-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ATw+Q5vweWmjWmn6kyTn52l8XDWkNAfb0lLnApFmQ7RZ89azoVd+2R6l0xqAy6YM F4RTnYwBUV3IKhKrBNH2lg== 0000070145-03-000033.txt : 20030515 0000070145-03-000033.hdr.sgml : 20030515 20030515141319 ACCESSION NUMBER: 0000070145-03-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL FUEL GAS CO CENTRAL INDEX KEY: 0000070145 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 131086010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03880 FILM NUMBER: 03703549 BUSINESS ADDRESS: STREET 1: 10 LAFAYETTE SQ CITY: BUFFALO STATE: NY ZIP: 14203 BUSINESS PHONE: 7168576980 MAIL ADDRESS: STREET 1: 10 LAFAYETTE SQ STREET 2: 10 LAFAYETTE SQ CITY: BUFFALO STATE: NY ZIP: 14203 10-Q 1 form10q.htm FORM10Q - MARCH National Fuel Gas Company Form 10-Q for March 31, 2003

United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2003

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 14203
Buffalo, New York (Zip Code)

(Address of principal executive offices)

(716) 857-7000
(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES    X    NO        

Indicate the number shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

      Common stock, $1 par value, outstanding at April 30, 2003: 80,790,460 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)
  Horizon Power, Inc. (Horizon Power)
  Niagara Independence Marketing Company (NIM)
  Seneca Independence Pipeline Company (SIP)

INDEX

           Part I. Financial Information

Item 1. Financial Statements

Consolidated Statements of Income and Earnings Reinvested in the Business - Three and Six Months Ended March 31, 2003 and 2002

Consolidated Balance Sheets - March 31, 2003 and September 30, 2002

Consolidated Statement of Cash Flows - Six Months Ended March 31, 2003 and 2002

Consolidated Statement of Comprehensive Income - Three Months and Six Months Ended March 31, 2003 and 2002

Notes to Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

           Part II. Other Information

Item 1. Legal Proceedings

Item 2. Changes in Securities

Item 3. Defaults Upon Senior Securities - The Company has nothing to report under this item.

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signature

Certifications

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 an asterisk (“*”) 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

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Consolidated Statements of Income and Earnings

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National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)

                                                                                             March 31,
(Thousands of Dollars, Except Per Common Share Amounts)                                 2003              2002
                                                                                 ----------------- -----------------
INCOME
Operating Revenues                                                                     $809,065          $477,436
- -------------------------------------------------------------------------------- ----------------- -----------------

Operating Expenses
  Purchased Gas                                                                         451,416           173,216
  Fuel Used in Heat and Electric Generation                                              23,124            16,929
  Operation and Maintenance                                                             104,084           100,933
  Property, Franchise and Other Taxes                                                    24,477            20,108
  Depreciation, Depletion and Amortization                                               49,261            43,114
  Income Taxes                                                                           50,299            33,808
- -------------------------------------------------------------------------------- ----------------- -----------------
                                                                                        702,661           388,108
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Income                                                                        106,404            89,328
Income (Loss) from Unconsolidated Subsidiaries                                              287              (193)
Other Income                                                                              2,552             1,092
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Interest Charges and
  Minority Interest in Foreign Subsidiaries                                             109,243            90,227
- -------------------------------------------------------------------------------- ----------------- -----------------

Interest Charges
  Interest on Long-Term Debt                                                             23,597            23,231
  Other Interest                                                                          3,317             3,726
- -------------------------------------------------------------------------------- ----------------- -----------------
                                                                                         26,914            26,957
- -------------------------------------------------------------------------------- ----------------- -----------------
Minority Interest in Foreign Subsidiaries                                                (1,791)           (1,346)
- -------------------------------------------------------------------------------- ----------------- -----------------

Net Income Available for Common Stock                                                    80,538            61,924

EARNINGS REINVESTED IN THE BUSINESS
Balance at December 31                                                                  566,557           526,634
- -------------------------------------------------------------------------------- ----------------- -----------------
                                                                                        647,095           588,558
Dividends on Common Stock
 (2003 - $0.26; 2002 - $0.2525)                                                          20,934            20,112
- -------------------------------------------------------------------------------- ----------------- -----------------
Balance at March 31                                                                    $626,161          $568,446
================================================================================ ================= =================

Earnings Per Common Share:
  Basic                                                                                   $1.00             $0.78
================================================================================ ================= =================
  Diluted                                                                                 $0.99             $0.77
================================================================================ ================= =================
Weighted Average Common Shares Outstanding:
  Used in Basic Calculation                                                          80,588,927        79,664,218
================================================================================ ================= =================
  Used in Diluted Calculation                                                        80,999,321        80,776,274
================================================================================ ================= =================

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)

                                                                                            March 31,
(Dollars in Thousands, Except Per Common Share Amounts)                               2003              2002
                                                                                 ----------------- -----------------
INCOME
Operating Revenues                                                                   $1,288,771          $869,763
- -------------------------------------------------------------------------------- ----------------- -----------------

Operating Expenses
  Purchased Gas                                                                        657,170           302,621
  Fuel Used in Heat and Electric Generation                                              42,151            32,547
  Operation and Maintenance                                                             194,856           205,479
  Property, Franchise and Other Taxes                                                    43,354            37,313
  Depreciation, Depletion and Amortization                                               94,909            87,159
  Income Taxes                                                                           77,912            56,518
- -------------------------------------------------------------------------------- ----------------- -----------------
                                                                                      1,110,352           721,637
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Income                                                                        178,419           148,126
Income (Loss) from Unconsolidated Subsidiaries                                              528              (250)
Other Income                                                                              4,378             3,282
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Interest Charges and
  Minority Interest in Foreign Subsidiaries                                            183,325           151,158
- -------------------------------------------------------------------------------- ----------------- -----------------

Interest Charges
  Interest on Long-Term Debt                                                            46,624            45,152
  Other Interest                                                                          6,500             8,907
- -------------------------------------------------------------------------------- ----------------- -----------------
                                                                                         53,124            54,059
- -------------------------------------------------------------------------------- ----------------- -----------------
Minority Interest in Foreign Subsidiaries                                                (2,730)           (1,969)
- -------------------------------------------------------------------------------- ----------------- -----------------

Income Before Cumulative Effect of Changes in Accounting                                127,471            95,130
Cumulative Effect of Changes in Accounting                                               (8,892)                -
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock                                                   118,579            95,130

EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1                                                                    549,397           513,488
- -------------------------------------------------------------------------------- ----------------- -----------------
                                                                                        667,976           608,618
Dividends on Common Stock
 (2003 - $0.52; 2002 - $0.505)                                                           41,815            40,172
- -------------------------------------------------------------------------------- ----------------- -----------------
Balance at March 31                                                                    $626,161          $568,446
================================================================================ ================= =================

Earnings Per Common Share:
  Basic:
      Income Before Cumulative Effect of Changes in Accounting                            $1.58             $1.20
      Cumulative Effect of Changes in Accounting                                          (0.11)                -
- -------------------------------------------------------------------------------- ----------------- -----------------
      Net Income Available for Common Stock                                               $1.47             $1.20
================================================================================ ================= =================
  Diluted:
      Income Before Cumulative Effect of Changes in Accounting                            $1.58             $1.18
      Cumulative Effect of Changes in Accounting                                          (0.11)                -
- -------------------------------------------------------------------------------- ----------------- -----------------
      Net Income Available for Common Stock                                               $1.47             $1.18
================================================================================ ================= =================
Weighted Average Common Shares Outstanding:
  Used in Basic Calculation                                                         80,495,496        79,566,962
================================================================================ ================= =================
  Used in Diluted Calculation                                                        80,895,211        80,592,122
================================================================================ ================= =================

See Notes to Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

Consolidated Balance Sheets

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National Fuel Gas Company
Consolidated Balance Sheets

                                                                                   March 31,
                                                                                    2003            September 30,
                                                                                 (Unaudited)             2002
                                                                             -------------------- -------------------

(Thousands of Dollars)

ASSETS
Property, Plant and Equipment                                                       $4,871,120          $4,512,651
   Less - Accumulated Depreciation, Depletion
     and Amortization                                                                1,776,248           1,667,906
- ---------------------------------------------------------------------------- -------------------- -------------------
                                                                                     3,094,872           2,844,745
- ---------------------------------------------------------------------------- -------------------- -------------------
Current Assets
   Cash and Temporary Cash Investments                                                  65,609              22,216
   Receivables - Net                                                                   325,851              95,510
   Unbilled Utility Revenue                                                             62,587              21,918
   Gas Stored Underground                                                                7,037              77,250
   Materials and Supplies - at average cost                                             31,979              31,582
   Unrecovered Purchased Gas Costs                                                           -              12,431
   Prepayments                                                                          34,845              41,354
   Fair Value of Derivative Financial Instruments                                          778               3,807
- ---------------------------------------------------------------------------- -------------------- -------------------
                                                                                       528,686             306,068
- ---------------------------------------------------------------------------- -------------------- -------------------

Other Assets
   Recoverable Future Taxes                                                             86,797              82,385
   Unamortized Debt Expense                                                             23,427              20,635
   Other Regulatory Assets                                                              56,375              26,104
   Deferred Charges                                                                      3,055               5,914
   Other Investments                                                                    67,131              65,090
   Investments in Unconsolidated Subsidiaries                                           16,662              16,753
   Goodwill                                                                              5,652               8,255
   Other                                                                                33,312              25,360
- ---------------------------------------------------------------------------- -------------------- -------------------
                                                                                       292,411             250,496
- ---------------------------------------------------------------------------- -------------------- -------------------

                                                                                    $3,915,969          $3,401,309
============================================================================ ==================== ===================

See Notes to Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company
Consolidated Balance Sheets

                                                                                  March 31,
                                                                                    2003            September 30,
                                                                                 (Unaudited)             2002
                                                                             -------------------- -------------------
(Thousands of Dollars)

CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders' Equity
   Common Stock, $1 Par Value
    Authorized  - 200,000,000 Shares; Issued
    And Outstanding - 80,656,450 Shares and
    80,264,734 Shares, Respectively                                                   $ 80,656            $ 80,265
   Paid in Capital                                                                     464,743             446,832
   Earnings Reinvested in the Business                                                 626,161             549,397
- ---------------------------------------------------------------------------- -------------------- -------------------
   Total Common Shareholder Equity Before
     Items of Other Comprehensive Loss                                               1,171,560           1,076,494
   Accumulated Other Comprehensive Loss                                                (47,770)            (69,636)
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Comprehensive Shareholders' Equity                                             1,123,790           1,006,858
Long-Term Debt, Net of Current Portion                                               1,259,546           1,145,341
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Capitalization                                                                 2,383,336           2,152,199
- ---------------------------------------------------------------------------- -------------------- -------------------

Minority Interest in Foreign Subsidiaries                                               32,920              28,785
- ---------------------------------------------------------------------------- -------------------- -------------------

Current and Accrued Liabilities
   Notes Payable to Banks and
    Commercial Paper                                                                   307,700             265,386
   Current Portion of Long-Term Debt                                                   145,419             160,564
   Accounts Payable                                                                    184,119             100,886
   Amounts Payable to Customers                                                         27,597                   -
   Other Accruals and Current Liabilities                                              225,980             121,518
   Fair Value of Derivative Financial Instruments                                       37,990              31,204
- ---------------------------------------------------------------------------- -------------------- -------------------
                                                                                       928,805             679,558
- ---------------------------------------------------------------------------- -------------------- -------------------

Deferred Credits
   Accumulated Deferred Income Taxes                                                   358,074             356,220
   Taxes Refundable to Customers                                                        15,596              15,596
   Unamortized Investment Tax Credit                                                     8,546               8,897
   Other Regulatory Liabilities                                                         75,360              82,676
   Asset Retirement Obligation                                                          38,170                   -
   Other Deferred Credits                                                               75,162              77,378
- ---------------------------------------------------------------------------- -------------------- -------------------
                                                                                       570,908             540,767
- ---------------------------------------------------------------------------- -------------------- -------------------
Commitments and Contingencies                                                                -                   -
- ---------------------------------------------------------------------------- -------------------- -------------------

                                                                                    $3,915,969          $3,401,309
============================================================================ ==================== ===================

See Notes to Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

Consolidated Statement of Cash Flows

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National Fuel Gas Company
Consolidated Statements of Cash Flows
(Unaudited)

                                                                                         Six Months Ended
                                                                                             March 31,
(Thousands of Dollars)                                                                2003                  2002
                                                                             ------------------- ---------------------

OPERATING ACTIVITIES
   Net Income Available for Common Stock                                             $118,579               $95,130
   Adjustments to Reconcile Net Income to Net Cash
    Provided by Operating Activities:
         Depreciation, Depletion and Amortization                                      94,909                87,159
         Deferred Income Taxes                                                         (5,008)               40,363
         Cumulative Effect of Changes in Accounting                                     8,892                     -
         (Income) Loss from Unconsolidated Subsidiaries, Net of
           Cash Distributions                                                              91                   641
         Minority Interest in Foreign Subsidiaries                                      2,730                 1,969
         Other                                                                          8,283                 1,454
         Change in:
           Receivables and Unbilled Utility Revenue                                  (265,546)              (69,827)
           Gas Stored Underground and Materials and
            Supplies                                                                   70,192                69,290
           Unrecovered Purchased Gas Costs                                             12,431               (42,152)
           Prepayments                                                                  9,174                 2,837
           Accounts Payable                                                            80,937               (28,243)
           Amounts Payable to Customers                                                27,597               (51,223)
           Other Accruals and Current Liabilities                                     106,280                44,032
           Other Assets                                                               (19,837)               10,330
           Other Liabilities                                                           (9,621)                4,505
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Provided by
 Operating Activities                                                                 240,083               166,265
- ---------------------------------------------------------------------------- ------------------- ---------------------

INVESTING ACTIVITIES
   Capital Expenditures                                                               (62,904)             (109,288)
   Investment in Subsidiaries, Net of Cash Acquired                                  (181,152)                    -
   Investment in Partnerships                                                               -                  (383)
   Other                                                                                2,894                13,914
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Used in Investing Activities                                                (241,162)              (95,757)
- ---------------------------------------------------------------------------- ------------------- ---------------------

FINANCING ACTIVITIES
   Change in Notes Payable to Banks and Commercial Paper                               42,103              (192,189)
   Net Proceeds from Issuance of Long-Term Debt                                       248,513               148,977
   Reduction of Long-Term Debt                                                       (210,109)               (3,095)
   Dividends Paid on Common Stock                                                     (41,711)              (40,092)
   Proceeds from Issuance of Common Stock                                               5,178                 3,890
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Provided by (Used in) Financing Activities                                    43,974               (82,509)
- ---------------------------------------------------------------------------- ------------------- ---------------------

Effect of Exchange Rates on Cash                                                          498                   454
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Increase (Decrease) in Cash and Temporary Cash
Investments                                                                            43,393               (11,547)

Cash and Temporary Cash Investments at October 1                                       22,216                36,227

- ---------------------------------------------------------------------------- ------------------- ---------------------

Cash and Temporary Cash Investments at March 31                                       $65,609               $24,680
============================================================================ =================== =====================

See Notes to Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

Consolidated Statement of Comprehensive Income

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National Fuel Gas Company
Consolidated Statement of Comprehensive Income
(Unaudited)

                                                                                            March 31,
(Thousands of Dollars)                                                               2003                   2002
                                                                             ------------------- ---------------------

Net Income Available for Common Stock                                                $80,538               $61,924
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax:
   Foreign Currency Translation Adjustment                                            18,878                   306
   Unrealized Gain on Securities Available for Sale Arising
     During the Period                                                                   291                   272
   Unrealized Loss on Derivative Financial Instruments
     Arising During the Period                                                       (28,402)              (45,459)
   Reclassification Adjustment for Realized (Gains) Losses on
     Derivative Financial Instruments in Net Income                                   31,738               (10,582)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax                                         22,505               (55,463)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Tax Expense Related to Unrealized Gain
   on Securities Available for Sale Arising During the Period                            102                    95
Income Tax Benefit Related to Unrealized Loss on
   Derivative Financial Instruments Arising During the Period                        (10,320)              (18,898)
Reclassification Adjustment for Income Tax (Expense) Benefit on
   Realized (Gains) Losses from Derivative Financial Instruments
   In Net Income                                                                      12,174                (4,261)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Taxes - Net                                                                     1,956               (23,064)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss)                                                     20,549               (32,399)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Comprehensive Income                                                                $101,087               $29,525
============================================================================ =================== =====================

                                                                                         Six Months Ended
                                                                                            March 31,
(Thousands of Dollars)                                                               2003                   2002
                                                                             ------------------- ---------------------

Net Income Available for Common Stock                                               $118,579               $95,130
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax:
   Foreign Currency Translation Adjustment                                            23,104                 3,215
   Unrealized Gain on Securities Available for Sale Arising
      During the Period                                                                  730                   738
   Unrealized Loss on Derivative Financial Instruments
      Arising During the Period                                                      (41,554)              (24,366)
   Reclassification Adjustment for Realized (Gains) Losses on
     Derivative Financial Instruments in Net Income                                   39,369               (21,404)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax                                         21,649               (41,817)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Tax Expense Related to Unrealized Gain
   on Securities Available for Sale Arising During the Period                            255                   258
Income Tax Benefit Related to Unrealized Loss
   on Derivative Financial Instruments Arising During the Period                     (15,909)              (11,053)
Reclassification Adjustment for Income Tax (Expense) Benefit on
   Realized (Gains) Losses from Derivative Financial Instruments
   In Net Income                                                                      15,437                (8,515)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Taxes - Net                                                                      (217)              (19,310)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss)                                                     21,866               (22,507)
============================================================================ =================== =====================
Comprehensive Income                                                                $140,445               $72,623
============================================================================ =================== =====================

See Notes to Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

Notes to Consolidated Financial Statements

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National Fuel Gas Company
Notes to Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

Principles of Consolidation. The Company consolidates its majority owned entities. The equity method is used to account for minority owned entities. All significant intercompany balances and transactions are eliminated.

          The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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, 2002, 2001 and 2000 that are included in the Company’s 2002 Form 10-K. The 2003 consolidated financial statements will be examined by the Company’s independent accountants after the end of the fiscal year.

          The earnings for the six months ended March 31, 2003 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2003. Most of the Utility segment’s business is seasonal in nature and is influenced by weather conditions. Because of the seasonal nature of the Utility segment’s heating business, earnings during the winter months normally represent a substantial part of the Utility segment’s 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. While the Pipeline and Storage segment’s business is influenced by weather conditions, 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.

Cumulative Effect of Changes in Accounting. Effective October 1, 2002, the Company adopted the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the estimated cost of retiring the asset as part of the carrying amount of the related long-lived asset. Over time, the liability is adjusted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. In the Company’s case, SFAS 143 changed the accounting for plugging and abandonment costs associated with the Exploration and Production segment’s crude oil and natural gas wells. In prior fiscal years, the Company accounted for plugging and abandonment costs using Securities and Exchange Commission full cost accounting rules. SFAS 143 was applied retroactively to determine the cumulative effect through October 1, 2002. This cumulative effect reduced earnings for the quarter ended December 31, 2002 and the six months ended March 31, 2003 by $0.6 million, net of income tax. If the new method of accounting for plugging and abandonment costs had been effective for the quarter and six months ended March 31, 2002, there would not have been a material change to net income available for common stock for the quarter and six months ended March 31, 2002.

Item 1. Financial Statements (Cont.)

          Effective October 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). In accordance with SFAS 142, the Company stopped amortization of goodwill and tested it for impairment as of October 1, 2002. The Company’s goodwill balance as of October 1, 2002 totaled $8.3 million and is related to the Company’s investments in the Czech Republic, which are included in the International segment. As a result of the impairment test, the Company recognized an impairment of $8.3 million, or $0.10 per diluted share. The Company used discounted cash flows to estimate the fair value of its goodwill and determined that the goodwill had no remaining value. Based on projected restructuring in the Czech electricity market, the Company cannot be assured that the level of future cash flows from the Company’s investments in the Czech Republic will attain the level that was originally forecasted. In accordance with SFAS 142, this impairment has been reported as a cumulative effect of change in accounting retroactive to the quarter ended December 31, 2002. As such, the Company’s reported earnings for the quarter ended December 31, 2002 have been reduced from $46.3 million ($0.57 per basic and diluted share) to $38.0 million ($0.47 per basic and diluted share). While the quarter and six months ended March 31, 2003 did not have any amortization expense associated with goodwill, the quarter and six months ended March 31, 2002 had $138,867 and $277,734, respectively, of goodwill amortization expense.

Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of generally three months or less to be cash equivalents.

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 March 31, 2003               At September 30, 2002
                                                         -----------------               ---------------------

Minimum Pension Liability Adjustment                         $(34,435)                          $(34,435)
Cumulative Foreign Currency
    Translation Adjustment                                      8,289                            (14,815)
Net Unrealized Loss on Derivative
    Financial Instruments                                     (22,258)                           (20,545)
Net Unrealized Gain on Securities
     Available for Sale                                           634                                159
                                                             --------                           --------
Accumulated Other Comprehensive Loss                         $(47,770)                          $(69,636)
                                                             ========                           ========

Stock Option and Stock Award Plans. The Company has various stock option and stock award plans which provide or provided for the issuance of one or more of the following to key employees: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units or performance shares. Stock options under all plans have exercise prices equal to the average market price of Company common stock on the date of grant, and generally no option is exercisable less than one year or more than ten years after the date of each grant.

          For the quarter and six months ended March 31, 2003 and March 31, 2002, no compensation expense was recognized for options granted under these plans since the Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Had compensation expense for stock options granted under the Company’s stock option and stock award plans been determined based on fair value at the grant dates, which is the accounting treatment specified by SFAS 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts below:

Item 1. Financial Statements (Cont.)

                                                    Three Months Ended                   Six Months Ended
(Thousands of Dollars, Except Per                       March 31,                            March 31,
  Common Share Amounts)                         2003               2002              2003                2002
                                                ----               ----              ----                ----

Net Income Available for
  Common Stock as Reported                     $80,538           $61,924           $118,579             $95,130
Deduct: Total Compensation
  Expense Determined Based
  on Fair Value at the Grant
  Dates                                            882               605              2,163               1,763
                                            ----------        ----------        -----------         -----------

Pro Forma Net Income Available
  For Common Stock                             $79,656           $61,319           $116,416             $93,367
                                               =======           =======           ========             =======

Earnings Per Common Share:
    Basic - As Reported                         $1.00             $0.78              $1.47               $1.20
    Basic - Pro Forma                           $0.99             $0.77              $1.45               $1.17
    Diluted - As Reported                       $0.99             $0.77              $1.47               $1.18
    Diluted - Pro Forma                         $0.98             $0.76              $1.44               $1.16

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 common shares outstanding shown on the Consolidated Statements of Income reflects the potential dilution as a result of these stock options as determined using the Treasury Stock Method. Stock options that are antidilutive are excluded from the calculation of diluted earnings per common share. For the quarters ended March 31, 2003 and 2002, 11,414,830 and 3,106,200 stock options, respectively, were excluded as being antidilutive. For the six months ended March 31, 2003 and 2002, 11,414,830 and 2,929,782 stock options, respectively, were excluded as being antidilutive.

Note 2 - Income Taxes

The components of federal and state income taxes included in the Consolidated Statement of Income are as follows (in thousands):

Item 1. Financial Statements (Cont.)

                                                                                         Six Months Ended
                                                                                             March 31,
                                                                             ----------------------------------------
                                                                                      2003                2002
                                                                             ------------------- --------------------

Operating Expenses:
  Current Income Taxes
     Federal                                                                         $63,237               $8,270
     State                                                                            15,595                4,192
     Foreign                                                                           4,088                3,693

  Deferred Income Taxes
     Federal                                                                          (8,760)              33,732
     State                                                                            (1,835)               4,897
     Foreign                                                                           5,587                1,734
- ---------------------------------------------------------------------------- ------------------- --------------------
                                                                                      77,912               56,518

Other Income:
  Deferred Investment Tax Credit                                                        (348)                (348)

Minority Interest in Foreign Subsidiaries                                             (1,192)                (672)
Cumulative Effect of Change in Accounting (SFAS 143)                                    (354)                   -
- ---------------------------------------------------------------------------- ------------------- --------------------
Total Income Taxes                                                                   $76,018              $55,498
============================================================================ =================== ====================
The U.S. and foreign components of income before income taxes are as follows (in thousands): 
                                                                                           Six Months Ended
                                                                                               March 31,
                                                                                      2003                2002
                                                                             ------------------- --------------------

U.S.                                                                                $177,710             $131,746
Foreign                                                                               16,888               18,882
- ---------------------------------------------------------------------------- ------------------- --------------------
                                                                                    $194,598             $150,628
============================================================================ =================== ====================

          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):

Item 1. Financial Statements (Cont.)

                                                                                        Six Months Ended
                                                                                            March 31,
                                                                             ----------------------------------------
                                                                                     2003                 2002
                                                                             ------------------- --------------------

Income tax expense, computed at
 statutory rate of 35%                                                                $68,109             $52,720

Increase (reduction) in taxes resulting from:
  State income taxes                                                                    8,895               5,898
  Foreign tax differential                                                                (86)             (1,853)
  Miscellaneous                                                                          (900)             (1,267)
- ---------------------------------------------------------------------------- ------------------- --------------------

  Total Income Taxes                                                                   $76,018            $55,498
============================================================================ =================== ====================

          Significant components of the Company's deferred tax liabilities (assets) were as follows (in thousands): 

                                                               At March 31, 2003            At September 30, 2002
                                                       --------------------------------- ----------------------------

Deferred Tax Liabilities:
  Property, Plant and Equipment                                     $441,269                     $417,673
  Other                                                               14,560                       27,930
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Liabilities                                       455,829                      445,603
- ------------------------------------------------------ --------------------------------- ----------------------------

Deferred Tax Assets:
  Other                                                              (97,755)                     (89,383)
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Assets                                            (97,755)                     (89,383)
- ------------------------------------------------------ --------------------------------- ----------------------------

Total Net Deferred Income Taxes                                     $358,074                     $356,220
====================================================== ================================= ============================

Note 3 - Capitalization

Common Stock. During the six months ended March 31, 2003, the Company issued 395,160 shares of common stock under the Company’s stock and benefit plans. The Company also repurchased and cancelled 3,444 shares of common stock.

Note 4 - Commitments and Contingencies

Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. 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. At March 31, 2003, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $4.0 million to $5.0 million. The minimum liability of $4.0 million has been recorded on the Consolidated Balance Sheet at March 31, 2003. Other than as discussed in Note H of the 2002 Form 10-K (referred to below), the Company is currently not aware of any material

Item 1. Financial Statements (Cont.)

additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company.

          For further discussion refer to Note H - Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the Company’s 2002 Form 10-K.

Other. The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such matters could have a material effect on earnings and cash flows in the period of resolution, none of these 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.

Note 5 – 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 2002 Form 10-K. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the 2002 Form 10-K, except for the Pipeline and Storage segment. In February 2003, the Pipeline and Storage segment’s acquisition of the Empire State Pipeline (Empire) increased assets by $257.6 million. See further discussion of this acquisition in Note 6 Acquisition.

Item 1. Financial Statements (Cont.)

Quarter Ended March 31, 2003 (Thousands)
- --------------------------------------------------------------------------------------------------------------------------------------------
                                       Exploration                                      Total                Corporate and
                             Pipeline      and                     Energy             Reportable             Intersegment       Total
                   Utility and Storage Production International  Marketing   Timber    Segments   All Other  Eliminations    Consolidated
- --------------------------------------------------------------------------------------------------------------------------------------------

Revenue from
External Customers $504,625   $28,736      $84,513     $46,981    $125,900   $18,080    $808,835      $ 230      $      -      $809,065

Intersegment
Revenues           $ 7,616    $23,054      $     -     $     -    $      -   $     -    $ 30,670      $   -       $(30,670)    $      -

Segment Profit:
Net Income         $ 39,731   $12,565      $14,216     $ 5,591    $  4,612   $ 4,020    $ 80,735      $(126)      $    (71)    $ 80,538

  Six Months Ended March 31, 2003 (Thousands)
- --------------------------------------------------------------------------------------------------------------------------------------------
                                       Exploration                                       Total                 Corporate and
                             Pipeline      and                     Energy              Reportable              Intersegment       Total
                   Utility and Storage Production International  Marketing    Timber    Segments   All Other   Eliminations   Consolidated
- --------------------------------------------------------------------------------------------------------------------------------------------

Revenue from
External Customers $794,697   $50,172     $157,983     $84,772    $168,576   $31,869   $1,288,069      $702       $      -     $1,288,771

Intersegment
Revenues           $ 12,359   $44,731     $      -     $     -    $      -   $     -   $   57,090      $  -       $(57,090)    $        -

Segment Profit:
Income Before
Cumulative Effect
of Change in
Accounting         $ 59,008   $23,299     $ 23,026     $ 8,362    $  6,198   $ 7,741   $  127,634      $ 53       $   (216)    $  127,471

  Quarter Ended March 31, 2002 (Thousands)
- --------------------------------------------------------------------------------------------------------------------------------------------
                                       Exploration                                      Total                 Corporate and
                             Pipeline      and                     Energy             Reportable              Intersegment       Total
                   Utility and Storage Production International  Marketing    Timber   Segments   All Other   Eliminations   Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------------------

Revenue from
External Customers  $285,025   $19,918      $73,205     $34,645     $52,136   $11,899    $476,828     $  608      $      -      $477,436

Intersegment
Revenues            $  6,995   $22,170      $     -     $     -     $     -   $     -    $ 29,165     $5,496      $(34,661)     $      -

Segment Profit:
Net Income          $ 35,703   $ 9,800      $ 8,708     $ 3,774     $ 2,518   $ 1,700    $ 62,203     $ (467)     $    188      $ 61,924

  Six Months Ended March 31, 2002 (Thousands)
- --------------------------------------------------------------------------------------------------------------------------------------------
                                       Exploration                                      Total                 Corporate and
                             Pipeline      and                     Energy             Reportable              Intersegment       Total
                   Utility and Storage Production International  Marketing    Timber   Segments   All Other   Eliminations   Consolidated
                             Storage
- --------------------------------------------------------------------------------------------------------------------------------------------

Revenue from
External Customers  $507,381   $40,712     $148,205     $65,183     $84,921   $22,230   $868,632      $1,131       $      -     $869,763

Intersegment
Revenues            $12,628    $44,321     $      -     $     -     $     -   $     -   $ 56,949      $7,341       $(64,290)    $      -

Segment Profit:
Net Income          $53,744    $19,815     $ 10,149     $ 4,766     $ 4,466   $ 3,238   $ 96,178      $ (462)      $   (586)    $ 95,130
Item 1. Financial Statements (Concl.)

Note 6 - Acquisition. On February 6, 2003, the Company acquired Empire from a subsidiary of Duke Energy Corporation for $189.2 million in cash plus $57.8 million of project debt. The acquisition, which was made through Highland (a direct subsidiary of the Company having timber property and sawmill operations in New York and Pennsylvania), consisted of acquiring 100% of two companies. Each of these companies have 50% ownership of Empire, which is a joint venture. Empire's results of operations were incorporated into the Company's consolidated financial statements for the period subsequent to the completion of the acquisition on February 6, 2003. Empire is a 157-mile, 24-inch pipeline that begins at the United States/Canadian border at the Chippawa Channel of the Niagara River near Buffalo, New York, which is within the Company's service territory, and terminates in Central New York just north of Syracuse, New York. Empire can transport 525 million cubic feet of gas per day and currently has almost all of its capacity under contract, with a substantial portion being long-term contracts. Empire delivers natural gas supplies to major industrial companies, utilities (including the Company's Utility segment), and power producers. Empire better positions the Company to bring Canadian gas supplies into the East Coast markets of the United States as demand for natural gas along the East Coast increases. Details of the acquisition are as follows:

           Assets Acquired (see Condensed Balance Sheet below)                          $257,573
           Liabilities Assumed (see Condensed Balance Sheet below)                       (68,368)
           Cash Acquired at Acquisition                                                   (8,053)
                                                                                       ---------
           Cash Paid, Net of Cash Acquired                                              $181,152
                                                                                        ========

           Condensed Balance Sheet:
           Property, Plant and Equipment                                                $220,792
           Current Assets                                                                 14,984
           Goodwill                                                                        5,652
           Other Assets                                                                   16,145
                                                                                        --------
                    Total Assets                                                        $257,573
                                                                                        ========

           Equity                                                                       $189,205
           Long-Term Debt, Net of Current Portion                                         48,433
                                                                                        --------
                    Total Capitalization                                                 237,638
           Current Liabilities                                                            15,441
           Other Liabilities                                                               4,494
                                                                                       ---------
                    Total Capitalization and Liabilities                                $257,573
                                                                                        ========

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Back to Table of Contents

RESULTS OF OPERATIONS

Critical Accounting Policies

          For a complete discussion of critical accounting policies, refer to “Critical Accounting Policies” in Item 7 of the Company’s 2002 Form 10-K. There have been no subsequent changes to that disclosure.

Earnings

          In addition to financial measures calculated in accordance with generally accepted accounting principles in the United States of America (GAAP), this report contains non-GAAP financial measures that exclude certain profit and loss items described in this report. The Company believes that such non-GAAP financial measures are useful to investors because they provide an alternative method for assessing the Company’s operating results in a manner that is focused on the performance of the Company’s ongoing operations. The Company’s management uses these non-GAAP financial measures for the same purpose, and for planning and forecasting purposes. The presentation of these additional measures is not meant to be considered a substitute for financial measures prepared in accordance with GAAP.

          The Company’s earnings were $80.5 million, or $1.00 per common share ($0.99 per common share on a diluted basis), for the quarter ended March 31, 2003. This compares with earnings of $61.9 million, or $0.78 per common share ($0.77 per common share on a diluted basis), for the quarter ended March 31, 2002. The increase in earnings is spread among all segments, as shown in the table below.

          The Company’s earnings were $118.6 million, or $1.47 per common share (on a basic and diluted basis), for the six months ended March 31, 2003. This compares with earnings of $95.1 million, or $1.20 per common share ($1.18 per common share on a diluted basis), for the six months ended March 31, 2002. The increase in earnings of $23.4 million was spread among all segments other than the International segment, as shown in the table below. However, earnings for the six months ended March 31, 2003 included a reduction to earnings in the amount of $8.3 million ($0.10 per common share on a basic and diluted basis), representing the cumulative effect of a change in accounting for goodwill in the Company’s International segment. Earnings for the six months ended March 31, 2003 also included a reduction to earnings in the amount of $0.6 million ($0.01 per common share on a basic and diluted basis) representing the cumulative effect of a change in accounting for plugging and abandonment costs in the Company’s Exploration and Production segment. Earnings for the six months ended March 31, 2003 before the cumulative effect of these changes in accounting were $127.5 million, an increase of $32.4 million over earnings for the six months ended March 31, 2002.

          Additional discussion of earnings in each of the business segments can be found in the business segment information that follows.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) 
Earnings by Segment
- ------------------------------------ ------------------------------------------- -------------------------------------------
                                                Three Months Ended                           Six Months Ended
                                                     March 31,                                   March 31,
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
                                                                   Increase/                                   Increase/
(Thousands)                                 2003          2002    (Decrease)            2003          2002    (Decrease)
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Utility                                  $39,731       $35,703          $4,028       $59,008       $53,744          $5,264
Pipeline and Storage                      12,565         9,800           2,765        23,299        19,815           3,484
Exploration and Production(1)             14,216         8,708           5,508        22,389        10,149          12,240
International(1)                           5,591         3,774           1,817           107         4,766          (4,659)
Energy Marketing                           4,612         2,518           2,094         6,198         4,466           1,732
Timber                                     4,020         1,700           2,320         7,741         3,238           4,503
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
  Total Reportable Segments               80,735        62,203          18,532       118,742        96,178          22,564
All Other                                   (126)         (467)            341            53         (462)             515
Corporate                                    (71)          188            (259)         (216)        (586)             370
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
   Total Consolidated(1)                 $80,538       $61,924         $18,614      $118,579       $95,130         $23,449
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------

(1)  Exclusive of the Cumulative Effect of Changes in Accounting, earnings for the six months ended March 31, 2003
     for the Exploration and Production segment and International segment would have been $23,026 and $8,362, respectively.
     Total consolidated earnings would have been $127,471.

Utility

Utility Operating Revenues
- ------------------------------- ------------------------------------------- ------------------------------------------
                                           Three Months Ended                           Six Months Ended
                                                March 31,                                  March 31,

- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
                                                              Increase/                                  Increase/
(Thousands)                        2003           2002        (Decrease)       2003          2002        (Decrease)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
  Retail Sales Revenues:
    Residential                    $373,160       $200,844       $172,316     $581,145       $365,680       $215,465
    Commercial                       69,259         34,905         34,354      104,099         60,900         43,199
    Industrial                        6,238          4,927          1,311       13,072          8,093          4,979
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
                                    448,657        240,676        207,981      698,316        434,673        263,643
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
  Off-System Sales                   31,767         21,507         10,260       58,075         32,851         25,224
  Transportation                     33,721         30,487          3,234       56,232         52,981          3,251
  Other                              (1,904)          (650)        (1,254)      (5,567)          (496)        (5,071)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
                                   $512,241       $292,020       $220,221     $807,056       $520,009       $287,047
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------

Utility Throughput
- ------------------------------- ------------------------------------------- ------------------------------------------
                                           Three Months Ended                           Six Months Ended
                                                March 31,                                  March 31,

- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
                                                              Increase/                                  Increase/
(MMcf)                             2003           2002        (Decrease)       2003          2002        (Decrease)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
  Retail Sales:
    Residential                      36,688         29,678          7,010       59,568         47,591         11,977
    Commercial                        7,203          5,479          1,724       11,298          8,595          2,703
    Industrial                          936            894             42        2,246          1,593            653
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
                                     44,827         36,051          8,776       73,112         57,779         15,333
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
  Off-System Sales                    4,342          7,651         (3,309)       9,609         11,600         (1,991)
  Transportation                     24,463         21,274          3,189       40,986         36,509          4,477
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
                                     73,632         64,976          8,656      123,707        105,888         17,819
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

2003 Compared with 2002

Operating revenues for the Utility segment increased $220.2 million and $287.0 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These increases were primarily the result of increases in the average cost of purchased gas ($7.86 and $4.49 per thousand cubic feet (Mcf) during the quarters ended March 31, 2003 and 2002, respectively; $6.82 and $4.67per Mcf for the six months ended March 31, 2003 and 2002, respectively) and higher retail sales volumes and transportation volumes. Colder weather, as shown in the table below, was the major factor for the increase in retail sales volumes and transportation volumes. The increases in off-system sales revenues were largely due to higher gas prices which more than offset lower volumes. Due to profit sharing with retail customers, the margins resulting from off-system sales are minimal. The decreases to other revenues primarily reflect an estimated refund provision of $2.6 million and $8.1 million, respectively, recorded in the Utility’s New York jurisdiction in the quarter and six months ended March 31, 2003 that relates to a 50% sharing with customers of earnings over a predetermined amount. This earnings sharing mechanism is in accordance with the New York Rate Settlement that went into effect October 1, 2000. Refund provisions of $1.8 million and $3.4 million, respectively, were recorded in the quarter and six months ended March 31, 2002. The final refund for the New York Rate Settlement will not be known until the end of 2003.

          The Utility segment’s earnings for the quarter ended March 31, 2003 were $39.7 million, an increase of $4.0 million when compared with the quarter ended March 31, 2002. The major factor for this increase was the impact of weather, which in the Pennsylvania jurisdiction was approximately 28% colder than the quarter ended March 31, 2002. The impact of weather variations in the New York jurisdiction is mitigated by that jurisdiction’s weather normalization clause (WNC). The WNC in New York, which covers the eight month period from October through May, has had a stabilizing effect on earnings. In periods of colder than normal weather, the WNC benefits Distribution Corporation’s New York customers. For the quarter ended March 31, 2003, the WNC reduced New York ratepayers’ bills by approximately $4.8 million because it was colder than normal. For the quarter ended March 31, 2002, the WNC increased New York ratepayers’ bills by approximately $8.7 million because it was warmer than normal.

          The Utility’s segment’s earnings for the six months ended March 31, 2003 were $59.0 million, an increase of $5.3 million when compared with the earnings of $53.7 million for the six months ended March 31, 2002. The major factor for this increase was the impact of weather, which in the Pennsylvania jurisdiction was approximately 31% colder than the six months ended March 31, 2002. As discussed above, the impact of weather variations in the New York jurisdiction is mitigated by that jurisdiction’s WNC. For the six months ended March 31, 2003, the WNC reduced New York ratepayers’ bills by approximately $6.1 million because it was colder that normal. For the six months ended March 31, 2002, the WNC increased New York ratepayers’ bills by approximately $15.7 million because it was warmer than normal. The refund provision discussed above partially offset the positive impact of colder weather in the Pennsylvania jurisdiction as the New York jurisdiction trued-up its cumulative refund provision under the earnings sharing mechanism in its New York Rate Settlement during the quarter ended December 31, 2002. As mentioned above, the final refund will not be known until the end of 2003.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) 
Degree Days
- ---------------------------------- -------------- -------------- -------------------- --------------------------------
                                                                                                     Percent
Three Months Ended                                                                             Colder Than
                                                                                      --------------------------------
March 31                              Normal          2003              2002              Normal         Prior Year
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo                               3,350          3,619             2,915                8.0             24.2
Erie                                  3,153          3,459             2,698                9.7             28.2
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Six Months Ended
March 31
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo                               5,661          6,002             4,714                6.0             27.3
Erie                                  5,169          5,686             4,357               10.0             30.5
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------

Pipeline and Storage

Pipeline and Storage Operating Revenues
- ------------------------------------ ---------------------------------------- -------------------------------------------
                                               Three Months Ended                         Six Months Ended
                                                   March 31,                                  March 31,
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------

                                                                Increase/                                   Increase/
(Thousands)                             2003         2002       (Decrease)        2003           2002       (Decrease)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Transportation                     $28,383      $22,710         $5,673         $50,196      $45,093         $5,103
Interruptible Transportation              1,155          728            427           1,502        1,508             (6)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
                                         29,538       23,438          6,100          51,698       46,601          5,097
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Storage Service                     15,834       15,643            191          31,603       31,016            587
Interruptible Storage Service                25            6             19              25            7             18
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
                                         15,859       15,649            210          31,628       31,023            605
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Other                                     6,393        3,001          3,392          11,577        7,409          4,168
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
                                        $51,790      $42,088         $9,702         $94,903      $85,033         $9,870
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------


Pipeline and Storage Throughput
- ---------------------------------- ---------------------------------------- ---------------------------------------
                                             Three Months Ended                       Six Months Ended
                                                 March 31,                                March 31,
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------

                                                              Increase/                               Increase/
(MMcf)                                2003         2002       (Decrease)      2003        2002       (Decrease)
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
Firm Transportation                   130,453       99,387         31,066     215,148     171,438          43,710
Interruptible Transportation            3,524        1,878          1,646       4,314       3,867             447
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
                                      133,977      101,265         32,712     219,462     175,305          44,157
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------

2003 Compared with 2002

Operating revenues for the Pipeline and Storage segment increased $9.7 million and $9.9 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. The acquisition of Empire State Pipeline (Empire) from Duke Energy Corporation on February 6, 2003 was a significant factor in these revenue increases. From February 6, 2003 to March 31, 2003, Empire recorded operating revenues of $5.8 million ($5.1 million in firm transportation revenues, $0.6 million in interruptible transportation revenues, and $0.1 million in other revenues). Supply Corporation’s revenue from unbundled pipeline sales and open access transportation (included in other revenues) was the other major factor in the revenue increase in the quarter and six month periods. For the quarter and six months ended March 31,

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

2003, revenue from unbundled pipeline sales and open access transportation increased $2.1 million and $2.9 million, respectively.

          The Pipeline and Storage segment’s earnings for the quarter ended March 31, 2003 were $12.6 million, an increase of $2.8 million when compared with earnings of $9.8 million for the quarter ended March 31, 2002. As discussed above, higher revenues from unbundled pipeline sales and open access transportation and a $1.2 million earnings contribution from Empire were the main factors in this increase.

          The Pipeline and Storage segment’s earnings for the six months ended March 31, 2003 were $23.3 million, an increase of $3.5 million when compared with earnings of $19.8 million for the six months ended March 31, 2002. This increase can be attributed primarily to an increase in revenues from unbundled pipeline sales and open access transportation as well as the earnings contribution from Empire discussed above.

Exploration and Production

Exploration and Production Operating Revenues
- ----------------------------------- ---------------------------------------- -----------------------------------------
                                              Three Months Ended                        Six Months Ended
                                                  March 31,                                 March 31,
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
                                                                 Increase/                                Increase/
(Thousands)                               2003         2002     (Decrease)          2003         2002    (Decrease)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
  Gas (after Hedging)                  $41,986      $36,804         $5,182       $77,748      $71,909         $5,839
  Oil (after Hedging)                   40,867       35,472          5,395        77,496       68,809          8,687
  Gas Processing Plant                   8,011        3,344          4,667        14,572        7,562          7,010
  Other                                    141          536           (395)         (321)       5,978         (6,299)
  Intrasegment Elimination *            (6,492)      (2,951)        (3,541)      (11,512)      (6,053)        (5,459)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
                                       $84,513      $73,205        $11,308      $157,983     $148,205         $9,778
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------

     * Represents the  elimination of certain West Coast gas production  revenue  included in "Gas (after  Hedging)" in the table above
     that was sold to the gas processing  plant shown in the table above.  An elimination for the same dollar amount was made to reduce
     the gas processing plant's Purchased Gas expense.


- ----------------------------------------- -------------------------------------- --------------------------------------
Production Volumes                                 Three Months Ended                      Six Months Ended
                                                       March 31,                              March 31,
- ------------------------------------------ ---------- ----------- --------------- ----------- ----------- --------------
                                                                   Increase/                              Increase/
                                              2003        2002    (Decrease)          2003        2002    (Decrease)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
Gas Production (MMcf)
  Gulf Coast                                 5,201       5,609           (408)      10,559      12,797        (2,238)
  West Coast                                 1,104       1,196            (92)       2,301       2,442          (141)
  Appalachia                                 1,300       1,144            156        2,388       2,202           186
  Canada                                     1,525       1,810           (285)       3,031       3,641          (610)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
                                             9,130       9,759           (629)      18,279      21,082        (2,803)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
Oil Production (thousands of barrels)
  Gulf Coast                                 401         438            (37)         791         892          (101)
  West Coast                                   731         747            (16)       1,467       1,496           (29)
  Appalachia                                     2           1              1            4           3             1
  Canada                                       604         733           (129)       1,244       1,488          (244)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
                                             1,738       1,919           (181)       3,506       3,879          (373)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) 
Average Prices
- ----------------------------------------- --------------------------------------- ----------------------------------------
                                                   Three Months Ended                        Six Months Ended
                                                        March 31,                               March 31,
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
                                                                    Increase/                                Increase/
                                               2003        2002    (Decrease)           2003         2002    (Decrease)
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
Average Gas Price/Mcf
  Gulf Coast                                  $6.60       $2.41           $4.19        $5.38        $2.41          $2.97
  West Coast                                  $5.75       $2.35           $3.40        $4.87        $2.35          $2.52
  Appalachia                                  $4.83       $3.82           $1.01        $4.28        $3.74          $0.54
  Canada                                      $5.41       $1.99           $3.42        $4.50        $2.03          $2.47
  Weighted Average                            $6.04       $2.49           $3.55        $5.02        $2.48          $2.54
  Weighted Average After Hedging              $4.60       $3.77           $0.83        $4.25        $3.41          $0.84

Average Oil Price/bbl
  Gulf Coast                                 $32.41      $20.16          $12.25       $29.74       $19.65         $10.09
  West Coast                                 $29.98      $17.15          $12.83       $26.87       $16.25         $10.62
  Appalachia                                 $27.73      $19.19           $8.54       $27.61       $22.80          $4.81
  Canada                                     $30.32      $17.51          $12.81       $26.57       $15.93         $10.64
  Weighted Average                           $30.65      $17.98          $12.67       $27.41       $16.92         $10.49
  Weighted Average After Hedging             $23.51      $18.48           $5.03       $22.11       $17.74          $4.37
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------

2003 Compared with 2002

Operating revenues for the Exploration and Production segment increased $11.3 million for the quarter ended March 31, 2003 as compared with the quarter ended March 31, 2002. Oil production revenue after hedging increased $5.4 million due primarily to an increase in the weighted average price of oil after hedging ($5.03 per bbl). The revenue increase resulting from higher weighted average oil prices after hedging helped offset the revenue decrease associated with a 181,000 barrel decline in oil production. Gas production revenue after hedging increased $5.2 million due primarily to an increase in the weighted average price of gas after hedging ($0.83 per Mcf). The revenue increase resulting from higher weighted average gas prices after hedging helped offset the revenue decrease associated with a 0.6 billion cubic feet (Bcf) decline in gas production. Most of this production decline occurred in the Gulf Coast of Mexico (a 0.4 Bcf decline). The Company had anticipated some of this decline in production due to its plan to phase out of that region. However, as a result of Hurricane Lili, some wells have not returned to pre-hurricane production.

          Operating revenues for the Exploration and Production segment increased $9.8 million for the six months ended March 31, 2003 as compared with the six months ended March 31, 2002. Oil production revenue after hedging increased $8.7 million due to a $4.37 per bbl increase in the weighted average price of oil after hedging. Increases in the weighted average price of oil after hedging ($4.37 per bbl) more than offset an overall decrease in oil production. Gas production revenue after hedging increased $5.8 million. Increases in the weighted average price of gas after hedging ($0.84 per Mcf) more than offset an overall decrease in gas production. As discussed above, most of the decrease in gas production occurred in the Gulf Coast of Mexico (a 2.2 Bcf decline). The plan to phase out of this region contributed to the decrease. However, the production decline was amplified by the shutting-in of production during Hurricane Lili and the fact that some of those wells have not returned to pre-hurricane production levels.

          The Exploration and Production segment’s earnings for the quarter ended March 31, 2003 were $14.2 million, an increase of $5.5 million when compared with earnings of $8.7 million for the quarter ended March 31, 2002. However, earnings for the quarter ended March 31, 2002 included a non-cash $1.1 million (after tax) reversal of a reserve for the Company’s exposure to Enron Corp. (“Enron”). Exclusive of the $1.1 million

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

reversal, earnings in the Exploration and Production segment for the quarter ended March 31, 2002 were $7.6 million. The increase in earnings of $6.6 million (exclusive of the Enron reserve reversal) was largely due to higher oil and gas prices, as discussed above. An increase in depreciation, depletion and amortization expense (mostly related to Seneca’s Canadian properties) and a slight increase in operating expenses partially offset the favorable impact of higher commodity prices.

          The Exploration and Production segment’s earnings for the six months ended March 31, 2003 were $22.4 million, an increase of $12.3 million when compared with earnings of $10.1 million for the six months ended March 31, 2002. However, as discussed above, earnings for the six months ended March 31, 2003 included a reduction to earnings in the amount of $0.6 million representing the cumulative effect of a change in accounting for plugging and abandonment costs. Exclusive of the cumulative effect, earnings in the Exploration and Production segment for the six months ended March 31, 2003 were $23.0 million. In the six months ended March 31, 2002, this segment recorded a net $2.2 million non-cash charge (after tax) to reserve for the Company’s exposure to Enron. This reserve, which originally amounted to $3.3 million, was established during the quarter ended December 31, 2001, and was reversed over the ensuing nine month period. Exclusive of this non-cash charge, earnings in the Exploration and Production segment for the six months ended March 31, 2002 were $12.3 million. The increase in earnings of $10.7 million (exclusive of the cumulative effect of change in accounting and the non-cash Enron reserve) was largely due to higher oil and gas prices, as discussed above. 

International

International Operating Revenues
- -------------------------------------- ------------------------------------------- -------------------------------------------
                                                  Three Months Ended                           Six Months Ended
                                                       March 31,                                   March 31,
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
                                                                     Increase/                                   Increase/
(Thousands)                                   2003          2002    (Decrease)            2003          2002    (Decrease)
- -------------------------------------- ------------- -------------  -------------- ------------- ------------- ---------------

  Heating                                 $36,718       $26,417         $10,301       $64,873       $49,090         $15,783
   Electricity                               9,103         7,550           1,553        18,032        14,649           3,383
   Other                                     1,160           678             482         1,867         1,444             423
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
                                           $46,981       $34,645         $12,336       $84,772       $65,183         $19,589
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------

International Heating and Electric Volumes
- -------------------------------------- ------------------------------------------- -------------------------------------------
                                                  Three Months Ended                           Six Months Ended
                                                       March 31,                                   March 31,
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
                                                                     Increase/                                   Increase/
                                              2003          2002    (Decrease)            2003          2002    (Decrease)
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------

   Heating Sales (Gigajoules) (1)        3,824,337     3,533,914         290,423     7,059,200     6,765,606         293,594
   Electricity Sales
     (megawatt hours)                      312,959       288,904          24,055       597,048       550,585          46,463

- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
 (1) Gigajoules = one billion joules.  A joule is a unit of energy.

2003 Compared with 2002

Operating revenues for the International segment increased $12.3 million and $19.6 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. Colder weather was the main reason for the revenue increase in both periods. Operating revenues for the

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

International segment also benefited from an increase in the value of the Czech Koruna (CZK) compared to the U.S. dollar.

          The International segment’s earnings for the quarter ended March 31, 2003 were $5.6 million, an increase of $1.8 million when compared with earnings of $3.8 million for the quarter ended March 31, 2002. The increase can be attributed primarily to colder weather in the Czech Republic service territory and higher rates for heating service. An increase in the value of the CZK compared to the U.S. dollar was also a factor in the earnings increase.

          The International segment’s earnings for the six months ended March 31, 2003 were $0.1 million, a decrease of $4.7 million when compared with earnings of $4.8 million for the six months ended March 31, 2002. However, earnings for the six months ended March 31, 2003 included a reduction to earnings in the amount of $8.3 million, representing the cumulative effect of a change in accounting for goodwill. The Company’s goodwill balance as of October 1, 2002 totaled $8.3 million and was related to the Company’s investments in the Czech Republic, which are included in the International segment. In accordance with SFAS 142, the Company stopped amortization of goodwill and tested its goodwill for impairment as of October 1, 2002. The Company completed this impairment test during the quarter ended March 31, 2003, and as a result of this test, recognized an impairment of $8.3 million. In accordance with SFAS 142, this impairment was reported as a cumulative effect of change in accounting retroactive to the quarter ended December 31, 2002. Exclusive of this cumulative effect, earnings in the International segment for the six months ended March 31, 2003 were $8.4 million. The increase in earnings of $3.6 million (exclusive of the cumulative effect of change in accounting) can be attributed to colder weather, higher heating service rates, improved electricity sales, and an increase in the value of the CZK compared to the U.S. dollar. 

Energy Marketing

Energy Marketing Operating Revenues
- ----------------------------------- -------------------------------------------- -----------------------------------------
                                                Three Months Ended                          Six Months Ended
                                                    March 31,                                   March 31,
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
                                                                   Increase/                                 Increase/
(Thousands)                                2003           2002    (Decrease)           2003          2002    (Decrease)
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
Natural Gas (after Hedging)            $125,860        $52,213         $73,647      $168,534      $85,016        $83,518
Electricity                                   -              -               -             -            -              -
Other                                        40            (77)            117            42          (95)           137
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
                                       $125,900        $52,136         $73,764     $168,576       $84,921        $83,655
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------


Energy Marketing Volumes
- ----------------------------------- -------------------------------------------- ----------------------------------------
                                                Three Months Ended                          Six Months Ended
                                                    March 31,                                  March 31,
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
                                                                   Increase/                                Increase/
                                           2003           2002    (Decrease)          2003          2002    (Decrease)
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
Natural Gas - (MMcf)                     18,987         11,785           7,202      26,662        18,975          7,687
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

2003 Compared with 2002

Operating revenues for the Energy Marketing segment increased $73.8 million and $83.7 million, respectively, for the quarter and six months ended March 31, 2003, as compared with the quarter and six months ended March 31, 2002. These increases primarily reflect higher gas sales revenue due to the increased price of natural gas. The increase also reflects an increase in volumes as a result of the addition of several high volume customers and colder weather in western New York and northwestern Pennsylvania.

          Earnings in the Energy Marketing segment increased $2.1 million and $1.7 million, respectively for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These increases primarily reflect higher margins on gas sales and lower operating expenses. 

Timber

Timber Operating Revenues
- ------------------------------- ------------------------------------------- ---------------------------------------------
                                           Three Months Ended                            Six Months Ended
                                                March 31,                                    March 31,
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
                                                              Increase/                                     Increase/
(Thousands)                             2003          2002    (Decrease)             2003          2002    (Decrease)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Log Sales                            $10,730       $ 5,625         $5,105         $18,449       $11,002          $7,447
Green Lumber Sales                     1,980         1,995            (15)          3,561         3,639             (78)
Kiln Dry Lumber Sales                  5,095         4,056          1,039           9,310         7,138           2,172
Other                                    275           223             52             549           451              98
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Operating Revenues                   $18,080       $11,899         $6,181         $31,869       $22,230          $9,639
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------


Timber Board Feet
- ------------------------------- ------------------------------------------- ---------------------------------------------
                                           Three Months Ended                            Six Months Ended
                                                March 31,                                    March 31,
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
                                                              Increase/                                     Increase/
(Thousands)                             2003          2002    (Decrease)             2003          2002    (Decrease)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Log Sales                              3,161         2,304            857           5,737         4,428           1,309
Green Lumber Sales                     3,853         3,657            196           7,017         6,667             350
Kiln Dry Lumber Sales                  3,307         2,959            348           6,081         4,930           1,151
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
                                      10,321         8,920          1,401          18,835        16,025           2,810
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------

2003 Compared with 2002

Operating revenues for the Timber segment increased $6.2 million and $9.6 million, respectively, for the quarter and six months ended March 31, 2003, as compared with the quarter and six months ended March 31, 2002. Higher sales of cherry logs and lumber, which command the highest prices, accounted for this increase.

          Earnings in the Timber segment increased $2.3 million and $4.5 million, respectively for the quarter and six months ended March 31, 2003, as compared with the quarter and six months ended March 31, 2002. The increase is primarily due to higher margins resulting from higher sales of cherry logs and lumber. The planned sale of approximately 70,000 acres of timber property is discussed below under “Capital Resources and Liquidity - Investing Cash Flow - Timber.”

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

Income (Loss) from Unconsolidated Subsidiaries

The Company’s unconsolidated subsidiaries consist of equity method investments in Seneca Energy II, LLC (Seneca Energy), Model City Energy, LLC (Model City), and Energy Systems North East, LLC (ESNE). The Company has 50% ownership interests in each of these entities. Seneca Energy and Model City generate and sell electricity using methane gas obtained from landfills owned by outside parties. ESNE generates electricity from an 80-megawatt, combined cycle, natural gas-fired power plant in North East, Pennsylvania. ESNE sells its electricity into the New York power grid.

          Income from unconsolidated subsidiaries increased $0.5 million and $0.8 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These increases are largely due to increases in income from the Company’s investments in Seneca Energy and Model City.

Interest Charges

Interest on long-term debt increased $0.4 million and $1.5 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These increases can be attributed primarily to higher average amounts of long-term debt outstanding.

          Other interest charges decreased $0.4 million and $2.4 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These decreases resulted mainly from a decrease in the average amount of short-term debt outstanding and lower weighted average interest rates.

CAPITAL RESOURCES AND LIQUIDITY

The Company’s primary sources of cash during the six-month period ended March 31, 2002 consisted of cash provided by operating activities and long-term debt. 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, cumulative effect of changes in accounting, income or loss from unconsolidated subsidiaries net of cash distributions, 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 heating business in the Utility, Energy Marketing and International segments, revenues in these segments are relatively high during the heating season, primarily the first and second quarters of the year, and receivables historically increase during these periods from what was receivable at September 30.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

          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.

          Cash provided by operating activities in the Exploration and Production segment may vary from period to period as a result of changes in the commodity prices of natural gas and crude oil. The Company uses various derivative financial instruments, including price swap agreements, no cost collars and options in an attempt to manage this energy commodity price risk.

          Net cash provided by operating activities totaled $240.1 million for the six months ended March 31, 2003, an increase of $73.8 million compared with $166.3 million provided by operating activities for the six months ended March 31, 2002. Higher cash receipts from the sale of oil and gas in the Exploration and Production segment combined with lower working capital requirements in the Utility and International segments were the main contributors to this increase.

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 $244.1 million during the six months ended March 31, 2003. The table below presents these expenditures: 

   ------------------------------------------------------------- ----------------------- -----------------------
   Six Months Ended March 31, 2003
   (in millions of dollars)
   -------------------------------------- ---------------------- ----------------------- -----------------------
                                                                     Investments in              Total
                                                 Capital             Corporations or        Expenditures for
                                              Expenditures            Partnerships          Long-Lived Assets
   -------------------------------------- ---------------------- ----------------------- -----------------------

      Utility                                     $23.7                   $   -                   $23.7
      Pipeline and Storage                         10.1                   181.2 (1)               191.3
      Exploration and Production                   27.4                       -                    27.4
      International                                 0.6                       -                     0.6
      Timber                                        1.0                       -                     1.0
      Energy Marketing                              0.1                       -                     0.1
      All Other                                       -                       -                       -
   -------------------------------------- ---------------------- ----------------------- -----------------------
                                                  $62.9                  $181.2                  $244.1
   -------------------------------------- ---------------------- ----------------------- -----------------------

(1)  Investment amount is net of $8.0 million of cash acquired.
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.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

          On February 6, 2003, the Company acquired the Empire State Pipeline (Empire) from a subsidiary of Duke Energy Corporation for $189.2 million in cash plus $57.8 million of project debt. The acquisition, which was made through Highland (a direct subsidiary having timber property and sawmill operations in New York and Pennsylvania), consisted of acquiring 100% of two companies. Each of these companies have 50% ownership of Empire, which is a joint venture. Empire's results of operations were incorporated into the Company's consolidated financial statements for the period subsequent to the completion of the acquisition on February 6, 2003. Empire is a 157-mile, 24-inch pipeline that begins at the United States/Canadian border at the Chippawa Channel of the Niagara River near Buffalo, New York, which is within the Company's service territory, and terminates in Central New York just north of Syracuse, New York. Empire can transport 525 million cubic feet of gas per day and currently has almost all of its capacity under contract, with a substantial portion being long-term contracts. Empire delivers natural gas supplies to major industrial companies, utilities (including the Company's Utility segment) and power producers. Empire better positions the Company to bring Canadian gas supplies into the East Coast markets of the United States as demand for natural gas along the East Coast increases.* The initial financing of the acquisition was accomplished through short-term borrowings. However, it is anticipated that proceeds from the planned sales of 70,000 acres of timber property will be used to repay the short-term borrowings.* The planned sale of this timber property is discussed below under "Timber."

          The Company also continues to explore various opportunities to expand its capabilities to transport gas to the East Coast, either through the Supply Corporation or Empire systems or in partnership with others. This includes the proposed Northwinds Pipeline that the Company and TransCanada PipeLines Limited are pursuing. This project would be a 215-mile, 30-inch natural gas pipeline that would originate in Kirkwall, Ontario, cross into the United States near Buffalo, New York and follow a southerly route to its destination in the Ellisburg-Leidy area in Pennsylvania.* The Company did not incur any material costs associated with this project during the six months ended March 31, 2003. The initial capacity of the pipeline would be approximately 500 million cubic feet of natural gas per day with the estimated cost of the pipeline ranging from $350-$400 million.* If the pipeline is constructed, it is possible that a significant amount of the construction costs would be financed by banks or other financial institutions with the pipeline serving as collateral for the financing arrangement.*

Exploration and Production

The Exploration and Production segment capital expenditures for the six months ended March 31, 2003 included approximately $25.9 million for on-shore drilling construction and recompletion costs for wells located in Louisiana, Texas, California and Canada as well as onshore geological and geophysical costs and fixed asset purchases. Of the $25.9 million amount, $15.7 million was spent on the Exploration and Production segment's Canadian properties. The Exploration and Production segment's capital expenditures also included approximately $1.5 million for Seneca's offshore program in the Gulf of Mexico.

International

The majority of the International segment capital expenditures were concentrated in improvements and replacements within the district heating and power generation plants in the Czech Republic.

Timber

The majority of the Timber segment capital expenditures were made for purchases of land and timber for Seneca's timber operations, as well as equipment for Highland's sawmill and kiln operations.

          As discussed above, the Company announced in March 2003, that its timber subsidiary, Highland, signed a purchase agreement to sell approximately 70,000 acres of its timber property located in Venango, Elk, Jefferson, McKean and Potter Counties in Pennsylvania and Allegany County in New York. Closing of the sale, and the sale price of about $190.0 million, are both contingent upon the results of a timber verification cruise and environmental review of the properties.* The sale does not require any regulatory approvals and is expected to close by July 31, 2003.* The Company intends to use the proceeds from this sale to repay short-term borrowings incurred in connection with the Empire acquisition.* Most of the timber sold has a very low historical

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

cost. As a result, upon closing of the transaction, the Company expects to record a gain on the sale in the range of $95 million to $100 million.*

          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.

In February 2003, the Company issued $250.0 million of 5.25% long-term notes due in March 2013. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to approximately $248.5 million. The proceeds of this debt issuance were used to refund $150.0 million of 7.30% medium-term notes which matured in February 2003. The remaining proceeds were used to reduce short-term borrowings.

          In March 2003, the Company redeemed $50.0 million of 8.48% medium-term notes at a redemption price of $52.5 million. The Company also redeemed $2.3 million of 6.214% medium-term notes in March 2003 at a redemption price of $2.25 million. The Company used short-term borrowings to redeem this debt.

          Consolidated short-term debt increased $42.3 million during the six months ended March 31, 2003. The temporary use of short-term debt to finance the acquisition of Empire was the main reason for this increase. As discussed above, the Company intends to use the proceeds from the sale of timber properties to repay short-term debt incurred in connection therewith.* 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. The Company has Securities and Exchange Commission (SEC) authorization under the Public Utility Holding Company Act of 1935, as amended, to borrow and have outstanding as much as $750.0 million of short-term debt at any time through December 31, 2005. The total amount available to be issued under the Company's commercial paper program is $200.0 million. The commercial paper program is backed by a committed $220 million, 364-day and 3-year credit facility. Under this committed credit facility, the Company has agreed that its debt to capitalization ratio will not at the last day of any fiscal quarter, exceed .65 from September 30, 2002 through September 30, 2003, .625 from October 1, 2003 through September 30, 2004 and .60 from October 1, 2004 and thereafter. At March 31, 2003, the Company's debt to capitalization ratio was .60. Given the constraints specified in the committed credit facility, the issuance of an additional $131.0 million in short-term and/or long-term debt would bring the Company's debt to capitalization ratio to .65. With regards to the Company's short-term notes payable to banks, the Company utilizes uncommitted bank lines of credit aggregating to $440.0 million. These uncommitted bank lines of credit are revocable at the option of the financial institutions and are reviewed on an annual basis. The Company anticipates that these lines of credit will continue to be renewed.* If a downgrade in any of the Company's credit ratings were to occur, access to the commercial paper markets might not be possible.* However, the Company expects that it could borrow under its uncommitted bank lines of credit or seek other liquidity sources, including cash provided by operations.* At March 31, 2003, the Company had outstanding short-term notes payable to banks and commercial paper of $163.7 million and $144.0 million, respectively.

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 March 31, 2003, the Company would have been permitted to issue up to a maximum of $259.0 million in additional long-term unsecured indebtedness at then current market interest rates (further limited by the debt to capitalization ratio constraints noted in the previous paragraph) in addition to being able to issue new indebtedness to replace maturing debt.

          The Company's indenture also contains certain cross-default provisions wherein the failure by the Company to pay the scheduled interest or principal on its outstanding short-term or long-term debt (if such failure is not cured) could trigger the obligation to re-pay the debt outstanding under said indenture. The Company believes that it has adequate committed credit facilities in place to protect against such defaults.*

          The Company also has authorization from the SEC, under the Public Utility Holding Company Act of 1935, to issue long-term debt securities and equity securities in amounts not exceeding $1.5 billion at any one time outstanding during the order's authorization period, which extends to December 31, 2005. In January 2003, the Company registered $800 million of debt and equity securities under the Securities Act of 1933. After the February 2003 debt issuance discussed above, the Company has available capacity to issue an additional $550 million of debt and equity securities registered under the Securities Act of 1933. The Company may sell all or a portion of the remaining registered securities if warranted by market conditions and the Company's capital requirements. Any offer and sale of the above mentioned securities will be made only by means of a prospectus meeting the requirements of the Securities Act of 1933 and the rules and regulations thereunder.

          The Company has entered into certain off-balance sheet financing arrangements. These financing arrangements are primarily operating and capital leases. The Company's consolidated subsidiaries have operating leases, the majority of which are with the Utility and the Pipeline and Storage segments, having a remaining lease commitment of approximately $32.0 million. These leases have been entered into for the use of vehicles, construction tools, meters, computer equipment and other items and are accounted for as operating leases. The Company's minority owned entities, which are accounted for under the equity method, have capital leases of electric generating equipment having a remaining lease commitment of approximately $9.2 million. The Company has guaranteed 50% or $4.6 million of these capital lease commitments.

          The following table summarizes the Company's expected future contractual cash obligations as of March 31, 2003, and the twelve-month periods over which they occur:

- -------------------------------------- -----------------------------------------------------------------------------------------
                                                                 Payments by Expected Maturity Dates
                                       -----------------------------------------------------------------------------------------
(Millions of Dollars)                   2003-2004    2004-2005    2005-2006   2006-2007   2007-2008   Thereafter        Total
- -------------------------------------- ------------ ------------ ----------- ----------- ----------- -------------- ------------
Long-Term Debt                            $145.4       $109.5         $4.9        $2.2      $   -        $1,143.0      $1,405.0
Short-Term Bank Notes                      163.7            -            -           -          -               -         163.7
Commercial Paper                           144.0            -            -           -          -               -         144.0
Operating Lease Commitments                  8.1          6.6          5.2         3.8        3.1             5.2          32.0
Capital Lease Commitments                    0.6          0.6          0.8         0.7        0.6             1.3           4.6
- -------------------------------------- ------------ ------------ ----------- ----------- ----------- -------------- ------------

          The Company has made certain guarantees on behalf of its subsidiaries. The guarantees relate primarily to: (i) obligations under derivative financial instruments, which are included on the consolidated balance sheet in accordance with SFAS 133 (see Item 2, MD&A under the headings “Critical Accounting Policies” and “Accounting for Derivative Financial Instruments”); (ii) Utility segment obligations to purchase gas to be resold in its regulated business in accordance with established regulatory mechanisms to pass through the cost of that gas to its retail customers; (iii) NFR obligations to purchase gas or to purchase gas transportation/storage services where the amounts actually due on those obligations each month are included

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

on the consolidated balance sheet as a current liability; and (iv) other obligations which are reflected on the consolidated balance sheet. The Company believes that the probability that it would be required to make payments under the guarantees is slight, and therefore has not included them in the table above.*

          The amounts and timing of the issuance and sale of debt and/or equity securities will depend on market conditions, indenture requirements, regulatory authorizations, and the capital requirements of the Company. *

          The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such matters could have a material effect on earnings and cash flows in the year of resolution, none of these 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 2002 Form 10-K. There have been no subsequent material changes to the Company’s exposure to market risk sensitive instruments.

REGULATORY MATTERS

Utility Operation

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.

New York Jurisdiction

On October 11, 2000, the NYPSC approved a settlement agreement (Agreement) between Distribution Corporation, Staff of the Department of Public Service, the New York State Consumer Protection Board and Multiple Intervenors (an advocate for large commercial and industrial customers) that establishes rates for a three-year period beginning October 1, 2000. For a complete discussion of this Agreement, refer to “Rate Matters” in Item 7 of the Company’s 2002 Form 10-K. The Company, Staff of the Department of Public Service and other parties have begun discussions regarding Distribution Corporation’s rates and services subsequent to the expiration of the Agreement on September 30, 2003.

On September 20, 2001, the NYPSC issued an order under which Distribution Corporation was Ordered to Show Cause why an action for penalties of $19 million should not be commenced against it for alleged violations of consumer protection requirements. According to the NYPSC and intervenors, the alleged violations may have caused or contributed to the death of an individual in an unheated apartment. On December 3, 2001, Distribution Corporation filed its response (submitted under a seal of confidentiality imposed by the Supreme Court, Erie County designed to protect the personal privacy interests of the deceased individual) and requested that the NYPSC either close (dismiss) the Show Cause proceeding based on the evidence presented in Distribution’s response, or hold investigatory hearings “to demonstrate that a penalty action is unwarranted.” On July 25, 2002 the NYPSC issued an order granting Distribution Corporation’s request for hearings, and referred the matter to an administrative law judge for scheduling and other matters. The Company believes and will continue to vigorously assert that the NYPSC’s allegations lack merit.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

Pennsylvania Jurisdiction

On April 16, 2003, Distribution Corporation filed a request with the Pennsylvania Public Utility Commission (PaPUC) to increase annual operating revenues by $16.5 million to cover increases in the cost of providing service, to be effective June 15, 2003. Distribution Corporation filed this request for several reasons including increases in the costs associated with Distribution Corporation’s ongoing construction program as well as increases in uncollectible accounts and personnel expenses.

Pipeline and Storage

Supply Corporation currently does not have a rate case on file with the Federal Energy Regulatory Commission (FERC). Management will continue to monitor Supply Corporation’s financial position to determine the necessity of filing a rate case in the future.

          On May 7, 2003, Supply Corporation entered into a Stipulation and Consent Agreement with the FERC Office of Market Oversight and Investigations to resolve the FERC investigation described in “Rate Matters” in Item 7 of the Company’s 2002 Form 10-K. FERC has approved the Stipulation and Consent Agreement. The settlement provides, among other things, that: 

(i)      Supply Corporation does not admit any violations of applicable laws or regulations;

(ii)     Supply Corporation asserts that neither Supply nor any of its affiliates were unjustly enriched by, received a competitive
         advantage, or otherwise profited from the alleged activities described in the Stipulation and
         Consent Agreement, and that there was no ascertainable harm to any shipper, potential shipper or
         the public;

(iii)    Supply Corporation will implement fully and follow the three-year "Compliance Plan" attached to the Stipulation and
         Agreement, which plan requires the establishment of various internal procedures, and various
         training, reviewing and reporting; and

(iv)     Supply Corporation will pay to the U.S. Treasury $0.3 million to cover the costs of the audit and investigation.

Other Matters

Environmental Matters

The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. 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. At March 31, 2003, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $4.0 million to $5.0 million.* The minimum liability of $4.0 million has been recorded on the Consolidated Balance Sheet at March 31, 2003. Other than discussed in Note H of the 2002 Form 10-K (referred to below), the Company is currently not aware of any material

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company.*

          For further discussion refer to Note H - Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the Company’s 2002 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 an asterisk (“*”), 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, including economic disruptions caused by terrorist activities or acts of war;

  2. Changes in demographic patterns and weather conditions;

  3. Changes in the availability and/or price of natural gas and oil;

  4. Inability to obtain new customers or retain existing ones;

  5. Significant changes in competitive factors affecting the Company;

  6. Governmental/regulatory actions, initiatives and proceedings, including those affecting acquisitions, financings, allowed rates of return, industry and rate structure, franchise renewal, and environmental/safety requirements;

  7. Unanticipated impacts of restructuring initiatives in the natural gas and electric industries;

  8. Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays or changes in project costs;

  9. The nature and projected profitability of pending and potential projects and other investments;

  10. Occurrences affecting the Company's ability to obtain funds from operations, debt or equity to finance needed capital expenditures and other investments;

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Concl.)
  1. Uncertainty of oil and gas reserve estimates;

  2. Ability to successfully identify and finance oil and gas property acquisitions and ability to operate and integrate existing and any subsequently acquired business or properties;

  3. Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves;

  4. Significant changes from expectations in the Company's actual production levels for natural gas or oil;

  5. Changes in the availability and/or price of derivative financial instruments;

  6. Changes in the price of natural gas or oil and the effect of such changes on the accounting treatment or valuation of financial instruments or the Company's natural gas and oil reserves;

  7. Inability of the various counterparties to meet their obligations with respect to the Company's financial instruments;

  8. Regarding foreign operations, changes in trade and monetary policies, inflation and exchange rates, taxes, operating conditions, laws and regulations related to foreign operations, and political and governmental changes;

  9. Significant changes in tax rates or policies or in rates of inflation or interest;

  10. Significant changes in the Company's relationship with its employees or contractors and the potential adverse effects if labor disputes, grievances or shortages were to occur;

  11. Changes in accounting principles or the application of such principles to the Company;

  12. Changes in laws and regulations to which the Company is subject, including tax, environmental, safety and employment laws and regulations; or

  13. The cost and effects of legal and administrative claims against 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

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Refer to the “Market Risk Sensitive Instruments” section in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4. Controls and Procedures

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The following information includes the evaluation of disclosure controls and procedures by the Company’s Chief Executive Officer and Treasurer, along with any significant changes in internal controls of the Company.

Evaluation of disclosure controls and procedures

          The term “disclosure controls and procedures” is defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (Exchange Act.) These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that

Item 4. Controls and Procedures (Concl.)

it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. The Company’s Chief Executive Officer and Treasurer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days before the filing of this Quarterly Report on Form 10-Q (Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective to accomplish those tasks.

Changes in internal controls

          The Company maintains a system of internal accounting controls that are designed to provide reasonable assurance that the Company’s transactions are properly authorized, the Company’s assets are safeguarded against unauthorized or improper use, and the Company’s transactions are properly recorded and reported to permit preparation of the Company’s financial statements in conformity with GAAP. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls.

Part II. Other Information

Item 1. Legal Proceedings

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In an action instituted in the New York State Supreme Court, Chautauqua County on January 31, 2000 against Seneca, NFR and “National Fuel Gas Corporation,” Donald J. and Margaret Ortel and Brian and Judith Rapp, “individually and on behalf of all those similarly situated,” allege, in an amended complaint which adds National Fuel Gas Company as a party defendant (a) that Seneca underpaid royalties due under leases operated by it, and (b) that Seneca’s co-defendants (i) fraudulently participated in and concealed such alleged underpayment, and (ii) induced Seneca’s alleged breach of such leases. Plaintiffs seek an accounting, declaratory and related injunctive relief, and compensatory and exemplary damages. Defendants have denied each of plaintiffs’ material substantive allegations and set up twenty-five affirmative defenses in separate verified answers.

          A motion was made by plaintiffs on July 15, 2002 to certify a class comprising all persons presently and formerly entitled to receive royalties on the sale of natural gas produced and sold from wells operated in New York by Seneca (and its predecessor Empire Exploration, Inc). On December 23, 2002, the court granted certification of the proposed class, as modified to exclude those leaseholders whose leases provide for calculation of royalties based upon a flat fee, or flat fee per cubic foot of gas produced. The court’s order states that there are approximately 749 potential class members.

          In an action instituted in the New York State Supreme Court, Kings County on February 18, 2003 against Distribution Corporation and Paul J. Hissin, an unaffiliated third party, plaintiff Donna Fordham-Coleman, as administratrix of the estate of Velma Arlene Fordham, alleges that Distribution Corporation’s denial of natural gas service in November 2000 to the plaintiff’s decedent, Velma Arlene Fordham, caused decedent’s death in February 2001. Plaintiff seeks damages for wrongful death and pain and suffering, plus punitive damages. Distribution Corporation has denied plaintiff’s material allegations, set up seven affirmative defenses in separate verified answers and filed a cross-claim against the co-defendant. Distribution Corporation believes and will vigorously assert that plaintiff’s allegations lack merit. For a discussion of a related matter before the NYPSC, refer to Part I, Item 2 - MD&A of this report under the heading “Regulatory Matters.”

          The Company believes, based on the information presently known, that the ultimate resolution of these matters, individually or in the aggregate, will not be material to the consolidated financial condition, results of

Item 1. Legal Proceedings (Concl.)

operations, or cash flow of the Company.* No assurances can be given, however, as to the ultimate outcomes of these matters, and it is possible that the outcomes, individually or in the aggregate, could be material to results of operations or cash flow for a particular quarter or annual period.*

          For a discussion of various environmental matters, refer to Part I, Item 1 at Note 4 and Part I, Item 2 – MD&A of this report under the heading “Environmental Matters.”

          The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such matters could have a material effect on earnings and cash flows in the period of resolution, none of these 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.*

Item 2. Changes in Securities

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          As of January 2, 2003, the Company issued a total of 2,440 unregistered shares of Company common stock to the nine non-employee directors of the Company then serving on the Board of Directors, 170 shares to each of two directors who retired from the Board on February 20, 2003, and 300 shares to each of the other seven directors. As of March 7, 2003, the Company issued 133 unregistered shares of Company common stock to R. Don Cash, who was elected to the Board on February 20, 2003. All of these shares were issued as partial consideration for those directors’ services during the quarter ended March 31, 2003, 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 transactions not involving a public offering.

Item 4. Submission of Matters to a Vote of Security Holders

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          The Annual Meeting of Shareholders of National Fuel Gas Company was held on February 20, 2003. At that meeting, the shareholders elected directors, appointed independent accountants, rejected a shareholder proposal to limit certain executive compensation plans, and rejected a shareholder proposal to create a committee to address alleged discrimination in employment. 

         The total votes were as follows:
                                                                 Against                            Broker
                                                For           Or Withheld          Abstain       Non- Votes
                                                ---           -----------          -------       ----------

(i)      Election of directors to
         serve for a three-year
         term:
           - R. Don Cash                    69,306,960         1,342,643                -             -
           - George L. Mazanec              66,086,293         4,563,310                -             -
           - John F. Riordan                65,797,138         4,852,465                -             -
         Election of director to
         serve for a two-year
         term:
           - Rolland E. Kidder              66,627,659         4,021,944                -             -
Item 4. Submission of Matters to a Vote of Security Holders (Concl.)

         Directors whose term of office continued after the meeting:

         Term expiring in 2004:  Philip C. Ackerman, James V. Glynn and Bernard J. Lee.

         Term expiring in 2005:  Robert T. Brady and Bernard J. Kennedy.


                                                                 Against                            Broker
                                                For           Or Withheld          Abstain       Non- Votes
                                                ---           -----------          -------       ----------

(ii)     Appointment of
         PricewaterhouseCoopers
         LLP as independent
         accountants                        65,680,081         4,702,111          267,411                 -

(iii)    Adoption of shareholder
         proposal to limit certain
         executive compensation
         plans                               6,528,091        44,765,721        1,460,097        17,895,694

(iv)     Adoption of shareholder
         proposal to create
         committee to address
         alleged discrimination
         in employment                       3,461,839        46,062,183        3,229,892        17,895,689

Item 5. Other Information

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          At the Annual Meeting of Shareholders held on February 20, 2003, the Company’s shareholders elected R. Don Cash as a new director of the Company. Also on February 20, 2003, William J. Hill and Eugene T. Mann retired from the Board of Directors.

          On February 20, 2003, the Board of Directors elected Ronald J. Tanski as Controller of the Company. Mr. Tanski is Controller and Senior Vice President of Distribution Corporation and Secretary and Treasurer of Horizon. On February 1, 2003, Gerald T. Wehrlin retired as Controller of the Company, President and Treasurer of NFR, and as an officer of certain other subsidiaries of the Company.


Item 6. Exhibits and Reports on Form 8-K

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         (a)     Exhibits

                 Exhibit
                 Number             Description of Exhibit

                 (4)                Officer's Certificate Establishing 5.25% Notes due 2013, dated February 18,
                                    2003.
Item 6. Exhibits and Reports on Form 8-K (Concl.) 
                 (10)(iii)          Consulting and Confidentiality Agreement, effective February 2, 2003, between  the Company and
                                    Gerald T. Wehrlin.

                 (12)               Statements regarding Computation of Ratios:
                                    Ratio of Earnings to Fixed  Charges for the Twelve Months Ended March 31, 2003 and the Fiscal Years
                                    Ended September 30, 1998 through 2002.

                 (99)               Additional Exhibits:

                 99.1               National Fuel Gas Company  Consolidated  Statements of Income for the Twelve Months Ended March 31,
                                    2003 and 2002.

                 99.2               Written  statements of Chief Executive Officer and Principal  Financial Officer furnished  pursuant
                                    to Section 906 of the Sarbanes-Oxley Act of 2002.

         (b)     Reports on Form 8-K

                                    A report on Form 8-K dated  January  27,  2003 was filed on  January  29,  2003  regarding  a press
                                    release  issued by the Company  concerning  earnings for the quarter ended  December 31, 2002 and a
                                    conference  call on January 28, 2003.  This  information was filed under Item 5, "Other Events." An
                                    exhibit was filed under Item 7, "Financial Statements and Exhibits."

                                    A report on Form 8-K dated and filed on February 7, 2003 regarding a press release issued by the
                                    Company concerning its acquisition of the Empire State Pipeline from a subsidiary of Duke Energy
                                    Corporation.  This information was filed under Item 5, "Other Events."  An exhibit was filed under
                                    Item 7, "Financial Statements and Exhibits."

Signature

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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, Principal Financial Officer
                                                          and Principal Accounting Officer
Date: May 15, 2003

Certifications

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CERTIFICATION



        I, Philip C. Ackerman, certify that:

        1. I have reviewed this quarterly report on Form 10-Q of National Fuel Gas Company;

        2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

        a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ Philip C. Ackerman

Philip C. Ackerman
Chairman of the Board, President and
Chief Executive Officer

CERTIFICATION



        I, Joseph P. Pawlowski, certify that:

        1. I have reviewed this quarterly report on Form 10-Q of National Fuel Gas Company;

        2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

        a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ Joseph P. Pawlowski

Joseph P. Pawlowski
Treasurer and Principal Financial Officer

EXHIBIT INDEX
(Form 10-Q) 


Exhibit 4                  Officer's Certificate Establishing 5.25% Notes due 2013
                           dated February 18, 2003

Exhibit 10(iii)            Consulting and Confidentiality Agreement, effective February 2,
                           2003, between the Company and Gerald T. Wehrlin

Exhibit 12                 Statements regarding Computation of Ratios:
                           Ratio of Earnings to Fixed Charges for the Twelve
                           Months Ended March 31, 2003 and the Fiscal Years Ended
                           September 30, 1998 through 2002

Exhibit 99.1               National Fuel Gas Company Consolidated Statement of
                           Income for the Twelve Months Ended March 31, 2003
                           and 2002

Exhibit 99.2               Written statements of Chief Executive Officer and Principal
                           Financial Officer furnished pursuant to Section 906 of the
                           Sarbanes-Oxley Act of 2002
EX-4 3 ex4.htm EXHIBIT4-OFFICERS CERTIFICATE Exhibit 4

Exhibit 4

NATIONAL FUEL GAS COMPANY

OFFICER’S CERTIFICATE

Establishing 5.25% Notes due 2013

           J. P. Pawlowski, the Treasurer, of National Fuel Gas Company, a New Jersey corporation (the "Company"), pursuant to the authority granted in the Board Resolutions of the Company adopted on February 12, 2003, and Sections 102, 201 and 301 of the Indenture defined herein, does hereby certify to The Bank of New York (the "Trustee"), as Trustee under the Indenture of the Company (For Unsecured Debt Securities) dated as of October 1, 1999 (the "Indenture"), that:

1.    The Securities of the third series to be issued under the Indenture shall be designated "5.25% Notes due 2013" (the "Notes of the Third Series"); the Notes of the Third Series shall be in substantially the form set forth in Exhibit A hereto. All capitalized terms used in this certificate which are not defined herein shall have the meanings set forth in the Indenture;
 
2.    The Notes of the Third Series shall mature, and the principal thereof shall be due and payable, together with all accrued and unpaid interest thereon, on March 1, 2013;
 
3.    The Notes of the Third Series shall be issued in the denominations of $1,000 and integral multiples thereof;
 
4.    The Notes of the Third Series shall bear interest as provided in the form thereof set forth in Exhibit A;
 
5.    The principal of and each installment of interest on the Notes of the Third Series shall be payable at, and registration of transfers and exchanges in respect of the Notes of the Third Series may be effected at, the office or agency of the Company in The City of New York; provided that payment of interest may be made at the option of the Company by check mailed to the address of the persons entitled thereto or, in certain circumstances described in the form of Notes of the Third Series hereto attached as Exhibit A, by wire transfer to an account designated by the person entitled thereto. Notices and demands to or upon the Company in respect of the Notes of the Third Series and the Indenture may be served at the office or agency of the Company in The City of New York. The Corporate Trust Office of the Trustee will initially be the agency of the Company for such payment, registration and registration of transfers and exchanges and service of notices and demands and the Company hereby appoints the Trustee as its agent for all such purposes; provided, however, that the Company reserves the right to change, by one or more Officer's Certificates, any such office or agency and such agent. The Trustee will initially be the Security Registrar and the Paying Agent for the Notes of the Third Series;
 
6.    The Notes of the Third Series are subject to redemption as provided in the form thereof set forth in Exhibit A;
 
7.    The Notes of the Third Series will not be entitled to the benefit of any sinking fund;
 
8.    The Notes of the Third Series shall be initially issued in global form registered in the name of Cede & Co. (as nominee of The Depository Trust Company ("DTC")); provided, that the Company reserves the right to provide for another depositary, registered as a clearing agency under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to act as depositary for the global Notes of the Third Series (DTC and any such successor depositary, the "Depository"); beneficial interests in Notes of the Third Series issued in global form may not be exchanged in whole or in part for individual certificated Notes of the Third Series in definitive form, and no transfer of a global Note of the Third Series in whole or in part may be registered in the name of any Person other than the Depository or its nominee except that if the Depository (A) has notified the Company that it is unwilling or unable to continue as depositary for the global Notes of the Third Series or (B) has ceased to be a clearing agency registered under the Exchange Act and, in either case, a successor depositary for such global Notes of the Third Series has not been appointed, the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of definitive Notes of the Third Series, will authenticate and deliver, Notes of the Third Series in definitive certificated form in an aggregate principal amount equal to the principal amount of the global Notes of the Third Series representing such Notes of the Third Series in exchange for such global Notes of the Third Series, such definitive Notes of the Third Series to be registered in the names provided by the Depository; each global Note of the Third Series (i) shall represent and shall be denominated in an amount equal to the aggregate principal amount of the Outstanding Notes of the Third Series to be represented by such global Note of the Third Series, (ii) shall be registered in the name of the Depository or its nominee, (iii) shall be delivered by the Trustee to the Depository, its nominee, any custodian for the Depository or otherwise pursuant to the Depository's instruction and (iv) shall bear a legend restricting the transfer of such global Note of the Third Series to any person other than the Depository or its nominee; none of the Company, the Trustee, any Paying Agent or any Authenticating Agent will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in a global Note of the Third Series or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests; the Notes of the Third Series in global form will contain restrictions on transfer, substantially as described in the form set forth in Exhibit A hereto;
 
9.    The Trustee, the Security Registrar and the Company will have no responsibility under the Indenture for transfers of beneficial interests in the Notes of the Third Series, for any depositary records of beneficial interests or for any transactions between the Depository and beneficial owners;
 
10.    No service charge will be made for the registration of transfer or exchange of the Notes of the Third Series; provided, however, that the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the exchange or transfer;
 
11.    If the Company shall make any deposit of money and/or Eligible Obligations with respect to any Notes of the Third Series, or any portion of the principal amount thereof, as contemplated by Section 701 of the Indenture, the Company shall not deliver an Officer's Certificate described in clause (z) in the first paragraph of said Section 701 unless the Company shall also deliver to the Trustee, together with such Officer's Certificate, either:
 
      (A)    an instrument wherein the Company, notwithstanding the satisfaction and discharge of its indebtedness in respect of the Notes of the Third Series, shall assume the obligation (which shall be absolute and unconditional) to irrevocably deposit with the Trustee or Paying Agent such additional sums of money, if any, or additional Eligible Obligations (meeting the requirements of Section 701), if any, or any combination thereof, at such time or times, as shall be necessary, together with the money and/or Eligible Obligations theretofore so deposited, to pay when due the principal of and interest, if any, due and to become due on such Notes of the Third Series or portions thereof, all in accordance with and subject to the provisions of said Section 701; provided, however, that such instrument may state that the obligation of the Company to make additional deposits as aforesaid shall be subject to the delivery to the Company by the Trustee of a notice asserting the deficiency accompanied by an opinion of an independent public accountant of nationally recognized standing, selected by the Company and acceptable to the Trustee, showing the calculation thereof; or
 
      (B)    an Opinion of Counsel to the effect that, as a result of (i) the receipt by the Company from, or the publication by, the Internal Revenue Service of a ruling or (ii) a change in law occurring after the date of this certificate, the Holders of such Notes of the Third Series, or portions of the principal amount thereof, will not recognize income, gain or loss for United States federal income tax purposes as a result of the satisfaction and discharge of the Company's indebtedness in respect thereof and will be subject to United States federal income tax on the same amounts, at the same times and in the same manner as if such satisfaction and discharge had not been effected;
 
12.    The Notes of the Third Series shall have such other terms and provisions as are provided in the form thereof set forth in Exhibit A;
 
13.    All conditions precedent, if any, provided for in the Indenture (including any covenants compliance with which constitutes a condition precedent), relating to the authentication and delivery of the Notes of the Third Series requested in the accompanying Company Order No. 3 have been complied with;
 
14.    The undersigned has read all of the covenants and conditions contained in the Indenture, and the definitions in the Indenture relating thereto, relating to the Company's issuance of the Notes of the Third Series and in respect of compliance with which this certificate is made;
 
15.    The statements contained in this certificate are based upon the familiarity of the undersigned with the Indenture, the documents accompanying this certificate, and upon discussions by the undersigned with officers, employees and counsel of the Company familiar with the matters set forth herein;
 
16.    In the opinion of the undersigned, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenants and conditions have been complied with; and
 
17.    In the opinion of the undersigned, such conditions and covenants have been complied with.


        IN WITNESS WHEREOF, I have executed this Officer’s Certificate this 18th day of February, 2003.

     /s/   J. P. Pawlowski
     J. P. Pawlowski
     Treasurer

EXHIBIT A

[depositary legend]

        [Unless this Certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation (“DTC”), to the Company or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.]

[FORM OF FACE OF NOTE]

NATIONAL FUEL GAS COMPANY

5.25% Notes due 2013

NO.CUSIP: 636180 BE 0
 
ORIGINAL ISSUE DATE:  February 18, 2003PRINCIPAL AMOUNT:
 
ORIGINAL INTEREST INTEREST RATE: 5.25%
ACCRUAL DATE: February 18, 2003 
 
MATURITY DATE: March 1, 2013
 
INTEREST PAYMENT DATES: March 1 and September 1, commencing September 1, 2003
 
REDEEMABLE AT OPTION OF THE COMPANY:     YES  X    NO    
 
REDEEMABLE AT OPTION OF THE HOLDER:         YES        NO  X 


(See the Reverse of this Note for redemption provisions)

        NATIONAL FUEL GAS COMPANY, a corporation duly organized and existing under the laws of the State of New Jersey (herein referred to as the “Company”, which term includes any successor Person under the Indenture referred to on the reverse hereof), for value received, hereby promises to pay to

or registered assigns, the principal sum of ____________________ Dollars on the Maturity Date specified above, and to pay interest thereon at the Interest Rate specified above, quarterly on the Interest Payment Dates specified above of each year and on the Maturity Date, from the Original Interest Accrual Date specified above or from the most recent Interest Payment Date to which interest has been paid, unless the Company shall default in the payment of interest due on such Interest Payment Date, in which case interest shall be payable from the next preceding Interest Payment Date to which interest has been paid, or, if no interest has been paid on this Security, from the Original Interest Accrual Date. In the event that the Maturity Date or any date fixed for redemption is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of such delay) with the same force and effect as if made on such Maturity Date or date fixed for redemption. In the event that any Interest Payment Date is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of such delay) with the same force and effect as if made on such Interest Payment Date. The Initial Interest Payment Date will be September 1, 2003, and the payment on that date will include all interest accrued from the Original Interest Accrual Date. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be (a) the Business Day immediately preceding such Interest Payment Date so long as Securities of this series remain in book-entry only form or (b) the 15th calendar day prior to such Interest Payment Date if Securities of this series do not remain in book-entry only form; provided, that interest payable at Maturity shall be paid to the Person to whom principal shall be paid. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.

                Payment of the principal of, premium, if any, and interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, the State of New York in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that (a) at the option of the Company, interest on this Security may be paid by check mailed to the address of the person entitled thereto, as such address shall appear on the Security Register or by wire transfer to an account designated by the person entitled thereto, and (b) upon the written request of a Holder of not less than $10 million in aggregate principal amount of Securities of this series delivered to the Company and the Paying Agent at least ten days prior to any Interest Payment Date, payment of interest on such Securities to such Holder on such Interest Payment Date shall be made by wire transfer of immediately available funds to an account maintained within the continental United States specified by such Holder or, if such Holder maintains an account with the entity acting as Paying Agent, by deposit into such account.

                Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

                Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

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        IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

 NATIONAL FUEL GAS COMPANY
 
 
 By:________________________________



[FORM OF CERTIFICATE OF AUTHENTICATION]

CERTIFICATE OF AUTHENTICATION

                This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

     Dated:

 THE BANK OF NEW YORK, as Trustee
 
 
 By:________________________________
       Authorized Signatory


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[FORM OF REVERSE OF NOTE]

        This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture (For Unsecured Debt Securities), dated as of October 1, 1999 (herein, together with any amendments or supplements thereto, called the “Indenture”, which term shall have the meaning assigned to it in such instrument), between the Company and The Bank of New York, as Trustee (herein called the “Trustee”, which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture, including the Board Resolutions and Officer’s Certificate filed with the Trustee on February 18, 2003 creating the series designated on the face hereof, for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof. The acceptance of this Security shall be deemed to constitute the consent and agreement by the Holder hereof to all terms and provisions of the Indenture.

      Optional Redemption

                Securities of this series shall be redeemable at the option of the Company, in whole at any time or in part from time to time, prior to the Maturity Date, in each case at a redemption price (the “Redemption Price”) equal to the greater of

•   100% of the principal amount of the Securities of this series being redeemed, or
 
•   the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed (excluding the portion of any such interest accrued to the Redemption Date, as defined), discounted to the date fixed for redemption (“Redemption Date”) on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus .20%

                plus, in each case, accrued interest on those Securities of this series to the Redemption Date.

                “Treasury Rate” means, with respect to any Redemption Date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.

                “Comparable Treasury Issue” means the United States Treasury security selected by the Independent Investment Banker as having a maturity comparable to the remaining term of the Securities to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities.

               “Comparable Treasury Price” means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption

A-4

Date, as set forth in the H. 15 Daily Update of the Federal Reserve Bank or (ii) if such release (or any successor release) is not published or does not contain prices on such Business Day, the Reference Treasury Dealer Quotation actually provided to the Trustee for such Redemption Date.

                 “H.15(519)” means the weekly statistical release entitled “H.15 (519) Selected Interest Rates”, or any successor publication, published by the Board of Governors of the Federal Reserve System.

                 “H.15 Daily Update” means the daily update of H.15(519) available through the worldwide website of the Board of Governors of the Federal Reserve System or any successor site or publication.

                  “Independent Investment Banker” means the Reference Treasury Dealer appointed by the Company.

                 “Reference Treasury Dealer” means Merrill Lynch Government Securities, Inc., and its successors; provided, however, that if the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a “Primary Treasury Dealer”), the Company shall substitute therefor another Primary Treasury Dealer.

                 “Reference Treasury Dealer Quotation” means, with respect to the Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by the Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date.

                 In lieu of stating the Redemption Price, notices of redemption of the Securities of this series shall state substantially the following: “The Redemption Price of the Securities of this series to be redeemed shall equal the sum of (a) the greater of (i) 100% of the principal amount of such Securities of this series, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed (excluding the portion of any such interest accrued to the Redemption Date), discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus .20%, plus accrued interest on the principal amount hereof to the Redemption Date.

                 Notice of redemption shall be given by mail to Holders of Securities, not less than 30 nor more than 60 days prior to the Redemption Date, all as provided in the Indenture. As provided in the Indenture, notice of redemption at the election of the Company as aforesaid may state that such redemption shall be conditional upon the receipt by the applicable Paying Agent or Agents of money sufficient to pay the principal of and premium, if any, and interest, if any, on this Security on or prior to the date fixed for such redemption; a notice of redemption so conditioned shall be of no force or effect if such money is not so received and, in such event, the Company shall not be required to redeem this Security.

A-5

                 In the event of redemption of this Security in part only, a new Security or Securities of this series of like tenor representing the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof.

                 The Indenture contains provisions for defeasance at any time of the entire indebtedness of the Company in respect of this Security, or any portion of the principal amount thereof, upon compliance with certain conditions set forth in the Indenture, including the Officer’s Certificate described above.

                 If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.

                 The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of all series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

                 As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless (a) such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, (b) the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding in respect of which an Event of Default shall have occurred and be continuing shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee, (c) such Holder shall have offered the Trustee reasonable indemnity, (d) the Trustee shall have failed to institute any such proceeding for 60 days after receipt of such notice, request and offer of indemnity, and (e) the Trustee shall not have received from the Holders of a majority in aggregate principal amount of Securities of all series at the time Outstanding in respect of which an Event of Default shall have occurred and be continuing a direction inconsistent with such request. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof, premium, if any, or interest hereon on or after the respective due dates expressed herein.

                 No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and

A-6

unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

                 The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are transferable to a transferee or transferees, as designated by the Holder surrendering the same for such registration of transfer, and exchangeable for a like aggregate principal amount of Securities of this series and of like tenor and of authorized denominations, as requested by the Holder surrendering the same.

                 No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

                 The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

                 All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

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 EX-10 4 ex10.htm EXHIBIT10-CONSULTING AGREEMENT Exhibit 10(iii)

Exhibit 10(iii)

CONSULTING AND CONFIDENTIALITY AGREEMENT

        This Consulting and Confidentiality Agreement (“Agreement”) is entered into this______ day of February, 2003, but shall become effective February 2, 2003. This Agreement is made by and between Gerald T. Wehrlin, an individual residing at 7491 Monte Verde Lane, West Palm Beach, Florida 33412 (hereinafter “Consultant” or “Mr. Wehrlin”); and National Fuel Gas Company with U.S. offices at 10 Lafayette Square, Buffalo, New York 14203.

WITNESSETH:

        WHEREAS, Mr. Wehrlin has been employed by National Fuel Gas Company and/or its various subsidiaries from August 16, 1976 through the date hereof, and among other things, has worked with and provided advice and expertise on matters relating to: 1) international energy investment opportunities, 2) domestic and foreign oil and gas exploration and development activities, and 3) the energy marketing business;

        WHEREAS, for purposes of this Agreement, “National Fuel” shall refer, collectively, to National Fuel Gas Company, and all of its affiliates and/or direct and indirect subsidiaries, including but not limited to Horizon Energy Development, Inc. (“Horizon”) and Seneca Resources Corporation (“Seneca”);

        WHEREAS, National Fuel desires to retain Consultant to perform the various tasks set out in Section 2. SCOPE OF WORK, set out below;

        WHEREAS, Consultant desires and has agreed to provide such services, subject to the terms and conditions of this Agreement and agrees that he is not otherwise entitled to the sums being paid under this Agreement, except as provided herein;

        WHEREAS, during the course of Mr. Wehrlin’s employment with National Fuel, Mr. Wehrlin had access to and became acquainted with National Fuel’s trade secrets and confidential and proprietary information and materials, including but not limited to investment plans and strategies;

        WHEREAS, during the course of Mr. Wehrlin’s employment with National Fuel, Mr. Wehrlin was aware that the confidentiality of National Fuel’s trade secrets and confidential and proprietary information was required to be maintained by National Fuel’s employees;

        WHEREAS, during the course of Mr. Wehrlin’s employment with National Fuel, Mr. Wehrlin was aware that National Fuel’s international energy investment plans, oil and gas exploration and development activities, and other business strategies were subject to restricted use and disclosure;

        WHEREAS, during the course of Mr. Wehrlin’s employment with National Fuel, National Fuel took steps to protect its trade secrets and confidential and proprietary information;

        WHEREAS, Mr. Wehrlin recognizes that National Fuel’s business and goodwill are dependent upon National Fuel’s trade secrets and confidential and proprietary information;

        WHEREAS, National Fuel will sustain great loss and damage if Mr. Wehrlin discloses, utilizes or causes to be disclosed or utilized National Fuel’s trade secrets and/or confidential and proprietary information to third parties or for Mr. Wehrlin’s own benefit;

        WHEREAS, in the absence of this Agreement, National Fuel would not otherwise continue to disclose such confidential and proprietary information to Mr. Wehrlin, or permit access to the same by Mr. Wehrlin.

        NOW THEREFORE, in consideration of the premises, mutual covenants, conditions, and terms to be kept and performed, the parties hereto agree as follows:

        1.         TERM OF AGREEMENT. This Agreement shall become effective on February 2, 2003, and continue for a period of two (2) years, subject to the rights of earlier termination set forth below. This Agreement shall be renewable at the option of the parties for successive 1 year periods, provided that the parties have executed an agreement regarding the terms of such renewal at least 30 days prior to the end of the initial period or any successive period. Both Consultant and National Fuel shall have the option, upon thirty (30) days written notice, to terminate this Agreement at any time, for whatever reason, including but not limited to National Fuel's decision to withdraw from, or otherwise cease, operations in Western or Central Europe, whether partially or wholly. In the event that Consultant fails to perform any of the terms and conditions of this Agreement, National Fuel shall have the option to give notice and immediately terminate this Agreement. Upon termination by either party before February 2, 2004, Consultant shall be entitled to payment as follows:

(a)    if Consultant has worked less than or equal to sixty (60) days, Consultant shall be paid an amount equal to $3,333 times each such day worked, less the $100,000 paid on or about February 2, 2003; and
 
(b)    if Consultant has worked more than sixty (60) days, in addition to the amount calculated under Paragraph 1(a) above, Consultant shall be paid an amount calculated pursuant to Paragraph 3(b) for each such excess day actually worked, provided the fees for such excess days are not in dispute at the time of termination; and
 
(c)    Consultant shall be entitled to reimbursement of expenses incurred through the date of termination, provided the expenses are not in dispute at the time of termination.

            Consultant agrees that all records furnished by National Fuel under the terms of this Agreement shall be immediately forwarded to National Fuel upon termination of this Agreement or upon Consultant’s business failure, bankruptcy, receivership, etc.

        2.         SCOPE OF WORK. Consultant shall perform his obligations under this Agreement for National Fuel (or such other direct or indirect subsidiary of National Fuel, as may be directed by National Fuel) as an independent consultant with the following specific duties:

(a)    provide certain consulting services, and
 
(b)    make recommendations to Horizon, Horizon Energy Development, s.r.o. or National Fuel Gas Company related to energy investment opportunities and any relevant duties with respect to properties owned or projects in the Czech Republic, and
 
(c)    make recommendations to Seneca or National Fuel related to oil and gas exploration and development opportunities and any relevant duties with respect to properties owned or projects in the United States and Canada.

In particular, a certain portion of Consultant’s time shall be devoted to the ongoing operation of certain projects in the Czech Republic. Consultant shall perform other tasks as National Fuel may prescribe from time to time provided such tasks are consistent with Consultant’s obligations under this Agreement. National Fuel will use its best efforts to assure that Consultant shall be given access to information, and may discuss information and issues with certain members of management (within the confidentiality provisions set forth herein), in order that Consultant may carry out his obligations hereunder. Consultant shall provide reports to the individual within the corporate structure of Horizon or National Fuel and its affiliated companies that may be designated from time to time. As of the effective date of this Agreement, Consultant shall provide reports to Philip C. Ackerman, President of Horizon and President of National Fuel Gas Company. Before asserting any written or oral representation to third parties on behalf of National Fuel or any of its affiliated companies, Consultant warrants and agrees that he will receive specific, prior approval from an authorized officer of National Fuel.

        3.         COMPENSATION AND AVAILABILITY OF CONSULTANT.

 (a)    RATE OF PAYMENT. For the term of this Agreement, National Fuel shall pay Consultant a retainer of $200,000. Such retainer shall be disbursed to Consultant as follows:
 
      (i)   On or about February 15, 2003, National Fuel shall pay Consultant $100,000; and
 
    (ii)   Subject to Paragraph 1 above, on or about February 15, 2004, National Fuel shall pay Consultant $100,000.
 
  (b)    AVAILABILITY. In consideration of the payment of the retainer, Consultant shall make himself available to provide services to National Fuel for up to sixty (60) days during the term of this Agreement. If National Fuel requests and if Consultant agrees to provide services in excess of sixty (60) days, National Fuel agrees to pay Consultant at the rate of $1,250 per day for each such excess day actually worked.
 
  (c)    INVOICES SUBMITTED BY CONSULTANT. Any invoices submitted by Consultant, for the purpose of being paid for work completed as set forth in Paragraph 2 above, shall be for the sole purpose of compensating Consultant for work fully and satisfactorily completed hereunder.
 
  (d)    All invoices submitted by Consultant shall be sent to National Fuel Gas Company, to the attention of P.C. Ackerman, located at 10 Lafayette Square, Buffalo, New York 14203.
 
  (e)    Within 30 days of receipt of such invoices for work fully and satisfactorily performed under the Agreement, National Fuel shall pay Consultant at the rate provided for herein.
 
  (f)    National Fuel shall have the right to determine whether such invoices submitted by Consultant are true and accurate only as to the amount of work that is fully and satisfactorily completed.


        4.         BUSINESS AND TRAVEL EXPENSES. Consultant hereby understands and agrees that National Fuel shall reimburse Consultant's normal reasonable travel, lodging, long distance communication, computer connection, and out of pocket expenses incurred in connection with performance of services hereunder.

        5.         CERTAIN BENEFITS. It is understood that National Fuel is not required to provide or pay for life, medical, retirement or any other compensation benefits to Consultant other than those benefits that are paid to Mr. Wehrlin in his status as a retiree from National Fuel. Included in the amounts payable under Paragraph 3 is an amount available to Consultant for the payment by Consultant for his purchase of the life, medical, retirement and any other compensation benefits required of Consultant by law, rule, order or regulation of any governmental agency or authority. Consultant shall not be eligible to participate in any benefit or compensation plan, practice, or arrangement that National Fuel provides to its active employees. Notwithstanding the foregoing, due to the domestic and international travel that may be required of the Consultant hereunder from time to time, during the term of this Agreement National Fuel shall arrange a rider on its Group Travel Accident Insurance policy to cover Consultant while performing services hereunder at a benefit limit of up to $375,000. Consultant agrees to provide to National Fuel a completed beneficiary designation form with respect to this policy.

        6.         NO CHANGE IN PENSION BENEFITS. The providing of services by Consultant hereunder, and the consulting time billed by Consultant shall neither decrease, nor increase, the calculation or payment of pension or other retirement benefits normally payable to Mr. Wehrlin as a result of his retirement as of February 1, 2003.

        7.         TAXES.

(a)   Consultant shall be responsible for the payment of any and all local, state and federal taxes, or other fees, imposed on the amounts made payable to Consultant as a result of the services rendered hereunder.
 
(b)    Consultant shall be responsible for the withholding and/or payment of any and all applicable local, state and federal employment, payroll and/or income taxes associated with any and all of Consultant's employees. Consultant agrees to indemnify and hold harmless National Fuel for or from any failure, on the part of Consultant, to withhold or remit such applicable taxes.
 
(c)    Upon request by National Fuel, Consultant shall provide documented proof that the above-referenced taxes were paid, as required.


        8.         INDEPENDENT CONTRACTOR. It is understood and agreed that, in performing all work hereunder, Consultant shall be an independent contractor, responsible for accomplishing the results contracted for under this Agreement, and, as such, shall control the detail, manner and means of providing consulting services pursuant to this Agreement. Accordingly, Consultant shall not be required to work any particular schedule, but shall use his best efforts to meet Horizon's and/or National Fuel's deadlines. Further, Consultant shall not, within reason, be required to work at any particular location. However, National Fuel shall provide reasonable and sufficient office space and clerical and office services support when Consultant's presence is required at Horizon's offices in the Czech Republic or at any of National Fuel's offices in North America. Neither party shall in any way represent that it is an employer or employee of the other party. In certain circumstances, as specifically authorized by National Fuel, Consultant may act as an agent of Horizon. As an independent contractor, Consultant is not authorized to make any contract, agreement, warranty or representation on behalf of National Fuel, unless specifically authorized to do so by National Fuel.

        9.         PROHIBITION AGAINST SUBCONTRACTING. Consultant shall not subcontract out any of the work to be performed by it under this Agreement without the prior written consent of National Fuel.

        10.         CONTRACTOR INDEMNITY CLAUSE. Consultant will indemnify and hold National Fuel harmless from and against any and all loss, damage, injury, suits, penalties, costs, liabilities and expenses (including, but not limited to, legal expenses) arising out of any claim for loss of or damage to property, including property of National Fuel or Consultant, liability to, injury to, or death of any person, including an employee of National Fuel or Consultant, caused by the negligent, reckless or intentionally tortious acts of Consultant, or his officers, employees, subcontractors or other agents, including but not limited to failure to comply with federal, state and local laws, ordinances and regulations applicable to services to be performed hereunder and all other applicable local, state and federal laws, ordinances and regulations. For purposes of this paragraph only, "National Fuel" shall include National Fuel Gas Company and all of its direct and indirect subsidiaries, along with any officer or employee of these entities.

        11.        CONFIDENTIALITY.

          (a)    In performing his obligations under this Agreement, Consultant shall maintain all information gathered, developed or communicated to the him by Horizon or National Fuel or any of their directors, officers, employees or agents, in connection with the work performed hereunder in a confidential manner, whether or not identified as a trade secret or as proprietary and confidential by Horizon or National Fuel. Consultant agrees that he will not duplicate, distribute, disclose, or otherwise provide such information, or National Fuel's trade secrets or proprietary and confidential information to anyone without prior written authorization of Horizon or National Fuel. The obligations created by this paragraph shall remain in effect indefinitely and shall survive the termination of this Agreement.

          (b)    National Fuel's "trade secrets" and "confidential and proprietary information" include, but are not limited to, any and all memoranda, software, data bases, computer programs, interface systems, pricing and client information, and records pertaining to National Fuel's methods or practices of doing business and marketing its services and products, whether or not developed or prepared by Consultant during the term of his employment with National Fuel or in connection with his providing consulting service to National Fuel. National Fuel's trade secrets and confidential and proprietary information also includes "writing" or "writings" which shall mean and include all works, expressed in words, numbers or other verbal or numerical symbols, regardless of the physical manner in which they are embodied, including, but not limited, to books, articles, manuscripts, memoranda, computer programs, computer software systems, maps, charts, diagrams, technical drawings, manuals, video and audio tape recordings, and photographs, whether or not developed or prepared by Consultant during the term of his employment with National Fuel or in connection with his providing consulting services to National Fuel. National Fuel's trade secrets and confidential and proprietary information shall mean any information or material not generally known to the public (other than by act of Consultant or his representatives in breach of this Agreement) which gives the holder thereof an opportunity to obtain an advantage over competitors without knowledge of such information.

       12.         COMMUNICATIONS. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, to the appropriate party at the addresses specified below or at such other addresses as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee.

(a)    With respect to Consultant:
 
  7491 Monte Verde Lane
  West Palm Beach, Florida 33412
 
(b)    With respect to National Fuel:
 
  P.C. Ackerman, President
  National Fuel Gas Company
  10 Lafayette Square
  Buffalo, NY 14203


        13.         AUDIT. National Fuel shall have the right, upon reasonable notice, to examine and audit all of Consultant billings and all of the backup support data for those billings. Consultant shall make available said information to National Fuel, upon request, at the offices of National Fuel.

        14.         SOCIAL SECURITY AND FAIR LABOR STANDARDS. Consultant covenants and agrees that it is bound by and will observe and perform all duties required under the Social Security Act and the United States Fair Labor Standards Act, and all other applicable local, state, and federal laws, ordinances, and regulations.

        15.         EQUAL EMPLOYMENT OPPORTUNITY. The Equal Opportunity clause in Section 202, Paragraphs 1 through 7 of Executive Order 11246, as amended; and Section 503 of the Rehabilitation Act of 1973, 29 U.S.C.ss.793, as amended; and Section 402 of the Vietnam Era Veterans Readjustment Assistance Act of 1974, 38 U.S.C.ss.ss.42l1-12; and the Americans with Disabilities Act of 1990, 42 U.S.C.ss.12101, et. seq., as amended, relating to equal employment opportunity; and the implementing Rules and Regulations of the Office of Federal Contracts Compliance Programs as set forth in 41 C.F.R. Chapter 60 are incorporated herein by specific reference.

        16.         NON-WAIVER. Failure of either party to act or exercise its rights under this Agreement upon the breach of any of the terms hereof by the other party shall not be construed as a waiver of such a breach or prevent said party from thereafter enforcing strict compliance with any or all of their terms hereof.

        17.         NON-ASSIGNABILITY. The obligations of Consultant hereunder are personal and cannot be assigned or delegated to subcontractors or employees. National Fuel may not assign this Agreement without the express written consent of Consultant. Said consent shall not be unreasonably withheld.

        18.         GOVERNING LAW. This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of laws provisions thereof.

        19.         SEVERABILITY. The provisions of this Agreement shall be severable, and if any clause, sentence, paragraph, provision or other part hereof shall be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair or invalidate the remainder hereof, which remainder shall continue in full force and effect.

        20.         CAPTIONS AND HEADINGS. The captions and headings herein are for convenience only and are not to be construed as a part of this Agreement, nor shall the same be construed as defining or limiting in any way the scope or intent of the provisions hereof.

        21.         ENTIRE AGREEMENT. This Agreement contains and states the entire agreement of the parties hereto and supersedes and cancels all prior written and oral agreements and understandings with respect to the subject matter of this Agreement. Any modification to this Agreement must be agreed upon in writing and signed by both parties.

        22.         BINDING CONSIDERATION. Consultant understands, represents, warrants, and agrees that the consideration provided under this Agreement is in addition to anything of value to which he is entitled.

        23.         BINDING AGREEMENT. This Agreement is and shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs, executors, administrators and assigns. Consultant represents, warrants and agrees that he has read, understands and intends to be bound by this Agreement and its recitals, terms, conditions and representations. Philip C. Ackerman, President of National Fuel, who executes this Agreement on behalf of National Fuel, represents and warrants that he has all necessary power and authority to do so.

           IN WITNESS WHEREOF, the parties hereto have made and entered into this Agreement as of the date it has been executed by both parties.

NATIONAL FUEL GAS COMPANY GERALD T. WEHRLIN
 
By:  /s/  P. C. Ackerman/s/  G. T. Wehrlin
Name:  P. C. Ackerman 
Title:  President 
Date:________________________ Date: __________________________
 EX-12 5 ex12.htm EXHIBIT12-COMPUTATION OF RATIOS Computation of Ratio of Earnings to Fixed Charges 
                                                                                                                                             EXHIBIT 12
                                                                                                 COMPUTATION OF RATIO OF
                                                                                                 EARNINGS TO FIXED CHARGES
                                                                                                        UNAUDITED
                                                                                                 Fiscal Year Ended September 30
                                                          For the Twelve    ----------------------------------------------------------------------------------------------
                                                           Months Ended
                                                           March 31, 2003                2002                 2001                 2000              1999            1998
                                                       -------------------------------------------------------------------------------------------------------------------

EARNINGS:

Income Before Interest Charges and Minority Interest
     in Foreign Subsidiaries (2)                                   $254,325             $222,137             $172,060             $226,696        $202,512       $118,085
Allowance for Borrowed Funds Used in Construction                       485                  446                  438                  424             303            110
Federal Income Tax                                                   63,998                8,637               71,625               22,143          44,583         43,626
State Income Tax                                                     12,788                1,385               21,330               13,067           6,215          6,635
Deferred Inc. Taxes - Net (3)                                        16,650               62,018              (55,844)              41,858          14,030        (26,237)
Investment Tax Credit - Net                                            (704)                (702)                (353)              (1,051)           (729)          (663)
Rentals (1)                                                           4,846                4,906                4,893                4,561           4,281          4,672
                                                       -------------------------------------------------------------------------------------------------------------------

                                                                   $352,388             $298,827             $214,149             $307,698        $271,195       $146,228
                                                       ===================================================================================================================

FIXED CHARGES:

Interest & Amortization of Premium and
   Discount of Funded Debt                                          $92,015              $90,543              $81,851              $67,195         $65,402        $53,154
Interest on Commercial Paper and
   Short-Term Notes Payable                                           4,119                6,218               21,733               23,840          17,319         13,605
Other Interest (2)                                                    7,162                7,410                2,072                7,495           2,835         16,919
Rentals (1)                                                           4,846                4,906                4,893                4,561           4,281          4,672
                                                       -------------------------------------------------------------------------------------------------------------------

                                                                   $108,142             $109,077             $110,549             $103,091         $89,837        $88,350
                                                       ===================================================================================================================

RATIO OF EARNINGS TO FIXED CHARGES                                     3.26                 2.74                 1.94                 2.98            3.02           1.66


Notes:
   (1) Rentals shown above represent the portion of all rentals (other than delay rentals) deemed representative of the interest factor.
   (2) The twelve months ended March 31, 2003 and fiscal 2002, 2001, 2000, 1999, and 1998 reflect the reclassification of $1,907, $1,927,
        $1,927, $1,979, $1,927 and $1,839 representing the loss on reacquired debt amortized during each period, from Other Interest Charges
        to Operation Expense.
   (3) Deferred Income Taxes - Net for the twelve months ended March 31, 2003 and fiscal 1998 excludes the cumulative effect of change in accounting.
EX-99 6 ex99-1.htm EXHIBIT99-1-STATEMENTS OF INCOME Consolidated Statement of Income 
Exhibit 99.1


                                                                              NATIONAL FUEL GAS
                                                                      CONSOLIDATED STATEMENTS OF INCOME
                                                                                 (UNAUDITED)


                                                                             Twelve Months Ended
                                                                                 March 31
                                                       ----------------------------------------------------------------

                                                                        2003                       2002
                                                                           (Thousands of Dollars)

INCOME
Operating Revenues                                                      $ 1,883,504              $ 1,512,672
                                                                 -------------------          ---------------

Operating Expenses
             Purchased Gas                                                  817,406                  512,142
             Fuel Used in Heat and Electric Generation                       60,238                   50,290
             Operation and Maintenance                                      383,534                  379,851
             Property, Franchise and Other Taxes                             78,195                   72,118
             Depreciation, Depletion and Amortization                       188,418                  180,973
             Impairment of Oil and Gas Producing Properties                       -                  180,781
             Income Taxes - Net                                              93,429                    7,747
                                                                 -------------------          ---------------
                                                                          1,621,220                1,383,902
                                                                 -------------------          ---------------

Operating Income                                                            262,284                  128,770
Operations of Unconsolidated Subsidiaries:
       Income (Loss)                                                          1,002                    1,072
       Impairment of Investment in Partnership                              (15,167)                       -
                                                                 -------------------          ---------------
                                                                            (14,165)                   1,072
                                                                 -------------------          ---------------
Other Income                                                                  8,111                    6,945
                                                                 -------------------          ---------------
Income Before Interest Charges and Minority
       Interest in Foreign Subsidiaries                                     256,230                  136,787
                                                                 -------------------          ---------------

Interest Charges
             Interest on Long-Term Debt                                      92,015                   86,872
             Other Interest                                                  12,702                   16,450
                                                                 -------------------          ---------------
                                                                            104,717                  103,322
                                                                 -------------------          ---------------

Minority Interest in Foreign Subsidiaries                                    (1,490)                  (1,095)
                                                                 -------------------          ---------------

Income Before Cumulative Effect of Changes in Accounting                    150,023                   32,370
Cumulative Effect of Changes in Accounting                                   (8,892)                       -
                                                                 -------------------          ---------------

Net Income Available for Common Stock                                  $    141,131              $    32,370
                                                                 ===================          ===============

Earnings Per Common Share:
     Basic:
             Income Before Cumulative Effect of
              Changes in Accounting                                    $       1.87              $      0.41
             Cumulative Effect of Changes in Accounting                       (0.11)                       -
                                                                 -------------------         ----------------

             Net Income Available for Common Stock                     $       1.76              $      0.41
                                                                 ===================          ===============
     Diluted:
             Income Before Cumulative Effect of
              Changes in Accounting                                    $       1.86              $      0.40
             Cumulative Effect of Changes in Accounting                       (0.11)                       -
                                                                 -------------------          ---------------

             Net Income Available for Common Stock                     $       1.75              $      0.40
                                                                 ===================          ===============

Weighted Average Common Shares Outstanding:
             Used in Basic Calculation                                   80,284,422               79,405,595
                                                                 ===================          ===============
             Used in Diluted Calculation                                 80,730,400               80,705,746
                                                                 ===================          ===============
EX-99 7 ex99-2.htm EXHIBIT99-2-SARBANES OXLEY ACT Statement Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

Exhibit 99.2

NATIONAL FUEL GAS COMPANY

Statement Furnished Pursuant to Section 906
of Sarbanes - Oxley Act of 2002

              Each of the undersigned, PHILIP. C. ACKERMAN, the Chairman of the Board, President and Chief Executive Officer, and JOSEPH P. PAWLOWSKI, the Treasurer and Principal Financial Officer of NATIONAL FUEL GAS COMPANY (the "Company"), DOES HEREBY CERTIFY that:

  1. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (the "Report") fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and

  2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

              IN WITNESS WHEREOF, each of the undersigned has executed this statement this 15th day of May, 2003.

                                                                  /s/  Philip C. Ackerman
                                                                  -----------------------
                                                                  Chairman of the Board, President and
                                                                  Chief Executive Officer




                                                                  /s/  Joseph P. Pawlowski
                                                                  ------------------------
                                                                  Treasurer and Principal Financial Officer

              A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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