion cubic feet per year or to pay certain costs in the event the minimum quantities are not taken. The Company expects that minimum demand on its systems for the duration of these contracts will continue to exceed these minimum purchase obligations. In certain of these contracts, the Company has recently negotiated terms with its suppliers which will allow the Company to reduce its commitment to its suppliers in connection with changes in the Company's markets that may result from further unbundling initiatives.
The Company distributes gas through approximately 5,900 miles of steel, cast iron and plastic mains. The Company has physical interconnections with five interstate pipelines in New Jersey and one interstate pipeline in Florida. In addition, the Company has physical interconnections in North Carolina and Pennsylvania with interstate pipelines which also connect to the Northern Division. Common interstate pipelines along the Company's operating system provide the Company with greater flexibility in managing pipeline capacity and supply, and thereby optimizing system utilization.
Regulation
The Company is subject to regulation with respect to, among other matters, rates, service, accounting and the issuance of securities. The Company is subject to regulation as an operating utility by the public utility commissions of the states in which it operates. The Company is also subject to regulation by the United States Department of Transportation under the Natural Gas Pipeline Safety Act of 1968, with respect to the design, installation, testing, construction and maintenance of pipeline facilities. Natural gas purchases, transportation service and storage service provided to the Company by interstate pipeline companies are subject to regulation by the FERC (see "--Gas Supply and Operations"). In addition, the Company is subject to federal and state legislation with respect to water, air quality, solid waste disposal and employee health and safety matters, and to
environmental regulations issued by the United States Environmental Protection Agency, the New Jersey Department of Environmental Protection and other federal and state agencies.
The Company's current rates and tariffs for its Northern Division reflect a rate case that was settled in October 1991, under which the Company obtained a weather normalization clause - see "Territory and Customers Served - Northern Division". In December 1994, the NJBPU authorized new tariffs which are designed to provide for unbundling of natural gas transportation and sales services for Northern Division commercial and industrial customers. The new tariffs became effective on January 1, 1995 and are designed to be neutral as to the operating margins of the Company.
The current rates and tariffs for the Florida operations were authorized on November 29, 1994. On October 29, 1996, the FPSC voted to authorize the Company to increase its base rates in Florida by $3.75 million annually. The rate increase reflects a rate base amounting to $91.9 million, reflecting the addition of investments in system improvements and expansion projects. Under the approval, the allowed return on equity will be 11.3% with an overall after-tax rate of return of 7.87%. The Company had been granted interim rate relief of $2.2 million effective in September 1996. The permanent increase, which is effective in December 1996, includes the interim adjustment. The FPSC order also gives the Company the flexibility to negotiate rates with certain business customers that have access to other energy sources.
The current rates and tariffs for the North Carolina, Maryland, Pennsylvania and New York operations were authorized between October 1988 and September 1995. These operations serve approximately 20,000 customers in aggregate. On September 20, 1995, the North Carolina Utilities Commission approved a stipulation to increase the Company's base rates in North Carolina by $385,000 annually. The tariff for NCGS reflects a weather normalization clause for its heat sensitive residential and commercial customers.
The Company's tariffs contain adjustment clauses that enable the Company to recover purchased gas costs. The adjustment clauses provide for periodic reconciliations of actual recoverable gas costs with the estimated amounts that have been billed. Under or over recoveries at the reconciliation date are recovered from or refunded to customers in subsequent periods.
Seasonal Aspects
Sales of gas to some classes of customers are affected by variations in demand due to changes in weather conditions, including normal seasonal variations throughout the year. The demand for gas for heating purposes is closely related to the severity of the winter heating season. Seasonal variations affect short-term cash requirements.
Persons Employed
As of September 30, 1996, the Company employed 1,086 persons, of which 293 employees in the Northern Division were represented by the Utility Workers Union of America (Local 424), 74 employees in Florida and 17 employees in Pennsylvania were represented by The Teamsters Union, and 43 employees in North Carolina were represented by the International Brotherhood of Electrical Workers. The current collective bargaining agreement with the Northern Division's union was negotiated effective November 20, 1994 and expires on November 20, 1998. The North Carolina union collective bargaining agreement was negotiated on August 20, 1995, and expires on August 20, 1998. The collective bargaining agreement in Pennsylvania was negotiated on November 30, 1996 and expires on September 30, 1997. The collective bargaining agreement in Florida expires on March 31, 1997.
Competition
The Company competes with distributors of other fuels and forms of energy, including electricity, fuel oil and propane, in all portions of the territories in which it has distribution mains. In addition, in 1992, the FERC issued Order No. 636 (see "Gas Supply and Operations"). Subsequently, initiatives were sponsored in various states, the purposes of which were to "unbundle" or separate into distinct transactions, the purchase of the gas commodity from the purchase of transportation services for the gas. To that end, as discussed under "Regulation", New Jersey has unbundled commercial and industrial gas purchase and transportation rates.
The unbundled sale of gas to customers is subject to competition from unregulated marketers and brokers, which generally do not bear the obligations or costs related to operating a regulated utility. Tariffs for transportation service have generally been designed to provide the same margins as bundled sales tariffs. Therefore, except for the regulatory risk of full recovery of gas costs, the Company is financially indifferent as to whether it transports gas, or sells gas and transportation together. The Company also faces the risk of loss of transportation service for large industrial customers which may have the ability to build connections to interstate gas pipelines and bypass the Company's distribution system. Gas distributors can also expect increased competition from electricity as deregulation in that industry decreases prices and increases supply sources. Alternatively, opportunities may increase for gas service to fuel generators for large industrial customers, replacing electric utility service.
The Company believes that in order to compete effectively, it must offer a greater variety of services at competitive prices. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Competition and Outlook" for a discussion of the Company's preparation for the impact of increased competition.
Franchises
The Company holds non-exclusive municipal franchises and other consents which enable it to provide natural gas in the territories it serves. The Company intends to seek to renew these franchises and consents as they expire.
Environment
Reference is made to Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations- Capital Expenditures and Commitments" and Note 10, "Commitments and Contingencies" of the "Notes to the Consolidated Financial Statements" for information regarding environmental matters affecting the Company.
Item 2.
Item 2. Properties
The Company owns approximately 5,900 miles of steel, cast iron and plastic gas mains, together with gate stations, meters and other gas equipment. In addition, the Company owns peak shaving plants, including an LNG storage facility in Elizabeth, New Jersey.
The Company also owns real property in Union, Middlesex, Warren, Sussex and Hunterdon Counties in New Jersey, and in Dade, Broward, Brevard and St. Lucie Counties in Florida, portions of which are under lease to others. The Company's owned properties include a general office building in Hialeah, Florida, that serves as the Southern Division's headquarters; another office facility in Rockledge, Florida; and office buildings in both Reidsville, North Carolina and Sayre, Pennsylvania, which serve as operating offices for the North Carolina and the Pennsylvania and New York operations, respectively. The Company also owns various service centers in New Jersey, Florida, North Carolina, Maryland and Pennsylvania from which the Company dispatches service crews and conducts construction and maintenance activities.
The Company leases office space in Bedminster, New Jersey, that serves as its corporate headquarters and leases certain other facilities in New Jersey and Florida that are operated as customer business offices or operating offices. The Company also leases approximately 160,000 square feet in an office building in Union, New Jersey, which serves as the Northern Division's headquarters.
Subject to minor exceptions and encumbrances, all other property materially important to the Company and all principal plants are owned in fee simple, except that most of the mains and pipes are installed in public streets under franchise or statutory rights or are constructed on rights of way acquired from the apparent owner of the fee.
Item 3.
Item 3. Legal Proceedings
The Company is involved in various claims and litigation incidental to its business. In the opinion of management, none of these claims and litigation will have a material adverse effect on the Company's results of operations or its financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was presented for submission to a vote of security holders through the solicitation of proxies or otherwise during the last quarter of fiscal 1996.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
NUI common stock is listed on the New York Stock Exchange and is traded under the symbol "NUI". The quarterly cash dividends paid and the reported high and low closing prices per share of NUI common stock for the two years ended September 30, 1996 were as follows:
Quarterly Price Range Cash Dividend High Low
Fiscal 1996: First Quarter $0.225 $17.75 $15.75 Second Quarter 0.225 19.25 17.125 Third Quarter 0.225 20.00 16.75 Fourth Quarter 0.225 20.00 16.50
Fiscal 1995: First Quarter $0.225 $18.375 $13.50 Second Quarter 0.225 16.50 14.25 Third Quarter 0.225 17.50 14.625 Fourth Quarter 0.225 16.875 14.875
There were 6,999 shareholders of record of NUI common stock at November 30, 1996.
It is the Company's intent to continue to pay quarterly dividends in the foreseeable future. NUI's dividend policy is reviewed on an ongoing basis and is dependent upon the Company's expectation of future earnings, cash flow, financial condition, capital requirements and other factors. On October 29, 1996, the Company increased its quarterly dividend to $0.235 per share of common stock. The previous quarterly rate was $0.225 per share of common stock.
The Company's long-term debt agreements include, among other things, restrictions as to the payment of cash dividends. Under the most restrictive of these provisions, the Company is permitted to pay $24 million of cash dividends at September 30, 1996.
Item 6.
Item 6. Selected Financial Data
____________________________________ Notes to the Selected Consolidated Financial Data: Net Income for fiscal 1995 includes restructuring and other non- recurring charges amounting to $5.6 million (after tax), or $0.61 per share.
Net income for fiscal 1994 includes the reversal of $1.8 million of income tax reserves and restructuring and other non-recurring charges amounting to $0.6 million (after tax). The effect of these items increased net income by $1.2 million, or $0.14 per share.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis refers to NUI Corporation and all of its operating divisions and subsidiaries (collectively referred to as "NUI" or the "Company"). The Company distributes and sells natural gas in six states through its Northern and Southern utility divisions. The Northern Division operates in New Jersey as Elizabethtown Gas Company. The Southern Division was formed effective April 1, 1995 through the consolidation of the Company's City Gas Company of Florida and Pennsylvania & Southern Gas Company ("PSGS") operations (see Note 3 of the Notes to the Consolidated Financial Statements). PSGS, which has operations in North Carolina, Maryland, Pennsylvania and New York, was acquired on April 19, 1994 (the "PSGS Merger") (see Note 2 of the Notes to the Consolidated Financial Statements).
In addition to gas distribution operations, the Company provides retail gas sales and related services through its NUI Energy, Inc. subsidiary (formerly Natural Gas Services, Inc.); bill processing and related customer services for utilities and municipalities through its Utility Business Services, Inc. subsidiary (formerly Utility Billing Services, Inc.); and wholesale energy brokerage and related services through its NUI Energy Brokers, Inc. subsidiary.
Results of Operations
Fiscal Years Ended September 30, 1996 and 1995
Net Income. Net income for fiscal 1996 was $14.9 million, or $1.52 per share, as compared with net income of $5.5 million, or $0.60 per share in fiscal 1995. The increase in the current year was primarily due to higher operating margins and approximately $5.6 million of after-tax non-recurring charges incurred in fiscal 1995. These increases were partially offset by higher operations and maintenance and depreciation expenses.
Net income per share in the current year was also affected by the increased average number of outstanding shares of common stock over the prior year, principally reflecting the Company's issuance of 1.8 million additional shares in May 1996 (see "Financing Activities and Resources- Common Stock").
Operating Revenues and Operating Margins. The Company's operating revenues include amounts billed for the cost of purchased gas pursuant to purchased gas adjustment clauses. Such clauses enable the Company to pass through to its utility customers, via periodic adjustments to customers' bills, increased or decreased costs incurred by the Company for purchased gas without affecting operating margins. Since the Company's utility operations do not earn a profit on the sale of the gas commodity, the Company's level of operating revenues is not necessarily indicative of financial performance. The Company's operating revenues increased by $92.5 million, or 25%, in fiscal 1996 as compared with fiscal 1995. The increase principally reflects the effect of weather in New Jersey that was 7% colder than normal and 23% colder than the prior year, and additional refunds to Northern Division customers in fiscal 1995 totaling $11.2 million as a result of lower than projected gas prices. Operating revenues also increased as a result of significantly higher unregulated sales in the current year, increased revenues from interruptible and industrial customers primarily as a result of higher gas prices incurred, increased customer service revenues and customer growth.
In order to take advantage of opportunities arising from increasing deregulation within the natural gas industry, the Company has increased its focus on transactions in which prices are established by competitive markets rather than regulatory mandate. The Company has increased its sales to commercial and industrial customers through its subsidiary, NUI Energy, Inc. In addition, the Company recently formed NUI Energy Brokers, Inc. for the purpose of enhancing margins through wholesale energy brokerage activities. The Company's utility operations also make sales of natural gas to customers outside of its franchise service territories when opportunities exist to obtain additional value from its supply and pipeline capacity under contract. While the prices charged for these activities are not regulated, margins realized are shared with customers of the utility operations as follows: New Jersey- 80%, Florida- 50% and North Carolina- 75%. The Company's other utility operations do not currently have margin sharing arrangements and therefore any off-system sales margins are returned 100% to customers.
The Company's operating margins increased by $10.7 million, or 7%, in fiscal 1996 as compared with fiscal 1995. The increase principally reflects customer growth, higher sales to unregulated customers, increased customer service revenues and the effect of colder-than-normal weather not fully returned to customers through the weather normalization clauses. The Company has weather normalization clauses in its New Jersey and North Carolina tariffs which are designed to help stabilize the Company's results by increasing amounts charged to customers when weather has been warmer than normal and by decreasing amounts charged when weather has been colder than normal. As a result of these weather normalization clauses, operating margins were approximately $2.2 million less in fiscal 1996 than they would have been without such clauses. In fiscal 1995, operating margins were approximately $4.5 million higher than they otherwise would have been without such clauses.
Other Operating Expenses. The Company's other operating expenses, excluding income taxes, decreased by approximately $3.3 million, or 3%, in fiscal 1996 as compared with fiscal 1995. The decrease was primarily the result of non-recurring pre-tax charges of $8.6 million incurred in fiscal 1995 (see Note 3 of the Notes to the Consolidated Financial Statements). Operations and maintenance expenses increased by approximately $4.0 million, or 4%, primarily due to costs incurred as a result of the colder weather in New Jersey during the current heating season, higher expenses related to the start-up and growth of the Company's non-regulated operations, and higher pension costs. Depreciation and amortization expenses increased by approximately $1.4 million primarily due to additional plant in service.
Income tax expense increased by approximately $4.9 million in fiscal 1996 as compared with fiscal 1995, primarily due to higher pre-tax income.
Interest Expense. Interest expense decreased by approximately $0.2 million, or 1%, in fiscal 1996 as compared with fiscal 1995. The decrease was primarily due to lower average short-term debt outstanding and short-term interest rates, and to approximately $0.6 million of
interest recorded in the prior year on the over-collection of gas costs by the Northern Division. This decrease was partially offset by higher average long-term interest rates due to the effect of a full year's inclusion of $70 million of Medium-Term Notes that were issued in fiscal 1995.
Fiscal Years Ended September 30, 1995 and 1994
Net Income. Net income for fiscal 1995 was $5.5 million, or $0.60 per share, as compared with net income of $10.8 million, or $1.25 per share in fiscal 1994. The decrease was primarily due to non-recurring charges which, on an after-tax basis, were approximately $5.6 million, or $0.61 per share, and the reversal in fiscal 1994 of approximately $1.8 million of income tax reserves. Partially offsetting this decrease was approximately $1.6 million of additional net income attributable to the inclusion of PSGS in the entire fiscal 1995 results. Absent the non- recurring charges, net income for fiscal 1995 would have been $11.1 million, or $1.21 per share.
Net income per share in fiscal 1995 was also reduced as a result of the increased number of outstanding shares of NUI common stock as compared with the prior year.
Operating Revenues and Operating Margins. The Company's operating revenues decreased by $28.8 million, or 7%, in fiscal 1995 as compared with fiscal 1994. The decrease principally reflects the effects of weather in New Jersey that was 13% warmer than normal and 12% warmer than the prior year, and refunds attributable to lower gas costs totaling $13.9 million to Northern Division customers (see "Regulatory Matters"). Operating revenues were also reduced by decreased sales to interruptible customers due to lower gas prices and the effect of purchased gas adjustment clauses. Partially offsetting these decreases were approximately $19.5 million of additional operating revenues from the inclusion of PSGS in the entire fiscal 1995 results, the effects of base rate and appliance leasing rate increases in Florida, increased sales to unregulated customers and other customer growth.
The Company's operating margins increased by $8.6 million, or 6%, in fiscal 1995 as compared with fiscal 1994. The increase was principally the result of the inclusion of PSGS for the entire fiscal 1995 results, increases in the number of customers served, and the base rate and appliance leasing rate increases in Florida. Partially offsetting these increases was the effect of the warmer-than-normal weather in New Jersey in fiscal 1995 not fully recovered through the weather normalization clause. As a result of the weather normalization clauses, operating margins were approximately $4.5 million higher in fiscal 1995 than they otherwise would have been without such clauses. There was no adjustment to operating margins in fiscal 1994 as the weather fell within the normal range.
Other Operating Expenses. The Company's other operating expenses, excluding income taxes, increased by $9.8 million, or 8%, in fiscal 1995 as compared with fiscal 1994. The increase was primarily the result of non-recurring pre-tax charges of $8.6 million (see Note 3 of the Notes to the Consolidated Financial Statements), an additional $4.6 million of other pre-tax operating expenses from the inclusion of PSGS in the entire fiscal 1995 results and an increase in depreciation expense due to additional utility plant in service. Partially offsetting these
increases were lower labor, pension and other employee benefit costs as a result of an early retirement program implemented by the Company in fiscal 1995 and other work force reductions.
Income taxes increased by $0.8 million in fiscal 1995 due to the reversal in fiscal 1994 of approximately $1.8 million of income tax reserves no longer required as a result of management's review of necessary reserve levels, partially offset by the effect of lower pre- tax income in fiscal 1995.
Interest Expense. Interest expense increased by $3.2 million in fiscal 1995 as compared with fiscal 1994. The increase was due to higher average outstanding borrowings, higher short-term interest rates and an increase of $0.6 million of interest recorded on the over collection of gas costs by the Northern Division. These increases were partially offset by a decrease in average long-term interest rates due to the refinancing of $46.5 million of the Company's 11% and 11.25% Gas Facilities Revenue Bonds at an interest rate of 6.35%.
Regulatory Matters
Northern Division
On August 2, 1996, the Northern Division filed a petition with the New Jersey Board of Public Utilities ("NJBPU") to increase its annual purchased gas adjustment revenues by approximately $22 million reflecting higher projected gas costs in the coming year. On December 4, 1996, the NJBPU approved an interim order authorizing the revenue increase effective in December 1996. The NJBPU is still reviewing the Company's request to incorporate, in a two-year pilot program, a performance-based mechanism whereby Northern Division customers and the Company would benefit from the Company's ability to secure gas at a cost more favorable than a market index benchmark. The proposed performance mechanism would provide a 50/50 sharing of risk and opportunity between the Northern Division customers and the Company on the difference between a monthly market benchmark and the actual cost of purchased gas, up to $1 million annually. Action by the NJBPU on the Company's request and final revenue increase is expected this winter. On November 3, 1995, the NJBPU approved a petition filed by the Northern Division to reduce its annual purchased gas adjustment revenues by approximately $13.7 million and to refund to customers approximately $2.7 million, due to lower gas costs. None of such revenue reduction and refund affects the operating margins of the Company.
On November 4, 1994, the NJBPU approved a petition filed by the Northern Division to reduce its annual purchased gas adjustment revenues by approximately $11.9 million. The decrease reflected the Company's projections for lower gas costs in fiscal 1995. The NJBPU also approved refunds of approximately $2.6 million, which were made in the first quarter of fiscal 1995, and $11.3 million, which were made in the third quarter of fiscal 1995, as a result of lower-than-projected gas prices paid in fiscal 1994 and fiscal 1995. None of such revenue reductions or refunds affected the operating margins of the Company.
Southern Division
On October 29, 1996, the Florida Public Service Commission (the "FPSC") voted to authorize the Company to increase its base rates in
Florida by $3.75 million annually. The rate increase reflects a rate base amounting to $91.9 million, reflecting the addition of investments in system improvements and expansion projects. Under the approval, the allowed return on equity will be 11.3% with an overall after-tax rate of return of 7.87%. The Company had been granted interim rate relief of $2.2 million effective in September 1996. The permanent increase, which is effective in December 1996, includes the interim adjustment. The FPSC order also gives the Company the flexibility to negotiate rates with certain business customers that have access to other energy sources.
On November 29, 1994, the FPSC voted to authorize the Company to increase its base rates in Florida by $1.6 million annually. The rate increase reflected a rate base amounting to approximately $82.6 million with an overall after-tax rate of return of 7.26%. In addition, it provided for several tariff changes designed to promote growth in developing markets for natural gas, and approved the deregulation of the Florida operation's leased appliance business which consists of leasing water heaters, clothes dryers and ranges to customers to promote natural gas usage in the residential market.
On September 20, 1995, the North Carolina Utilities Commission approved a stipulation to increase the Company's base rates in North Carolina by $385,000 annually. The stipulation provides for a rate base amounting to approximately $11.9 million with an overall after-tax rate of return of 7.89%. The rate increase was effective in October 1995.
Financing Activities and Resources
The Company's net cash provided by operating activities was $22.5 million in fiscal 1996, $47.9 million in fiscal 1995, and $22.5 million in fiscal 1994. The decrease in net cash provided by operating activities in fiscal 1996 as compared with fiscal 1995 principally reflects a higher level of accounts receivable primarily due to the colder weather and increased activity by the Company's unregulated businesses, and an under collection of gas costs through the Company's purchased gas adjustment clauses. The increase in net cash provided by operating activities in fiscal 1995 as compared with fiscal 1994 was primarily the result of lower accounts receivable due to accelerated collections of budget billed customer accounts, lower gas costs and a lower level of payments in fiscal 1995 for New Jersey gross receipts and franchise taxes; the 1994 New Jersey gross receipts and franchise tax payments included an additional amount representing almost a half year's liability as a result of a change in the payment schedule by the State.
Because the Company's business is highly seasonal, short-term debt is used to meet seasonal working capital requirements. The Company also borrows under its bank lines of credit to finance portions of its capital expenditures, pending refinancing through the issuance of equity or long-term indebtedness at a later date depending upon prevailing market conditions.
Short-Term Debt. The weighted average daily amounts outstanding of notes payable to banks and the weighted average interest rates on those amounts were $39.9 million at 5.6% in fiscal 1996, $58.0 million at 5.9% in fiscal 1995 and $82.0 million at 4.1% in fiscal 1994. The weighted average daily amounts of notes payable to banks decreased in fiscal 1996 primarily due to the full effect of the issuance of $70 million of
Medium-Term Notes in fiscal 1995, which were used to repay short-term debt, and the issuance of an additional 1.8 million shares of common stock, of which part of the proceeds were used to repay short-term debt. These decreases were partially offset by borrowings to finance portions of the Company's construction expenditures. The weighted average daily amount of notes payable decreased in fiscal 1995 as compared with fiscal 1994 principally due to the $70 million Medium-Term Note issuance.
At September 30, 1996, the Company had outstanding notes payable to banks amounting to $54.9 million and available unused lines of credit amounting to $76 million. Notes payable to banks increased as of September 30, 1996 as compared with the balance outstanding as of September 30, 1995, due to the use of short-term debt to finance portions of the Company's capital expenditures and to the under- collection of gas costs in the current year through the Company's purchased gas adjustment clauses.
Long-Term Debt and Funds for Construction Held by Trustee. On June 12, 1996, the Company issued $39 million of floating rate tax exempt Gas Facilities Revenue Bonds which mature on June 1, 2026. Under the terms of the floating rate debt, the interest rate paid by the Company, which averaged 3.1% since the date of issuance, is reset daily. The proceeds of the bond issuance are being used to finance part of the Northern Division's capital expenditure program.
In November 1994, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate of up to $100 million of debt and equity securities. On February 16, 1995, the Company issued $50 million aggregate principal amount of Medium-Term Notes, Series A, with a stated maturity date of February 1, 2005 and an interest rate of 8.35%. On May 25, 1995, the Company issued an additional $20 million of Medium-Term Notes, Series A, with a stated maturity date of August 1, 2002 and an interest rate of 7.125%. The net proceeds from these Medium-Term Notes were used to repay short-term debt. The Company may issue a portion of the remaining securities subject to the shelf registration during fiscal 1997 to finance part of the Company's capital expenditure program.
The Company expects to refinance approximately $55 million of its Gas Facilities Revenue Bonds in fiscal 1997. Regulatory approval for such refinancing has been sought, but has not yet been obtained.
On July 17, 1995, the Company completed an early redemption of its remaining $8.7 million of First Mortgage Bonds. The bonds carried coupon rates of 8% and 8.5% and were redeemed with proceeds from short-term debt.
The Company deposits in trust the unexpended portion of the net proceeds from its Gas Facilities Revenue Bonds until drawn upon for eligible capital expenditures. As of September 30, 1996 and 1995, the total unexpended portions of all of the Company's Gas Facilities Revenue Bonds were $42.6 million and $13.6 million, respectively, and are classified on the Company's consolidated balance sheet, including interest earned thereon, as funds for construction held by trustee.
Common Stock. On May 20, 1996, the Company issued an additional 1.8 million shares of NUI common stock. The net proceeds from the offering totaled $31.1 million and were used to reduce outstanding debt.
The Company periodically issues shares of common stock in connection with NUI Direct, the Company's dividend reinvestment and stock purchase plan, and various employee benefit plans. Effective in December 1994, these plans commenced purchasing shares on the open market to fulfill the plans' requirements, rather than purchasing the shares directly from the Company. Under the terms of these plans, the Company may periodically change the method of purchasing shares from open market purchases to purchases directly from the Company, or vice versa. The proceeds of such issuances amounted to $1.0 million and $6.3 million in fiscal 1995 and 1994, respectively, and were used to reduce outstanding short-term debt. Effective in October 1996, these plans began purchasing shares directly from the Company. In addition, during fiscal 1996, the Company began issuing shares of NUI common stock under three new stock plans. The proceeds from such issuances amounted to $0.3 million in fiscal 1996, and were used primarily to reduce outstanding short-term debt.
On April 19, 1994, the Company issued 683,443 additional shares of NUI common stock in connection with the PSGS Merger (see Note 2 of the Notes to the Consolidated Financial Statements).
Dividends. On October 29, 1996, the Company increased its quarterly dividend to $0.235 per share of common stock. The previous quarterly rate was $0.225 per share of common stock.
Capital Expenditures and Commitments
Capital expenditures, which consist primarily of expenditures to expand and upgrade the Company's gas distribution systems, were $37.1 million in fiscal 1996, $37.9 million in fiscal 1995 and $55.8 million in fiscal 1994. The Company's capital expenditures are expected to be approximately $57 million in fiscal 1997.
The Company owns or previously owned six former manufactured gas plant ("MGP") sites in the Northern Division and ten MGP sites in the Southern Division states. The Company, with the aid of environmental consultants, regularly assesses the potential future costs associated with conducting remedial actions, as well as the likelihood of whether such actions will be necessary. The Company records a reserve if it is probable that a liability will be incurred and the amount of the liability is reasonably estimable. Based on the Company's most recent assessment, as of September 30, 1996, the Company has recorded a total reserve for environmental investigation and remediation costs of approximately $34 million, which the Company expects it will expend in the next 20 years to remediate seven of the Company's 16 MGP sites. Of this reserve, approximately $30 million relates to Northern Division MGP sites and approximately $4 million relates to Southern Division MGP sites. In addition to these costs, the Company believes that it is possible that costs associated with conducting investigative activities and implementing remedial actions, if necessary, with respect to all of its MGP sites may exceed the approximately $34 million reserve by an amount that could range up to $21 million and be incurred during a future period of time that may range up to fifty years. Of this $21 million in possible future expenditures, approximately $10 million relates to the Northern Division MGP sites and approximately $11 million relates to the Southern Division MGP sites. As compared with the approximately $34 million reserve discussed above, the Company believes that it is less
likely that this additional $21 million will be incurred and therefore has not recorded it on its books. The Company believes that its remediation costs associated with the Northern Division MGP sites will be recoverable in rates and from insurance carriers. In July 1996, the NJBPU approved a petition filed by the Northern Division to establish an MGP Remediation Adjustment Clause ("RAC"). The RAC enables the Company to recover actual environmental expenditures incurred over a rolling seven-year period. On September 3, 1996, the Company made its initial filing under the RAC to begin recovery of $3.1 million of environmental costs incurred from inception through June 30, 1996. A decision is expected in fiscal 1997. With respect to costs which may be associated with the Southern Division MGP sites, the Company intends to pursue recovery from ratepayers, former owners and operators of the sites and from insurance carriers. However, the Company is not able at this time to express a belief as to whether any or all of these recovery efforts related to Southern Division MGP sites will ultimately be successful. For a further discussion of environmental matters, see Note 10 of the Notes to the Consolidated Financial Statements.
Certain of the Company's long-term contracts for the supply, storage and delivery of natural gas include fixed charges that amount to approximately $75 million annually. The Company currently recovers, and expects to continue to recover, such fixed charges through its purchased gas adjustment clauses. The Company also is committed to purchase, at market-related prices, minimum quantities of gas that, in the aggregate, are approximately 10 billion cubic feet per year or to pay certain costs in the event the minimum quantities are not taken. The Company expects that minimum demand on its systems for the duration of these contracts will continue to exceed these minimum purchase obligations.
The implementation of the Federal Energy Regulatory Commission's ("FERC") Order No. 636 required the restructuring of the Company's contracts with certain pipeline companies that together supply less than one-third of the Company's total firm gas supply. Under Order No. 636 the pipeline companies are passing through to their customers transition costs associated with mandated restructuring, such as costs resulting from buying out unmarketable gas purchase contracts. The Company has been charged approximately $11 million of such costs through September 30, 1996. All of such costs, except for costs incurred by the Company's Pennsylvania operation, have been authorized for recovery through the Company's purchased gas adjustment clauses. The Company has recently filed for and expects full recovery of such costs in Pennsylvania, as well. The Company currently estimates that its remaining Order No. 636 transition obligation will be approximately $7 million, which it expects also to recover through its purchased gas adjustment clauses as these costs are incurred. This transition obligation is subject to possible future FERC actions based upon filings by the Company's pipeline suppliers.
As of September 30, 1996, the Company is scheduled to repay approximately $1 million of long-term debt in fiscal 1997. No other long-term debt is scheduled to be repaid over the next five years.
Competition and Outlook
The natural gas distribution industry is undergoing significant changes. The sale of gas by utility companies to commercial and industrial customers has been ``unbundled,'' or separated from the transportation
service component, by several state regulatory commissions, including the NJBPU. In these states, while the sale of the gas commodity to commercial and industrial customers is now fully competitive, the transportation service remains regulated as to price and returns and subject to various restrictions and franchise protections. It is anticipated that additional states will unbundle these services for commercial and industrial customers and that, in the near term, some states will begin to unbundle these services for residential customers as well.
NUI intends to submit proposals to state regulators in New Jersey and Florida to continue the unbundling process within NUI's service territories. In New Jersey, the Company plans to submit, during 1997, a pilot program to unbundle gas service to certain residential customers. As opposed to the commercial and industrial markets, the long-term benefits of unbundling for the residential customer are not clear. Accordingly, this program will provide valuable information to the Company and to other gas marketing companies regarding the energy choices of residential gas customers. The Company also intends to submit a proposal to the FPSC to unbundle gas service to commercial customers, in a manner similar to that currently in place in the Company's New Jersey service territory. This proposal is expected to cover the Company's entire Florida commercial customer base.
Tariffs for transportation service have generally been designed to provide the same margins as bundled sales tariffs. Therefore, except for the regulatory risk of full recovery of gas costs, the Company is financially indifferent as to whether it transports gas or sells gas and transportation together. Unbundling provides the Company with an opportunity to make additional margins through its unregulated marketing subsidiary, NUI Energy, Inc. by competing with other unregulated marketers and brokers for sales of gas.
The Company also faces the risk of loss of transportation service for large industrial customers who may have the ability to build connections to interstate gas pipelines and thereby bypass the Company's distribution system. Gas distributors can also expect increased competition from electricity as deregulation in that industry decreases prices and increases supply sources. Alternatively, opportunities may increase for gas service to fuel generators for large industrial customers, replacing electric utility service.
The Company believes that in order to successfully compete in the deregulated energy markets, it must be able to provide customers with a broad array of energy and other products and services. In addition to the transportation and sale of gas, such products and services may include electricity and other energy commodities, energy efficiency services, comprehensive billing services, plant operations management, and fuels management. In addition, the Company may offer non-energy products and services to customers if such offerings are consistent with the Company's business plan.
Most of the products and services described above are not currently provided by the Company. Therefore, the Company intends to acquire the skills and capabilities to provide some or all of them through various means, including acquisitions of companies, hiring of experienced employees, and alliances, partnerships and joint ventures. All such
products and services would likely be offered through the coordinated marketing efforts of the Company.
Mergers and acquisitions within the energy industry, including the gas distribution industry, have accelerated as many companies endeavor to offer more varied services to customers. The Company believes that the broadening of its product offerings and the expansion of its customer base are important to its future success. As a result, the Company may participate in one or more mergers and/or acquisitions if the Company deems such actions consistent with its business plan.
The Company's operations are organized under three primary lines of business: Distribution Services, Energy Sales and Services, and Customer Services. The outlook for each is discussed below.
Distribution Services
Distribution Services is the core business of the Company, defined as the distribution, or transportation, of energy to retail customers. Such distribution service is regulated as to price, safety and return by the regulatory commissions of the states in which the Company operates.
The Company has substantial growth opportunities in its distribution business. Capital investments for the entire Company are expected to increase to an estimated $57 million in fiscal 1997 from $37 million in fiscal 1996, in large part to take advantage of these growth opportunities. Almost half of the planned capital investment in fiscal 1997 is related to providing gas or transportation service to new customers. The highest rate of expected growth compared to fiscal 1996 levels will occur in the Company's Southern Division, where population growth rates are above the national average, and substantially higher than those in the Northern Division. While the Company is confident that these 1997 investments will earn a return in excess of its cost of capital, there can be no assurance that the expected margins from each capital investment will be fully realized.
Customer Services
The Customer Services unit provides repair and maintenance for customer- owned gas facilities and appliances, and collects energy usage data for billing purposes. The Company's strategy for its Customer Services unit is to improve the quality and timeliness of customer services, and to charge prices that fully reflect the quality of those services to its customers.
The Company intends to implement several measures, including the use of new metering and communications technology, to improve the accuracy and timeliness of billing information. The Company is also working to lower the response time to customer service requests and to increase the types of services that are offered.
The Company has reviewed its rate schedules and has imposed new or increased fees where appropriate for certain customer-initiated services. NUI may request state regulatory agencies to approve other service fee increases, thereby providing income to offset cost of providing gas service to its general customer base.
Energy Sales and Services
The Company's primary operations in Energy Sales and Services are composed of three business lines. First, in fiscal 1995 the Company started Natural Gas Services, Inc., later renamed NUI Energy, Inc. ("NUI Energy") to market gas service to unbundled retail commercial and industrial customers. The margins from NUI Energy in fiscal 1996 were approximately $1.1 million, but the expenses related to this start- up operation resulted in a slight loss for the year. The Company plans to capture market share and expand margins in its NUI Energy unit by rapidly increasing the number and experience level of salespeople dedicated to its target markets. The working capital investment planned for NUI Energy's operations is not expected to exceed $4 million in fiscal 1997. Due to the start-up nature of NUI Energy, it is not expected to provide a meaningful contribution to earnings until fiscal 1998.
The second business line of Energy Sales and Services is wholesale sales and brokering of energy, primarily to utilities and energy marketing companies. The Company formed NUI Energy Brokers, Inc. ("Energy Brokers") in fiscal 1996 to perform such activities. Energy Brokers also is the provider of energy to the Company's retail marketing subsidiary, NUI Energy. Energy Brokers generated margins of approximately $1.6 million in fiscal 1996. Due to the start-up nature of Energy Brokers, it did not provide a meaningful contribution to earnings in fiscal 1996. The Company expects that margins will increase substantially in future years as Energy Brokers enhances its gas brokerage operations and expands into electric and other energy brokerage activities. The Company intends to minimize its risks in this business by limiting its financial and physical positions at any one time. As in any commodity brokerage activity, however, there are risks pertaining to market changes and credit exposure that can be managed but not eliminated. The earnings from Energy Brokers are likely to be more volatile, therefore, than the Company's distribution business.
The third business line within Energy Sales and Services is in "off- system sales", or the use of utility-owned gas assets to make sales to customers outside of NUI's service areas. Such assets include pipeline capacity and gas storage facilities. These assets are managed separately from non-utility assets, and their use is monitored and regulated by state regulatory commissions. Pursuant to regulatory agreements in some states in which the Company operates, the Company is able to retain a portion of the margins from these sales in varying percentages depending on the state in which the assets are owned. The Company's share of margins from off-system sales were approximately $0.9 million in fiscal 1996. Such margins are likely to increase in fiscal 1997 as margin sharing agreements in Florida and other states become fully implemented.
Effects of Inflation
The Company's tariffs provide purchased gas adjustment clauses through which rates charged to customers are adjusted for changes in the cost of gas on a reasonably current basis. Increases in other utility costs and expenses not otherwise offset by increases in revenues or reductions in other expenses could have an adverse effect on earnings due to the time lag associated with obtaining regulatory approval to recover such
increased costs and expenses, and the uncertainty of whether regulatory commissions will allow full recovery of such increased costs and expenses.
Item 8.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of the Company as of September 30, 1996 and 1995 and for each of the three years in the period ended September 30, 1996, the auditors' report thereon, and the unaudited quarterly financial data for the two-year period ended September 30, 1996, are included herewith as indicated on "Index to Financial Statements and Schedule" on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors and officers of the Company is included in the definitive Proxy Statement for the Company's Annual Meeting of Stockholders, which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than January 28, 1997.
Item 11.
Item 11. Executive Compensation
Information concerning executive compensation is included in the definitive Proxy Statement for the Company's Annual Meeting of Stockholders, which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than January 28, 1997.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and management is included in the definitive Proxy Statement for the Company's Annual Meeting of Stockholders, which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than January 28, 1997.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is included in the definitive Proxy Statement for the Company's Annual Meeting of Stockholders, which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than January 28, 1997.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Consolidated financial statements of the Company as of September 30, 1996 and 1995 and for each of the three years in the period ended September 30, 1996 and the auditors' report thereon, and the unaudited quarterly financial data for the two-year period ended September 30, 1996 are included herewith as indicated on the "Index to Financial Statements and Schedule" on page.
(2) The applicable financial statement schedule for the fiscal years 1996, 1995 and 1994 is included herewith as indicated on the "Index to Financial Statements and Schedule" on page.
(3) Exhibits: Exhibit Description Reference No. 2(i) Letter Agreement, dated June 29, Incorporated by 1993, by and between NUI Corporation reference to Exhibit and Pennsylvania & Southern Gas 2(i) to Registration Company Statement No. 33-50561
2(ii) Agreement and Plan of Merger, dated Incorporated by as of July 27, 1993, by and between reference to Exhibit NUI Corporation and Pennsylvania & 2(ii) to Registration Southern Gas Company Statement No. 33-50561
3(i) Certificate of Incorporation, amended Incorporated by and restated as of December 1, 1995 reference to Exhibit 3(i) of NUI's Form 10-K Report for Fiscal
3(ii) By-Laws, amended and restated as of Incorporated by October 24, 1995 reference to Exhibit 3(ii) of NUI's Form 10-K Report for Fiscal
4(i) Rights Agreement between NUI Incorporated by Corporation and Mellon Securities reference to NUI's Trust Company dated November 28, Form 8-K dated 1995 December 1, 1995.
10(i) Service Agreement by and between Incorporated by Transcontinental Gas Pipe Line reference to Exhibit Corporation and Elizabethtown Gas 10(i) to Registration Company ("EGC"), dated February 1, Statement No. 33-50561 1992 (#3686)
10(ii) Service Agreement under Rate Schedule Incorporated by GSS by and between Transcontinental reference to Exhibit Gas Pipe Line Corporation and EGC, 10(ii) to Registration dated May 3, 1972 Statement No. 33-50561
10(iii) Service Agreement under Rate Schedule Incorporated by LG-A by and between Transcontinental reference to Exhibit Gas Pipe Line Corporation and EGC, 10(iii) to dated January 12, 1971 Registration Statement No. 33-50561
10(iv) Service Agreement by and between Filed herewith Transcontinental Gas Pipe Line Corporation and EGC, dated November 1, 1995 (Contract #1.1997)
10(v) Service Agreement by and between Filed herewith Transcontinental Gas Pipe Line Corporation and EGC, dated
November 1, 1995 (Contract #1.1995) 10(vi) Firm Gas Transportation Agreement by Incorporated by and among Transcontinental Gas Pipe reference to Exhibit Line Corporation, EGC and National 10(vi) to Registration Fuel Gas Supply Corporation, dated Statement No. 33-50561 November 1, 1984
10(vii) Service Agreement by and among Filed herewith Transcontinental Gas Pipe Line Corporation and EGC, dated November 1, 1995 (Contract #1.1998)
10(viii) Service Agreement for Rate Schedule Incorporated by CDS by and between Texas Eastern reference to Exhibit Transmission Corporation and EGC, 10(viii) to NUI's Form dated December 1, 1993 (Contract 10-K Report for Fiscal #800361) 1994
10(ix) Service Agreement under Rate Schedule Incorporated by FTS-7 by and between Texas Eastern reference to Exhibit Transmission Corporation and EGC, 10(ix) to NUI's Form dated October 25, 1994 (Contract 10-K Report for Fiscal #331720) 1994
10(x) Service Agreement for Rate Schedule Incorporated by FTS-5 by and between Texas Eastern reference to Exhibit Transmission Corporation and EGC, 10(x) to Registration dated June 1, 1993 (Contract #330917) Statement No. 33-50561
10(xi) Service Agreement under Rate Schedule Incorporated by FTS-8 by and between Texas Eastern reference to Exhibit Transmission Corporation and EGC, 10(xi) to NUI's Form dated June 28, 1994 (Contract 10-K Report for Fiscal #331013) 1994
10(xii) Service Agreement for Rate Schedule Incorporated by FTS-5 by and between Texas Eastern reference to Exhibit Transmission Corporation and EGC, 10(xii) to dated June 1, 1993 (Contract #330212) Registration Statement No.33-50561
10(xiii) Service Agreement for Rate Schedule Incorporated by FTS-2 by and between Texas Eastern reference to Exhibit Transmission Corporation and EGC, 10(xiii) to dated June 1, 1993 (Contract #330788) Registration Statement No. 33-50561
10(xiv) Service Agreement under NTS Rate Incorporated by Schedule by and between Columbia Gas reference to Exhibit Transmission Corporation and EGC, 10(xiv) to NUI's Form dated November 1, 1993 (Contract 10-K Report for Fiscal #39275) 1993
10(xv) Service Agreement under SST Rate Incorporated by Schedule by and between Columbia Gas reference to Exhibit Transmission Corporation and EGC, 10(xv) to NUI's Form dated November 1, 1993 (Contract 10-K Report for Fiscal #38045) 1993
10(xvi) Service Agreement under FTS Rate Incorporated by Schedule by and between Columbia Gas reference to Exhibit Transmission Corporation and EGC, 10(xvi) to NUI's Form dated November 1, 1993 (Contract 10-K Report for Fiscal #37882) 1993
10(xvii) Gas Transportation Agreement under Incorporated by FT-G Rate Schedule by and between reference to Exhibit Tennessee Gas Pipeline Company and 10(xvii) to NUI's Form EGC (Contract #597), dated 10-K Report for Fiscal September 1, 1993 1993
10(xviii) Gas Transportation Agreement under Incorporated by FT-G Rate Schedule by and between reference to Exhibit Tennessee Gas Pipeline Company and 10(xviii) to NUI's EGC (Contract #603), dated Form 10-K Report for September 1, 1993 Fiscal 1993
10(xix) Service Agreement by and between Filed herewith Tennessee Gas Pipeline Company and EGC, dated November 1, 1995 (Contract #3832)
10(xx) Firm Transportation Service Agreement Incorporated by under FTS-1 Rate Schedule by and reference to Exhibit between City Gas and Florida Gas 10(xx) of NUI's Form Transmission dated October 1, 1993 10-K Report for Fiscal
10(xxi) Lease Agreement between EGC and Incorporated by Liberty Hall Joint Venture, dated reference to Exhibit August 17, 1987 10(vi) of EGC's Form 10-K Report for Fiscal
10(xxii) 1988 Stock Plan Incorporated by reference to Exhibit 10(viii) to Registration Statement No.33-21525
10(xxii) First Amendment to 1988 Stock Plan Incorporated by reference to Exhibit 10(xxxiii) to Registration Statement No. 33-46162
10(xxiii) Form of Termination of Employment and Incorporated by Change in Control Agreements reference to Exhibit 10(xxiii) of NUI's Form 10-K Report for Fiscal 1995
10(xxiv) Firm Transportation Service Agreement Incorporated by under FTS-2 Rate Schedule by and reference to Exhibit between City Gas and Florida Gas 10(xxiv) of NUI's Form Transmission, dated December 12, 1991 10-K Report for Fiscal and Amendment dated November 12, 1993 1994
10(xxv) Service Agreement under Rate Schedule Incorporated by LG-A by and between Transcontinental reference to Exhibit Gas Pipeline and North Carolina Gas 10(xxv) of NUI's Form Service Division of Pennsylvania & 10-K Report for Fiscal Southern Gas Company, dated August 5, 1994
10(xxvi) Service Agreement under Rate Schedule Incorporated by GSS by and between Transcontinental reference to Exhibit Gas Pipeline and North Carolina Gas 10(xxvi) of NUI's Form Service Division of Pennsylvania & 10-K Report for Fiscal Southern Gas Company, dated April 13, 1994
10(xxvii) 1996 Employee Stock Purchase Plan Filed herewith
10(xxviii) Service Agreement under Rate Schedule Incorporated by FT by and between Transcontinental reference to Exhibit Gas Pipeline and North Carolina Gas 10(xxviii) of NUI's Service Division of Pennsylvania & Form 10-K Report for Southern Gas Company, dated Fiscal 1994 February 1, 1992
10(xxix) 1996 Directors Stock Purchase Plan Filed herewith
10(xxx) Gas Storage Contract under Rate Incorporated by Schedule FS by and between Tennessee reference to Exhibit Gas Pipeline Company and Pennsylvania 10(xxx) of NUI's Form & Southern Gas Company, dated 10-K Report for Fiscal September 1, 1993 1994
10(xxxi) Gas Transportation Agreement under Incorporated by Rate Schedule FT-A by and between reference to Exhibit Tennessee Gas Pipeline Co. and 10(xxxi) of NUI's Form Pennsylvania & Southern Gas Company, 10-K Report for Fiscal dated September 1, 1993 (Contract 1994 #935)
10(xxxii) Gas Transportation Agreement under Incorporated by Rate Schedule FT-A by and between reference to Exhibit Tennessee Gas Pipeline Co. and 10(xxxii) of NUI's Pennsylvania & Southern Gas Company, Form 10-K Report for dated September 1, 1993 (Contract Fiscal 1994 #936)
10(xxxiii) Gas Transportation Agreement under Incorporated by Rate Schedule FT-A by and between reference to Exhibit Tennessee Gas Pipeline Co. and 10(xxxiii) of NUI's Pennsylvania & Southern Gas Company, Form 10-K Report for dated September 1, 1993 (Contract Fiscal 1994 #959)
10(xxxiv) Gas Transportation Agreement under Incorporated by Rate Schedule FT-A by and between reference to Exhibit Tennessee Gas Pipeline Co. and 10(xxxiv) of NUI's Pennsylvania & Southern Gas Company, Form 10-K Report for dated September 1, 1993 (Contract Fiscal 1994 #2157)
10(xxxv) Employment Agreement, dated as of Incorporated by July 29, 1988, between NUI reference to Exhibit Corporation and Jack Langer 10(xxxv) of NUI's Form 10-K Report for Fiscal
10(xxxvi) Service Agreement for Rate Schedule Incorporated by FT by and between Transcontinental reference to Exhibit Gas Pipe Line Corporation and EGC 10(xxxvi) of NUI's (Contract #1.0431) dated April 1, Form 10-K Report for 1995 Fiscal 1995
10(xxxvii) Service Agreement for Rate Schedule Incorporated by FT by and between Transcontinental reference to Exhibit Gas Pipe Line Corporation and EGC 10(xxxvii) of NUI's (Contract #1.0445) dated April 1, Form 10-K Report for 1995 Fiscal 1995
10(xxxviii) Service Agreement for Rate Schedule Incorporated by SS-1 by and between Texas Eastern reference to Exhibit Transmission Corporation and EGC 10(xxxviii) of NUI's (Contract (#400196) dated Form 10-K Report for September 23, 1994 Fiscal 1995
10(xxxix) Gas Storage Agreement under Rate Incorporated by Schedule FS by and between Tennessee reference to Exhibit Gas Pipeline Company and EGC 10(xxxix) of NUI's (Contract #8703) dated November 1, Form 10-K Report for 1994 Fiscal 1995
10(xl) Consulting Agreement, dated as of Incorporated by March 24, 1995, between NUI reference to Exhibit Corporation and John Kean 10(xl) of NUI's Form 10-K Report for Fiscal
10(xli) Form of Deferred Compensation Incorporated by Agreement reference to Exhibit 10(xli) ) of NUI's Form 10-K Report for Fiscal 1995
10(xlii) 1996 Stock Option and Stock Award Filed herewith Plan
12 Consolidated Ratio of Earnings to Fixed Charges Filed herewith
21 Subsidiaries of NUI Corporation Filed herewith
23 Consent of Independent Public Filed herewith Accountants
27 Financial Data Schedule Filed herewith
Exhibits listed above which have heretofore been filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, and which were designated as noted above and have not been amended, are hereby incorporated by reference and made a part hereof with the same effect as if filed herewith.
The Company is a party to various agreements with respect to long-term indebtedness to which the total amount of indebtedness authorized under each agreement, respectively, does not exceed 10% of the total assets of the Company on a consolidated basis. The Company hereby agrees to furnish to the Securities and Exchange Commission copies of such agreements upon request.
(b) Reports on Form 8-K:
None
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Consolidated Financial Statements of NUI Corporation and Subsidiaries:
Report of Independent Public Accountants.............F-2
Consolidated Financial Statements as of September 30, 1996 and 1995 and for each of the Three Years in the Period Ended September 30, 1996.............................F-3
Unaudited Quarterly Financial Data for the Two-Year Period Ended September 30, 1996 (Note 11 of the Notes to the Company's Consolidated Financial Statements)...............................F-18
Financial Statement Schedule of NUI Corporation and Subsidiaries:
Report of Independent Public Accountants.............F-2
Schedule II --- Valuation and Qualifying Accounts for each of the Three Years in the Period Ended September 30, 1996.....................F-19
All other schedules are omitted because they are not required, are inapplicable or the information is otherwise shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NUI Corporation:
We have audited the accompanying consolidated balance sheet and consolidated statement of capitalization of NUI Corporation (a New Jersey corporation) and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of income, cash flows and shareholders' equity, for each of the three years in the period ended September 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NUI Corporation and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York November 19, 1996
NUI Corporation and Subsidiaries Consolidated Statement of Income (Dollars in thousands, except per share amounts)
Years Ended September 30,
1996 1995 1994 Operating Margins Operating revenues $468,978 $376,445 $405,240 Less- Purchased gas and fuel 268,123 189,510 223,421 Gross receipts and franchise taxes 36,927 33,669 37,173 ------- ------- ------- 163,928 153,266 144,646 ------- ------- ------- Other Operating Expenses Operations and maintenance 94,497 90,523 90,904 Depreciation and amortization 21,134 19,750 17,446 Restructuring and other non- recurring charges -- 8,591 923 Other taxes 7,605 7,657 7,435 Income taxes 7,811 2,886 2,098 ------- ------- ------- 131,047 129,407 118,806 ------- ------- -------
Operating Income 32,881 23,859 25,840 ------ ------ ------ Other Income and Expense, Net 625 439 506 ------ ------ ------ Interest Expense 18,610 18,781 15,566 ------ ------ ------ Net Income $14,896 $ 5,517 $10,780 ====== ====== ====== Net Income Per Share of Common Stock $ 1.52 $ .60 $ 1.25 ====== ====== ====== Dividends Per Share of Common Stock $ .90 $ .90 $ 1.60 ====== ====== ====== Weighted Average Number of Shares of Common Stock Outstanding 9,819,431 9,152,837 8,617,790 ========= ========= =========
See the notes to the consolidated financial statements
NUI Corporation and Subsidiaries Consolidated Balance Sheet (Dollars in thousands)
September 30, 1996 1995 ASSETS Utility Plant Utility plant, at original cost $630,909 $597,360 Accumulated depreciation and amortization (200,333) (184,558) Unamortized plant acquisition adjustments 33,724 35,269 ------- ------- 464,300 448,071 ------- ------- Funds for Construction Held by Trustee 44,652 14,405 ------- ------- Investments in Marketable Securities, at market 4,417 2,723 ------- ------- Current Assets Cash and cash equivalents 3,736 3,601 Accounts receivable (less allowance for doubtful accounts of $2,288 in 1996 and $1,689 in 1995) 43,664 30,293 Fuel inventories, at average cost 29,191 27,629 Unrecovered purchased gas costs 6,987 -- Prepayments and other 18,525 20,007 ------- ------- 102,103 81,530 ------- ------- Other Assets Regulatory assets 52,482 54,374 Deferred assets 10,012 9,062 ------- ------- 62,494 63,436 ------- ------- $677,966 $610,165 ======= =======
CAPITALIZATION AND LIABILITIES Capitalization (See accompanying statements) Common shareholders' equity $179,107 $140,912 Preferred stock -- -- Long-term debt 230,100 222,060 ------- ------- 409,207 362,972 ------- -------
Capital Lease Obligations 10,466 11,114 ------- ------- Current Liabilities Current portion of long-term debt and capital lease obligations 2,584 1,759 Notes payable to banks 54,895 37,935 Accounts payable, customer deposits and accrued liabilities 65,902 58,770 Overrecovered purchased gas costs -- 4,895 Federal income and other taxes 2,696 7,718 ------- ------- 126,077 111,077 ------- ------- Other Liabilities Deferred Federal income taxes 59,050 51,946 Unamortized investment tax credits 6,635 7,102 Environmental remediation reserve 33,981 33,981 Regulatory and other liabilities 32,550 31,973 ------- ------- 132,216 125,002 ------- ------- $677,966 $610,165 ======= =======
See the notes to the consolidated financial statements
NUI Corporation and Subsidiaries Consolidated Statement of Cash Flows (Dollars in thousands)
Years Ended September 30,
1996 1995 1994
Operating Activities Net Income $14,896 $5,517 $10,780
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,315 20,932 18,733 Deferred Federal income taxes 7,569 2,005 6,893 Non-cash portion of restructuring and other non-recurring charges -- 4,913 683 Amortization of deferred investment tax credits (467) (468) (476) Other 4,617 4,626 2,926 Effects of changes in: Accounts receivable, net (13,371) 7,923 (5,724) Fuel inventories (1,562) 987 (193) Accounts payable, deposits and accruals 8,310 7,775 2,627 Over (under) recovered purchased gas costs (11,882) 2,949 4,332 Gross receipts and franchise taxes 1,543 (4,152) (11,112) Other (9,438) (5,088) (6,986) Net cash provided by operating activities 22,530 47,919 22,523 ------ ------ ------ Financing Activities Proceeds from sales of common stock, net of treasury stock purchased 31,371 577 6,323 Dividends to shareholders (8,700) (8,296) (13,836) Proceeds from issuance of long-term debt 39,000 70,000 66,500 Funds for construction held by trustee, net (29,049) 10,125 (2,093) Repayments of long-term debt (30,138) (9,902) (54,159) Principal payments under capital lease obligations (1,829) (1,844) (2,055) Net short-term borrowings (repayments) 16,960 (72,190) 33,893 ------ ------ ------ Net cash provided by (used for) financing activities 17,615 (11,530) 34,573 - Investing Activities Cash expenditures for utility plant (37,053) (37,976) (53,601) Proceeds from sales of marketable securities 1,268 1,199 659 Purchases of marketable securities (2,343) -- -- Proceeds from sale of assets -- -- 1,610 Other (1,882) (1,648) (2,000) ------ ------ ------ Net cash (used for) investing activities (40,010) (38,425) (53,332) ------ ------ ------ Net Increase (Decrease) in Cash and Cash Equivalents $ 135 $(2,036) $ 3,764 ===== ===== ===== Cash and Cash Equivalents At beginning of period $ 3,601 $ 5,637 $ 1,873 At end of period 3,736 3,601 5,637
Supplemental Disclosures of Cash Flows Income taxes paid (refunds received), net $ 2,612 $(1,129) $ 666 Interest paid 18,654 17,436 17,597
See the notes to the consolidated financial statements
NUI Corporation and Subsidiaries Consolidated Statement of Capitalization (Dollars in thousands)
September 30,
1996 1995 Long-Term Debt Gas facilities revenue bonds 6.625% due October 1, 2021* $ 8,400 $ 8,400 6.75% due October 1, 2021* 46,200 46,200 6.35% due October 1, 2022 46,500 46,500 6.40% due October 1, 2024* 20,000 20,000 Variable rate due June 1, 2026* 39,000 -- Medium-term notes 7.125% due August 1, 2002 20,000 20,000 8.35% due February 1, 2005 50,000 50,000 Credit agreement indebtedness -- 30,000 ESOP indebtedness, 6% due May 31, 2002 950 1,088 ------- ------- 231,050 222,188 Current portion of long-term debt (950) (128) ------- ------- 230,100 222,060 ------- -------
Preferred Stock, 5,000,000 shares authorized; -- -- none issued
Common Shareholders' Equity Common Stock, no par value; shares authorized: 30,000,000; shares outstanding: 11,085,876 in 1996 and 9,201,237 in 1995 171,968 139,093 Shares held in treasury: 92,731 shares in 1996 (1,564) (1,265) and 90,397 in 1995 Retained earnings 10,117 3,921 Valuation of marketable securities 389 232 Unearned employee compensation (1,803) (1,069) ------- ------- 179,107 140,912 ------- ------- Total Capitalization $409,207 $362,972 ======= =======
* The total unexpended portions of the net proceeds from these bonds, amounting to $42.6 million and $13.6 million as of September 30, 1996 and September 30, 1995, respectively, are carried on the Company's consolidated balance sheet as funds for construction held by trustee, including interest earned thereon, until drawn upon for eligible construction expenditures.
See the notes to the consolidated financial statements
* Represents common stock issued in connection with NUI Direct and various employee benefit plans.
See the notes to the consolidated financial statements.
NUI Corporation and Subsidiaries Notes to the Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include all operating divisions and subsidiaries of NUI Corporation (collectively referred to as "NUI" or the "Company"). The Company distributes and sells natural gas and related services in six states through its Northern and Southern utility Divisions. The Northern Division operates in New Jersey as Elizabethtown Gas Company. The Southern Division was formed effective April 1, 1995 through the consolidation of the Company's City Gas Company of Florida ("CGF") and Pennsylvania & Southern Gas Company ("PSGS") operations (see Note 3). PSGS, which has operations in North Carolina, Maryland, Pennsylvania and New York, was acquired on April 19, 1994. In addition to gas distribution operations, the Company provides retail gas sales and related services through its NUI Energy, Inc. subsidiary; bill processing and related customer services for utilities and municipalities through its Utility Business Services, Inc. subsidiary; and wholesale energy brokerage and related services through its NUI Energy Brokers, Inc. subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation.
Regulation. The Company is subject to regulation as an operating utility by the public utility commissions of the states in which it operates.
Utility Plant. Utility plant is stated at its original cost. Depreciation is provided on a straight-line basis over the remaining estimated lives of depreciable property by applying composite average annual rates as approved by the state commissions. The composite average annual depreciation rate was 3% in fiscal 1996, 3.2% in fiscal 1995 and 3.1% in fiscal 1994. At the time properties are retired, the original cost plus the cost of retirement, less salvage, is charged to accumulated depreciation. Repairs of all utility plant and replacements and renewals of minor items of property are charged to maintenance expense as incurred.
The unamortized plant acquisition adjustments represent the remaining portion of the excess of the purchase price over the book value of net assets acquired. The excess is being amortized on a straight-line basis over thirty years from the date of acquisition. The results of operations of acquired entities have been included in the accompanying consolidated financial statements for the periods subsequent to their acquisition.
Operating Revenues and Purchased Gas and Fuel Costs. Operating revenues include accrued unbilled revenues through the end of each accounting period. Operating revenues also reflect adjustments attributable to weather normalization clauses that are accrued during the winter heating season and billed or credited to customers in the following year.
Costs of purchased gas and fuel are recognized as expenses in accordance with the purchased gas adjustment clause applicable in each state. Such clauses provide for periodic reconciliations of actual recoverable gas costs and the estimated amounts that have been billed to customers. Under or over recoveries are deferred when they arise and are recovered from or refunded to customers in subsequent periods.
Restricted Cash. In accordance with certain regulatory requirements in North Carolina, the Company is required to deposit pipeline supplier refunds in an interest-bearing account. These funds, including interest earned thereon, amounted to approximately $1.0 million and $0.9 million as of September 30, 1996 and 1995, respectively, and are restricted for uses as prescribed by North Carolina regulatory authorities. This balance is classified in the Company's consolidated balance sheet in deferred charges with a corresponding amount included in other liabilities.
Income Taxes. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires the liability method to be used to account for deferred income taxes. Under this method, deferred income taxes related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the tax is expected to be paid.
Investment tax credits, which were generated principally in connection with additions to utility plant made prior to January 1, 1986, are being amortized over the estimated service lives of the properties that gave rise to the credits.
Regulatory Assets and Liabilities. The Company's utility operations follow the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). In general, SFAS 71 requires deferral of certain costs and obligations, based upon orders received from regulators, to be recovered from or refunded to customers in future periods. The following represents the Company's regulatory assets and liabilities deferred in the accompanying consolidated balance sheet as of September 30, 1996 and 1995 (in thousands):
1996 1995
Regulatory Assets Environmental investigation and remediation costs $33,658 $32,967 Unrecovered gas costs 6,730 9,675 Postretirement and other employee benefits 8,339 6,332 Deferred piping allowances 3,010 3,249 Other 745 2,151 ------ ------ $52,482 $54,374 ====== ====== Regulatory Liabilities Net overcollection of income taxes $ 5,208 $ 5,365 Gas supplier refunds 850 1,387 Other 88 222 ----- ----- $ 6,146 $ 6,974 ===== ===== Although the gas distribution industry is becoming increasingly competitive, the Company's utility operations continue to recover their costs through cost-based rates established by the public utility commissions. As a result, the Company believes that the accounting prescribed under SFAS 71 remains appropriate.
Cash Equivalents. Cash equivalents consist of a money market account which invests in securities with original maturities of three months or less.
Net Income Per Share of Common Stock. Net income per share of common stock is based on the weighted average number of shares of NUI common stock outstanding. The assumed exercise of outstanding employee stock options would not have a dilutive effect on net income per share of common stock.
New Accounting Standards. The Company is required to adopt Statement of Financial Accounting Standards No. 121 ("SFAS 121") in fiscal 1997. SFAS 121 establishes accounting standards for the impairment of long-lived assets. The adoption of this statement is not expected to have a material impact on the Company's financial condition or results of operations.
The Company is also required to adopt Statement of Financial Accounting Standards No. 123 ("SFAS 123") in fiscal 1997. SFAS 123 establishes a fair value method of accounting for or disclosing stock-based compensation plans. The Company intends to adopt the disclosure provisions of SFAS 123 only, which requires disclosing the pro-forma consolidated net income and earnings per share amounts assuming the fair value accounting provisions of SFAS 123 were adopted. This adoption will not affect the Company's financial condition or results of operations.
2. Acquisition of Pennsylvania & Southern Gas Company
On April 19, 1994, the Company issued and exchanged 683,443 shares of NUI common stock for all of the outstanding common shares of PSGS pursuant to the merger of PSGS with and into NUI (the "PSGS Merger").
The transaction was valued at approximately $17 million. PSGS operates as part of the Southern Division of NUI.
The PSGS Merger was accounted for as a purchase in accordance with generally accepted accounting principles and the results of operations of PSGS have been consolidated with those of NUI as of April 19, 1994. Due to the effects of the regulatory process, the underlying net assets of PSGS have been recorded at their historical net book value. The excess of the purchase price over the historical net book value of the underlying net assets of PSGS is included in utility plant as a "plant acquisition adjustment" and is being amortized over a thirty year period. On September 30, 1994, NUI sold its PSGS propane assets. The excess of the purchase price over the net book value of the propane assets sold reduced the plant acquisition adjustment by approximately $1.4 million. As discussed further in Note 10, the Company, in connection with the PSGS Merger, acquired former manufactured gas plant facilities. No provision for environmental remediation had been made by PSGS in its financial statements prior to the PSGS Merger. As a result, during fiscal years 1994 and 1995, the Company recorded a total of $3.7 million additional plant acquisition adjustment to provide for probable environmental remediation liabilities.
3. Restructuring and Other Non-Recurring Charges
In fiscal 1995, the Company incurred approximately pre-tax $8.6 million of non-recurring charges for, among other things, the implementation of an early retirement program and the consolidation of its Florida and PSGS operations.
In November 1994, the Company offered an early retirement program to certain employees. The program, which became effective on April 1, 1995, was accepted by 95 of the eligible 112 employees. In accordance with Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", the Company recorded a special termination charge of approximately $4.1 million. In addition, the Company recorded approximately $0.8 million of other benefit expenses associated with these employees. The Company also deferred, pending regulatory recovery, a charge of approximately $0.6 million for special termination benefits.
Effective April 1, 1995, the Company consolidated its Florida and PSGS divisions to form a new NUI Southern Division. The Southern Division is headquartered in Hialeah, Florida. As a result, PSGS headquarters in Sayre, Pennsylvania was closed effective December 31, 1995. The Company incurred a charge of approximately $2.6 million for severance and other expenses associated with the consolidation of the two divisions.
In addition, during fiscal 1995, the Company incurred a charge of approximately $0.8 million to write down certain regulatory assets as a result of the November 1994 settlement of the Company's Florida rate case.
The Company also incurred approximately $0.9 million of non-recurring charges in fiscal 1994 related to the write-down of certain non- recoverable regulatory assets and for certain restructuring costs in Florida.
4. Capitalization
Long-Term Debt. On June 12, 1996, the Company issued $39 million of floating rate tax exempt Gas Facilities Revenue Bonds which mature on June 1, 2026. Under the terms of the floating rate debt, the interest rate paid by the Company, which averaged 3.1% since the date of issuance, is reset daily. The proceeds of the bond issuance are being used to finance part of the Northern Division's capital expenditure program.
On February 16, 1995, the Company issued $50 million aggregate principal amount of Medium-Term Notes, Series A, with a stated maturity date of February 1, 2005 and an interest rate of 8.35%. On May 25, 1995, the Company issued an additional $20 million of Medium-Term Notes, Series A, with a stated maturity date of August 1, 2002 and an interest rate of 7.125%. The net proceeds from these Medium-Term Notes were used to repay short-term debt. On July 17, 1995, the Company completed an early redemption of its remaining $8.7 million of First Mortgage Bonds. The bonds carried coupon rates of 8% and 8.5% and were redeemed with proceeds from short-term debt.
The Company deposits in trust the unexpended portion of the net proceeds from its Gas Facilities Revenue Bonds until drawn upon for eligible expenditures. As of September 30, 1996 and 1995, the total unexpended portions of all of the Company's Gas Facilities Revenue Bonds were $42.6 million and $13.6 million, respectively, and are classified on the Company's consolidated balance sheet, including interest earned thereon, as funds for construction held by trustee.
As of September 30, 1996, the Company is scheduled to repay approximately $1 million of long-term debt in fiscal 1997. No other long-term debt is scheduled to be repaid over the next five years.
Preferred Stock. The Company has 5,000,000 shares of authorized but unissued preferred stock. Shares of Series A Junior Participating Preferred Stock have been reserved for possible future issuance in connection with the Company's Shareholder Rights Plan described below.
Shareholder Rights Plan. In November 1995, the Company's Board of Directors adopted a Shareholder Rights Plan under which shareholders of NUI common stock were issued as a dividend one right to buy one one- hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $50 ("Right") for each share of common stock held. The Rights initially attach to the shares of NUI common stock and can be exercised or transferred only if a person or group (an "Acquirer"), with certain exceptions, acquires, or commences a tender offer to acquire, beneficial ownership of 15% or more of NUI common stock. Each Right, except those held by the Acquirer, may be used by the non-acquiring shareholders to purchase, at the Right's exercise price, shares of NUI common stock having a market value equivalent to twice the Right's exercise price, thus substantially reducing the Acquirer's ownership percentage.
The Company may redeem the Rights at $0.001 per Right at any time prior to the occurrence of any such event. All Rights expire on November 27, 2005.
Common Stock. On May 20, 1996, the Company issued an additional 1.8 million shares of NUI common stock. The net proceeds from the offering totaled $31.1 million and were used to repay the Company's $30 million credit agreement indebtedness with the remainder used to reduce outstanding short-term debt.
As discussed in Note 2, the Company issued 683,443 shares of NUI common stock in connection with the acquisition of PSGS on April 19, 1994.
The Company periodically issues shares of common stock in connection with NUI Direct, the Company's dividend reinvestment and stock purchase plan, and various employee benefit plans. Effective in December 1994, these plans commenced purchasing shares on the open market to fulfill the plans' requirements rather than purchasing the shares directly from the Company. Under the terms of these plans, the Company may change the method of purchasing shares from open market purchases to purchases directly from the Company, or vice versa. Effective in October 1996, the Company began purchasing shares directly from the Company for these common stock plans. In addition, during fiscal 1996, the Company began issuing new shares of NUI common stock under three new stock plans.
At September 30, 1996, shares reserved for issuance under the Company's common stock plans were: NUI Direct, 202,325; Savings and Investment Plan, 325,769; 1996 Stock Option and Stock Award Plan, 212,092; 1996 Employee Stock Purchase Plan, 123,038; and the 1996 Director Stock Purchase Plan, 65,102.
Stock Plans. The Company's Board of Directors believes that both directors' and management's interest should be closely aligned with that of shareholders. As a result, under the 1996 Stock Option and Stock Award Plan, the 1996 Director Stock Purchase Plan and the 1988 Stock Plan, the Company has a long-term compensation program for directors, executive officers and key employees involving shares of NUI common stock.
Each non-employee director of the Company earns an annual retainer fee that consists of a deferred grant of shares of NUI common stock. As of September 30, 1996, such retainer fee was equivalent to a fair market value of $15,000 on the date of grant. In addition, non-employee directors who also chair committees of the Board receive additional deferred grants with a fair market value of $2,500 on the date of grant. Deferred stock grants are increased on each common stock dividend payment date by an amount equal to the number of shares of NUI common stock which would have been purchased had all deferred stock grants been issued and the dividends reinvested in additional shares. As of September 30, 1996, the total deferred grants for non-employee directors were 27,681 shares of NUI common stock, an increase of 6,585 shares during fiscal 1996.
Shares granted as long-term compensation for executive officers and key employees amounted to 65,113 shares in fiscal 1996, 17,620 shares in fiscal 1995 and 15,730 shares in fiscal 1994. As of September 30, 1996, a total of 87,297 shares of restricted stock that have been granted as long-term compensation are subject to future vesting requirements, and are restricted from resale.
Executive officers and key employees are eligible to be granted options for the purchase of NUI common stock at prices equal to the market price
per share on the date of grant. The option must be exercised within ten years from the date of grant. Transactions during the last three fiscal years involving stock options were as follows:
Number of Option Price Shares per share
Options outstanding and exercisable at September 30, 1993 16,450 $14.42-$17.625
Fiscal 1994 Exercised (2,300) $14.42 Canceled (1,150) $14.42
Fiscal 1995 Canceled (3,200) $15.77 ----- Options outstanding and exercisable at September 30, 1996 9,800 $15.77-$17.625 =====
As of September 30, 1996, options with respect to 2,400 shares carry stock appreciation rights with an exercise price of $15.77 per share. During fiscal 1995, payment on 1,600 stock appreciation rights was made at an exercise price of $15.77.
Employee Stock Ownership Plan. On March 30, 1995, the Company terminated the employee stock ownership plan ("ESOP") which was provided for certain employees of CGF. The ESOP is completing its allocation of plan assets among participant's accounts in accordance with a private letter ruling issued by the Internal Revenue Service in October 1996 at the request of the Company. Upon completion of the allocations, which is expected in fiscal 1997, the ESOP indebtedness will be satisfied.
The Company incurred ESOP expense amounting to $0.2 million in both fiscal 1996 and 1995, and $0.9 million in fiscal 1994. As of September 30, 1996, the ESOP trust held 113,895 shares of NUI common stock, of which 62,047 shares were allocated to participating employees. Participating employees are entitled to vote the allocated shares and the ESOP trustee votes the remainder of the shares.
Dividend Restrictions. The Company's long-term debt agreements include, among other things, restrictions as to the payment of cash dividends. Under the most restrictive of these provisions, the Company was permitted to pay $24 million of cash dividends at September 30, 1996.
5. Notes Payable to Banks
At September 30, 1996, the Company's outstanding notes payable to banks were $54.9 million with a combined weighted average interest rate of 5.8%. Unused lines of credit at September 30, 1996 were $76 million.
The weighted average daily amount outstanding of notes payable to banks and the weighted average interest rate on that amount was $39.9 million at 5.6% in fiscal 1996, $58 million at 5.9% in fiscal 1995 and $82 million at 4.1% in fiscal 1994.
6. Leases
Utility plant held under capital leases amounted to $23.5 million at September 30, 1996 and $22.9 million at September 30, 1995, with related accumulated amortization of $11.5 million and $10.3 million, respectively. These properties consist principally of leasehold improvements and office furniture and fixtures. A summary of future minimum payments for properties held under capital leases follows (in thousands):
1997 $2,582 1998 2,397 1999 8,875 2000 415 2001 300 2002 and thereafter 344 Total future minimum payments 14,913 Amount representing interest (2,813) Current portion of capital lease obligations (1,634) ------ Capital lease obligation $10,466 ======
Minimum payments under noncancelable operating leases, which relate principally to office space, are approximately $4.1 million in fiscal 1997, $3.8 million in fiscal 1998, $3.7 million in fiscal 1999, $3.8 million in fiscal 2000 and $3.9 million in fiscal 2001.
Rents charged to operations expense were $4.6 million in both fiscal 1996 and fiscal 1995, and $4.3 million in fiscal 1994.
7. Financial Instruments
As of September 30, 1996 and 1995, the market value of the Company's investments in marketable securities exceeded their cost by approximately $623,000 and $372,000, respectively, which unrealized gain is reflected net of deferred income taxes in the accompanying consolidated balance sheet as a component of shareholders' equity.
The fair value of the Company's cash equivalents, funds for construction held by trustee and notes payable to banks are approximately equivalent to their carrying value. The fair value of the Company's long-term debt exceeded its carrying value by approximately $11 million and $8 million as of September 30, 1996 and 1995, respectively. The fair value of long-term debt was estimated based on quoted market prices for the same or similar issues.
8. Consolidated Taxes
The provision for Federal income taxes is comprised of the following (in thousands):
1996 1995 1994
Currently payable $ 647 $ 833 $(4,102) Deferred, net 7,569 2,005 6,893 Amortization of investment tax credits (467) (468) (476) ----- ----- ----- Total provision for Federal income taxes $7,749 $2,370 $ 2,315 ===== ===== =====
The components of the Company's net deferred tax liability (asset) as of September 30, 1996 and 1995 are as follows (in thousands):
1996 1995
Depreciation and other utility plant differences $47,700 $45,142 Plant acquisition adjustments 11,254 11,650 Alternative minimum tax credit (2,984) (4,632) Unamortized investment tax credit (2,306) (2,467) Deferred charges and regulatory assets 8,864 5,882 Gross receipts and franchise taxes 2,559 3,132 Other (6,037) (6,761) ------ ------ $59,050 $51,946 ====== ======
The alternative minimum tax credit can be carried forward indefinitely to reduce the Company's future tax liability.
The Company's effective income tax rates differ from the statutory Federal income tax rates due to the following (in thousands):
1996 1995 1994 Income before Federal income taxes $22,645 $ 7,888 $13,095 ------ ------ ------
Federal income taxes computed at statutory tax rate (35% in fiscal 1996 and 34% in both fiscal 1995 and 1994) 7,926 2,682 4,452 Increase (reduction) resulting from: Excess of book over tax depreciation 360 367 373 Amortization of investment tax credits (467) (468) (476) Adjustments of prior years' taxes -- -- (1,770) Other, net (70) (211) (264) ----- ----- ----- Total provision for Federal income taxes 7,749 2,370 2,315 Provision (benefit) for state income taxes 395 756 (212) ----- ----- ----- Total provision for income taxes 8,144 3,126 2,103 (Less) provision included in other income and expense (333) (240) (5) Provision for income taxes included in operating expenses $7,811 $2,886 $2,098 ===== ===== =====
9. Retirement Benefits
Pension Benefits. The Company has non-contributory defined benefit retirement plans which cover all of its employees other than the CGF union employees who participate in a union sponsored multi-employer plan. The Company funds its plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974 and makes contributions to the union sponsored plan in accordance with its contractual obligations. Benefits paid under the Company's plans are based on years of service and levels of compensation. The Company's actuarial calculation of pension expense is based on the projected unit cost method.
The components of pension expense for the Company's plans were as follows (in thousands):
1996 1995 1994
Service cost $1,973 $ 2,044 $2,579 Interest cost 6,103 5,290 5,016 Actual return on plan assets (15,076) (20,072) (163) Net amortization and deferral 6,653 11,949 (7,035) Special termination benefits -- 4,083 -- ----- ----- ----- Pension expense (credit) $ (347) $ 3,294 $ 397 ===== ===== =====
The status of the Company's funded plans as of September 30 was as follows (in thousands):
1996 1995 Actuarial present value of benefit obligations: Vested benefits $67,142 $64,125 Non-vested benefits 2,531 2,626 ------- ------- Accumulated benefit obligations 69,673 66,751 Projected increases in compensation levels 11,725 15,658 ------- ------- Projected benefit obligation 81,398 82,409 Market value of plan assets 109,952 96,910 ------- ------- Plan assets in excess of projected benefit obligation 28,554 14,501 Unrecognized net gain (22,756) (11,175) Unrecognized prior service cost 773 888 Unrecognized net transition asset (3,272) ( 3,924) Deferred special termination benefits -- (573) ------- ------- Pension prepayment (liability) $ 3,299 $ (283) ======= ======
The projected benefit obligation was calculated using a discount rate of 8% in fiscal 1996 and 7.5% in fiscal 1995 and an assumed annual increase in compensation levels of 4% in fiscal 1996 and 5% in fiscal 1995. The expected long-term rate of return on assets is 9%. The assets of the Company's funded plans are invested primarily in publicly-traded fixed income and equity securities.
Certain key employees also participate in an unfunded supplemental retirement plan. The projected benefit obligation under this plan was $2.6 million as of September 30, 1996 and $3.1 million as of September 30, 1995, and the expense for this plan was approximately $0.4 million in both fiscal 1996 and fiscal 1995, and $0.5 million in fiscal 1994.
Postretirement Benefits Other Than Pensions. The Company provides certain health care benefits to all retirees receiving benefits under a Company pension plan other than the CGF plan, who reach retirement age while working for the Company.
The Company accounts for these plans under Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), which, among other things, requires companies to accrue the expected cost of providing other postretirement benefits to employees and their beneficiaries during the years that eligible employees render the necessary service. The Company does not currently fund these future benefits.
The components of postretirement benefit expense other than pensions for the years ended September 30, 1996 and 1995 were as follows (in thousands):
1996 1995
Service cost $ 600 $ 518 Interest cost 2,096 1,713 Amortization of transition obligation 1,028 1,028 Other 115 132 Net postretirement expense 3,839 3,391 Benefits paid (1,284) (1,352) ----- ----- Increase in accrued postretirement benefit obligations $2,555 $2,039 ===== =====
The status of the Company's postretirement plans other than pensions as of September 30, 1996 and 1995 was as follows (in thousands):
1996 1995
Accumulated postretirement benefit obligation: Retirees $19,905 $15,045 Fully eligible active plan participants 3,095 3,729 Other active plan participants 6,721 6,725 ------ ------ Total accumulated postretirement benefit obligations 29,721 25,499 Unrecognized transition obligation (17,475) (18,503) Unrecognized net (loss) (4,113) (1,844) Unrecognized prior service cost (426) -- ------ ------ Accrued postretirement benefit obligation $7,707 $ 5,152 ===== =====
The health care trend rate assumption is 11.85% in 1997 gradually decreasing to 5.5% for the year 2006 and later. The discount rate used to compute the accumulated postretirement benefit obligation was 8% in fiscal 1996 and 7.5% in fiscal 1995. An increase in the health care trend rate assumption by one percentage point in all years would increase the accumulated postretirement benefit obligation by approximately $4 million and the aggregate annual service and interest costs by approximately $0.5 million.
The Company has received an order from the North Carolina Utilities Commission to include the amount of postretirement benefit expense other than pensions computed under SFAS 106 in rates. The Company has also received an order from the New Jersey Board of Public Utilities (the "NJBPU") permitting the Northern Division to defer the difference between the amount of postretirement benefits expense other than pensions computed as claims are incurred and the amount computed on the accrual method in accordance with SFAS 106, pending ratemaking treatment that would be considered in a base rate proceeding. The consensus issued in 1993 by the Emerging Issues Task Force of the Financial Accounting Standards Board (the "EITF") permits rate regulated companies to defer such expenses for as long as five years when the ratemaking treatment provides for full recovery within the succeeding fifteen years.
On August 1, 1996, the NJBPU issued a generic order setting forth certain guidelines under which mechanisms would be established for New Jersey utilities to recover postretirement benefits expense other than pensions in accordance with SFAS 106 and the EITF consensus, without being required to file a base rate case. The Company expects that this proceeding will be concluded and an order will be issued by the NJBPU in early 1997, pursuant to which the Company will be able to seek rate recovery of these costs. The Company will also seek ratemaking treatment consistent with the EITF consensus from the commissions in the other states in which it operates.
The Company continually evaluates alternative ways to manage these benefits and control their costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefit may have a significant effect on the amount of the reported obligation and the annual deferral and expense.
10. Commitments and Contingencies
Commitments. Capital expenditures are expected to be approximately $57 million in fiscal 1997.
Environmental Matters. The Company is subject to federal and state laws with respect to water, air quality, solid waste disposal and employee health and safety matters, and to environmental regulations issued by the United States Environmental Protection Agency (the "EPA"), the New Jersey Department of Environmental Protection (the "NJDEP"), and other federal and state agencies.
The Company owns, or previously owned, certain properties on which manufactured gas plants ("MGP") were operated by the Company or by other parties in the past. Coal tar residues are present on the six MGP sites located in the Northern Division. The Company has reported the presence of the six MGP sites to the EPA, the NJDEP and the NJBPU. In 1991, the NJDEP issued an Administrative Consent Order for an MGP site located at South Street in Elizabeth, New Jersey, wherein the Company agreed to conduct a remedial investigation and to design and implement a remediation plan. In 1992 and 1993, the Company entered into a Memorandum of Agreement with the NJDEP for each of the other five Northern Division MGP sites. Pursuant to the terms and conditions of the Administrative Consent Order and the Memoranda of Agreement, the Company is conducting remedial activities at all six sites with oversight from the NJDEP.
The Southern Division owned ten former MGP facilities, only three of which it currently owns. The former MGP sites are located in the states of North Carolina, South Carolina, Pennsylvania, New York and Maryland. The Company has joined with other North Carolina utilities to form the North Carolina Manufactured Gas Plant Group (the "MGP Group"). The MGP Group has entered into a Memorandum of Understanding with the North Carolina Department of Environment, Health and Natural Resources ("NCDEHNR") to develop a uniform program and framework for the investigation and remediation of MGP sites in North Carolina. The Memorandum of Understanding contemplates that the actual investigation and remediation of specific sites will be addressed pursuant to Administrative Consent Orders between the NCDEHNR and the responsible parties. The NCDEHNR has recently sought the investigation and remediation of sites owned by members of the MGP Group and has entered into Administrative Consent Orders with respect to four such sites. None of these four sites are currently or were previously owned by the Southern Division.
The Company, with the aid of environmental consultants, regularly assesses the potential future costs associated with conducting investigative activities at each of the Company's sites and implementing appropriate remedial actions, as well as the likelihood of whether such actions will be necessary. The Company records a reserve if it is probable that a liability will be incurred and the amount of the liability is reasonably estimable. Based on the Company's most recent assessment, as of September 30, 1996, the Company has recorded a total reserve for environmental investigation and remediation costs of approximately $34 million, which the Company expects to expend during the next 20 years. The reserve, which includes remediation costs for seven of the Company's 16 MGP sites, is net of approximately $5 million which will be borne by a prior owner and operator of two of the Northern
Division sites in accordance with a cost sharing agreement. Of this approximate $34 million reserve, approximately $30 million relates to Northern Division MGP sites and approximately $4 million relates to Southern Division MGP sites. The Company is not able at this time to determine the requirement for remediation if contamination is present at any of the other sites and, if present, the costs associated with such remediation. The Company believes that it is possible that costs associated with conducting investigative activities and implementing remedial activities, if necessary, with respect to all of its MGP sites may exceed the approximately $34 million reserve by an amount that could range up to $21 million and be incurred during a future period of time that may range up to fifty years. Of this $21 million in possible future expenditures, approximately $10 million relates to the Northern Division MGP sites and approximately $11 million relates to the Southern Division MGP sites. As compared with the approximately $34 million reserve discussed above, the Company believes that it is less likely that this additional $21 million will be incurred and therefore has not recorded it on its books.
The Company believes that its remediation costs for the Northern Division MGP sites will be recoverable in rates and that a portion of such costs may be recoverable from the Company's insurance carriers. The last base rate order for the Northern Division permits the Company to utilize full deferred accounting for expenditures related to MGP sites. The order also provides for the recovery of $130,000 annually of MGP related expenditures incurred prior to the rate order. Accordingly, the Company has recorded a regulatory asset of approximately $33 million as of September 30, 1996, reflecting the future recovery of environmental remediation liabilities related to the Northern Division MGP sites. In July 1996, the NJBPU approved a petition filed by the Northern Division to establish an MGP Remediation Adjustment Clause ("RAC"). The RAC enables the Company to recover actual MGP expenses over a rolling seven year period. On September 3, 1996, the Company made its initial filing under the RAC to begin recovery of $3.1 million of environmental costs incurred from inception through June 30, 1996. A decision is expected in early fiscal 1997. With respect to costs associated with the Southern Division MGP sites, the Company intends to pursue recovery from ratepayers, former owners and operators, and insurance carriers, although the Company is not able to express a belief as to whether any or all of these recovery efforts will be successful. Since the Company is not able at this time to determine the extent of recovery, if any, relating to the Southern Division MGP sites, the Company recorded remediation costs of $3.7 million in fiscal 1994 and 1995 as an additional plant acquisition adjustment (see Note 2). The Company is working with the regulatory agencies to prudently manage its MGP costs so as to mitigate the impact of such costs on both ratepayers and shareholders.
Gas Procurement Contracts. Certain of the Company's long-term contracts for the supply, storage and delivery of natural gas include fixed charges that amount to approximately $75 million annually. The Company currently recovers, and expects to continue to recover, such fixed charges through its purchased gas adjustment clauses. The Company also is committed to purchase, at market-related prices, minimum quantities of gas that, in the aggregate, are approximately 10 billion cubic feet per year or to pay certain costs in the event the minimum quantities are not taken. The Company expects that minimum demand on its systems for
the duration of these contracts will continue to exceed these minimum purchase obligations.
The implementation of the Federal Energy Regulatory Commission's ("FERC") Order No. 636 required the restructuring of the Company's contracts with certain pipeline companies that together supply less than one-third of the Company's total firm gas supply. Under Order No. 636 the pipeline companies are passing through to their customers transition costs associated with mandated restructuring, such as costs resulting from buying out unmarketable gas purchase contracts. The Company has been charged approximately $11 million of such costs through September 30, 1996. All of such costs, except for costs incurred by the Company's Pennsylvania operation, have been authorized for recovery through the Company's purchased gas adjustment clauses. The Company has filed for and expects full recovery of such costs in Pennsylvania, as well. The Company currently estimates that its remaining Order No. 636 transition obligation will be approximately $7 million, which it expects also to recover through its purchased gas adjustment clauses as these costs are incurred. This transition obligation is subject to possible future FERC actions based upon filings by the Company's pipeline suppliers.
Other. The Company is involved in various claims and litigation incidental to its business. In the opinion of management, none of these claims and litigation will have a material adverse effect on the Company's results of operations or its financial condition.
11. Unaudited Quarterly Financial Data
The quarterly financial data presented below reflects the seasonal nature of the Company's operations which normally results in higher earnings during the heating season which is primarily in the first two fiscal quarters (in thousands, except per share amounts):
Fiscal Quarters
First Second Third Fourth 1996: Operating Revenues $124,650 $170,855 $95,370 $78,103 Operating Income (Loss) 11,420 19,161 3,372 (1,072) Net Income (Loss) 6,446 14,455 (1,003) (5,002) Net Income (Loss) Per Share 0.70 1.58 (0.10) (0.45)
1995: Operating Revenues $105,852 $147,940 $62,137 $60,516 Operating Income 8,348 12,931 2,376 204 Net Income (Loss) 3,978 8,554 (2,196) (4,819) Net Income (Loss) Per Share 0.44 0.93 (0.24) (0.53)
Quarterly net income (loss) per share in fiscal 1996 does not total to the annual amounts due to rounding and to changes in the average common shares outstanding.
In the first and second quarters of fiscal 1995, the Company incurred after-tax restructuring and other non-recurring charges of approximately $0.9 million and $4.7 million, respectively.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the Township of Bedminster, State of New Jersey, on the day of December 27, 1996
NUI CORPORATION
By: JAMES R. VAN HORN Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
JOHN KEAN, JR. President, Chief December 27, 1996 Executive Officer and Director (Principal executive officer)
JOHN KEAN Chairman and Director December 27, 1996
STEPHEN M. LIASKOS Controller (Principal December 27, 1996 financial & accounting officer)
C. R. CARVER Director December 27, 1996
DR. VERA KING FARRIS Director December 27, 1996
JAMES J. FORESE Director December 27, 1996
BERNARD S. LEE Director December 27, 1996
R. V. WHISNAND Director December 27, 1996
JOHN WINTHROP Director December 27, 1996
INDEX TO EXHIBITS
Exhibit Description No. 10(iv) Service Agreement by and between Transcontinental Gas Pipe Line Corporation and EGC, dated November 1, 1995 (Contract #1.1997) 10(vi) Service Agreement by and between Transcontinental Gas Pipe Line Corporation and EGC, dated November 1, 1995 (Contract #1.1995) 10(vii) Service Agreement by and among Transcontinental Gas Pipe Line Corporation and EGC, dated November 1, 1995 (Contract #1.1998) 10(xix) Service Agreement by and between Tennessee Gas Pipeline Company and EGC, dated November 1, 1995 (Contract #3832) 10(xxvii) 1996 Employee Stock Purchase Plan 10(xxix) 1996 Directors Stock Purchase Plan 10(xlii) 1996 Stock Option and Stock Award Plan 12 Consolidated Ratio of Earnings to Fixed Charges 21 Subsidiaries of NUI Corporation 23 Consent of Independent Public Accountants 27 Financial Data Schedule