10-Q 1 0001.txt NATIONAL FUEL GAS COMPANY FORM 10Q -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2000 ------------- Commission File Number 1-3880 ----------------------------- NATIONAL FUEL GAS COMPANY (Exact name of registrant as specified in its charter) New Jersey 13-1086010 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 Lafayette Square Buffalo, New York 14203 ------------------ ----- (Address of principal executive offices) (Zip Code) (716) 857-6980 -------------- (Registrant's telephone number, including area code) ---------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO -------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $1 par value, outstanding at July 31, 2000: 39,279,886 shares. -------------------------------------------------------------------------------- Company or Group of Companies for which Report is Filed: -------------------------------------------------------- NATIONAL FUEL GAS COMPANY (Company or Registrant) DIRECT SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution Corporation) National Fuel Gas Supply Corporation (Supply Corporation) Seneca Resources Corporation (Seneca) Highland Forest Resources, Inc. (Highland) Leidy Hub, Inc. (Leidy Hub) Data-Track Account Services, Inc. (Data-Track) National Fuel Resources, Inc. (NFR) Horizon Energy Development, Inc. (Horizon) Upstate Energy, Inc. (Upstate) NFR Power, Inc. (NFR Power) Niagara Independence Marketing Company (NIM) Seneca Independence Pipeline Company (SIP) INDEX Part I. Financial Information Page ----------------------------- ---- Item 1. Financial Statements a. Consolidated Statements of Income and Earnings Reinvested in the Business - Three and Nine Months Ended June 30, 2000 and 1999 4 - 5 b. Consolidated Balance Sheets - June 30, 2000 and September 30, 1999 6 - 7 c. Consolidated Statement of Cash Flows - Nine Months Ended June 30, 2000 and 1999 8 d. Consolidated Statement of Comprehensive Income - Three and Nine Months Ended June 30, 2000 and 1999 9 e. Notes to Consolidated Financial Statements 10 - 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 - 39 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 Part II. Other Information -------------------------- Item 1. Legal Proceedings 40 Item 2. Changes in Securities 40 Item 3. Defaults Upon Senior Securities o Item 4. Submission of Matters to a Vote of Security Holders o Item 5. Other Information 40 Item 6. Exhibits and Reports on Form 8-K 40 - 41 Signature 42 o The Company has nothing to report under this item. Reference to the "Company" in this report means the Registrant or the Registrant and its subsidiaries collectively, as appropriate in the context of the disclosure. All references to a certain year in this report are to the Company's fiscal year ended September 30 of that year, unless otherwise noted. This Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), under the heading "Safe Harbor for Forward-Looking Statements." Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those statements that are designated with a "*" following the statement, as well as those statements that are identified by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions. Part I. Financial Information ------- --------------------- Item 1. Financial Statements --------------------
National Fuel Gas Company ------------------------- Consolidated Statements of Income and Earnings ---------------------------------------------- Reinvested in the Business -------------------------- (Unaudited) ----------- Three Months Ended June 30, (Dollars in Thousands, Except Per Common Share Amounts) 2000 1999 ----------------- ----------------- INCOME Operating Revenues $289,757 $248,658 -------------------------------------------------------------------------------------------- Operating Expenses Purchased Gas 94,883 64,449 Fuel Used in Heat and Electric Generation 9,896 9,530 Operation 79,469 77,058 Maintenance 5,710 5,753 Property, Franchise and Other Taxes 14,794 20,817 Depreciation, Depletion and Amortization 35,083 31,985 Income Taxes 14,481 7,747 -------------------------------------------------------------------------------------------- 254,316 217,339 -------------------------------------------------------------------------------------------- Operating Income 35,441 31,319 Other Income 2,271 1,584 -------------------------------------------------------------------------------------------- Income Before Interest Charges and Minority Interest in Foreign Subsidiaries 37,712 32,903 -------------------------------------------------------------------------------------------- Interest Charges Interest on Long-Term Debt 17,550 16,180 Other Interest 6,115 5,231 -------------------------------------------------------------------------------------------- 23,665 21,411 -------------------------------------------------------------------------------------------- Minority Interest in Foreign Subsidiaries 421 348 -------------------------------------------------------------------------------------------- Net Income Available for Common Stock 14,468 11,840 EARNINGS REINVESTED IN THE BUSINESS Balance at April 1 552,198 492,233 -------------------------------------------------------------------------------------------- 566,666 504,073 Dividends on Common Stock (2000 - $0.48 per share; 1999 - $0.465 per share) 18,794 17,974 -------------------------------------------------------------------------------------------- Balance at June 30 $547,872 $486,099 ============================================================================================ Earnings Per Common Share: Basic $0.37 $0.31 ============================================================================================ Diluted $0.36 $0.30 ============================================================================================ Weighted Average Common Shares Outstanding: Used in Basic Calculation 39,177,148 38,662,728 ============================================================================================ Used in Diluted Calculation 39,677,909 39,000,553 ============================================================================================
See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ----------------------------
National Fuel Gas Company ------------------------- Consolidated Statements of Income and Earnings ---------------------------------------------- Reinvested in the Business -------------------------- (Unaudited) ----------- Nine Months Ended June 30, (Dollars in Thousands, Except Per Common Share Amounts) 2000 1999 ----------------- ----------------- INCOME Operating Revenues $1,184,555 $1,072,484 ----------------------------------------------------------------------------------------------- Operating Expenses Purchased Gas 441,912 377,273 Fuel Used in Heat and Electric Generation 46,563 47,311 Operation 241,350 232,221 Maintenance 17,101 17,400 Property, Franchise and Other Taxes 61,195 73,504 Depreciation, Depletion and Amortization 102,685 92,820 Income Taxes 76,997 60,327 ----------------------------------------------------------------------------------------------- 987,803 900,856 ----------------------------------------------------------------------------------------------- Operating Income 196,752 171,628 Other Income 7,636 7,901 ----------------------------------------------------------------------------------------------- Income Before Interest Charges and Minority Interest in Foreign Subsidiaries 204,388 179,529 ----------------------------------------------------------------------------------------------- Interest Charges Interest on Long-Term Debt 50,446 49,630 Other Interest 21,300 16,755 ----------------------------------------------------------------------------------------------- 71,746 66,385 ----------------------------------------------------------------------------------------------- Minority Interest in Foreign Subsidiaries (2,255) (2,540) ----------------------------------------------------------------------------------------------- Net Income Available for Common Stock 130,387 110,604 EARNINGS REINVESTED IN THE BUSINESS Balance at October 1 472,517 428,112 ----------------------------------------------------------------------------------------------- 602,904 538,716 Dividends on Common Stock (2000 - $1.41 per share; 1999 - $1.365 per share) 55,032 52,617 ----------------------------------------------------------------------------------------------- Balance at June 30 $547,872 $486,099 =============================================================================================== Earnings Per Common Share: Basic $3.34 $2.86 =============================================================================================== Diluted $3.30 $2.84 =============================================================================================== Weighted Average Common Shares Outstanding: Used in Basic Calculation 39,058,490 38,619,120 =============================================================================================== Used in Diluted Calculation 39,470,417 38,969,822 ===============================================================================================
See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ----------------------------
National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- (Unaudited) ----------- June 30, September 30, 2000 1999 -------------------- ------------------- (Thousands of Dollars) ASSETS Property, Plant and Equipment $3,779,061 $3,390,875 Less - Accumulated Depreciation, Depletion and Amortization 1,116,491 1,029,643 ------------------------------------------------------------------------------------------- 2,662,570 2,361,232 ------------------------------------------------------------------------------------------- Current Assets Cash and Temporary Cash Investments 55,354 29,222 Receivables - Net 158,105 97,828 Unbilled Utility Revenue 17,756 18,674 Gas Stored Underground 23,406 41,099 Materials and Supplies - at average cost 29,740 23,631 Unrecovered Purchased Gas Costs 2,741 4,576 Prepayments 26,990 35,072 ------------------------------------------------------------------------------------------- 314,092 250,102 ------------------------------------------------------------------------------------------- Other Assets Recoverable Future Taxes 87,724 87,724 Unamortized Debt Expense 20,508 21,717 Other Regulatory Assets 20,247 25,214 Deferred Charges 21,955 14,266 Other 92,686 82,331 ------------------------------------------------------------------------------------------- 243,120 231,252 ------------------------------------------------------------------------------------------- $3,219,782 $2,842,586 ===========================================================================================
See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ----------------------------
National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- (Unaudited) ----------- June 30, September 30, 2000 1999 -------------------- ------------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES Capitalization: Common Stock Equity Common Stock, $1 Par Value Authorized - 200,000,000 Shares; Issued and Outstanding - 39,223,061 Shares and 38,837,499 Shares, Respectively $39,223 $38,837 Paid in Capital 448,115 431,952 Earnings Reinvested in the Business 547,872 472,517 Accumulated Other Comprehensive Loss (18,668) (4,013) ---------------------------------------------------------------------------------------------- Total Common Stock Equity 1,016,542 939,293 Long-Term Debt, Net of Current Portion 958,327 822,743 ----------------------------------------------------------------------------------------------- Total Capitalization 1,974,869 1,762,036 ----------------------------------------------------------------------------------------------- Minority Interest in Foreign Subsidiaries 26,052 27,589 ----------------------------------------------------------------------------------------------- Current and Accrued Liabilities Notes Payable to Banks and Commercial Paper 518,774 393,495 Current Portion of Long-Term Debt 12,646 69,608 Accounts Payable 95,659 82,747 Amounts Payable to Customers 3,070 5,934 Other Accruals and Current Liabilities 140,667 87,310 ----------------------------------------------------------------------------------------------- 770,816 639,094 ----------------------------------------------------------------------------------------------- Deferred Credits Accumulated Deferred Income Taxes 308,935 275,008 Taxes Refundable to Customers 14,814 14,814 Unamortized Investment Tax Credit 10,214 11,007 Other Deferred Credits 114,082 113,038 ----------------------------------------------------------------------------------------------- 448,045 413,867 ----------------------------------------------------------------------------------------------- Commitments and Contingencies - - ----------------------------------------------------------------------------------------------- $3,219,782 $2,842,586 ===============================================================================================
See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ----------------------------
National Fuel Gas Company ------------------------- Consolidated Statement of Cash Flows ------------------------------------ (Unaudited) ----------- Nine Months Ended June 30, ----------------------------------------- (Thousands of Dollars) 2000 1999 ------------------- --------------------- OPERATING ACTIVITIES Net Income Available for Common Stock $130,387 $110,604 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation, Depletion and Amortization 102,685 92,820 Deferred Income Taxes 14,557 12,912 Minority Interest in Foreign Subsidiaries 2,255 2,540 Other 5,102 5,597 Change in: Receivables and Unbilled Utility Revenue (53,959) (56,195) Gas Stored Underground and Materials and Supplies 14,579 11,235 Unrecovered Purchased Gas Costs 1,835 6,316 Prepayments 9,415 (6,284) Accounts Payable 561 (13,234) Amounts Payable to Customers (2,864) 15,703 Other Accruals and Current Liabilities 53,868 46,637 Other Assets (18,440) (12,203) Other Liabilities 1,030 31,576 --------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 261,011 248,024 --------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital Expenditures (184,862) (205,859) Investment in Subsidiaries, Net of Cash Acquired (123,809) - Investment in Partnerships (4,375) (3,633) Other 11,390 3,519 ---------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (301,656) (205,973) ---------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Change in Notes Payable to Banks and Commercial Paper 125,450 24,700 Net Proceeds from Issuance of Long-Term Debt 149,334 98,736 Reduction of Long-Term Debt (161,499) (115,365) Dividends Paid on Common Stock (54,253) (51,904) Proceeds from Issuance of Common Stock 11,128 7,921 ---------------------------------------------------------------------------------------------------- Net Cash Provided By (Used in) Financing Activities 70,160 (35,912) ---------------------------------------------------------------------------------------------------- Effect of Exchange Rates on Cash (3,383) (728) ---------------------------------------------------------------------------------------------------- Net Increase in Cash and Temporary Cash Investments 26,132 5,411 Cash and Temporary Cash Investments at October 1 29,222 30,437 ---------------------------------------------------------------------------------------------------- Cash and Temporary Cash Investments at June 30 $55,354 $35,848 ====================================================================================================
See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ----------------------------
National Fuel Gas Company ------------------------- Consolidated Statement of Comprehensive Income ---------------------------------------------- (Unaudited) ----------- Three Months Ended June 30, --------------------------------------------------- (Thousands of Dollars) 2000 1999 ------------------------ -------------------------- Net Income Available for Common Stock $14,468 $11,840 ------------------------------------------------------------------------------------------------------------------------ Other Comprehensive Income, Before Tax: Foreign Currency Translation Adjustment 762 2,326 Unrealized Gain on Securities Available for Sale Arising During the Period 447 - Less: Reclassification Adjustment for Gains Realized in Net Income (103) - ----------- ----------- 344 - ------------------------------------------------------------------------------------------------------------------------ Other Comprehensive Gain, Before Tax 1,106 2,326 Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period (156) - Less: Reclassification Adjustment for Income Tax Expense on Gains Realized in Net Income 36 - ----------- ----------- (120) - ------------------------------------------------------------------------------------------------------------------------ Other Comprehensive Gain, Net of Tax 986 2,326 ------------------------------------------------------------------------------------------------------------------------ Comprehensive Income $15,454 $14,166 ======================================================================================================================== Nine Months Ended June 30, ------------------------------------------------------- (Thousands of Dollars) 2000 1999 --------------------------- --------------------------- Net Income Available for Common Stock $130,387 $110,604 ------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income, Before Tax: Foreign Currency Translation Adjustment (15,802) (16,719) Unrealized Gain on Securities Available for Sale Arising During the Period 1,867 - Less: Reclassification Adjustment for Gains Realized in Net Income (103) - ----------- ----------- 1,764 - ------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Loss, Before Tax (14,038) (16,719) Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period (653) - Less: Reclassification Adjustment for Income Tax Expense on Gains Realized in Net Income 36 - ----------- ----------- (617) - ------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Loss, Net of Tax (14,655) (16,719) ------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $115,732 $93,885 =========================================================================================================================
See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ---------------------------- National Fuel Gas Company ------------------------- Notes to Consolidated Financial Statements ------------------------------------------ Note 1 - Summary of Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. The equity method is used to account for the Company's investment in minority owned entities. All significant intercompany balances and transactions have been eliminated where appropriate. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Quarterly Earnings. The Company, in its opinion, has included all adjustments that are necessary for a fair statement of the results of operations for the reported periods. The consolidated financial statements and notes thereto, included herein, should be read in conjunction with the financial statements and notes for the years ended September 30, 1999, 1998 and 1997 that are included in the Company's combined Annual Report to Shareholders/Form 10-K for 1999. The 2000 consolidated financial statements will be examined by the Company's independent accountants after the end of the fiscal year. The earnings for the nine months ended June 30, 2000 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2000. Most of the Company's business is seasonal in nature and is influenced by weather conditions. Because of the seasonal nature of the Company's heating business, earnings during the winter months normally represent a substantial part of earnings for the entire fiscal year. The impact of abnormal weather on earnings during the heating season is partially reduced by the operation of a weather normalization clause (WNC) included in Distribution Corporation's New York tariff. The WNC is effective for October through May billings. Distribution Corporation's tariff for its Pennsylvania jurisdiction does not have a WNC. In addition, Supply Corporation's straight fixed-variable rate design, which allows for recovery of substantially all fixed costs in the demand or reservation charge, reduces the earnings impact of weather fluctuations. Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of generally three months or less to be cash equivalents. Cash interest payments during the nine months ended June 30, 2000 and 1999 amounted to $70.8 million and $64.1 million, respectively. Income taxes paid during the nine months ended June 30, 2000 and 1999 amounted to $33.0 million and $30.4 million, respectively. In November 1999, the Company entered into a non-cash investing activity whereby it issued 54,674 shares of Company common stock to Supply Corporation, which in turn exchanged those shares for the assets of Cunningham Natural Gas Corporation. The assets included approximately $1.2 million of property, plant and equipment and $1.6 million of other assets. In June 2000, Seneca acquired 100% of the stock of Tri Link Resources, Ltd. (Tri Link). Details of the acquisition are as follows (dollars in millions): Assets acquired $260.7 Liabilities assumed (136.9) Cash acquired at acquisition - -------- Cash paid, net of cash acquired $123.8 ====== Further discussion of this acquisition can be found at Note 3 - Stock Acquisition. Item 1. Financial Statements (Cont.) ---------------------------- Reclassification. Certain prior year amounts have been reclassified to conform with current year presentation. Accumulated Other Comprehensive Income (Loss). The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands): At June 30, 2000 At September 30, 1999 ---------------- --------------------- Cumulative Foreign Currency Translation Adjustment $(20,274) $(4,472) Net Unrealized Gain on Securities Available for Sale 1,606 459 -------- ------- Accumulated Other Comprehensive Loss $(18,668) $(4,013) ======== ======= Earnings Per Common Share. Basic earnings per common share is computed by dividing income available for common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only potentially dilutive securities the Company has outstanding are stock options. The diluted weighted average shares outstanding shown on the Consolidated Statement of Income reflects the potential dilution that could result from the exercise of these stock options as determined using the Treasury Stock Method. Note 2 - Income Taxes The components of federal and state income taxes included in the Consolidated Statement of Income are as follows (in thousands): Nine Months Ended June 30, --------------------------------- 2000 1999 ---------------- ---------------- Operating Expenses: Current Income Taxes Federal $49,979 $35,940 State 13,538 6,050 Deferred Income Taxes Federal 9,834 13,585 State 660 1,706 Foreign Income Taxes 2,986 3,046 ---------------------------------------------------------------------------- 76,997 60,327 Other Income: Deferred Investment Tax Credit (788) (499) Minority Interest in Foreign Subsidiaries (479) (705) ---------------------------------------------------------------------------- Total Income Taxes $75,730 $59,123 ============================================================================ Item 1. Financial Statements (Cont.) ---------------------------- The U.S. and foreign components of income before income taxes are as follows (in thousands): Nine Months Ended June 30, 2000 1999 ------------------------------------------------------------------------------- U.S. $193,042 $155,553 Foreign 13,075 14,174 ------------------------------------------------------------------------------- $206,117 $169,727 =============================================================================== Total income taxes as reported differ from the amounts that were computed by applying the federal income tax rate to income before income taxes. The following is a reconciliation of this difference (in thousands): Nine Months Ended June 30, --------------------------- 2000 1999 --------------------------- Net income available for common stock $130,387 $110,604 Total income taxes 75,730 59,123 ------------------------------------------------------------------------------- Income before income taxes $206,117 $169,727 =============================================================================== Income tax expense, computed at statutory rate of 35% $ 72,141 $ 59,404 Increase (reduction) in taxes resulting from: State income taxes 9,229 5,045 Depreciation 1,387 1,492 Prior years tax adjustment 37 (1,329) Foreign tax in excess of (less than) statutory rate (2,629) (2,620) Miscellaneous (4,435) (2,869) ------------------------------------------------------------------------------- Total Income Taxes $ 75,730 $ 59,123 =============================================================================== Significant components of the Company's deferred tax liabilities (assets) were as follows (in thousands):
At June 30, 2000 At September 30, 1999 --------------------------------- ---------------------------- Deferred Tax Liabilities: Excess of tax over book depreciation $219,521 $227,881 Exploration and intangible well drilling costs 118,237 95,034 Other 62,821 39,040 --------------------------------------------------------------------------------------------------------------------- Total Deferred Tax Liabilities 400,579 361,955 --------------------------------------------------------------------------------------------------------------------- Deferred Tax Assets: Capitalized overheads (29,345) (26,861) Other (62,299) (60,086) --------------------------------------------------------------------------------------------------------------------- Total Deferred Tax Assets (91,644) (86,947) --------------------------------------------------------------------------------------------------------------------- Total Net Deferred Income Taxes $308,935 $275,008 =====================================================================================================================
Item 1. Financial Statements (Cont.) ---------------------------- The Internal Revenue Service audits of the Company for the years 1977 - 1994 were settled during December 1998. Net income for the nine months ended June 30, 1999 was increased by approximately $3.9 million as a result of interest, net of tax and other adjustments, related to this settlement. Note 3 - Stock Acquisition In June 2000, National Fuel Exploration Corporation (NFEC), a wholly-owned subsidiary of Seneca, acquired the outstanding shares of Tri Link, a Calgary-Alberta based oil and gas exploration and production company. The cost of acquiring the outstanding shares of Tri Link was approximately $123.8 million. The acquisition was financed with short-term borrowings. Upon completing this acquisition, Tri Link was amalgamated under the name of NFEC. The acquisition of Tri Link was accounted for in accordance with the purchase method as specified by Accounting Principles Board Opinion No. 16. NFEC's results of operations were incorporated into the Company's consolidated financial statements for the period subsequent to the completion of the acquisition of Tri Link on June 15, 2000. See Note 4 - Capitalization for discussion of the redemption of long-term debt, which was assumed as part of the Tri Link stock acquisition. Note 4 - Capitalization Common Stock. During the nine months ended June 30, 2000, the Company issued 330,888 shares of common stock under the Company's stock and benefit plans. As previously discussed, 54,674 shares were issued for the purchase of the assets of Cunningham Natural Gas Corporation. On February 17, 2000, 725,500 stock options were granted at an exercise price of $46.66 per share. On March 17, 2000, 25,000 stock options were granted at an exercise price of $41.56 per share. On June 15, 2000, 140,600 stock options were granted at an exercise price of $49.72 per share. In February 2000, the Company issued $150.0 million of 7.30% medium-term notes due in February 2003. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to $149.3 million. The proceeds of this debt issuance were used to redeem $50.0 million of 6.60% medium-term notes which matured in February 2000 and to reduce short-term debt. On June 27, 2000, NFEC paid approximately $96.2 million to redeem the bank loans (CND 70.0 million, USD 47.2 million) and subordinated convertible debentures (CND 72.7 million, USD 49.0 million) of the former Tri Link. Short-term debt was used to redeem the bank loans and subordinated convertible debentures. Note 5 - Derivative Financial Instruments Seneca has entered into certain price swap agreements, no cost collars and options to manage a portion of the market risk associated with fluctuations in the price of natural gas and crude oil in an effort to provide more stability to its operating results. These derivative financial instruments are not held for trading purposes. The price swap agreements call for Seneca to receive monthly payments from (or make payments to) other parties based upon the difference between a fixed and a variable price as specified by the agreement. The no cost collars call for Seneca to receive monthly payments from (or make payments to) other parties when a variable price falls below an established floor price (Seneca receives payment from the counterparty) or exceeds an established ceiling price (Seneca pays the counterparty). The variable prices specified in the price swap agreements and the no cost collars are either a crude oil price quoted on the New York Mercantile Exchange or a natural gas price quoted in "Inside FERC." These variable prices are highly correlated with the market prices received by Seneca for its natural gas and crude oil production. The fair value of outstanding natural gas and crude oil price swap agreements, no cost collars and options discussed below reflect the estimated amounts Seneca would pay or receive to terminate its derivative financial instruments at June 30, 2000. Item 1. Financial Statements (Cont.) ---------------------------- At June 30, 2000, Seneca had natural gas price swap agreements covering a notional amount of 36.4 billion cubic feet (Bcf) extending through 2003 at a weighted average fixed rate of $2.85 per thousand cubic feet (Mcf). Seneca also had crude oil price swap agreements covering a notional amount of 8,703,895 barrels (bbls) extending through 2003 at a weighted average fixed rate of $20.34 per bbl. The fair value of Seneca's outstanding natural gas and crude oil price swap agreements at June 30, 2000 was a net loss of approximately $74.6 million. This loss was offset by corresponding unrecognized gains from Seneca's anticipated natural gas and crude oil production over the terms of the price swap agreements. Seneca recognized net losses of $12.6 million and $23.0 million related to settlements of its price swap agreements during the quarter and nine months ended June 30, 2000, respectively. During the quarter and nine months ended June 30, 1999, Seneca recognized net gains of $0.3 million and $6.2 million, respectively, related to its price swap agreements. Gains or losses from Seneca's price swap agreements are accrued in operating revenues on the Consolidated Statement of Income at the contract settlement dates. These gains or losses were offset by corresponding gains or losses from Seneca's natural gas and crude oil production. At June 30, 2000, Seneca had no cost collars on natural gas covering a notional amount of 3.1 Bcf in 2001 with a weighted average floor price of $3.69 per Mcf and a weighted average ceiling price of $6.00 per Mcf. Seneca also had no cost collars on crude oil covering a notional amount of 1,500,000 bbls extending through 2002 with a weighted average floor price of $22.00 per bbl and a weighted average ceiling price of $29.03 per bbl. The fair value of Seneca's outstanding no cost collars on natural gas and crude oil at June 30, 2000 was a net loss of approximately $0.1 million. This loss was offset by corresponding gains or losses from Seneca's natural gas and crude oil production. At June 30, 2000, Seneca had the following options outstanding:
Type of Option Notional Amount Weighted Average Strike Price -------------- --------------- ----------------------------- Written Call Options (1) 7.0 Bcf or 368,000 bbls $2.58/Mcf or $18.00/bbl Written Put Option 368,000 bbls $12.50/bbl Purchased Call Option 368,000 bbls $20.00/bbl
(1) The counterparty has a choice between a natural gas call option and a crude oil call option, depending on whichever option has greater value to the counterparty. Seneca's call and put options are being marked-to-market with gains or losses recorded in Operating Revenues on the Consolidated Statement of Income. The mark-to-market adjustment for the quarter and nine months ended June 30, 2000 was a loss of $7.4 million. The mark-to-market adjustment for the quarter and nine months ended June 30, 1999 was a loss of $1.1 million. The fair value of the call and put options at June 30, 2000 was a net loss of $11.1 million. During the quarter and nine months ended June 30, 2000, Seneca paid the counterparty $4.1 million and $7.5 million, respectively, related to the exercise of a portion of the written call options and received $3.1 million and $8.0 million, respectively, from the counterparty related to Seneca's exercise of a portion of the $20.00 per bbl call options that it had purchased. Settlements related to Seneca's call and put options during the quarter and nine months ended June 30, 1999 were minor payments of less than $100,000. The Company is exposed to credit risk on the price swap agreements and no cost collars that Seneca has entered into, as well as on the call options that Seneca has purchased. Credit risk relates to the risk of loss that the Company would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. To mitigate such credit risk, management performs an initial credit check and then on an ongoing basis monitors counterparty credit exposure. Item 1. Financial Statements (Cont.) ---------------------------- NFR utilizes exchange-traded futures and exchange-traded options to manage a portion of the market risk associated with fluctuations in the price of natural gas. Such futures and options are not held for trading purposes. At June 30, 2000, NFR had natural gas futures contracts covering 0.9 Bcf of gas on a net basis (net short position) extending through 2002 at a weighted average contract price of $3.87 per Mcf. NFR had purchased natural gas options covering 70.2 Bcf of gas extending through 2001 at a weighted average strike price of $4.21 per Mcf. NFR also had sold natural gas options covering 60.4 Bcf of gas extending through 2001 at a weighted average strike price of $4.63 per Mcf. The exchange-traded futures and exchange-traded options are used to hedge NFR's purchase and sale commitments and storage gas inventory. The fair value of NFR's outstanding exchange-traded futures and exchange-traded options at June 30, 2000 was a net loss of approximately $5.9 million. This fair value reflects the estimated net amount that NFR would pay to terminate its exchange-traded futures and exchange-traded options at June 30, 2000. This loss was substantially offset by corresponding unrecognized gains from the related commodity transaction. Gains or losses from these natural gas futures and options are recorded in either Other Deferred Credits or Deferred Charges on the Consolidated Balance Sheet until the hedged commodity transaction occurs, at which point they are reflected in operating revenues on the Consolidated Statement of Income. NFR recognized net gains of $2.2 million and $4.0 million related to these futures contracts and options during the quarter and nine months ended June 30, 2000, respectively. During the quarter and nine months ended June 30, 1999, NFR recognized net losses of $1.1 million and $6.5 million, respectively, related to these futures contracts and options. These gains or losses were substantially offset by the related commodity transaction. NFR also utilizes exchange-traded options as a financing mechanism for its hedging program. These exchange-traded options are not held for trading purposes. At June 30, 2000, the notional amount of these exchange-traded options was approximately 32.3 Bcf at a weighted average strike price of $4.28 per Mcf. These options are being marked-to-market with gains or losses recorded in Operating Revenues on the Consolidated Statement of Income. The mark-to-market adjustment for the quarter and nine months ended June 30, 2000 was a loss of $5.3 million. This represents the fair value of the exchange-traded options at June 30, 2000. There was not a corresponding mark-to-market adjustment during the quarter and nine months ended June 30, 1999. Privni severozapadni teplarenska, a.s. (PSZT) utilizes an interest rate swap to mitigate interest rate fluctuations on its Czech koruna (CZK) 1,436,331,600 term loan ($38.5 million at June 30, 2000), which carries a variable interest rate of six month Prague Interbank Offered Rate (PRIBOR) plus 0.475%. Under the terms of the interest rate swap, which extends until 2002, PSZT pays a fixed rate of 8.31% and receives a floating rate of six month PRIBOR. PSZT recognized a loss of approximately $0.3 million and $0.7 million related to this interest rate swap during the quarter and nine months ended June 30, 2000, respectively. The fair value of PSZT's interest rate swap at June 30, 2000 was a loss of approximately $1.8 million. Note 6 - Commitments and Contingencies Environmental Matters. It is the Company's policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. Distribution Corporation and Supply Corporation have estimated their clean-up costs related to former manufactured gas plant and former gasoline plant sites and third party waste disposal sites will be in the range of $8.1 million to $9.1 million. The minimum liability of $8.1 million has been recorded on the Consolidated Balance Sheet at June 30, 2000. Other than as discussed in Note H of the 1999 Form 10-K (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. Item 1. Financial Statements (Cont.) ---------------------------- For further discussion refer to Note H - Commitments and Contingencies under the heading "Environmental Matters" in Item 8 of the Company's 1999 Form 10-K. Other. The Company is involved in litigation arising in the normal course of business. The Company is involved in regulatory matters arising in the normal course of business that involve rate base, cost of service and purchased gas cost issues. While the resolution of such litigation or regulatory matters could have a material effect on earnings and cash flows in the year of resolution, none of this litigation, and none of these regulatory matters, are expected to have a material adverse effect on the financial condition of the Company at this time. Note 7 - Business Segment Information. The Company has six reportable segments: Utility, Pipeline and Storage, Exploration and Production, International, Energy Marketing, and Timber. The breakdown of the Company's reportable segments is based upon a combination of factors including differences in products and services, regulatory environment and geographic factors. The data presented in the tables below reflect the reportable segments and reconciliations to consolidated amounts. There have been no changes in the basis of segmentation nor in the basis of measuring segment profit or loss from those used in the 1999 Form 10-K. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the 1999 Form 10-K, except for the Exploration and Production segment. On June 15, 2000, the Exploration and Production segment, through NFEC, acquired the outstanding shares of Tri Link, which included assets of $260.7 million. See further discussion of this acquisition in Note 3 - Stock Acquisition. Item 1. Financial Statements (Concl.) -----------------------------
Quarter Ended June 30, 2000 (Thousands) ------------------------------------------------------------------------------------------------------------------------------------ Pipeline Exploration Total Corporate and and and Energy Reportable Intersegment Total Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------------------------ Revenue from External Customers $160,428 $19,736 $53,447 $15,303 $34,209 $10,662 $293,785 $(4,028) $ - $289,757 Intersegment Revenues 4,022 22,104 - - - - 26,126 4,322 (30,448) - Segment Profit: Net Income (Loss) 5,565 7,324 6,026 (1,394) (3,992) 1,155 14,684 (315) 99 14,468 Nine Months Ended June 30, 2000 (Thousands) ------------------------------------------------------------------------------------------------------------------------------------ Pipeline Exploration Total Corporate and and and Energy Reportable Intersegment Total Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------------------------ Revenue from External Customers $727,172 $61,775 $153,591 $92,985 $117,117 $30,933 $1,183,573 $982 $ - $1,184,555 Intersegment Revenues 16,868 66,425 224 - - - 83,517 4,323 (87,840) - Segment Profit: Net Income (Loss) 68,843 26,762 21,910 7,606 (2,544) 6,175 128,752 212 1,423 130,387 Quarter Ended June 30, 1999 (Thousands) ------------------------------------------------------------------------------------------------------------------------------------ Exploration Total Corporate and Pipeline and Energy Reportable Intersegment Total Utility and Production International Marketing Timber Segments All Other Eliminations Consolidated Storage ------------------------------------------------------------------------------------------------------------------------------------ Revenue from External Customers $141,960 $19,544 $38,655 $16,089 $25,979 $6,333 $248,560 $98 $ - $248,658 Intersegment Revenues 1,236 20,925 1,507 - - - 23,668 - (23,668) - Segment Profit: Net Income (Loss) 3,439 6,995 2,576 (2,495) 847 586 11,948 (43) (65) 11,840 Nine Months Ended June 30, 1999 (Thousands) ------------------------------------------------------------------------------------------------------------------------------------ Pipeline Exploration Total Corporate and and and Energy Reportable Intersegment Total Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------------------------ Revenue from External Customers $705,581 $62,837 $99,001 $97,166 $82,253 $24,110 $1,070,948 $1,536 $ - $1,072,484 Intersegment Revenues 5,269 63,839 6,449 - - - 75,557 - (75,557) - Segment Profit: Net Income 62,438 30,094 2,982 7,996 1,730 4,445 109,685 162 757 110,604
Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- RESULTS OF OPERATIONS Earnings. The Company's earnings were $14.5 million, or $0.37 per common share ($0.36 per common share on a diluted basis), for the quarter ended June 30, 2000. This compares with earnings of $11.8 million, or $0.31 per common share ($0.30 per common share on a diluted basis), for the quarter ended June 30, 1999. The increase in earnings of approximately $2.7 million is the result of higher earnings in the Exploration and Production, Utility, Timber, and Pipeline and Storage segments. The increase in earnings also reflects a lower loss in the current quarter for the International segment. These higher earnings were offset in part by a loss in the Energy Marketing segment this year compared with the earnings reported in the prior year's quarter. The Company's earnings were $130.4 million, or $3.34 per common share ($3.30 per common share on a diluted basis), for the nine months ended June 30, 2000. This compares with earnings of $110.6 million, or $2.86 per common share ($2.84 per common share on a diluted basis), for the nine months ended June 30, 1999. The increase in earnings of $19.8 million is the result of higher earnings in the Exploration and Production, Utility and Timber segments. These increases were offset in part by lower earnings in the Pipeline and Storage and International segments and a loss in the Energy Marketing segment. Due to the precipitous rise in natural gas prices this quarter, the Company took a $12.7 million pretax, or $8.3 million after tax charge to earnings for the quarter ended June 30, 2000. This charge recognizes the estimated net value related to written put and call gas option contracts scheduled to be settled over various periods of time from July 2000 through February 2001. Generally Accepted Accounting Principles require the Company to mark these contracts to market at the end of each quarter. The contracts relate to price risk management activities in the Exploration and Production and Energy Marketing segments. This mark-to-market adjustment does not reflect the actual gain or loss that will be realized upon settlement of the option contracts. Additional discussion of earnings in each of the business segments can be found in the business segment information that follows. Earnings (Loss) by Segment
---------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, --------------------------------------------------------------------------------------------------- (Thousands) 2000 1999 2000 1999 ------------------------------ ---------------- ----------------- ---------------- ----------------- Utility $ 5,565 $ 3,439 $ 68,843 $ 62,438 Pipeline and Storage 7,324 6,995 26,762 30,094 Exploration and Production 6,026 2,576 21,910 2,982 International (1,394) (2,495) 7,606 7,996 Energy Marketing (3,992) 847 (2,544) 1,730 Timber 1,155 586 6,175 4,445 ------------------------------ ---------------- ----------------- ---------------- ----------------- Total Reportable Segments 14,684 11,948 128,752 109,685 All Other (315) (43) 212 162 Corporate 99 (65) 1,423 757 ------------------------------ ---------------- ----------------- ---------------- ----------------- Total Consolidated $14,468 $11,840 $130,387 $110,604 ------------------------------ ---------------- ----------------- ---------------- -----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) ---------------------
Utility Utility Operating Revenues ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ---------------------------------------------------------------------------------------------------------------------- (Thousands) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Retail Sales Revenues: Residential $107,883 $100,924 $515,703 $521,457 Commercial 15,856 15,214 84,418 93,444 Industrial 3,742 2,618 13,217 11,988 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- 127,481 118,756 613,338 626,889 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Off-System Sales 9,417 5,401 38,605 22,897 Transportation 24,861 19,331 90,167 65,996 Other 2,691 (292) 1,930 (4,932) ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- $164,450 $143,196 $744,040 $710,850 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Utility Throughput ------------------------------------------------ ---------------------------------- ---------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- (MMcf) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Retail Sales: Residential 11,305 11,222 62,766 66,199 Commercial 1,907 1,926 11,425 13,055 Industrial 851 747 2,929 2,978 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- 14,063 13,895 77,120 82,232 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Off-System Sales 2,295 2,223 10,916 10,195 Transportation 17,085 15,608 60,763 53,638 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- 33,443 31,726 148,799 146,065 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
2000 Compared with 1999 Operating revenues for the Utility segment increased $21.3 million and $33.2 million, respectively, for the quarter and nine months ended June 30, 2000 as compared with the same periods a year ago. For the quarter, this increase resulted from higher retail, transportation, off-system sales and other revenue. For the nine months ended, this increase resulted from higher transportation, off-system sales and other revenue, offset in part by lower retail gas sales revenues. The increase in retail gas sales revenue for the quarter was primarily the result of the recovery of higher gas costs and slightly higher volumes sold. The recovery of higher gas costs resulted from a much higher cost of purchased gas (the average cost of purchased gas was $5.21 per Mcf and $3.87 per Mcf for the three months ended June 30, 2000 and 1999, respectively). The slight increase in sales volumes was the result of colder weather, offset by the impact of the migration of residential and small commercial retail customers to transportation service in both the New York and Pennsylvania jurisdictions. This migration to transportation service was also the primary cause of the increase in volumes transported and transportation revenue. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- The decrease in retail gas sales revenue for the nine months was the result of lower volumes of retail gas sales because of the migration of residential and small commercial retail customers to transportation service. This was offset in part by a higher average cost of purchased gas (the average cost of purchased gas was $4.55 per Mcf and $3.64 per Mcf, for the nine months ended June 30, 2000 and 1999, respectively). This migration to transportation service was also the primary cause of the increase in volumes transported and transportation revenue. Restructuring in the Utility segment's service territory is further discussed in the "Rate Matters" section that follows. Off-system gas sales revenue increased $4.0 million and $15.7 million, respectively, for the quarter and nine months ended June 30, 2000, as compared with the same periods a year ago, largely due to increased gas prices in combination with higher volumes. However, due to profit sharing with retail customers, the margins resulting from off-system sales are minimal. Other operating revenues increased $3.0 million and $6.9 million, respectively, for the quarter and nine months ended June 30, 2000, as compared with the same periods a year ago. Other operating revenues in the quarter and nine months ended June 30, 1999 were reduced by $1.6 million and $6.5 million, respectively, for the recording of a special gas restructuring reserve to be applied against incremental costs that could result from the New York Public Service Commission's (NYPSC) gas restructuring effort. No such reserve is required in 2000 by the terms of the New York rate settlement of 1998. Other operating revenues for the quarter and nine months ended June 30, 2000, include revenue of $2.0 million accrued to offset additional state income taxes which resulted from the enactment of tax changes in New York State. The revenue and related regulatory asset were recorded as the NYPSC has provided for the opportunity of rate recovery by New York State utilities of such additional taxes. Partly offsetting these increases to other operating revenues, Distribution Corporation accrued an estimated refund provision for a 50% sharing with customers of earnings over a predetermined amount in accordance with the New York rate settlement of 1998. The estimated refund provision was $1.1 million for the quarter ended June 30, 2000 and $3.3 million for the nine months ended June 30, 2000. The Utility segment's third quarter 2000 earnings were $5.6 million, an increase of $2.1 million when compared with third quarter 1999 earnings. The most significant reasons for the increase were that last year's quarter included a portion (approximately $1.0 million reduction to earnings) of the 1999 special gas restructuring reserve, as discussed above, and the current quarter had lower operation and maintenance (O&M) expense of approximately $1.3 million (after tax). This lower O&M expense is due in part to a charge for an early retirement offer in 1999. Partially offsetting these increases, the third quarter 2000 earnings included an estimated refund provision (approximately $0.7 million reduction to earnings), which is also discussed above. The Utility segment's earnings for the nine months ended June 30, 2000 were $68.8 million, an increase of $6.4 million when compared with the earnings for the nine months ended June 30, 1999. This increase can be attributed primarily to expenses related to early retirement offers in 1999 (approximately $3.7 million reduction to earnings in 1999) as well as the 1999 special gas restructuring reserve (approximately $4.2 million reduction to earnings in 1999), which was discussed above. Both the early retirement offers and the gas restructuring reserve did not recur in 2000. Partly offsetting these increases, the nine months ended June 30, 2000 earnings included an estimated refund provision (approximately $2.1 million reduction to earnings), as previously discussed. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) ---------------------
Degree Days ---------------------------------------------------------------------------------------------------------------------- Percent (Warmer) Three Months Ended Colder Than -------------------------------- June 30 Normal 2000 1999 Normal Prior Year ---------------------------------- -------------- -------------- -------------------- ----------------- -------------- Buffalo 976 936 817 (4.1%) 14.6% Erie 874 835 755 (4.5%) 10.6% ---------------------------------- -------------- -------------- -------------------- ----------------- -------------- Nine Months Ended June 30 ---------------------------------- -------------- -------------- -------------------- ----------------- -------------- Buffalo 6,733 6,090 6,066 (9.5%) 0.4% Erie 6,130 5,478 5,513 (10.6%) (0.6%) ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Pipeline and Storage Pipeline and Storage Operating Revenues ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- (Thousands) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Firm Transportation $22,663 $21,810 $69,078 $68,951 Interruptible Transportation 826 243 1,800 995 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- 23,489 22,053 70,878 69,946 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Firm Storage Service 15,594 15,654 47,706 47,117 Interruptible Storage Service 38 9 211 172 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- 15,632 15,663 47,917 47,289 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Other 2,719 2,753 9,405 9,441 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- $41,840 $40,469 $128,200 $126,676 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Pipeline and Storage Throughput ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- (MMcf) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Firm Transportation 52,834 53,970 237,575 240,395 Interruptible Transportation 4,752 418 7,199 4,099 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- 57,586 54,388 244,774 244,494 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
2000 Compared with 1999 Operating revenues for the Pipeline and Storage segment increased $1.4 million and $1.5 million for the quarter and nine months ended June 30, 2000, respectively, as compared with the same period a year ago. Approximately, $1.3 million of these increases relates to a "pass through" type item (which did not recur in 2000) that reduced revenues in the prior year and correspondingly reduced O&M expense in the prior year, thus having no bottom line earnings impact. The Pipeline and Storage segment's third quarter 2000 earnings were $7.3 million, an increase of $0.3 million when compared with the third quarter of 1999's earnings. Lower O&M expense, due in part to a charge in the prior year for an early retirement, increased earnings for the quarter. The impact of the recently enacted New York State tax changes, as discussed in the Utility segment above, mostly offset the O&M savings. The Federal Energy Regulatory Commission (FERC), which regulates this segment, has not provided for the recovery of additional taxes as has the NYPSC. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- The Pipeline and Storage segment's earnings for the nine months ended June 30, 2000 were $26.8 million, a decrease of $3.3 million when compared with the earnings for the nine months ended June 30, 1999. The most significant reason for this decrease is that the prior year's earnings included interest income and a reduction in income taxes related to the final settlement of Internal Revenue Service audits of years 1977-1994. This, coupled with the negative impact of New York State tax changes, discussed above, resulted in decreased earnings.
Exploration and Production Exploration and Production Operating Revenues ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- (Thousands) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Gas (after Hedging) $28,321 $23,823 $83,532 $61,502 Oil (after Hedging) 28,624 14,271 66,059 35,585 Gas Processing Plant 4,170 2,734 12,541 8,326 Other (7,668) (666) (8,317) 37 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- $53,447 $40,162 $153,815 $105,450 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
2000 Compared with 1999 Operating revenues for the Exploration and Production segment increased $13.3 million and $48.4 million, respectively, for the quarter and nine months ended June 30, 2000, as compared with the same periods a year ago. For the quarter ended June 30, 2000, gas production revenue (after hedging) increased $4.5 million and oil production revenue (after hedging) increased $14.4 million due to increased production and prices. For the nine months ended June 30, 2000, gas production revenue (after hedging) and oil production revenue (after hedging) increased $22.0 million and $30.5 million, respectively, due to increased production and prices. Refer to the tables below for production volumes and average price information. Revenue from Seneca's gas processing plant was up $1.4 million and $4.2 million, respectively, for the quarter and nine months ended June 30, 2000 as compared with the same periods a year ago due to increased prices for gas liquids and residue. Other revenue decreased $7.0 million and $8.4 million, respectively, for the quarter and nine months ended June 30, 2000, as compared with the same periods a year ago. The decreases to other revenues resulted primarily from mark-to-market and other revenue adjustments related to written options. Refer to further discussion of written options in the "Market Risk Sensitive Instruments" section that follows and in Item 1, Note 5 - Derivative Financial Instruments. The Exploration and Production segment's third quarter 2000 earnings were $6.0 million, an increase of $3.4 million when compared with third quarter 1999 earnings. As discussed above, significant improvement in oil and gas pricing combined with an increase in production were the main reasons for higher earnings. A 20% increase in oil production was attributable largely to production from the Canadian wells acquired by National Fuel Exploration Corporation (NFEC) (a 100% wholly-owned subsidiary of Seneca) as part of the Tri Link Resources, Ltd. (Tri Link) stock acquisition in mid-June. Partly offsetting these increases in revenues were increases in depletion expense (due to higher production volumes and higher depletable base), lease operating costs (due to increased production), a negative mark-to-market revenue adjustment related to written options, and increased interest expense due to higher borrowings and higher weighted average interest rates. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- The Exploration and Production segment's earnings for the nine months ended June 30, 2000 were $21.9 million, an increase of $18.9 million when compared with the earnings for the nine months ended June 30, 1999. As discussed above, significant improvement in oil and gas pricing combined with an increase in production were the main reasons for higher earnings. Partly offsetting these increases were higher depletion expense and lease operating costs. Earnings were also reduced due to revenue adjustments related to written options discussed above. Also, there was a decrease in interest income as 1999 included nonrecurring interest received from the final settlement of the IRS audits in December 1998. In addition, there was an increase in interest expense as a result of increased borrowings and higher weighted average interest rates.
Production Volumes ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Gas Production (MMcf) Gulf Coast 8,860 8,532 24,948 21,473 West Coast 1,058 1,050 3,301 2,839 Appalachia 1,100 1,069 3,252 3,381 Canada 17 - 17 - ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- 11,035 10,651 31,518 27,693 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Oil Production (thousands of barrels) Gulf Coast 372 352 1,025 1,022 West Coast 714 664 2,106 1,957 Appalachia 3 2 7 7 Canada 128 - 128 - ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- 1,217 1,018 3,266 2,986 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Average Prices ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Average Gas Price/Mcf Gulf Coast $3.57 $2.19 $2.93 $1.99 West Coast $3.58 $2.30 $3.02 $2.17 Appalachia $3.03 $2.31 $2.94 $2.42 Canada $2.68 - $2.68 - Weighted Average $3.52 $2.22 $2.94 $2.06 Weighted Average After Hedging $2.57 $2.24 $2.65 $2.22 Average Oil Price/bbl Gulf Coast $28.83 $16.54 $27.06 $13.41 West Coast $24.15 $12.60 $22.70 $10.19 Appalachia $27.16 $14.95 $24.23 $13.19 Canada $28.58 - $28.58 - Weighted Average $26.06 $13.97 $24.30 $11.30 Weighted Average After Hedging $23.52 $14.02 $20.22 $11.92 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) ---------------------
International International Operating Revenues ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- (Thousands) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Heating $7,601 $8,221 $64,291 $68,020 Electricity 7,141 7,853 25,466 27,224 Other 561 15 3,228 1,922 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- $15,303 $16,089 $92,985 $97,166 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
International Heating and Electric Volumes ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Heating Sales (Gigajoules) (1) 1,199,835 1,266,929 9,464,307 9,502,415 Electricity Sales (megawatt hours) 271,823 279,987 911,520 897,829 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
(1) Gigajoules = one billion joules. A joule is a unit of energy. 2000 Compared with 1999 Operating revenues for the International segment decreased $0.8 million and $4.2 million, respectively, for the quarter and nine months ended June 30, 2000 as compared to the same periods a year ago. The decrease reflects a decrease in the value of the Czech koruna as well as the impact of warm weather and conservation efforts by customers. The International segment experienced a loss of $1.4 million for the third quarter 2000, $1.1 million lower than the loss of $2.5 million for the third quarter of 1999. This lower loss was primarily due to lower O&M expenses and additional consideration received on the sale of a previous project. The International segment's earnings for the nine months ended June 30, 2000 were $7.6 million, a decrease of $0.4 million when compared with the earnings for the nine months ended June 30, 1999. This decrease can be attributed primarily to lower margins stemming from warm weather and conservation efforts by customers combined with the decline in the value of the Czech koruna. These factors were offset, in part, by lower O&M expenses. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) ---------------------
Energy Marketing Energy Marketing Operating Revenues ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- (Thousands) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Natural Gas (after Hedging) $38,631 $25,407 $120,193 $81,693 Electricity 536 471 1,290 1,179 Other (4,958) 101 (4,366) (619) ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- $34,209 $25,979 $117,117 $82,253 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Energy Marketing Volumes ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Natural Gas - (MMcf) 9,233 8,892 31,496 29,231 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
2000 Compared with 1999 Operating revenues for the Energy Marketing segment increased $8.2 million and $34.9 million, respectively, for the quarter and nine months ended June 30, 2000, as compared with the same periods a year ago. This increase reflects higher marketing volumes and revenues as NFR's customer base continues to increase. These increases were partly offset by a negative $5.3 million mark-to-market adjustment related to written put and call gas option contracts for the quarter and nine months ended June 30, 2000 (included in "Other" on the table above). The mark-to-market adjustment does not reflect the actual gain or loss that will be realized upon settlement of the option contracts. At July 31, 2000, NFR had settled 73% of these written put and call gas option contracts at a net gain of approximately $0.9 million. NFR utilizes exchange-traded futures and exchange-traded options to manage a portion of the market risk associated with fluctuations in the price of natural gas. Refer to further discussion of these hedging activities and discussion of written options in the "Market Risk Sensitive Instruments" section that follows and in Item 1, Note 5 - Derivative Financial Instruments. The Energy Marketing segment incurred losses for both the quarter and nine months ended June 30, 2000. When compared to the same periods a year ago, earnings decreased $4.8 million for the quarter and $4.3 million for the nine month period. The most significant reason for these decreases were the mark-to-market adjustments related to written put and call gas option contracts, noted above.
Timber Timber Operating Revenues ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- (Thousands) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Log Sales $6,334 $2,757 $19,688 $14,610 Green Lumber Sales 1,272 1,045 3,401 3,142 Kiln Dry Lumber Sales 2,950 2,518 7,414 5,840 Other 106 13 430 518 ---------------- ----------------- ---------------- ----------------- $10,662 $6,333 $30,933 $24,110 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) ---------------------
---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------------------ ---------------------------------- ---------------------------------- Board Feet (Thousands) 2000 1999 2000 1999 ------------------------------------------------ ---------------- ----------------- ---------------- ----------------- Log Sales 2,331 1,111 7,439 5,000 Green Lumber Sales 2,251 2,135 6,405 6,767 Kiln Dry Lumber Sales 2,046 1,818 5,343 4,122 ---------------- ----------------- ---------------- ----------------- 6,628 5,064 19,187 15,889 ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
2000 Compared with 1999 Operating revenues for the Timber segment increased $4.3 million and $6.8 million, respectively, for the quarter and nine months ended June 30, 2000, as compared with the same periods a year ago. The increase for the quarter and nine month period resulted primarily from higher veneer log sales and kiln dry lumber sales. The increase in kiln dry lumber sales is due to the operation of additional kilns purchased late in the quarter ended December 31, 1998. Earnings in the Timber segment increased $0.6 million and $1.7 million, respectively, for the quarter and nine months ended June 30, 2000, as compared with the same periods a year ago. The increase for the quarter and nine months is the result of higher log and lumber sales, partly offset by higher interest expense resulting from higher debt related to the PennzEnergy Company acquisition in July 1999. For the nine month period a pretax gain of $2.3 million ($1.5 million after tax) on the sale of land and standing timber increased earnings of this segment. Other Income and Interest Charges Although variances in Other Income items and Interest Charges are discussed in the earnings discussion by segment above, following is a recap on a consolidated basis: Other Income Other income increased $0.6 million for the quarter ended June 30, 2000 compared with the quarter ended June 30, 1999. This increase resulted primarily from the $0.5 million of additional consideration received on the sale of a previous project in the International segment. Other income decreased $0.2 million for the nine months ended June 30, 2000 compared with the nine months ended June 30, 1999. This decrease resulted mainly from approximately $3.2 million of interest income related to the final settlement of IRS audits for years 1977 - 1994 which was recorded during 1999 and did not recur this year. Partially offsetting this decrease was the gain on the sale of land and standing timber in the second quarter of 2000, as well as the additional consideration received on the sale of a previous project, both noted above. Interest Charges Interest on long-term debt increased $1.4 million and $0.8 million for the quarter and nine months ended June 30, 2000, respectively, as compared with the quarter and nine months ended June 30, 1999. This increase can be attributed primarily to a higher average amount of long-term debt outstanding combined with higher weighted average interest rates. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- Other interest charges increased $0.8 million for the quarter ended June 30, 2000. This increase resulted mainly from higher weighted average interest rates in the current quarter, offset partially by a decrease in the average amount of short-term debt outstanding. For the nine months ended June 30, 2000, other interest charges increased $4.5 million. Higher weighted average interest rates for the nine-month period together with an increase in the average amount of short-term debt outstanding contributed to this increase. Also, a reduction in interest charges was recorded in 1999 related to the final settlement of IRS audits of years 1977 - 1994. CAPITAL RESOURCES AND LIQUIDITY The Company's primary sources of cash during the nine-month period ended June 30, 2000, consisted of cash provided by operating activities, long-term debt and short-term bank loans and commercial paper. These sources were supplemented by issuances of common stock under the Company's stock and benefit plans. Operating Cash Flow. Internally generated cash from operating activities consists of net income available for common stock, adjusted for non-cash expenses, non-cash income and changes in operating assets and liabilities. Non-cash items include depreciation, depletion and amortization, deferred income taxes and minority interest in foreign subsidiaries. Cash provided by operating activities in the Utility and the Pipeline and Storage segments may vary from period to period because of the impact of rate cases. In the Utility segment, supplier refunds, over- or under-recovered purchased gas costs and weather also significantly impact cash flow. The impact of weather on cash flow is tempered in the Utility segment's New York rate jurisdiction by its WNC and in the Pipeline and Storage segment by Supply Corporation's straight fixed-variable rate design. Because of the seasonal nature of the Company's heating business, revenues are relatively high during the nine months ended June 30 and receivables historically increase from September to June because of winter weather. The storage gas inventory normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. For storage gas inventory accounted for under the last-in, first-out (LIFO) method, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets and is included under the caption "Other Accruals and Current Liabilities." Such reserve is reduced as the inventory is replenished. Net cash provided by operating activities totaled $261.1 million for the nine months ended June 30, 2000, an increase of $13.0 million compared with $248.0 million provided by operating activities for the nine months ended June 30, 1999. The increase can be attributed primarily to higher cash receipts from the sale of oil and gas and lower interest payments in the Exploration and Production segment. Higher cash receipts for oil and gas production resulted from increased oil and gas production and significantly higher prices. Interest payments are down in this segment due to the retirement of the HarCor Energy, Inc. 14.875% Senior Secured Notes in March 1999 and July 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- Investing Cash Flow. Expenditures for Long-Lived Assets ---------------------------------- Expenditures for long-lived assets include additions to property, plant and equipment (capital expenditures) and investments in corporations (stock acquisitions) or partnerships, net of any cash acquired. The Company's expenditures for long-lived assets totaled $314.2 million during the nine months ended June 30, 2000. The table below presents these expenditures:
--------------------------------------------------------------------------------------------------------------------- Nine Months Ended June 30, 2000 (in millions of dollars) --------------------------------------------------------------------------------------------------------------------- Investments in Total Capital Corporations Expenditures for Expenditures and Partnerships Long-Lived Assets --------------------------------------------------------------------------------------------------------------------- Utility $ 43.1 $ - $43.1 Pipeline and Storage 27.8(1) 1.8 29.6 Exploration and Production 96.4 123.8 220.2 International 6.3 - 6.3 Timber 11.4 - 11.4 Energy Marketing - - - All Other 1.0 2.6 3.6 --------------------------------------------------------------------------------------------------------------------- $186.0(1) $128.2 $314.2 ---------------------------------------------------------------------------------------------------------------------
(1)Includes non-cash acquisition of $1.2 million in a stock-for-asset swap. Utility ------- The majority of the Utility capital expenditures were made for replacement of mains and main extensions, as well as for the replacement of service lines. Pipeline and Storage -------------------- The majority of the Pipeline and Storage capital expenditures were made for additions, improvements, and replacements to this segment's transmission and storage systems. Of the total capital expenditures, $9.2 million was related to Supply Corporation's acquisition of another company's interest in the Niagara Spur Loop Line and the Ellisburg-Leidy pipeline in January 2000. This acquisition was financed with short-term borrowings. The capital expenditures also include approximately $1.2 million of natural gas wells and related pipelines as well as some undeveloped timber property acquired from Cunningham Natural Gas Corporation (Cunningham) in November 1999. These assets were acquired through the issuance of 54,674 shares of Company common stock. In addition to the assets identified above, the Company received Cunningham's temporary cash investments in exchange for the shares of Company common stock. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- During the nine months ended June 30, 2000, SIP made a $1.8 million investment in Independence Pipeline Company, a Delaware general partnership (Independence), and had an aggregate investment balance of $12.9 million at June 30, 2000. This investment represents a one-third partnership interest. The investment has been financed with short-term borrowings. Independence intends to build a 370 mile natural gas pipeline (the Independence Pipeline) from Defiance, Ohio to Leidy, Pennsylvania at an estimated cost of $680 million.* If construction never begins on the Independence Pipeline project, SIP's share of the development costs (including SIP's investment in Independence) is estimated not to exceed $15.0 million.* On July 12, 2000, the FERC issued a certificate of public convenience and necessity (the Certificate) authorizing, among other things, the construction and operation of the Independence Pipeline, subject to satisfaction of various conditions spelled out in the Certificate and in previous FERC orders. Among those conditions is the requirement that, before construction may commence, Independence must file at FERC executed, firm transportation agreements with "no out" clauses for at least 68.2% of its capacity. (Independence already filed, on June 26 and July 6, 2000, precedent agreements for firm transportation amounting to about 38% of the capacity of the Independence Pipeline, thereby satisfying a FERC requirement previously imposed as a precondition to FERC's issuance of the Certificate.) The Independence Pipeline sponsors are working on obtaining the required customer commitments. The Certificate also requires that the Independence Pipeline be constructed and placed in service by July 12, 2003. Assuming contracts are in place in quantities satisfactory to the partners, the Independence Pipeline's planned in service date is November 1, 2002.* Exploration and Production -------------------------- The Exploration and Production segment capital expenditures for the nine months ended June 30, 2000 included approximately $76.4 million for Seneca's offshore program in the Gulf of Mexico, including offshore drilling expenditures, offshore construction, lease acquisition costs and geological and geophysical expenditures. The remaining $20.0 million of capital expenditures included onshore drilling, construction and recompletion costs for wells located in Louisiana, Texas and California as well as onshore geological and geophysical costs, including the purchase of certain 3-D seismic data and fixed asset purchases. In June 2000, NFEC acquired the outstanding shares of Tri Link, a Calgary-Alberta based oil and gas exploration and production company. This acquisition builds Seneca's total reserve base to approximately one trillion cubic feet equivalent.* The cost of acquiring the outstanding shares of Tri Link was approximately $123.8 million. The acquisition was financed with short-term borrowings. Refer to "Financing Cash Flow" for a discussion of the redemption of the debt that was assumed as part of the Tri Link acquisition. International ------------- The majority of the International segment capital expenditures were concentrated in the areas of improvements and replacements within the district heating and power generation plants in the Czech Republic. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- Timber ------ The majority of the Timber segment capital expenditures were made for the purchase of land and timber in Pennsylvania, and the construction and/or purchase of new facilities and equipment for this segment's sawmill and kiln operations. As discussed under the Timber segment's results of operations, in January 2000, this segment sold land and timber with a book value of $3.0 million for $5.3 million. The resulting gain on this sale of $2.3 million is included in earnings for the nine months ending June 30, 2000. All Other --------- Expenditures for Long-Lived Assets for all other subsidiaries consisted of Upstate's purchase of a 50% interest in a gas processing facility and NFR Power's purchase of a 50% partnership interest in Seneca Energy II, LLC (Seneca Energy). Seneca Energy generates and sells electricity to a public utility. Seneca Energy generates the electricity by using methane gas obtained from a landfill in Seneca Falls, New York, which is owned by an outside party. The Company continuously evaluates capital expenditures and investments in corporations and partnerships. The amounts are subject to modification for opportunities such as the acquisition of attractive oil and gas properties, timber or storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures or other investments in the Company's other business segments depends, to a large degree, upon market conditions.* Financing Cash Flow. Consolidated short-term debt increased $125.3 million during the first nine months of 2000. The Company continues to consider short-term debt an important source of cash for temporarily financing capital expenditures and investments in corporations and/or partnerships, gas-in-storage inventory, unrecovered purchased gas costs, exploration and development expenditures and other working capital needs. Fluctuations in these items can have a significant impact on the amount and timing of short-term debt. In June 2000, NFEC paid approximately $96.2 million to redeem the bank loans and convertible debentures of the former Tri Link. These redemptions were financed with short-term debt. In February 2000, the Company issued $150.0 million of 7.30% medium-term notes due in February 2003. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to $149.3 million. The proceeds of this debt issuance were used to redeem $50.0 million of 6.60% medium-term notes which matured in February 2000 and to reduce short-term debt. In March 1998, the Company obtained authorization from the Securities and Exchange Commission (SEC), under the Public Utility Holding Company Act of 1935, to issue long-term debt securities and equity securities in amounts not exceeding $2.0 billion at any one time outstanding during the order's authorization period, which extends to December 31, 2002. In August 1999, the Company registered $625.0 million of debt and equity securities under the Securities Act of 1933. After the February 2000 medium-term note issuance discussed above, the Company currently has $475.0 million of debt and equity securities registered under the Securities Act of 1933. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- The Company's present liquidity position is believed to be adequate to satisfy known demands.* Under the Company's existing indenture covenants, at June 30, 2000, the Company would have been permitted to issue up to a maximum of $510.0 million in additional long-term unsecured indebtedness at projected market interest rates. In addition, at June 30, 2000, the Company had regulatory authorizations and unused short-term credit lines that would have permitted it to borrow an additional $231.2 million of short-term debt. The amounts and timing of the issuance and sale of debt and/or equity securities will depend on market conditions, regulatory authorizations, and the requirements of the Company. The Company is involved in litigation arising in the normal course of business. The Company is involved in regulatory matters arising in the normal course of business that involve rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such litigation or regulatory matters could have a material effect on earnings and cash flows in the year of resolution, none of this litigation, and none of these regulatory matters are expected to change materially the Company's present liquidity position, nor have a material adverse effect on the financial condition of the Company.* Market Risk Sensitive Instruments For a complete discussion of market risk sensitive instruments, refer to "Market Risk Sensitive Instruments" in Item 7 of the Company's 1999 Form 10-K. The following discussion is an update to that disclosure. Energy Commodity Price Risk Certain of the Company's subsidiaries (primarily Seneca and NFR) utilize various derivative financial instruments (derivatives), including price swap agreements, options, no cost collars, exchange-traded futures and exchange-traded options, as part of the Company's overall energy commodity price risk management strategy. Under this strategy, the Company manages a portion of the market risk associated with fluctuations in the price of natural gas and crude oil, thereby providing more stability to operating results. The derivatives entered into by these subsidiaries are not held for trading purposes. The following tables disclose natural gas and crude oil price swap information by expected maturity dates for agreements in which Seneca receives a fixed price in exchange for paying a variable price as quoted in "Inside FERC" or on the New York Mercantile Exchange. Notional amounts (quantities) are used to calculate the contractual payments to be exchanged under the contract. The tables do not reflect the earnings impact of the physical transactions that are expected to offset any financial gains and losses arising from the use of the price swap agreements. The weighted average variable prices represent the prices as of June 30, 2000. At June 30, 2000, Seneca had not entered into any natural gas or crude oil price swap agreements with maturity dates extending beyond 2003.
Natural Gas Price Swap Agreements --------------------------------- -------------------------------------------------------------------------------------------------------------------- Expected Maturity Dates ----------------------------------------------------------------- 2000 2001 2002 2003 Total -------------------------------------------------- ------------ ------------ ------------- ------------ ------------ Notional Quantities (Equivalent Bcf) 6.6 17.9 10.8 1.1 36.4 Weighted Average Fixed Rate (per Mcf) $2.63 $2.79 $3.08 $2.78 $2.85 Weighted Average Variable Rate (per Mcf) $4.58 $4.56 $4.56 $4.55 $4.56 -------------------------------------------------- ------------ ------------ ------------- ------------ ------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) ---------------------
Crude Oil Price Swap Agreements ------------------------------- ------------------------------------------------------------------------------------------------------------------------- Expected Maturity Dates 2000 2001 2002 2003 Total -------------------------------------------------- ------------- -------------- ------------- ------------- ------------- Notional Quantities (Equivalent bbls) 574,000 3,717,915 2,608,980 1,803,000 8,703,895 Weighted Average Fixed Rate (per bbl) $18.88 $21.04 $19.93 $19.93 $20.34 Weighted Average Variable Rate (per bbl) $31.53 $31.53 $31.53 $31.53 $31.53 -------------------------------------------------- ------------- -------------- ------------- ------------- -------------
At June 30, 2000, Seneca would have had to pay the respective counterparties to its natural gas price swap agreements an aggregate of approximately $40.7 million to terminate the natural gas price swap agreements outstanding at that date. Seneca would have had to pay an aggregate of approximately $33.9 million to the counterparties to its crude oil price swap agreements to terminate the crude oil price swap agreements outstanding at June 30, 2000. The following table discloses the notional quantities, the weighted average ceiling price and the weighted average floor price for the no cost collars utilized by Seneca to manage natural gas and crude oil price risk. The table does not reflect the earnings impact of the physical transactions that are expected to offset any financial gains and losses arising from the use of the no cost collars. At June 30, 2000, Seneca had not entered into any no cost collars with maturity dates extending beyond 2002.
No Cost Collars -------------------------------------------------------------------------------------------------------------------- Expected Maturity Dates 2001 2002 Total ---------------------------------------------------------------------- -------------- -------------- --------------- Crude Oil Notional Quantities (Equivalent bbls) 1,245,000 255,000 1,500,000 Weighted Average Ceiling Price (per bbl) $29.13 $28.58 $29.03 Weighted Average Floor Price (per bbl) $22.10 $21.53 $22.00 ---------------------------------------------------------------------- -------------- -------------- --------------- Natural Gas Notional Quantities (Equivalent Bcf) 3.1 - 3.1 Weighted Average Ceiling Price (per Mcf) $6.00 - $6.00 Weighted Average Floor Price (per Mcf) $3.69 - $3.69 ---------------------------------------------------------------------- -------------- -------------- ---------------
The following tables disclose the notional quantities and weighted average strike prices for options utilized by Seneca to manage natural gas and crude oil price risk. The tables do not reflect the earnings impact of the physical transactions that are expected to offset any financial gains or losses that might arise if an option were to be exercised. At June 30, 2000, Seneca held no options with maturity dates extending beyond December 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) ---------------------
Written Call Options(1) -------------------- -------------------------------------------------------------------------------------------------------------------- Expected Maturity Dates --------------------------------------------- 2000 2001 Total ---------------------------------------------------------------------- -------------- -------------- --------------- Crude Oil Notional Quantities (Equivalent bbls) 184,000 184,000 368,000 Weighted Average Strike Price (per bbl) $18.00 $18.00 $18.00 Natural Gas Notional Quantities (Equivalent Bcf) 3.5 3.5 7.0 Weighted Average Strike Price (per Mcf) $2.42 $2.74 $2.58 ---------------------------------------------------------------------- -------------- -------------- ---------------
(1) The counterparty has a choice between a natural gas call option and a crude oil call option, depending on whichever option has greater value to the counterparty.
Written Put Options ------------------- -------------------------------------------------------------------------------------------------------------------- Expected Maturity Dates --------------------------------------------- 2000 2001 Total ---------------------------------------------------------------------- -------------- -------------- --------------- Crude Oil Notional Quantities (Equivalent bbls) 184,000 184,000 368,000 Weighted Average Strike Price (per bbl) $12.50 $12.50 $12.50 ---------------------------------------------------------------------- -------------- -------------- ---------------
Purchased Call Option --------------------- ----------------------------------------------------------------------------- Expected Maturity Date - 2000 ----------------------------------------------------------------------------- Crude Oil Notional Quantities (Equivalent bbls) 368,000 Weighted Average Strike Price (per bbl) $20.00 ----------------------------------------------------------------------------- At June 30, 2000, Seneca would have had to pay the counterparty to its call options $11.1 million on a net basis to terminate its call options. Seneca would have paid the counterparty $15.0 million related to the exercise of the written call and put options but would have received $3.9 million related to Seneca's exercise of its purchased call option. The Company is exposed to credit risk on the price swap agreements and no cost collars that Seneca has entered into as well as on the call options that Seneca has purchased. Credit risk relates to the risk of loss that the Company would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. To mitigate such credit risk, management performs a credit check and then on an ongoing basis monitors counterparty credit exposure. The Company does not anticipate any material impact to its financial position, results of operations, or cash flows as a result of nonperformance by counterparties.* The following table discloses the net notional quantities, weighted average contract prices and weighted average settlement prices by expected maturity date for exchange-traded futures contracts utilized by NFR to manage natural gas price risk. The table does not reflect the earnings impact of the physical transactions that are expected to offset any financial gains or losses arising from the use of the futures contracts. At June 30, 2000, NFR held no futures contracts with maturity dates extending beyond 2002. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) ---------------------
Exchange-Traded Futures Contracts ---------------------------------------------------------------------------------------------------------------------- Expected Maturity Dates ---------------------------------------------------------- 2000 2001 2002 Total ------------------------------------------------------------ ------------- ---------------- ------------- ------------- Contract Volumes Purchased (Sold) (Equivalent Bcf) (1.0) 0.2 (0.1) (0.9) Weighted Average Contract Price (per Mcf) $3.97 $3.60 $3.56 $3.87 Weighted Average Settlement Price (per Mcf) $4.67 $4.52 $3.65 $4.61 ------------------------------------------------------------ ------------- ---------------- ------------- -------------
The following table discloses the notional quantities and weighted average strike prices by expected maturity dates for exchange-traded options utilized by NFR to manage natural gas price risk. The table does not reflect the earnings impact of the physical transactions that would offset any financial gains or losses that might arise if an option were to be exercised. At June 30, 2000, NFR held no options with maturity dates extending beyond 2001.
Exchange-Traded Options Purchased --------------------------------- --------------------------------------------------------------------------------------------------------------------- Expected Maturity Date ----------------------------------------------------- 2000 2001 Total --------------------------------------------------------------- ------------------ ---------------- ----------------- Notional Quantities (Equivalent Bcf) 51.7 18.5 70.2 Weighted Average Strike Price (per Mcf) $4.32 $3.91 $4.21 --------------------------------------------------------------- ------------------ ---------------- -----------------
Exchange-Traded Options Sold ---------------------------- --------------------------------------------------------------------------------------------------------------------- Expected Maturity Date ----------------------------------------------------- 2000 2001 Total --------------------------------------------------------------- ------------------ ---------------- ----------------- Notional Quantities (Equivalent Bcf) 38.9 21.5 60.4 Weighted Average Strike Price (per Mcf) $4.74 $4.44 $4.63 --------------------------------------------------------------- ------------------ ---------------- -----------------
At June 30, 2000, NFR would have paid approximately $3.9 million to settle the exchange-traded futures outstanding at that date. NFR would have paid approximately $2.0 million to settle its exchange-traded options outstanding at June 30, 2000. The following table discloses the notional quantities and weighted average strike prices by expected maturity dates for exchange-traded options utilized by NFR as a financing mechanism for its hedging program. At June 30, 2002, NFR held no such options with maturity dates extending beyond 2001.
Exchange-Traded Options Sold ---------------------------- --------------------------------------------------------------------------------------------------------------------- Expected Maturity Date ----------------------------------------------------- 2000 2001 Total --------------------------------------------------------------- ------------------ ---------------- ----------------- Notional Quantities (Equivalent Bcf) 28.3 4.0 32.3 Weighted Average Strike Price (per Mcf) $4.31 $4.06 $4.28 --------------------------------------------------------------- ------------------ ---------------- -----------------
At June 30, 2000, NFR would have had to pay $5.3 million on a net basis to terminate these options. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- Exchange Rate Risk Seneca's investment in NFEC is valued in Canadian dollars, and, as such, this investment is subject to currency exchange risk when the Canadian dollars are translated into U.S. dollars. Subsequent to the completion of the acquisition of Tri Link on June 15, 2000, the Canadian dollar decreased in value in relation to the U.S. dollar resulting in a $0.8 million negative adjustment to the Cumulative Foreign Currency Translation Adjustment (a component of Accumulated Other Comprehensive Loss). Further valuation charges to the Canadian dollar would result in corresponding positive or negative adjustments to the Cumulative Foreign Currency Translation Adjustment. Management cannot predict whether the Canadian dollar will increase or decrease in value against the U.S. dollar.* RATE MATTERS Utility Operation New York Jurisdiction On October 21, 1998, the NYPSC approved a rate plan for Distribution Corporation for the period beginning October 1, 1998 and ending September 30, 2000. The plan was the result of a settlement agreement entered into by Distribution Corporation, Staff for the NYPSC (Staff), Multiple Intervenors (an advocate for large industrial customers) and the State Consumer Protection Board. Under the plan, Distribution Corporation's rates decreased by $7.2 million, or 1.1%. In addition, the plan provided customers with up to $6.0 million in bill credits, disbursed volumetrically over the two year term, reflecting a predetermined share of excess earnings under a 1996 settlement. An allowed return on equity of 12%, above which additional earnings are to be shared equally with the customers, was maintained from a 1996 settlement. Finally, as provided by the rate plan, $7.2 million of 1999 revenues were set aside in a special reserve to be applied against Distribution Corporation's incremental costs resulting from the NYPSC's gas restructuring effort further described below. On July 28, 2000, Distribution Corporation distributed a plan to extend the above-described rate plan for a period beyond the expiration date of September 30, 2000. The proposal was served on the rate plan parties identified above and interested marketers. In addition to extending the term of the current rate plan, Distribution Corporation's proposal includes service and rate modifications designed to further the NYPSC's gas restructuring initiative. Discussions are currently under way to determine if the parties might reach an agreement on the Distribution Corporation's proposal. On November 3, 1998, the NYPSC issued its Policy Statement Concerning ----------------------------- the Future of the Natural Gas Industry in New York State and Order Terminating -------------------------------------------------------------------------------- Capacity Assignment (Policy Statement). The Policy Statement sets forth the -------------------- NYPSC's "vision" on "how best to ensure a competitive market for natural gas in New York." That vision includes the following goals: (1) Effective competition in the gas supply market for retail customers; (2) Downward pressure on customer gas prices; (3) Increased customer choice of gas suppliers and service options; (4) A provider of last resort (not necessarily the utility); (5) Continuation of reliable service and maintenance of operations procedures that treat all participants fairly; (6) Sufficient and accurate information for customers to use in making informed decisions; Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- (7) The availability of information that permits adequate oversight of the market to ensure fair competition; and (8) Coordination of Federal and State policies affecting gas supply and distribution in New York State. The Policy Statement provides that the most effective way to establish a competitive market in gas supply is "for local distribution companies to cease selling gas." The NYPSC indicated in its order that it hopes to accomplish that objective over a three-to-seven year transition period from the date the Policy Statement was issued, taking into account "statutory requirements" and the individual needs of each local distribution company (LDC).* The Policy Statement directs Staff to schedule "discussions" with each LDC on an "individualized plan that would effectuate our vision." In preparation for negotiations, LDCs will be required to address issues such as a strategy to hold new capacity contracts to a minimum, a long-term rate plan with a goal of reducing or freezing rates, and a plan for further unbundling. In addition, Staff was instructed to hold collaborative sessions with multiple parties to discuss generic issues including reliability and market power regulation. Distribution Corporation has participated in the collaborative sessions. These collaborative sessions have not yet produced a consensus document on all issues before the NYPSC. Distribution Corporation will continue to participate in all future collaborative sessions.* On March 22, 2000, the NYPSC issued an order directing electric and gas utilities to file tariff amendments "to accommodate the wishes of retail access customers who prefer to receive combined, single bills from either their utility company or their [marketer]" (the Billing Order). The tariff amendments will provide for marketer single-bill or utility single-bill services, thereby allowing a customer to choose a billing preference through the customer's choice of suppliers - utility or marketer. Distribution Corporation has permitted marketer single billing since 1996. The Billing Order will permit Distribution Corporation to provide a single retail bill service for marketers. Included in the Billing Order is a requirement that utilities design a "back-out" credit equal to the long run costs avoided by each utility when billing is provided by another party. On April 24, 2000 Distribution Corporation submitted draft tariff sheets setting forth a proposed back-out credit methodology for review and comment by NYPSC Staff and other interested parties. Although a methodology is described, no back-out credit was calculated. Distribution Corporation's filing included provisions for a billing service to be provided by Distribution Corporation, together with additional rules and regulations governing marketer-provided retail billing. Several utilities filed requests for rehearing of the Billing Order. The requests include, among other things, arguments challenging the NYPSC's authority to impose a back-out credit based on long run avoided costs. Distribution Corporation chose against joining the other utilities on rehearing and may, if necessary, pursue other avenues of relief.* At this time, Distribution Corporation is unable to ascertain the outcome of matters relating to the Billing Order. In conversations with NYPSC Staff prior to the release of the Billing Order, Distribution Corporation requested approval for a temporary, interim billing service to be provided in response to marketer inquiries. As a result of Distribution Corporation's efforts, the Billing Order included a provision for a billing service as requested. Accordingly, beginning on May 1, 2000, Distribution Corporation commenced a retail billing service for two marketers serving approximately 2000 retail customers. The billing service is being offered to the marketer community for a per-bill fee of $0.50, subject to modification pursuant to the Billing Order. The temporary billing service will remain available for interested marketers until it is replaced by a permanent billing service under the Billing Order. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- On March 30, 2000, a collaborative was convened to address the NYPSC's Order Instituting Proceeding in the so-called "Provider of Last Resort" (POLR) case. The collaborative was charged with the task of helping the NYPSC to "refine our concept of the mature competitive retail energy markets (especially the future role of the regulated utilities) and to identify and remove obstacles to its achievement." This case is expected to address, among other things, issues arising from utilities exiting the merchant function. The proceeding is also focusing on utilities' responsibility to provide low-income assistance programs. Currently the parties are meeting on a periodic basis to establish a procedure for identifying the issues and managing the proceeding. At this time, Distribution Corporation is unable to ascertain the outcome of the POLR proceeding.* On April 12, 2000, the NYPSC issued an order setting forth procedures for implementation of electronic data interchange (EDI) for electronic exchange of retail access data in New York (EDI Order). As described by the NYPSC, EDI is the computer-to-computer exchange of routine business information in a standard form. The NYPSC believes that EDI is necessary to develop uniform data exchange protocol for the state's customer choice initiatives. The EDI Order adopts provisions of a report prepared after an EDI collaborative involving utilities, marketers and other interests. Distribution Corporation submitted its EDI implementation plans on May 31, 2000. At this time, Distribution Corporation is unable to ascertain the outcome of the EDI proceeding. The NYPSC continues to address, through various proceedings and "collaboratives," upstream pipeline capacity issues arising from the restructuring. At this point, Distribution Corporation remains authorized to release upstream intermediate capacity to marketers serving former sales customers. Costs relating to retained upstream transmission capacity are recovered through a transition cost surcharge. At this time, Distribution Corporation does not foresee any material changes to upstream capacity requirements in the near term.* Pennsylvania Jurisdiction Distribution Corporation currently does not have a rate case on file with the Pennsylvania Public Utility Commission (PaPUC). Management will continue to monitor its financial position in the Pennsylvania jurisdiction to determine the necessity of filing a rate case in the future. A natural gas restructuring bill was signed into law on June 22, 1999. Entitled the Natural Gas Choice and Competition Act (Act), the new law requires all Pennsylvania LDCs to file tariffs designed to provide retail customers with direct access to competitive gas markets. Distribution Corporation submitted its compliance filing on October 1, 1999 for an effective date on or about July 1, 2000. The filing largely mirrored the company's System Wide Energy Select program previously in effect, which substantially complied with the Act's requirements. After negotiations with PaPUC Staff and intervenors, a settlement was reached with all parties except for the Pennsylvania Office of Consumer Advocate (OCA). The settlement parties generally agreed that Distribution Corporation's proposal needed only modest changes to meet the requirements of the Act. Hearings were held and briefs filed on OCA's open issues. In a Recommended Decision issued on March 31, 2000, the Administrative Law Judge rejected the OCA's arguments and recommended approval of the settlement agreement. On June 29, 2000, the PaPUC entered an Opinion and Order adopting the settlement, with immaterial changes. Distribution Corporation's restructured rates and services became effective on July 1, 2000. Base rate adjustments in both the New York and Pennsylvania jurisdictions do not reflect the recovery of purchased gas costs. Such costs are recovered through operation of the purchased gas adjustment clauses of the appropriate regulatory authorities. Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Cont.) --------------------- Pipeline and Storage Supply Corporation currently does not have a rate case on file with the FERC. Management will continue to monitor Supply Corporation's financial position to determine the necessity of filing a rate case in the future. Other Matters Environmental Matters It is the Company's policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. Distribution Corporation and Supply Corporation have estimated their clean-up costs related to former manufactured gas plant and former gasoline plant sites and third party waste disposal sites will be in the range of $8.1 million to $9.1 million.* The minimum liability of $8.1 million has been recorded on the Consolidated Balance Sheet at June 30, 2000. Other than discussed in Note H of the 1999 Form 10-K (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company.* The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. For further discussion refer to Note H - Commitments and Contingencies under the heading "Environmental Matters" in Item 8 of the Company's 1999 Form 10-K. Safe Harbor for Forward-Looking Statements. The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein, including without limitation those which are designated with a "*", are forward-looking statements and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including, without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements: 1. Changes in economic conditions, demographic patterns and weather conditions 2. Changes in the availability and/or price of natural gas and oil Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations (Concl.) ---------------------- 3. Inability to obtain new customers or retain existing ones 4. Significant changes in competitive factors affecting the Company 5. Governmental/regulatory actions and initiatives, including those affecting acquisitions, financings, allowed rates of return, industry and rate structure, franchise renewal, and environmental/safety requirements 6. Unanticipated impacts of restructuring initiatives in the natural gas and electric industries 7. Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays or changes in project costs 8. The nature and projected profitability of pending and potential projects and other investments 9. Occurrences affecting the Company's ability to obtain funds from operations, debt or equity to finance needed capital expenditures and other investments 10. Uncertainty of oil and gas reserve estimates 11. Ability to successfully identify and finance oil and gas property acquisitions and ability to operate existing and any subsequently acquired businesses and/or properties 12. Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves 13. Changes in the availability and/or price of derivative financial instruments 14. Changes in the price of natural gas or oil and the related effect given the accounting treatment or valuation of these financial instruments. 15. Inability of the various counterparties to meet their obligations with respect to the Company's financial instruments 16. Regarding foreign operations - changes in foreign trade and monetary policies, laws and regulations related to foreign operations, political and governmental changes, inflation and exchange rates, taxes and operating conditions 17. Significant changes in tax rates or policies or in rates of inflation or interest 18. Significant changes in the Company's relationship with its employees and the potential adverse effects if labor disputes or grievances were to occur 19. Changes in accounting principles and/or the application of such principles to the Company The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Refer to the "Market Risk Sensitive Instruments" section in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Part II. Other Information --------------------------- Item 1. Legal Proceedings ----------------- For a discussion of various environmental matters, refer to Part I, Item 1 at Note 6 and to Part I, Item 2 - MD&A of this report under the heading "Other Matters." Item 2. Changes in Securities --------------------- On April 3, 2000, the Company issued 600 unregistered shares of Company common stock to the non-employee directors of the Company. The shares were issued as partial consideration for the directors' service during the quarter ended June 30, 2000, pursuant to the Company's Retainer Policy for Non-Employee Directors. These transactions were exempt from registration by Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving a public offering. Item 5. Other Information ----------------- In June, John F. Riordan was elected to the Board of Directors for a term that will expire in February 2001. Mr. Riordan's election filled a vacancy created in February when George H. Schofield retired from the Board. Also in June, Highland Land & Minerals, Inc. changed its name to Highland Forest Resources, Inc. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit Number Description of Exhibit ------ ---------------------- 3 (ii) By-Laws: 3.1 National Fuel Gas Company By-Laws as amended on February 17, 2000. (10) Material Contracts 10.1 Amended and Restated Split Dollar Insurance Agreement, effective June 15, 2000 among National Fuel Gas Company, Bernard J. Kennedy, and Joseph B. Kennedy, as Trustee of the Trust under the Agreement dated January 9, 1998. 10.2 Contingent Benefit Agreement effective June 15, 2000 between National Fuel Gas Company and Bernard J. Kennedy. Item 6. Exhibits and Reports on Form 8-K (Concl.) ----------------------------------------- (a) Exhibits Exhibit Number Description of Exhibit ------ ---------------------- (12) Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the Twelve Months Ended June 30, 2000 and the Fiscal Years Ended September 30, 1995 through 1999. (27) Financial Data Schedules 27.1 Financial Data Schedule for the Nine Months Ended June 30, 2000. 27.2 Restated Financial Data Schedule for the Nine Months Ended June 30, 1999. (99) National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended June 30, 2000 and 1999. (b) Reports on Form 8-K On April 24, 2000, the Company filed a Form 8-K regarding an agreement whereby Seneca Resources Corporation agreed to offer to acquire all of the outstanding common shares of Tri Link Resources, Ltd., a Calgary, Alberta based exploration and production company. This report did not include any financial statements. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL FUEL GAS COMPANY ------------------------- (Registrant) /s/Joseph P. Pawlowski ----------------------------------- Joseph P. Pawlowski Treasurer and Principal Accounting Officer Date: August 14, 2000 --------------- EXHIBIT INDEX (Form 10Q) Exhibit 3(ii) By-Laws, as amended on February 17, 2000. Exhibit 10.1 Amended and Restated Split Dollar Insurance Agreement, effective June 15, 2000 among National Fuel Gas Company, Bernard J. Kennedy, and Joseph B. Kennedy, as Trustee of the Trust under the Agreement dated January 9, 1998. Exhibit 10.2 Contingent Benefit Agreement effective June 15, 2000 between National Fuel Gas Company and Bernard J. Kennedy. Exhibit 12 Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the Twelve Months Ended June 30, 2000 and the Years Ended September 30, 1995 through 1999. Exhibit 27.1 Financial Data Schedule for the Nine Months Ended June 30, 2000. Exhibit 27.2 Restated Financial Data Schedule for the Nine Months Ended June 30, 1999. Exhibit 99 National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended June 30, 2000 and 1999.