-----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, KNI2BpzYvOyTZGKXyoQL10c/iVhQGOee/gLvRUir7PdFvq0bDwDstdnjYl3Pn7nJ o53vOxL9HaPZaWyoUMK2bg== 0000070145-99-000070.txt : 19990816 0000070145-99-000070.hdr.sgml : 19990816 ACCESSION NUMBER: 0000070145-99-000070 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: SEC FILE NUMBER: 001-03880 FILM NUMBER: 99687274 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 QUARTERLY REPORT FOR NATIONAL FUEL GAS - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1999 ------------- Commission File Number 1-3880 ----------------------------- NATIONAL FUEL GAS COMPANY (Exact name of registrant as specified in its charter) New Jersey 13-1086010 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 Lafayette Square Buffalo, New York 14203 ----------------- ----- (Address of principal executive offices) (Zip Code) (716) 857-6980 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $1 par value, outstanding at July 31, 1999: 38,798,310 shares. - -------------------------------------------------------------------------------- Company or Group of Companies for which Report is Filed: - -------------------------------------------------------- NATIONAL FUEL GAS COMPANY (Company or Registrant) SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution Corporation) National Fuel Gas Supply Corporation (Supply Corporation) Seneca Resources Corporation (Seneca) Highland Land & Minerals, Inc. (Highland) Leidy Hub, Inc. (Leidy Hub) Data-Track Account Services, Inc. (Data-Track) National Fuel Resources, Inc. (NFR) Horizon Energy Development, Inc. (Horizon) Upstate Energy, Inc. (Upstate) Niagara Independence Marketing Company (NIM) Seneca Independence Pipeline Company (SIP) Utility Constructors, Inc. (UCI) NFR Power, Inc. INDEX Part I. Financial Information Page ----------------------------- ---- Item 1. Financial Statements a. Consolidated Statements of Income and Earnings Reinvested in the Business - Three Months and Nine Months Ended June 30, 1999 and 1998 4 - 5 b. Consolidated Balance Sheets - June 30, 1999 and September 30, 1998 6 - 7 c. Consolidated Statements of Cash Flows - Nine Months Ended June 30, 1999 and 1998 8 d. Consolidated Statements of Comprehensive Income - Three Months and Nine Months Ended June 30, 1999 and 1998 9 e. Notes to Consolidated Financial Statements 10 - 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 - 40 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 Part II. Other Information -------------------------- Item 1. Legal Proceedings * Item 2. Changes in Securities 40 Item 3. Defaults Upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders * Item 5. Other Information 40 - 41 Item 6. Exhibits and Reports on Form 8-K 41 Signature 42 * The Company has nothing to report under this item. Reference to "the Company" in this report means the Registrant or the Registrant and its subsidiaries collectively, as appropriate in the context of the disclosure. All references to a certain year in this report are to the Company's fiscal year ended September 30 of that year, unless otherwise noted. This Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements should be read with the cautionary statements included in this Form 10-Q at Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), under the heading "Safe Harbor for Forward-Looking Statements." Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those statements that are designated with a "1" following the statement, as well as those statements that are identified by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions. Part I. - Financial Information - ------------------------------- Item 1. Financial Statements -------------------- National Fuel Gas Company ------------------------- Consolidated Statements of Income and Earnings ---------------------------------------------- Reinvested in the Business -------------------------- (Unaudited) ----------- Three Months Ended June 30, ------------------ 1999 1998 ---- ---- (Thousands of Dollars, Except Per Common Share Amounts) INCOME Operating Revenues $248,658 $243,130 -------- -------- Operating Expenses Purchased Gas 64,449 65,088 Fuel Used in Heat and Electric Generation 9,530 11,650 Operation 76,163 62,614 Maintenance 5,753 6,440 Property, Franchise and Other Taxes 20,817 20,716 Depreciation, Depletion and Amortization 32,880 31,019 Income Taxes - Net 7,747 11,877 -------- -------- 217,339 209,404 -------- -------- Operating Income 31,319 33,726 Other Income 1,584 5,651 -------- -------- Income Before Interest Charges and Minority Interest in Foreign Subsidiaries 32,903 39,377 -------- -------- Interest Charges Interest on Long-Term Debt 16,180 14,636 Other Interest 5,231 5,427 -------- -------- 21,411 20,063 -------- -------- Minority Interest in Foreign Subsidiaries 348 (207) -------- -------- Net Income Available for Common Stock 11,840 19,107 EARNINGS REINVESTED IN THE BUSINESS Balance at April 1 492,233 446,565 -------- -------- 504,073 465,672 Dividends on Common Stock (1999 - $.465; 1998 - $.45) 17,974 17,224 -------- -------- Balance at June 30 $486,099 $448,448 ======== ======== Earnings Per Common Share: Basic $ 0.31 $ 0.50 ====== ====== Diluted $ 0.30 $ 0.49 ====== ====== Weighted Average Common Shares Outstanding: Used in Basic Calculation 38,662,728 38,358,065 ========== ========== Used In Diluted Calculation 39,000,553 38,719,074 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ---------------------------- National Fuel Gas Company ------------------------- Consolidated Statements of Income and Earnings ---------------------------------------------- Reinvested in the Business -------------------------- (Unaudited) ----------- Nine Months Ended June 30, ------------------ 1999 1998 ---- ---- (Thousands of Dollars, Except Per Common Share Amounts) INCOME Operating Revenues $1,072,484 $1,070,592 ---------- ---------- Operating Expenses Purchased Gas 377,273 418,228 Fuel Used in Heat and Electric Generation 47,311 30,160 Operation 228,586 214,454 Maintenance 17,400 19,347 Property, Franchise and Other Taxes 73,504 75,607 Depreciation, Depletion and Amortization 96,455 88,936 Impairment of Oil and Gas Producing Properties - 128,996 Income Taxes - Net 60,327 25,085 ---------- ---------- 900,856 1,000,813 ---------- ---------- Operating Income 171,628 69,779 Other Income 7,901 32,413 ---------- ---------- Income Before Interest Charges and Minority Interest in Foreign Subsidiaries 179,529 102,192 ---------- ---------- Interest Charges Interest on Long-Term Debt 49,630 37,517 Other Interest 16,755 26,260 ---------- ---------- 66,385 63,777 ---------- ---------- Minority Interest in Foreign Subsidiaries (2,540) (3,036) ---------- ---------- Income Before Cumulative Effect 110,604 35,379 Cumulative Effect of Change in Accounting for Depletion - (9,116) ---------- ---------- Net Income Available for Common Stock 110,604 26,263 EARNINGS REINVESTED IN THE BUSINESS Balance at October 1 428,112 472,595 ---------- ---------- 538,716 498,858 Dividends on Common Stock (1999 - $1.365; 1998 - $1.32) 52,617 50,410 ---------- ---------- Balance at June 30 $ 486,099 $ 448,448 ========== ========== Basic Earnings Per Common Share: Income Before Cumulative Effect $2.86 $ 0.93 Cumulative Effect of Change in Accounting for Depletion - (0.24) ----- ------ Net Income Available for Common Stock $2.86 $ 0.69 ===== ====== Diluted Earnings Per Common Share: Income Before Cumulative Effect $2.84 $ 0.92 Cumulative Effect of Change in Accounting for Depletion - (0.24) ----- ------ Net Income Available for Common Stock $2.84 $ 0.68 ===== ====== Weighted Average Common Shares Outstanding: Used in Basic Calculation 38,619,120 38,272,907 ========== ========== Used in Diluted Calculation 38,969,822 38,688,564 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ---------------------------- National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- June 30, 1999 September 30, (Unaudited) 1998 ----------- ------------- (Thousands of Dollars) ASSETS Property, Plant and Equipment $3,330,839 $3,186,853 Less - Accumulated Depreciation, Depletion and Amortization 1,003,818 938,716 ---------- ---------- 2,327,021 2,248,137 ---------- ---------- Current Assets Cash and Temporary Cash Investments 35,848 30,437 Receivables - Net 139,303 82,336 Unbilled Utility Revenue 13,023 15,403 Gas Stored Underground 20,737 31,661 Materials and Supplies - at average cost 23,069 24,609 Unrecovered Purchased Gas Costs - 6,316 Prepayments 26,026 19,755 ---------- ---------- 258,006 210,517 ---------- ---------- Other Assets Recoverable Future Taxes 88,302 88,303 Unamortized Debt Expense 21,771 22,295 Other Regulatory Assets 40,915 41,735 Deferred Charges 13,736 8,619 Other 77,413 64,853 ---------- ---------- 242,137 225,805 ---------- ---------- $2,827,164 $2,684,459 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ---------------------------- National Fuel Gas Company ------------------------- Consolidated Balance Sheets --------------------------- June 30, 1999 September 30, (Unaudited) 1998 ----------- ------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES Capitalization: Common Stock Equity Common Stock, $1 Par Value Authorized - 200,000,000 Shares; Issued and Outstanding - 38,750,428 Shares and 38,468,795 Shares, Respectively $ 38,751 $ 38,469 Paid in Capital 428,273 416,239 Earnings Reinvested in the Business 486,099 428,112 Cumulative Translation Adjustment (9,454) 7,265 ---------- ---------- Total Common Stock Equity 943,669 890,085 Long-Term Debt, Net of Current Portion 726,272 693,021 ---------- ---------- Total Capitalization 1,669,941 1,583,106 ---------- ---------- Minority Interest in Foreign Subsidiaries 24,346 25,479 ---------- ---------- Current and Accrued Liabilities Notes Payable to Banks and Commercial Paper 351,000 326,300 Current Portion of Long-Term Debt 159,696 216,929 Accounts Payable 44,966 59,933 Amounts Payable to Customers 21,484 5,781 Other Accruals and Current Liabilities 125,666 80,480 ---------- ---------- 702,812 689,423 ---------- ---------- Deferred Credits Accumulated Deferred Income Taxes 269,855 258,222 Taxes Refundable to Customers 18,404 18,404 Unamortized Investment Tax Credit 11,782 11,372 Other Deferred Credits 130,024 98,453 ---------- ---------- 430,065 386,451 ---------- ---------- Commitments and Contingencies - - ---------- ---------- $2,827,164 $2,684,459 ========== ========== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ---------------------------- National Fuel Gas Company ------------------------- Consolidated Statements of Cash Flows ------------------------------------- (Unaudited) ----------- Nine Months Ended June 30, ------------------ 1999 1998 ---- ---- (Thousands of Dollars) OPERATING ACTIVITIES Net Income Available for Common Stock $110,604 $ 26,263 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Cumulative Effect of Change in Accounting for Depletion - 9,116 Impairment of Oil and Gas Producing Properties - 128,996 Depreciation, Depletion and Amortization 96,455 88,936 Deferred Income Taxes 12,912 (44,829) Minority Interest in Foreign Subsidiaries 2,540 3,036 Other 5,597 (215) Change in: Receivables and Unbilled Utility Revenue (56,195) (6,357) Gas Stored Underground and Materials and Supplies 11,659 14,422 Unrecovered Purchased Gas Costs 6,316 - Prepayments (6,284) (8,930) Accounts Payable (13,234) (14,237) Amounts Payable to Customers 15,703 5,003 Other Accruals and Current Liabilities 46,637 40,088 Other Assets (12,203) (11,470) Other Liabilities 31,576 12,802 -------- -------- Net Cash Provided by Operating Activities 252,083 242,624 -------- -------- INVESTING ACTIVITIES Capital Expenditures (209,918) (315,223) Investment in Subsidiaries, Net of Cash Acquired - (111,179) Other (114) 2,065 -------- -------- Net Cash Used in Investing Activities (210,032) (424,337) -------- -------- FINANCING ACTIVITIES Change in Notes Payable to Banks and Commercial Paper 24,700 105,187 Net Proceeds from Issuance of Long-Term Debt 98,736 198,750 Reduction of Long-Term Debt (115,365) (53,048) Dividends Paid on Common Stock (51,904) (49,734) Proceeds from Issuance of Common Stock 7,921 5,429 -------- -------- Net Cash Provided by (Used in) Financing Activities (35,912) 206,584 --------- -------- Effect of Exchange Rates on Cash (728) - --------- -------- Net Increase in Cash and Temporary Cash Investments 5,411 24,871 Cash and Temporary Cash Investments at October 1 30,437 14,039 -------- -------- Cash and Temporary Cash Investments at June 30 $ 35,848 $ 38,910 ======== ======== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ---------------------------- National Fuel Gas Company ------------------------- Consolidated Statements of Comprehensive Income ----------------------------------------------- (Unaudited) ----------- Three Months Ended June 30, ------------------ 1999 1998 ---- ---- (Thousands of Dollars) Net Income Available for Common Stock $ 11,840 $ 19,107 Other Comprehensive Income, Net of Tax: Cumulative Translation Adjustment 2,326 116 -------- -------- Comprehensive Income Available for Common Stock $ 14,166 $ 19,223 ======== ======== Nine Months Ended June 30, ----------------- 1999 1998 ---- ---- (Thousands of Dollars) Net Income Available for Common Stock $110,604 $ 26,263 Other Comprehensive Income (Loss), Net of Tax: Cumulative Translation Adjustment (16,719) 1,026 -------- -------- Comprehensive Income Available for Common Stock $ 93,885 $ 27,289 ======== ======== See Notes to Consolidated Financial Statements Item 1. Financial Statements (Cont.) ---------------------------- National Fuel Gas Company ------------------------- Notes to Consolidated Financial Statements ------------------------------------------ Note 1 - Summary of Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. The equity method is used to account for the Company's investment in minority owned entities. All significant intercompany balances and transactions have been eliminated where appropriate. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as 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, 1998, 1997 and 1996, that are included in the Company's combined Annual Report to Shareholders/Form 10-K for 1998. The 1999 consolidated financial statements will be examined by the Company's independent accountants after the end of the year. The earnings for the nine months ended June 30, 1999 should not be taken as a prediction of earnings for the entire year ending September 30, 1999. Most of the Company's business is seasonal in nature and is influenced by weather conditions. Because of the seasonal nature of the Company's heating business, earnings during the winter months normally represent a substantial part of earnings for the entire year. The impact of abnormal weather on earnings during the heating season is partially reduced by the operation of a weather normalization clause included in Distribution Corporation's New York tariff. The weather normalization clause is effective for October through May billings. Distribution Corporation's tariff for its Pennsylvania jurisdiction does not include a weather normalization clause. In addition, Supply Corporation's straight fixed-variable rate design, which allows for recovery of substantially all fixed costs in the demand or reservation charge, reduces the earnings impact of weather fluctuations. Cumulative Effect of Change in Accounting. Effective October 1, 1997, Seneca changed its method of depletion for oil and gas properties from the gross revenue method to the units of production method. The units of production method was applied retroactively to prior years to determine the cumulative effect through October 1, 1997. This cumulative effect reduced earnings for 1998 by $9.1 million, net of income tax. Item 1. Financial Statements (Cont.) ---------------------------- Oil and Gas Exploration and Development Costs. Oil and gas property acquisition, exploration and development costs are capitalized under the full-cost method of accounting as prescribed by the Securities and Exchange Commission (SEC). Due to significant declines in oil prices in 1998, Seneca's capitalized costs under the full-cost method of accounting exceeded the full-cost ceiling at March 31, 1998. Accordingly, Seneca was required to recognize an impairment of its oil and gas producing properties in the quarter ended March 31, 1998. This charge amounted to $129.0 million (pretax) and reduced net income for the nine months ended June 30, 1998 by $79.1 million ($2.07 per common share, basic; $2.04 per common share, diluted). Consolidated Statements of Cash Flows. For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of generally three months or less to be cash equivalents. Cash interest payments during the nine months ended June 30, 1999 and 1998, amounted to $64.1 million and $38.0 million, respectively. Income taxes paid during the nine months ended June 30, 1999 and 1998 amounted to $30.4 million and $55.4 million, respectively. During the nine months ended June 30, 1999, the Company received a $1.0 million refund of taxes and interest from the Internal Revenue Service (IRS) stemming from the final settlement of the audits of years 1977-1994. During the nine months ended June 30, 1998, the Company received a $22.4 million refund of taxes and interest from the IRS stemming from the aforementioned settlement. Reclassification. Certain prior year amounts have been reclassified to conform with current year presentation. Earnings per Common Share. Basic earnings per common share is computed by dividing income available for common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Such additional shares are added to the denominator of the basic earnings per common share calculation in order to calculate diluted earnings per common share. The only potentially dilutive securities the Company has outstanding are stock options. The diluted weighted average shares outstanding shown on the Consolidated Statement of Income reflects the potential dilution as a result of these stock options. Such dilution was determined using the Treasury Stock Method as required by Statement of Financial Accounting Standards No. 128, "Earnings per Share." Item 1. Financial Statements (Cont.) ---------------------------- Note 2 - Income Taxes The components of federal and state income taxes included in the Consolidated Statement of Income are as follows (in thousands): Nine Months Ended June 30, ----------------- 1999 1998 ---- ---- Operating Expenses: Current Income Taxes - Federal $35,940 $59,208 State 6,050 6,814 Deferred Income Taxes - Federal 13,585 (41,132) State 1,706 (3,697) Foreign Income Taxes 3,046 3,892 ------- ------- 60,327 25,085 Other Income: Deferred Investment Tax Credit (499) (457) Minority Interest in Foreign Subsidiaries (705) (1,576) Cumulative Effect of Change in Accounting - (5,737) ------- ------- Total Income Taxes $59,123 $17,315 ======= ======= Total income taxes as reported differ from the amounts that were computed by applying the federal income tax rate to income before income taxes. The following is a reconciliation of this difference (in thousands): Nine Months Ended June 30, ----------------- 1999 1998 ---- ---- Net income available for common stock $110,604 $ 26,263 Total income taxes 59,123 17,315 -------- -------- Income before income taxes $169,727 $ 43,578 ======== ======== Income tax expense, computed at federal statutory rate of 35% $ 59,404 $ 15,252 Increase (reduction) in taxes resulting from: State income taxes 5,045 1,488 Depreciation 1,492 1,738 Prior years tax adjustment (1,329) 3,021 Foreign tax in excess of (less than) federal statutory rate (2,620) 10 Miscellaneous (2,869) (4,194) --------- -------- Total Income Taxes $ 59,123 $ 17,315 ======== ======== Item 1. Financial Statements (Cont.) ---------------------------- Significant components of the Company's deferred tax liabilities (assets) were as follows (in thousands): At June 30, 1999 At September 30, 1998 ---------------- --------------------- Deferred Tax Liabilities: Abandonments $ 18,951 $ 15,545 Excess of tax over book depreciation 140,051 132,138 Exploration and intangible well drilling costs 163,302 147,795 Other 41,855 42,109 -------- -------- Total Deferred Tax Liabilities 364,159 337,587 -------- -------- Deferred Tax Assets: Overheads capitalized for tax purposes (24,793) (22,484) Other (69,511) (56,881) -------- -------- Total Deferred Tax Assets (94,304) (79,365) -------- -------- Total Net Deferred Income Taxes $269,855 $258,222 ======== ======== The primary issues related to Internal Revenue Service audits of the Company for the years 1977 - 1994 were settled during March 1998 with the settlement of remaining issues related to these same audits occurring in December 1998. Net income for the nine months ended June 30, 1999 and 1998 were increased by approximately $3.9 and $5.0 million, respectively, as a result of interest, net of tax and other adjustments, related to these settlements. Note 3 - Capitalization Common Stock. During the nine months ended June 30, 1999, the Company issued 94,255 shares of common stock under the Company's section 401(k) Plans, 88,446 shares to participants in the Company's Dividend Reinvestment Plan and 26,399 shares to participants in the Company's Customer Stock Purchase Plan. Additionally, 72,533 shares of common stock were issued under the Company's stock option and award plans, including 6,580 shares of restricted stock. On December 10, 1998, 615,500 stock options were granted at an exercise price of $46.0625 per share. Shareholder Rights Plan. The Company's shareholder rights plan (the "Plan") was adopted in 1996, and is described in the Company's combined Annual Report to Shareholders/Form 10-K for the year ended September 30, 1998 at Note D (Capitalization) to the financial statements which are found in Item 8. The Plan was amended effective April 30, 1999, and is now embodied in an Amended and Restated Rights Agreement, which was included as Exhibit 10.2 to the Company's Form 10-Q for the period ended March 31, 1999. Item 1. Financial Statements (Cont.) ---------------------------- Long-Term Debt. In February 1999, the Company issued $100.0 million of 6.0% medium-term notes due to mature in March 2009. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to $98.7 million. The proceeds of this debt issuance were used to redeem $100.0 million of 5.58% medium-term notes which matured in March 1999. In July 1999, the Company issued $100.0 million of 6.82% medium-term notes due to mature in August 2004. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to $99.5 million. The proceeds of this debt issuance were used to redeem $50 million of 7.25% medium-term notes which matured in July 1999 and to complete the redemption of HarCor's 14.875% Senior Secured Notes, which is discussed below. In March 1999, the Company redeemed $10.3 million of HarCor Energy, Inc.'s (HarCor) 14.875% Senior Secured Notes through an open market purchase. HarCor is a wholly-owned subsidiary of Seneca. The total cost of this redemption was $11.9 million, which included a redemption price of 110% and accrued interest. In July 1999, the Company redeemed the remaining $43.5 million of HarCor's 14.875% Senior Secured Notes. The total cost of this redemption was $51.0 million, which included a redemption price of 110% and accrued interest. As noted above, this redemption was financed primarily by proceeds from the Company's July 1999 issuance of 6.82% medium-term notes. The redemption premiums were accrued on the opening balance sheet when HarCor was acquired in 1998. Note 4 - Derivative Financial Instruments Seneca has entered into certain price swap agreements and options to manage a portion of the market risk associated with fluctuations in the price of natural gas and crude oil, in an effort to provide more stability to its operating results. These agreements and options are not held for trading purposes. The price swap agreements call for Seneca to receive monthly payments from (or make payment to) other parties based upon the difference between a fixed and a variable price as specified by the agreement. The variable price is either a crude oil price quoted on the New York Mercantile Exchange or a quoted natural gas price in "Inside FERC." These variable prices are highly correlated with the market prices received by Seneca for its natural gas and crude oil production. At June 30, 1999, Seneca had natural gas price swap agreements covering a notional amount of 17.9 Bcf extending through 2002 at a weighted average fixed rate of $2.45 per Mcf. Seneca also had crude oil price swap agreements covering a notional amount of 1,550,000 bbls extending through 2001 at a fixed rate of $17.76 per bbl. Gains or losses from these price swap agreements are accrued in Operating Revenues on the Consolidated Statement of Income at the contract settlement dates. Seneca recognized gains of $0.3 million and $6.2 million related to its price swap agreements during the quarter and nine months ended June 30, 1999, respectively. During the quarter ended June 30, 1998, Seneca recognized gains of $0.9 million related to its price swap agreements. For the nine months ended June 30, 1998, Seneca recognized losses of $6.9 million related to its price swap agreements. The unrealized net loss on these natural gas and crude oil price swap agreements was $2.4 million at June 30, 1999. Item 1. Financial Statements (Cont.) ---------------------------- At June 30, 1999, Seneca had the following options outstanding: Weighted Average Type of Option Notional Amount Strike Price - -------------- --------------- ---------------- Written Call Options* 13.9 Bcf or $2.62/Mcf or 732,000 bbls $18.00/bbl Written Call Option 19.1 Bcf $2.65/Mcf Written Put Option 1,100,000 bbls $12.50/bbl Purchased Call Option 1,832,000 bbls $20.00/bbl *The counterparty has a choice between a natural gas call option and a crude oil call option, depending on whichever option has a greater value to the counterparty. Seneca's call and put options are being marked-to-market on a quarterly basis with gains or losses recorded in Operating Revenues on the Consolidated Statement of Income. The mark-to-market adjustment for the quarter and nine months ended June 30, 1999 was a loss of $1.1 million, which was recorded in Operating Revenues on the Consolidated Statement of Income. The fair value of the call and put options at June 30, 1999 was a net liability of $3.4 million. None of the options were exercised during the quarter ended June 30, 1999. For the nine months ended June 30, 1999, a portion of the written put options were exercised, resulting in a minimal payment of $28,000 to the counterparty. The Company is exposed to credit risk on the price swap agreements that Seneca has entered into as well as on the call options that Seneca has purchased. Credit risk relates to the risk of loss that the Company would incur as a result of nonperformance by Seneca's counterparties of their contractual obligations pursuant to the price swap agreements. To mitigate such credit risk, before entering into a price swap agreement with a new counterparty, management performs a credit check and prepares a report indicating the results of the credit investigation. This report must be approved by Seneca's board of directors after which a Master Swap Agreement is executed between Seneca and the counterparty. On an ongoing basis, periodic reports are prepared by management to monitor counterparty credit exposure. In the case of the call options that Seneca purchased, the counterparty selected was one in which Seneca currently has a Master Swap Agreement, meaning that a credit investigation had been completed and continues to be monitored. Considering the procedures in place, the Company does not anticipate any material impact to its financial position, results of operations, or cash flows as a result of nonperformance by counterparties. NFR utilizes exchange-traded futures and options to manage a portion of the market risk associated with fluctuations in the price of natural gas. Such futures and options are not held for trading purposes. At June 30, 1999, NFR had natural gas futures contracts related to gas purchase and sale commitments covering 7.2 Bcf of gas on a net basis extending through 2000 at a weighted average contract price of $2.40 per Mcf. NFR also had sold natural gas options related to gas purchase and sale commitments covering 3.3 Bcf of gas on a net basis extending through 2000 at a weighted average strike price of $2.68 per Mcf. Gains or losses from natural gas futures are recorded in Other Deferred Credits on the Consolidated Balance Sheet until the hedged commodity transaction occurs, at which point they are reflected in operating revenues in the Consolidated Statement of Income. At June 30, 1999, NFR had deferred gains of $3.0 million related to these futures contracts and options. NFR recognized net losses of $1.1 million related to futures contracts and options Item 1. Financial Statements (Cont.) ---------------------------- during the quarter ended June 30, 1999. For the quarter ended June 30, 1998, NFR recognized a minimal gain. NFR recognized net losses of $6.5 million related to futures contracts and options for the nine months ended June 30, 1999. For the nine months ended June 30, 1998, NFR recognized net gains of $1.3 million. Since these futures contracts and options qualify and have been designated as hedges these net losses and gains were substantially offset by the related commodity transaction. Note 5 - Commitments and Contingencies Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations in order to identify potential environmental exposures and assure compliance with regulatory policies and procedures. It is the Company's policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. Distribution Corporation has estimated its clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $9.1 million to $10.1 million. At June 30, 1999, Distribution Corporation has recorded the minimum liability of $9.1 million. The Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company. In New York and Pennsylvania, Distribution Corporation is recovering site investigation and remediation costs in rates. Accordingly, the Consolidated Balance Sheet at June 30, 1999 includes related regulatory assets in the amount of approximately $11.7 million. The Company, in its international operations in the Czech Republic, is in the process of constructing new fluidized-bed boilers at the district heating and power generation plant of Prvni severozapadni teplarenska, a.s. (PSZT) in order to comply with certain clean air standards mandated by the Czech Republic government. Capital expenditures related to this construction incurred by PSZT for the nine months ended June 30, 1999 were approximately $20.4 million. An additional $12.6 million is budgeted for this construction for the remainder of 1999. For further discussion, refer to Note H - Commitments and Contingencies under the heading "Environmental Matters" in Item 8 of the Company's 1998 Form 10-K. Other. The Company is involved in litigation arising in the normal course of business. The Company is involved in regulatory matters arising in the normal course of business that involve rate base, cost of service and purchased gas cost issues. While the resolution of such litigation or regulatory matters could have a material effect on earnings and cash flows, none of this litigation, and none of these regulatory matters, is expected to have a material adverse effect on the financial condition of the Company at this time. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- Earnings. The Company's earnings were $11.8 million, or $0.31 per common share ($0.30 per common share on a diluted basis), for the third quarter ended June 30, 1999. This compares with earnings of $19.1 million, or $0.50 per common share ($0.49 per common share on a diluted basis), for the quarter ended June 30, 1998. The Company's earnings were $110.6 million, or $2.86 per common share ($2.84 per common share on a diluted basis), for the nine months ended June 30, 1999. This compares with earnings of $26.3 million, or $0.69 per common share ($0.68 per common share on a diluted basis), for the nine months ended June 30, 1998. Earnings for the nine months ended June 30, 1998 included a non-cash impairment of the Exploration and Production segment's oil and gas assets and a non-cash cumulative effect of a change in accounting. Last year's accounting change, which was a change in depletion methods for the Exploration and Production segment's oil and gas assets, had a negative $9.1 million (after-tax), or $0.24 per common share, non-cash cumulative effect through 1997, which was recorded in the first quarter of 1998. Excluding these two non-cash special items, earnings for the nine months ended June 30, 1998 would have been $114.5 million, or $3.00 per common share ($2.96 per common share on a diluted basis). Discussion of Quarter Results. Except for the Other Nonregulated segment, which showed higher earnings in its timber and natural gas marketing operations, earnings decreased in all other segments for the quarter as compared with the prior year's quarter. The rebound in the market price of the Company's stock during the quarter ended June 30, 1999 (the price increased from $39.25 per common share on March 31, 1999 to $48.50 per common share on June 30, 1999), while benefiting shareholders, carried with it the required recognition of $5.9 million of expense for stock appreciation rights (SARs). This expense is spread across all segments. In the prior year's quarter, the Company's stock price decreased from $47.00 per common share on March 31, 1998 to $43.56 per common share at June 30, 1998. This resulted in the reduction of the SAR liability and related expense by $3.2 million in the quarter ended June 30, 1998. For the nine months ended June 30, 1999, the expense related to SARs of $1.5 million was not as significant as in the quarter since it reflects the stock price increase from September 30, 1998 ($47.00 per common share) to the price at June 30, 1999 ($48.50 per common share). For the nine months ended June 30, 1998, there was a minimal reduction of the SAR liability and related expense since the stock price at September 30, 1997 ($44.00 per common share) was close to the price at June 30, 1998 ($43.56 per common share). In the Pipeline and Storage and Utility segments, earnings were down because of the SARs expense, as discussed above, and because of $1.6 million of expense associated with an early retirement offer effective in May 1999. In addition, a buyout of a firm transportation agreement by a customer in the amount of $2.5 million made a positive contribution to the Pipeline and Storage segment's earnings in the third quarter of last year. Had it not been for the early retirement charge and the SARs, the Utility segment would have shown an increase in earnings in spite of a rate reduction in New York that became effective October 1, 1998 and a reduction in revenues due to the setting up of a special reserve to be applied against incremental costs resulting from the New York Public Service Commission's (PSC) gas restructuring efforts. Weather that was colder than the prior year's quarter and lower operation and maintenance (O&M) expenses (exclusive of the SARs and early retirement) benefited the Utility's earnings. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- The International segment's decreased earnings reflect its Czech Republic operations where warmer weather and lower margins on heat and electric sales negatively impacted earnings. In addition, the prior year's quarter included a gain of approximately $1.2 million associated with U.S. dollar denominated debt. In the Exploration and Production segment, earnings were down slightly. Higher interest expense associated with the acquisitions made in the prior year impacted earnings this quarter. Partly offsetting this was an increase in oil prices, after hedging, which were higher than the prior year's quarter by $2.80 barrel (a 25% increase) and an increase in both oil and gas production. Discussion of Nine-Months Results. Excluding both the non-cash impairment and the cumulative effect of a change in accounting from the prior year's period, the decrease in earnings for the nine months ended June 30, 1999 as compared with the prior year's period was the result of lower earnings in the Exploration and Production and Pipeline and Storage segments offset in part by higher earnings in the Utility, International and Other Nonregulated segments. In the Exploration and Production segment, earnings are down primarily because of this segment's portion of interest income recognized last year related to the settlement of the primary issues of IRS audits of years 1977-1994. In addition, earnings year-to-date reflect low oil and gas prices experienced through most of the first part of this year and higher interest, as discussed above. In the Pipeline and Storage segment, lower earnings resulted from the expense associated with early retirement offers effective in December 1998 and May 1999, the previously mentioned buyout of a firm transportation agreement by a customer in the prior year, and the impact of the above noted settlement of IRS audits, which had a greater positive effect on earnings of this segment in the prior year-to-date period. Partly offsetting these items, the prior year's results reflect recognition of several reserves related to proposed pipeline projects and a storage loss that did not recur this year. In the Utility segment, earnings were up because the settlement of the primary issues of IRS audits had a negative impact on earnings in the prior year while adjustments made relating to the final settlement of these audits had a positive impact to earnings in the current year. Absent the IRS audit items, operating results of the Utility segment are actually down from the prior year as slightly colder weather (which mainly benefits the Pennsylvania jurisdiction) and lower O&M expense were not enough to offset the effects of the New York rate decrease, the special gas restructuring reserve and the expense associated with early retirement offers effective in December 1998 and May 1999. The International segment's higher earnings reflect nine months of results from one of its investments in the Czech Republic, while the prior year's period only includes five months. Earnings in the Other Nonregulated segment continue to benefit from timber and natural gas marketing operations. A more detailed discussion of current period results 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.) -----------------------------
OPERATING REVENUES (in thousands) Three Months Ended Nine Months Ended June 30, June 30, ------------------------- --------------------------- 1999 1998 % Change 1999 1998 % Change ---- ---- -------- ---- ---- -------- Utility Retail Revenues: Residential $100,924 $100,816 0.1 $ 521,457 $ 553,950 (5.9) Commercial 15,214 17,831 (14.7) 93,444 114,512 (18.4) Industrial 2,618 3,478 (24.7) 11,988 15,137 (20.8) -------- -------- ---------- ---------- 118,756 122,125 (2.8) 626,889 683,599 (8.3) Off-System Sales 5,401 9,201 (41.3) 22,897 39,972 (42.7) Transportation 19,331 15,196 27.2 65,996 52,710 25.2 Other (292) (618) 52.8 (4,932) 2,834 (274.0) -------- -------- ---------- ---------- 143,196 145,904 (1.9) 710,850 779,115 (8.8) -------- -------- ---------- ---------- Pipeline and Storage Storage Service 15,663 15,315 2.3 47,289 47,785 (1.0) Transportation 22,054 22,756 (3.1) 69,946 71,218 (1.8) Other 2,752 3,252 (15.4) 9,441 10,509 (10.2) -------- -------- ---------- ---------- 40,469 41,323 (2.1) 126,676 129,512 (2.2) -------- -------- ---------- ---------- Exploration and Production 40,162 36,802 9.1 105,450 86,330 22.1 -------- -------- ---------- ---------- International 16,089 19,322 (16.7) 97,166 67,262 44.5 -------- -------- ---------- ---------- Other Nonregulated 32,410 24,054 34.7 107,899 85,380 26.4 -------- -------- ---------- ---------- Less-Intersegment Revenues 23,668 24,275 (2.5) 75,557 77,007 (1.9) -------- -------- ---------- ---------- $248,658 $243,130 2.3 $1,072,484 $1,070,592 0.2 ======== ======== ========== ==========
OPERATING INCOME (LOSS) BEFORE INCOME TAXES (in thousands) Three Months Ended Nine Months Ended June 30, June 30, ------------------------- ------------------------- 1999 1998 % Change 1999 1998 % Change ---- ---- -------- ---- ---- -------- Utility $ 12,640 $ 12,956 (2.4) $121,123 $132,810 (8.8) Pipeline and Storage 14,256 19,960 (28.6) 53,633 56,976 (5.9) Exploration and Production* 12,640 11,859 6.6 29,796 (104,507) 128.5 International (1,941) 794 NM 18,675 7,704 142.4 Other Nonregulated 2,419 124 NM 10,481 3,063 242.2 Corporate (948) (90) NM (1,753) (1,182) (48.3) -------- -------- -------- -------- $ 39,066 $ 45,603 (14.3) $231,955 $ 94,864 144.5 ======== ======== ======== ========
*The nine months ended June 30, 1998 includes a non-cash impairment charge of $128,996,000. NM = Not meaningful Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) -----------------------------
SYSTEM NATURAL GAS VOLUMES (millions of cubic feet-MMcf) Three Months Ended Nine Months Ended June 30, June 30, ------------------------ ------------------------- 1999 1998 % Change 1999 1998 % Change ---- ---- -------- ---- ---- -------- Utility Gas Sales Retail Sales: Residential 11,222 10,739 4.5 66,199 66,749 (0.8) Commercial 1,926 2,219 (13.2) 13,055 15,406 (15.3) Industrial 747 884 (15.5) 2,978 3,353 (11.2) ------- ------- ------- ------- 13,895 13,842 0.4 82,232 85,508 (3.8) Off-System 2,223 3,484 (36.2) 10,195 14,432 (29.4) ------- ------- ------- ------- 16,118 17,326 (7.0) 92,427 99,940 (7.5) ------- ------- ------- ------- Non-Utility Gas Sales Production(in equivalent MMcf) 16,759 15,840 5.8 45,607 36,293 25.7 ------- ------- ------- ------- Total Gas Sales 32,877 33,166 (0.9) 138,034 136,233 1.3 ------- ------- ------- ------- Transportation Utility 15,608 14,690 6.2 53,638 50,022 7.2 Pipeline and Storage 54,388 59,281 (8.3) 244,494 255,174 (4.2) Nonregulated 16 262 (93.9) 337 538 (37.4) ------- ------- ------- ------- 70,012 74,233 (5.7) 298,469 305,734 (2.4) ------- ------- ------- ------- Marketing Volumes 8,875 6,176 43.7 29,214 20,696 41.2 ------- ------- ------- ------- Less-Inter and Intrasegment Volumes: Transportation 23,649 22,796 3.7 133,301 125,539 6.2 Production 578 1,001 (42.3) 2,438 3,059 (20.3) ------- ------- ------- ------- 24,227 23,797 1.8 135,739 128,598 5.6 ------- ------- ------- ------- Total System Natural Gas Volumes 87,537 89,778 (2.5) 329,978 334,065 (1.2) ======= ======= ======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- Utility. Operating revenues for the Utility segment decreased $2.7 million for the quarter ended June 30, 1999, as compared with the same period a year ago. This resulted from a reduction in retail and off-system gas sales revenue of $3.3 million and $3.8 million, respectively, offset in part by an increase in transportation revenue of $4.1 million. In addition, other operating revenue increased $0.3 million. The decrease in retail gas revenue was caused primarily by the general base rate decrease in the New York jurisdiction effective October 1, 1998. Retail gas sales volumes have increased slightly from the prior year's quarter, although higher volumes sold due to colder weather have been partly offset by a reduction in sales volumes due to the migration of certain retail customers to transportation service in both the New York and Pennsylvania jurisdictions. This is the result of customers turning to marketers for their gas supplies while using Distribution Corporation for gas transportation service. (Restructuring in the Utility segment's service territory is further discussed in the "Rate Matters" section that follows.) Transportation revenues and volumes are up as a result of the migration from retail service and because of colder weather. Off-system revenues are down due to lower volumes sold. The margins resulting from off-system sales are minimal. Operating revenues for the Utility segment decreased $68.3 million for the nine months ended June 30, 1999, as compared with the same period a year ago. This resulted from a reduction in retail and off-system gas sales revenue of $56.7 million and $17.1 million, respectively, and a reduction in other operating revenue of $7.8 million. These decreases were partly offset by an increase in transportation revenue of $13.3 million. The decrease in retail gas revenue was caused by the recovery of lower gas costs and the general base rate decrease in the New York jurisdiction effective October 1, 1998. The recovery of lower gas costs resulted from both lower retail volumes sold of 3.3 billion cubic feet (Bcf) and a lower average cost of purchased gas (the average cost of purchased gas was $3.64 per Mcf and $4.03 per Mcf, for the nine months ended June 30, 1999 and 1998, respectively). Despite weather that was colder than the prior year, retail volumes sold decreased, mainly due to the migration from retail to transportation service noted above. Transportation revenues increased and volumes are up 3.6 Bcf as a result of this migration and because of colder weather. Off-system revenues are down due to lower volumes sold. The decrease in other operating revenue of $7.8 million is due primarily to a $6.5 million gas restructuring reserve reducing revenue in the current nine month period, $6.0 million of revenue recorded in 1998 as a result of the settlement of IRS audits and $0.5 million of a revenue reduction in the current year due to a final IRS audit settlement. These items are offset in part by a $4.9 million refund provision recorded in the prior year's nine month period. The gas restructuring reserve is to be applied against incremental costs resulting from the PSC's gas restructuring efforts (the PSC's gas restructuring efforts are further discussed in the "Rate Matters" section that follows). The revenue related to the IRS audits represents the rate recovery of interest expense as allowed by the New York rate settlement of July 1996. The refund provision recorded in the prior year's period was for a 50% sharing with customers of earnings over a predetermined amount in Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- accordance with the New York rate settlement of July 1996. All of these items are included in the "Other" category in the Utility section of the Operating Revenues table above. Operating income before income taxes for the Utility segment decreased $0.3 million for the quarter ended June 30, 1999, as compared with the same period a year ago. This decrease reflects higher O&M ($4.0 million) and higher other operating expenses ($0.3 million) which were only partially offset by higher margin on gas and transportation sales of approximately $4.0 million (i.e., lower revenues, as noted above, more than offset by lower purchased gas costs). An item that increased margin by lowering gas costs was an adjustment for lost and unaccounted-for (LAUF) gas in the New York jurisdiction related to 1998. Since Distribution Corporation's earnings in 1998 were above the predetermined amount in accordance with the New York rate settlement of July 1996, 50% of the LAUF adjustment will be shared with customers and 50% (or $1.6 million) was recognized as a reduction in gas cost in June 1999. Higher O&M for the quarter includes higher SARs expense of $3.8 million and the expense related to the early retirement offer effective in May 1999 of $1.0 million. Partly offsetting these two major items was a reduction in other O&M expense of $0.8 million, including labor savings. Operating income before income taxes for the Utility segment decreased $11.7 million for the nine months ended June 30, 1999, as compared with the same period a year ago. Excluding the $6.0 million of rate recovery of interest expense related to the IRS audits in 1998, as well as $0.5 million of a revenue reduction in 1999 due to a final IRS audit settlement, as noted in the revenue discussion above (this rate recovery is offset 100% by interest expense, included below the operating income line), the Utility segment's pretax operating income decreased $5.2 million. This decrease reflects a lower margin on gas and transportation sales of approximately $3.1 million (i.e., lower revenues, as noted above, partly offset by lower purchased gas costs) and higher O&M ($2.4 million) offset in part by lower other operating expenses ($0.3 million). Although the LAUF gain is included in the margin for the nine months ended June 30, 1999, the lower margin reflects the previously mentioned rate reduction and gas restructuring reserve in New York. Higher O&M for the nine month period includes higher expense related to the early retirement offers effective in December 1998 and May 1999 of $5.6 million. Partly offsetting this major item was a reduction in other O&M expense of $3.2 million, including labor savings. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- Degree Days Three Months Ended June 30: --------------------------- Percent (Warmer) Colder in 1999 Than Normal 1999 1998 Normal 1998 - ---------------------------------------------------------------------- Buffalo 982 816 738 (16.9) 10.6 Erie 880 755 695 (14.2) 8.6 Nine Months Ended June 30: -------------------------- Buffalo 6,647 6,065 5,817 (8.8) 4.3 Erie 6,123 5,513 5,338 (10.0) 3.3 - ---------------------------------------------------------------------- Pipeline and Storage. Operating income before income taxes for the Pipeline and Storage segment decreased $5.7 million and $3.3 million for the quarter and nine months ended June 30, 1999, respectively, as compared with the same periods a year ago. For the quarter, the decrease is primarily attributable to higher SARs expense of $4.0 million, expense related to the early retirement offer effective May 1, 1999 of $0.6 million and an accrual for a gas imbalance payable of $1.0 million. The decrease in operating income before income taxes for the nine months ended June 30, 1999, is primarily attributable to lower revenue from interruptible transportation and storage service, lower revenues from unbundled pipeline sales and open access transportation and the accrual for the gas imbalance payable, noted above. These items account for the majority of the $2.8 million revenue decrease of this segment. This combined with increased depreciation and other taxes offset in part by lower O&M expense reduced pretax operating income by $3.3 million. The reduction in O&M is partially attributable to certain reserves and base gas loss recorded in 1998. In the previous year, reserves were established for preliminary survey and investigation costs associated with the Niagara Expansion and Green Canyon projects. In addition, last year's period includes a base gas loss at the Zoar storage field. In total, these three items amounted to $3.7 million. Partly offsetting these reductions in O&M was the reversal of a reserve for a storage project in the first quarter of 1998 in the amount of $1.0 million and expense related to the early retirement offers in December 1998 and May 1999 of $1.4 million. Transportation volumes in this segment decreased 4.9 Bcf and 10.7 Bcf, respectively, for the quarter and nine months ended June 30, 1999. For the quarter, the majority of the volume decrease relates to firm contracted volumes and thus the change in volumes did not have a significant impact on earnings as a result of Supply Corporation's straight fixed-variable (SFV) rate design. For the nine month period, 9.5 Bcf of the 10.7 Bcf volume decrease relates to lower interruptible transportation. This decrease reduced Supply Corporation's revenues by $0.5 million. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- Exploration and Production. Operating income before income taxes from the Company's Exploration and Production segment increased $0.8 million for the quarter ended June 30, 1999, compared with the same period a year ago. This increase resulted primarily from higher oil prices and production and lower lease operating costs. Oil prices after hedging were higher than the prices for the prior year's quarter by $2.80 per bbl. The production increase came mainly from the properties acquired in the HarCor Energy, Inc. (HarCor), Whittier Trust Company (Whittier) and Bakersfield Energy Resources (BER) acquisitions in the prior year. There was also increased production in the Gulf Coast, primarily new production at Vermilion 309 and Vermilion 253. Lease operating costs decreased as a result of management's effort to reduce costs. The increases to operating income before income taxes noted above were partly offset by lower gas revenues, a mark-to-market adjustment for written options (see further discussion in Note 4 - - Derivative Financial Instruments), higher depletion expense and higher general and administrative costs. Gas revenues are down primarily due to lower gas prices, offset slightly by higher production. The weighted average gas price after hedging decreased $0.08 per Mcf, while production increased 209 MMcf. General and administrative costs are up primarily due to the SARs expense. For the nine months ended June 30, 1999, operating income before income taxes for the Exploration and Production segment increased $134.3 million, compared with the same period a year ago. Excluding the prior year's $129 million non-cash impairment of this segment's oil and gas assets, as discussed previously, operating income before income taxes for the nine months ended June 30, 1999, increased $5.3 million as compared with the prior year's same period. This increase on a year-to-date basis, was mainly caused by higher oil and gas production, due to the acquisitions on the West Coast in 1998, and new production on certain Gulf Coast properties. However, lower weighted average oil and gas prices, after hedging, higher lease operating costs, a mark-to-market adjustment for written options (see further discussion in Note 4 - - Derivative Financial Instruments) and higher depletion expense, partly offset the positive impacts of this higher production. PRODUCTION VOLUMES Exploration and Production. Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 % Change 1999 1998 % Change ---- ---- -------- ---- ---- -------- Gas Production - (MMcf) Gulf Coast 8,532 8,552 (0.2) 21,473 21,253 1.0 West Coast 1,050 697 50.6 2,839 1,109 156.0 Appalachia 1,069 1,193 (10.4) 3,381 3,677 (8.1) ------ ------ ------ ------ 10,651 10,442 2.0 27,693 26,039 6.4 ====== ====== ====== ====== Oil Production - (Thousands of Barrels) Gulf Coast 352 312 12.8 1,022 921 11.0 West Coast 664 586 13.3 1,957 780 150.9 Appalachia 2 2 - 7 8 (12.5) ----- --- ----- ----- 1,018 900 13.1 2,986 1,709 74.7 ===== === ===== ===== Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- AVERAGE PRICES Exploration and Production. Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 % Change 1999 1998 % Change ---- ---- -------- ---- ---- -------- Average Gas Price/Mcf Gulf Coast $2.19 $2.29 (4.4) $1.99 $2.52 (21.0) West Coast $2.30 $2.19 5.0 $2.17 $2.17 - Appalachia $2.31 $2.72 (15.1) $2.42 $2.95 (18.0) Weighted Average $2.22 $2.33 (4.7) $2.06 $2.57 (19.8) Weighted Average After Hedging $2.24 $2.32 (3.4) $2.22 $2.25 (1.3) Average Oil Price/bbl Gulf Coast $16.54 $12.70 30.2 $13.41 $15.54 (13.7) West Coast $12.60 $ 8.75 44.0 $10.19 $10.10 0.9 Appalachia $14.95 $14.85 0.7 $13.19 $17.00 (22.4) Weighted Average $13.97 $10.13 37.9 $11.30 $13.06 (13.5) Weighted Average After Hedging $14.02 $11.22 25.0 $11.92 $13.78 (13.5) Seneca has entered into certain price swap agreements and options to manage a portion of the market risk associated with fluctuations in the price of natural gas and crude oil, in an effort to provide more stability to its operating results (refer to the "Market Risk Sensitive Instruments" section of this Item and to Note 4 - Derivative Financial Instruments for further discussion). The following summarizes Seneca's settlements under its price swap agreements and options. Three Months Ended Nine Months Ended June 30, June 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Natural Gas Price Swap Agreements: Notional Quantities - Equivalent Bcf 6.6 6.0 17.9 19.1 Gain (Loss) (thousands of dollars) $227,000 $(82,000) $4,357,000 $(8,167,000) Crude Oil Price Swap Agreements: Notional Quantities - Equivalent bbls 232,000 219,000 547,000 672,000 Gain (thousands of dollars) $52,000 $982,000 $1,871,000 $ 1,221,000 Written Put Option on Crude Oil: Notional Quantities - Equivalent bbls - - 118,000 - Gain (Loss) (thousands of dollars) - - $(28) - Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- International. Operating income before income taxes for the International segment decreased $2.7 million for the quarter ended June 30, 1999, compared with the same period a year ago. This decrease resulted from warmer weather and lower margins on heat and electric sales combined with higher O&M expense. Operating income before income taxes for the nine months ended June 30, 1999, increased $11.0 million for this segment. This increase, as well as the revenue increase shown in the "Operating Revenues" table above and the "Heat and Electric Revenues" table below, resulted primarily from the operations of Prvni severozapadni teplarenska, a.s. (PSZT), a district heating and power generation plant located in the northern part of the Czech Republic. Horizon first acquired 75.3% of the outstanding shares of PSZT in February 1998 and currently owns 86.2%. The nine months ended June 30, 1998 reflected only five months of operating revenues and income for PSZT. The following table summarizes the heating and electricity sales of the International segment for the quarter and nine months ended June 30, 1999 and 1998, respectively: Heating and Electric Volumes Three Months Ended Nine Months Ended June 30, June 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Heating (Gigajoules) 1,266,928 1,385,875 9,502,414 6,246,905 Electricity (Megawatt hours) 279,987 277,280 897,829 520,635 Heating and Electric Revenues Three Months Ended Nine Months Ended June 30, June 30, ------------------ ----------------- (in thousands) 1999 1998 1999 1998 ---- ---- ---- ---- Heating $ 8,225 $ 9,516 $68,522 $43,222 Electricity $ 7,853 $ 9,827 $27,531 $15,907 Other Nonregulated. Operating income before income taxes associated with this segment increased $2.3 million and $7.4 million, respectively, for the quarter and nine months ended June 30, 1999, compared with the same periods a year ago. The increases can be attributed primarily to improved performance in the Company's timber operations and principal energy marketing subsidiary. The increased performance in the timber operations resulted from the 1998 purchase of timber property and two lumber mills during 1998. The increased performance of NFR, the Company's principal energy marketing subsidiary, was the result of increased volumes and margins, offset in part by higher operating and maintenance expense. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- Income Taxes. Income taxes decreased $4.1 million for the quarter ended June 30, 1999, primarily as a result of a decrease in pretax income. For the nine months ended June 30, 1999, income taxes increased $35.2 million, primarily as a result of an increase in pretax income (pretax income before cumulative effect, for the nine months ended June 30, 1998). For further discussion of income taxes, refer to "Note 2 - Income Taxes" in Part I, Item 1 of this report. Other Income. Other income decreased $4.1 million and $24.5 million, respectively, for the quarter and nine months ended June 30, 1999. For the quarter, this decrease is primarily the result of a buyout of a firm transportation agreement by a Pipeline and Storage segment customer in the prior year's quarter in the amount of $2.5 million combined with a gain of $1.2 million that was also recorded in the prior year for U.S. dollar denominated debt carried on the balance sheet of PSZT (until December 1998, at which time it was converted to a Czech koruna denominated loan). The decrease for the nine months is due to the same reasons noted in the quarter (the gain on U.S. dollar denominated debt was $3.4 million for the nine month period) combined with $18.5 million of interest income, which resulted from the settlement of IRS audits in March 1998. As an offset to these decreases, $3.1 million of interest income was recorded in December 1998 related to a final settlement of these audits. Interest Charges. Interest on long-term debt increased $1.5 million and $12.1 million for the quarter and nine months ending June 30, 1999, respectively, mainly because of a higher average amount of long-term debt outstanding compared to the same periods a year ago. Long-term balances have grown significantly as a result of last year's acquisitions of PSZT, HarCor, Whittier and BER, as well as last year's additional investment in Severoceske teplarny, a.s. (SCT). Other interest decreased $0.2 million and $9.5 million for the quarter and nine-month period ended June 30, 1999. The decrease in the quarter was the result of lower interest rates, partly offset by higher short-term debt balances. The decrease in the nine-month period as compared to the prior year was mainly the result of interest expense related to the previously mentioned settlement of IRS audits. The nine months ended June 30, 1998 included $11.7 million of interest expense related to these IRS audits. The nine months ended June 30, 1999 includes a reduction of interest expense of $1.3 million related to the final settlement of these audits. Partly offsetting these decreases in the nine months was higher interest on short-term borrowings as the result of higher short-term debt balances, offset in part by lower interest rates. Short-term debt balances are at a higher level due to the aforementioned acquisitions in 1998, combined with the retirement of long-term debt in 1998. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- CAPITAL RESOURCES AND LIQUIDITY The Company's primary sources of cash during the nine month period ended June 30, 1999, consisted of cash provided by operating activities, long-term debt and short-term bank loans and commercial paper. These sources were supplemented by issuances of common stock under the Company's stock and benefit plans. Operating Cash Flow. Internally generated cash from operating activities consists of net income available for common stock, adjusted for non-cash expenses, non-cash income and changes in operating assets and liabilities. Non-cash items include depreciation, depletion and amortization, deferred income taxes, minority interest in foreign subsidiaries and allowance for funds used during construction. For the nine months ended June 30, 1998, non-cash items also included the cumulative effect of a change in accounting for depletion and the impairment of oil and gas producing properties. Cash provided by operating activities in the Utility and the Pipeline and Storage segments may vary substantially from period to period because of the impact of rate cases. In the Utility segment, pipeline company refunds, over- or under-recovered purchased gas costs and weather also significantly impact cash flow. The Company considers pipeline company refunds and over-recovered purchased gas costs as a substitute for short-term borrowings. The impact of weather on cash flow is tempered in the Utility segment's New York rate jurisdiction by its weather normalization clause and in the Pipeline and Storage segment by Supply Corporation's SFV rate design. Historically, because of the seasonal nature of the Company's heating business, revenues have been relatively high during the nine months ended June 30 and receivables have increased between September and June because of winter weather. The storage gas inventory normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. For storage gas inventory accounted for under the last-in, first-out (LIFO) method, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statement of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheet and is included under the caption "Other Accruals and Current Liabilities." Such reserve is reduced as the inventory is replenished. Net cash provided by operating activities totaled $252.1 million for the nine months ended June 30, 1999, an increase of $9.5 million compared with the $242.6 million provided by operating activities for the nine months ended June 30, 1998. This slight increase is attributed primarily to the Utility segment's contribution offset partly by a decrease to cash provided by operations in the Exploration and Production segment. The increase in the Utility segment can be attributed to lower cash disbursements for gas purchases, taxes and interest, all of which more than offset lower cash receipts from gas sales and transportation service. The decrease to cash provided by operations in the Exploration and Production segment is primarily because of an increase in interest payments stemming from the acquisitions made in 1998. An increase in cash received from hedging transactions offset the decrease in cash receipts from the Exploration and Production segment's sale of natural gas and crude oil production. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- Investing Cash Flow. Capital Expenditures and Other Investing Activities - --------------------------------------------------- Capital expenditures represent the Company's additions to property, plant and equipment and are exclusive of investments in corporations (stock acquisitions) and/or partnerships. Such investments are treated separately in the Statements of Cash Flows and further discussed in the segment discussion below. The Company's capital expenditures and other investments totaled $213.5 million during the nine months ended June 30, 1999. The following table summarizes the Company's capital expenditures and other investments by business segment: (in millions) Other Total Capital Investments Capital Expenditures through Expenditures and through 6/30/99 6/30/99 Other Investments --------------- ----------- ----------------- Utility $ 30.6 $ - $ 30.6 Pipeline and Storage 19.4 3.6 23.0 Exploration and Production 80.5 - 80.5 International 23.6 - 23.6 Other Nonregulated 55.8 - 55.8 ------ ----- ------ $209.9 $ 3.6 $213.5 ====== ===== ====== Utility - ------- The Utility capital expenditures were made primarily for replacement of mains and main extensions, as well as for the replacement of service lines. Pipeline and Storage - -------------------- The Pipeline and Storage capital expenditures were made primarily for additions, improvements, and replacements to this segment's transmission and storage systems. During the nine month period, SIP made a $3.6 million investment in Independence Pipeline Company, a Delaware general partnership, bringing its total investment through June 30, 1999 to $9.1 million. This investment represents a one-third partnership interest. The investment has been financed with short-term borrowings. Independence Pipeline Company intends to build a 370 mile natural gas pipeline (Independence Pipeline Project) from Defiance, Ohio to Leidy, Pennsylvania at an estimated cost of $675 million.1 If the Independence Pipeline Project is not constructed, SIP's share of the development costs (including SIP's investment in Independence Pipeline Company) is estimated not to exceed $9.0 to $13.0 million. Exploration and Production - -------------------------- The Exploration and Production segment's capital expenditures for the nine months ended June 30, 1999 contained approximately $46.7 million for Seneca's offshore program in the Gulf of Mexico, including offshore drilling expenditures, offshore construction, lease acquisition costs and geological and geophysical expenditures. Offshore drilling was concentrated on Vermilion Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- 309, Galveston 239, Vermilion 253, Brazos 414S, Brazos 375, Brazos 376 and Eugene Island Block 29. Offshore construction occurred primarily at Eugene Island 47 and Galveston 239. Lease acquisition costs resulted from successful bidding on six state of Texas tracts and five federal lease blocks in the Gulf of Mexico. Offshore geological and geophysical expenditures were made for purchases of 3-D seismic data. The remaining $33.8 million of capital expenditures reflects, among other things, onshore drilling, construction and recompletion costs for wells located in Louisiana, Texas, Alabama and California as well as onshore geological and geophysical costs, including the purchase of certain 3-D seismic data and fixed asset purchases. The onshore capital expenditures were concentrated on the California properties acquired through the Whittier and BER asset purchases, as well as the HarCor stock purchase, all of which occurred in 1998. Another area of emphasis included the Thomas Ranch #1-H Well in Grimes County, Texas. During the quarter ended June 30, 1999, Seneca sold its 50% working interest in the Jurassic Park prospect in Escambia and Monroe Counties, Alabama, which included two producing wells and approximately 3,300 gross acres. Proceeds from this sale, as well as other sales of assets within the Company, are included in other investing activities in the Statement of Cash Flows. International - ------------- The International segment capital expenditures were made primarily by PSZT for the construction of new fluidized-bed boilers at its district heating and power generation plant in order to comply with stricter clean air standards. Short-term borrowings and cash from operations were used to finance these capital expenditures. Other Nonregulated - ------------------ Other Nonregulated capital expenditures consisted primarily of 36,300 acres of land and timber purchased from PennzEnergy Company by Seneca and Highland. The purchase price was approximately $47 million and was funded by short-term borrowings. The remaining capital expenditures consisted of smaller land and timber purchases for Seneca's timber operations, as well as the installation of new equipment for Highland's sawmill and kiln operations. The capital expenditure programs of the Company's subsidiaries are under continuous review. The amounts are subject to modification for opportunities in the natural gas industry such as the acquisition of attractive oil and gas properties or storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures in the Company's other business segments depends, to a large degree, upon market conditions.1 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- Financing Cash Flow. Consolidated short-term debt increased by $24.7 million during the first nine months of 1999. The Company continues to consider short-term bank loans and commercial paper important sources of cash for temporarily financing capital expenditures and investments in corporations and/or partnerships, gas-in-storage inventory, unrecovered purchased gas costs, exploration and development expenditures and other working capital needs. In addition, the Company considers pipeline company refunds and over-recovered purchased gas costs as a substitute for short-term debt. Fluctuations in these items can have a significant impact on the amount and timing of short-term debt. In February 1999, the Company issued $100.0 million of 6.0% medium-term notes due to mature in March 2009. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to $98.7 million. The proceeds of this debt issuance were used to redeem $100.0 million of 5.58% medium-term notes which matured in March 1999. In July 1999, the Company issued $100.0 million of 6.82% medium-term notes due to mature in August 2004. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to $99.5 million. The proceeds of this debt issuance were used to redeem $50 million of 7.25% medium-term notes which matured in July 1999 and to complete the redemption of HarCor's 14.875% Senior Secured Notes, which is discussed below. In March 1999, the Company redeemed $10.3 million of HarCor's 14.875% Senior Secured Notes through an open market purchase. The total cost of this redemption was $11.9 million, which included a redemption price of 110% and accrued interest. The Company used short-term debt to finance this redemption. In July 1999, the Company redeemed the remaining $43.5 million of HarCor's 14.875% Senior Secured Notes. The total cost of this redemption was $51.0 million, which included a redemption price of 110% and accrued interest. As noted above, this redemption was financed primarily by proceeds from the Company's July 1999 issuance of 6.82% medium-term notes. The redemption premiums were accrued on the opening balance sheet when HarCor was acquired in 1998. In March 1998, the Company obtained authorization from the SEC, under the Public Utility Holding Company Act of 1935, to issue, in the aggregate, long-term debt securities and equity securities amounting to $2.0 billion during the order's authorization period, which extends to December 31, 2002. In July 1999, the Company filed a registration statement pursuant to the Securities Act of 1933 to register up to $625 million of either debt or equity securities. The Company's present liquidity position is believed to be adequate to satisfy known demands.1 Under the Company's covenants contained in its indenture covering long-term debt, at June 30, 1999, the Company would have been permitted to issue up to a maximum of $499.0 million in additional long-term unsecured indebtedness at projected market interest rates. In addition, at June 30, 1999, the Company had regulatory authorizations and unused short-term credit lines that would have permitted it to borrow an additional $399.0 million of short-term debt. The amounts and timing of the issuance and sale of debt and/or equity securities will depend on market conditions, regulatory authorizations, and the requirements of the Company. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- The Company is involved in litigation arising in the normal course of business. The Company is involved in regulatory matters arising in the normal course of business that involve rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such litigation or regulatory matters could have a material effect on earnings and cash flows in the year of resolution, none of this litigation and none of these regulatory matters are expected to change materially the Company's present liquidity position, nor have a material adverse effect on the financial condition of the Company at this time.1 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 1998 Form 10-K and Item 2 of the Company's December 31, 1998 Form 10-Q (see also "Note 4 - Derivative Financial Instruments in this Form 10-Q). There have been no subsequent material changes to the Company's exposure to market risk sensitive instruments. RATE MATTERS Utility Operation. New York Jurisdiction On October 21, 1998, the PSC approved a rate plan for Distribution Corporation for the period beginning October 1, 1998 and ending September 30, 2000. The plan is the result of a settlement agreement entered into by Distribution Corporation, Staff for the PSC (Staff), Multiple Intervenors (an advocate for large industrial customers) and the State Consumer Protection Board. Under the plan, Distribution Corporation's rates are reduced by $7.2 million, or 1.1%. In addition, customers will receive up to $6.0 million in bill credits, disbursed volumetrically over the two year term, reflecting a predetermined share of excess earnings under a 1996 settlement. An allowed return on equity of 12%, above which 50% of additional earnings are shared with the customers, is maintained from the 1996 settlement. Finally, the rate plan also provides that $7.2 million of 1999 revenues will be set aside in a special reserve to be applied against Distribution Corporation's incremental costs resulting from the PSC's gas restructuring effort further described below. On November 3, 1998, the PSC issued its Policy Statement Concerning ----------------------------- the Future of the Natural Gas Industry in New York State and Order Terminating - -------------------------------------------------------------------------------- Capacity Assignment (Policy Statement). The Policy Statement sets forth the - -------------------- PSC's "vision" on "how best to ensure a competitive market for natural gas in New York." That vision includes the following goals: (1) Effective competition in the gas supply market for retail customers; (2) Downward pressure on customer gas prices; (3) Increased customer choice of gas suppliers and service options; (4) A provider of last resort (not necessarily the utility); (5) Continuation of reliable service and maintenance of operations procedures that treat all participants fairly; (6) Sufficient and accurate information for customers to use in making informed decisions; Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- (7) The availability of information that permits adequate oversight of the market to ensure fair competition; and (8) Coordination of Federal and State policies affecting gas supply and distribution in New York State. The Policy Statement provides that the most effective way to establish a competitive market in gas supply is "for local distribution companies to cease selling gas." The PSC hopes to accomplish that objective over a three-to-seven year transition period, taking into account "statutory requirements" and the individual needs of each local distribution company (LDC).1 The Policy Statement directs Staff to schedule "discussions" with each LDC on an "individualized plan that would effectuate our vision." In preparation for negotiations, LDCs will be required to address issues such as a strategy to hold new capacity contracts to a minimum, a long-term rate plan with a goal of reducing or freezing rates, and a plan for further unbundling. In addition, Staff was instructed to hold collaborative sessions with multiple parties to discuss generic issues including reliability and market power regulation. As of February 1, 1999, Staff had convened a multitude of collaboratives, proceedings and discussions on various issues relating to restructuring, including reliability of service, billing and allocation of stranded costs. Distribution Corporation is participating in all facets of Staff's effort. The PSC's Order Terminating Capacity Assignment, included with the --------------------------------------- Policy Statement, directed the state's LDCs to file proposed tariffs, by no later than February 1, 1999, revising the current requirement that marketers take assignment of an allocation of upstream capacity for each customer that elects to purchase gas from a marketer other than the LDC. Although the order states that the so-called "mandatory assignment" feature of aggregation service was terminated effective April 1, 1999, LDCs are permitted to show that their individual circumstances may warrant continuation of the requirement. The order also recognizes that LDCs with intermediate pipelines, like Distribution Corporation, could present "unique cost and reliability issues which require further consideration." The order provides that to the extent all or part of an LDC's mandatory assignment authority is indeed terminated, there will be a reasonable opportunity to recover stranded costs. On February 1, 1999, Distribution Corporation filed revised tariff sheets in compliance with the Order Terminating Capacity Assignment. ------------------------------------------- Distribution Corporation's compliance filing is designed to comply with the PSC's directives and operate in the same manner as the company's "System Wide Energy Select" program approved for the Pennsylvania Division (described below). In an order issued on March 24, 1999, the PSC rejected portions of the February 1, 1999 compliance filing without prejudice, and directed Distribution Corporation to submit revised tariff sheets, effective April 1, 1999, to adopt a new capacity option for retail marketers. The new capacity option eliminates long line capacity upstream of Supply Corporation from the "mandatory capacity" requirement described above. This change, effective April 1, 1999, allows marketers to choose alternate capacity paths, if available, from the production area to Supply Corporation's city gate. Marketers will continue to be obligated to take release of Distribution Corporation's storage and transmission capacity on Supply Corporation. To the extent any stranded pipeline costs are generated by the above proposal, they would be recoverable from firm service customers through a "transition surcharge" mechanism.1 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- The effective date for the compliance filing was April 1, 1999. On March 17, 1999, the PSC issued an order in Case 98-G-0122 directing the state's LDCs to file a uniform, basic gas-for-electric-generation-service tariff to replace tariffs filed pursuant to the PSC's 1991 Bypass Policy Statement. Distribution Corporation serves a number of generation customers under tariffs designed pursuant to the 1991 Bypass Policy Statement. Although existing contracts for service would not be disturbed by the March 17, 1999 order, future contracts would be negotiated under the terms of the new, uniform tariff. In its filing to comply with the March 17 order, Distribution Corporation proposed to implement the PSC's uniform tariff while retaining flexibility for individual customer negotiations. The PSC has not ruled on Distribution Corporation's filing and the outcome cannot be ascertained at this time. To preserve its legal rights, however, Distribution Corporation filed for rehearing of the March 17, 1999 order challenging several features of the uniform tariff. That action remains pending. On June 7, 1999, the PSC issued a notice requesting comments on a proposal for a "single retailer" billing environment. The proposal recommends that electric and gas utilities exit the billing function at an undetermined future date. The retail billing function would then be performed solely by unregulated marketers. Included in the billing proposal is a recommendation that utilities design a "back-out" credit equal to the long run costs avoided by each utility when billing is provided by another party. Distribution Corporation filed comments opposing much of the proposal, but supporting a suggested interim regime where multiple billing arrangements, including utility billing, would be permitted. This proceeding remains pending. Pennsylvania Jurisdiction Distribution Corporation currently does not have a rate case on file with the Pennsylvania Public Utility Commission (PaPUC). Management will continue to monitor its financial position in the Pennsylvania jurisdiction to determine the necessity of filing a rate case in the future. Effective October 1, 1997, Distribution Corporation commenced a PaPUC approved customer choice pilot program called Energy Select. Energy Select, which lasted until April 1, 1999, allowed approximately 19,000 small commercial and residential customers of Distribution Corporation in the greater Sharon, Pennsylvania area to purchase gas supplies from qualified, participating non-utility suppliers (or marketers) of gas. Distribution Corporation was not a supplier of gas in this pilot. Under Energy Select, Distribution Corporation delivered the gas to the customer's home or business and remained responsible for reading customer meters, the safety and maintenance of its pipeline system and responding to gas emergencies. NFR was a participating supplier in Energy Select. Effective February 11, 1999, Distribution Corporation's System Wide Energy Select tariff was approved by the PaPUC. This program is intended to expand the Energy Select pilot program described above to apply across Distribution Corporation's entire Pennsylvania service territory. The plan borrows many features of the Energy Select pilot, but several important changes were adopted. Most significantly, the new program includes Distribution Corporation as a choice for retail consumers, in furtherance of Distribution Corporation's objective to remain a merchant. Also departing Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- from the pilot scheme, Distribution Corporation resumes its role as provider of last resort, and maintains customer contact by providing a billing service on its own behalf and, as an option, for participating marketers. Finally, the System Wide Energy Select program addresses upstream capacity requirements in a manner substantially similar to the method proposed for Distribution Corporation's New York compliance filing, described above. In Pennsylvania, a natural gas restructuring bill was signed into law on June 22, 1999. Entitled the Natural Gas Choice and Competition Act ("Act"), the new law requires all Pennsylvania LDCs to file tariffs designed to provide retail customers with direct access to competitive gas markets. Distribution Corporation has been scheduled by the PaPUC to submit its compliance filing on October 1, 1999, for an effective date on or about April 1, 2000. Distribution Corporation is currently reviewing the filing requirements and preparing its case. It is anticipated that the October 1 filing will largely mirror the Energy Select program currently in effect, which substantially complies with the Act's requirements. 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. Pipeline and Storage. Supply Corporation currently does not have a rate case on file with the Federal Energy Regulatory Commission (FERC). Its last case was settled with the FERC in February 1996. As part of that settlement, Supply Corporation agreed not to seek recovery of revenues related to certain terminated service from storage customers until April 1, 2000, as long as the terminations were not greater than approximately 30% of the terminable service. Supply Corporation has been successful in marketing and obtaining executed contracts for such terminated storage service (at discounted rates) and expects to continue obtaining executed contracts for additional terminated storage service as it arises.1 OTHER MATTERS Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and assure compliance with regulatory policies and procedures.1 It is the Company's policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. Distribution Corporation has estimated its clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $9.1 million to $10.1 million.1 At June 30, 1999, Distribution Corporation has recorded the minimum liability of $9.1 million. The Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- In New York and Pennsylvania, Distribution Corporation is recovering site investigation and remediation costs in rates. Accordingly, the Consolidated Balance Sheet at June 30, 1999 includes related regulatory assets in the amount of approximately $11.7 million. The Company, in its international operations in the Czech Republic, is in the process of constructing new fluidized-bed boilers at the district heating and power generation plant of PSZT in order to comply with certain clean air standards mandated by the Czech Republic government. Capital expenditures related to this construction incurred by PSZT for the nine months ended June 30, 1999 were approximately $20.4 million. An additional $12.6 million is budgeted for this construction for the rest of 1999. For further discussion, refer to Note H - Commitments and Contingencies under the heading "Environmental Matters" in Item 8 of the Company's 1998 Form 10-K. Year 2000 Readiness Disclosure. Numerous media reports have heightened concern that information technology computer systems, software programs and semiconductors may not be capable of recognizing dates after the Year 2000 because such systems use only two digits to refer to a particular year. Such systems may read dates in the Year 2000 and thereafter as if those dates represent the year 1900 or thereafter and, in certain instances, such systems may fail to function properly. State of Readiness. The Company believes that all necessary work has been completed in order to make its internal computer system Year 2000 ready.1 Following the completion of an early-impact analysis study, a formal project manager at the Company was designated to spearhead the Year 2000 remediation effort. The methodology adopted by the Company to address the Year 2000 issue is a combination of methods recommended by respected industry consultants and efforts tailored to meet the Company's specific needs. The Company's Year 2000 plan addresses five primary areas. A. Mainframe Corporate Business Applications Developed and Maintained by the Company: A detailed plan and impact analysis was conducted in 1996-1997 to determine the extent of Year 2000 implications on the Company's mainframe-based computer systems. The remediation and testing in this area have been completed.1 B. Personal Computer Business Applications Software Developed and Supported by the Company: The Company has retained a consulting firm to perform a detailed impact analysis of the personal computer business application systems supported by the Company's Information Services Department. The firm has corrected Year 2000 problems identified by its analysis. Certain applications identified by the consulting firm as potentially problematic have been retired and replaced with Year 2000 compliant applications. The required changes and testing for these applications are complete.1 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- C. Vendor-Supplied Software, Hardware, and Services for Corporate Business Applications Supported by the Company: This category includes all mainframe infrastructure products as well as all PC client / server software and hardware. The Company has sent letters to its vendors asking if their products and services will continue to perform as expected after January 1, 2000. These vendors are responsible for approximately 200 products and services associated with corporate computer applications. The Company has received responses from all vendors which the Company believes supply critical hardware, software, date-sensitive embedded chips and related computer services. The Company has completed testing and implementation of the vendor-supplied Year 2000 compliant products and services.1 D. Vendor-Supplied Products and Services Used on a Corporate Wide Basis: This category includes the critical products and services that are used by multiple departments within the Company including all products containing embedded chips which might be date sensitive. The Company has sent letters to the primary vendors who provide these products and services to the Company, requesting Year 2000 compliance plans. The Company is monitoring their responses and incorporating them into the Company's overall Year 2000 project and contingency plans. The Company has completed testing and implementation of the products and services of these vendors (reference is made to the "Risks" section below).1 E. User-Department Maintained Business Applications: The Company uses certain business software applications that were either built in-house or vendor-supplied and subsequently maintained by individual departments of the Company. The scope of such applications includes, but is not limited to, spreadsheets, databases, vendor provided products and services and embedded process controls. A corporate wide Year 2000 task force is in place and has established a process to identify and resolve Year 2000 problems in this area. This task force meets on a monthly basis to coordinate ongoing activities and report on the project status. Providers of critical products and services have been identified and the Company has sent letters requesting their Year 2000 compliance plans. Responses are being monitored and incorporated into the Year 2000 planning of the various departments. Based on responses received to date along with internal testing, the Company anticipates that all applications and services under this category will be Year 2000 ready.1 Cost. The cost of upgrading both vendor supplied and internally developed systems and services is expensed as incurred and has amounted to approximately $2.1 million in total. Minimal additional expenses related to Year 2000 administration are expected to be incurred.1 Risks. The Company's main concern is to ensure the safe and reliable production and delivery of natural gas and Company-provided services to its customers. Based on the efforts discussed above, the Company expects to be able to operate its own facilities without interruption and continue normal operation in Year 2000 and beyond.1 However, the Company has no control over the systems and services used by third parties with whom it interfaces. While the Company has placed its major third parties on notice that the Company expects their products and services to perform as expected after January 1, 2000, the Company cannot predict with accuracy the actual adverse consequences to the Company that could result if such third parties are not Year 2000 compliant.1 The widespread failure of electric, telecommunication, and Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- upstream gas supply could potentially affect gas service to utility customers, and the Company is pursuing contingency plans to avoid such disruptions. The majority of the devices which control the Company's physical delivery system are not susceptible to Year 2000 problems because they do not contain micro-processors. The Company has conducted an extensive review of its existing micro-processors (embedded technology) and has replaced non-Year 2000 compliant hardware. Distribution Corporation is subject to regulatory review by both the PSC and the PaPUC. Both of these regulatory bodies have issued orders concerning the Year 2000 issue, and both have established dates in 1999 by which jurisdictional utilities must have taken the necessary steps to ensure that its critical systems are Year 2000 ready. In the event Distribution Corporation fails to meet the requirements of those orders, it may be subject to the imposition of fines or formal enforcement actions by the regulatory bodies. Contingency Planning. The Company formed its Corporate Year 2000 task force in mid-1997. The primary function of this group is to: (1) raise awareness of the Year 2000 issue within the Company, (2) facilitate identification and remediation of Year 2000 potential problems within the Company, and (3) facilitate and develop corporate contingency plans. The group is comprised of middle to senior level managers and Company executives. The Company has developed Year 2000 strategic contingency plans which have been prioritized in relation to the overall corporation in the order of human safety, reliability/delivery of Company services and administrative services. The Company will be adding the operational specifics between now and mid-September. The pertinent portions of these plans have been filed with the New York State Public Service Commission whose review is ongoing. The Company is currently working with other utilities in its service areas and regional Emergency Management Services to establish communication channels and procedures in the low probability event of a serious Year 2000 disruption. The Company has existing disaster/contingency plans to deal with operational gas supply or delivery problems, loss of the corporate data center, and loss of the corporate customer telephone centers. These plans are being reviewed to address failures resulting from Year 2000 problems created or occurring outside of the Company (i.e. loss of electricity, telephone service, etc.). The Company expects to have its Year 2000 contingency plans completed by mid- September 1999.1 The Company has selected this date as opposed to one in early 1999 so that the contingency plans are current and operational and that the Company will be able to use them immediately, if required.1 Safe Harbor for Forward-Looking Statements. The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein, including without limitation those which are designated with a "1", Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- are forward-looking statements and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including, without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements: 1. Changes in economic conditions, demographic patterns and weather conditions 2. Changes in the availability and/or price of natural gas and oil 3. Inability to obtain new customers or retain existing ones 4. Significant changes in competitive factors affecting the Company 5. Governmental/regulatory actions and initiatives, including those affecting financings, allowed rates of return, industry and rate structure, franchise renewal, and environmental/safety requirements 6. Unanticipated impacts of restructuring initiatives in the natural gas and electric industries 7. Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays 8. Occurrences affecting the Company's ability to obtain funds from operations, debt or equity to finance needed capital expenditures and other investments 9. Ability to successfully identify and finance oil and gas property acquisitions and ability to operate existing and any subsequently acquired properties 10. Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves 11. Changes in the availability and/or price of derivative financial instruments 12. Inability of the various counterparties to meet their obligations with respect to the Company's financial instruments 13. Regarding foreign operations - changes in foreign trade and monetary policies, laws and regulations related to foreign operations, political and governmental changes, inflation and exchange rates, taxes and operating conditions Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations (Cont.) ----------------------------- 14. Significant changes in tax rates or policies or in rates of inflation or interest 15. Significant changes in the Company's relationship with its employees and the potential adverse effects if labor disputes or grievances were to occur 16. Changes in accounting principles and/or the application of such principles to the Company 17. Unanticipated problems related to the Company's internal Year 2000 initiative as well as potential adverse consequences related to third party Year 2000 compliance. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Refer to the "Market Rate Sensitive Instruments" section in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Part II. Other Information - --------------------------- Item 2. Changes in Securities --------------------- On April 1, 1999, the Company issued 700 unregistered shares of Company common stock to the seven non-employee directors of the Company. These shares were issued as partial consideration for the directors' service as directors during the quarter ended June 30, 1999, pursuant to the Company's Retainer Policy for Non-Employee Directors. These transactions were exempt from registration by Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving any public offering. Item 5. Other Information ----------------- The Company's By-Laws were amended by the Board on June 17, 1999. The amended By-Laws are included in this Form 10-Q as Exhibit 3(ii). Specifically, the By-Laws were amended at Article I ("Meetings of Stockholders") to insert new Sections 7 and 8. These amendments relate to both those matters which may properly come before meetings of stockholders and the conduct of such meetings. Among other things, as permitted by SEC Rule 14a-4(c) [17 CFR Section 240.14a-4(c)] the amendments incorporated into the By-Laws an "advance notice provision" describing when a stockholder's notice of business or nominations to be considered at a meeting of stockholders will be considered timely. Under most circumstances, this provision requires that a stockholder provide such a notice at least 110 days prior to the anniversary of the date on which the Company mailed its proxy materials for the prior year's annual meeting of stockholders. For example, since the Company mailed its proxy materials for the February 1999 annual meeting on December 31, 1998, a stockholder's notice of business or nominations for the February 2000 annual meeting will be due on September 13, 1999. Item 5. Other Information (Cont.) ------------------------- This requirement is separate and apart from the requirements of SEC Rule 14 a-8 (17 CFR Section 240.14 a-8)that a stockholder must meet in order to have a stockholder proposal included in the Company's proxy statement and form of proxy. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit Number Description of Exhibit ------ ---------------------- (3)(ii) By-Laws, as amended on June 17, 1999 (10) Material Contracts 10.1 Form of Employment Continuation and Noncompetition Agreement, dated as of December 11, 1998, with Philip C. Ackerman, Walter E. DeForest, Joseph P. Pawlowski, Dennis J. Seeley, David F. Smith and Gerald T. Wehrlin. 10.2 Form of Employment Continuation and Noncompetition Agreement, dated as of December 11, 1998, with Bruce H. Hale and Richard Hare. 10.3 Form of Employment Continuation and Noncompetition Agreement, dated as of December 11, 1998, with James A. Beck. (12) Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the Twelve Months Ended June 30, 1999 and the Years Ended September 30, 1994 through 1998. (27) Financial Data Schedules 27.1 Financial Data Schedule for the Nine Months Ended June 30, 1999. 27.2 Amended Financial Data Schedule for the Nine Months Ended June 30, 1998. (99) National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended June 30, 1999 and 1998. (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL FUEL GAS COMPANY ------------------------- (Registrant) /s/Joseph P. Pawlowski -------------------------------- Joseph P. Pawlowski Treasurer and Principal Accounting Officer Date: August 13, 1999 --------------- EXHIBIT INDEX (Form 10Q) Exhibit 3(ii) By-Laws, as amended on June 17, 1999. Exhibit 10.1 Form of Employment Continuation and Noncompetition Agreement, dated as of December 11, 1998, with Philip C. Ackerman, Walter E. DeForest, Joseph P. Pawlowski, Dennis J. Seeley David F. Smith and Gerald T. Wehrlin. Exhibit 10.2 Form of Employment Continuation and Noncompetition Agreement, dated as of December 11, 1998, with Bruce H. Hale and Richard Hare. Exhibit 10.3 Form of Employment Continuation and Noncompetition Agreement, dated as of December 11, 1998, with James A. Beck. Exhibit 12 Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the Twelve Months Ended June 30, 1999 and the Years Ended September 30, 1994 through 1998. Exhibit 27.1 Financial Data Schedule for the Nine Months Ended June 30, 1999. Exhibit 27.2 Amended Financial Data Schedule for the Nine Months Ended June 30, 1998. Exhibit 99 National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended June 30, 1999 and 1998. EX-3 2 BY-LAWS Amended 2/21/85 6/19/86 7/07/88 6/14/90 6/18/92 12/8/93 6/09/94 9/19/96 1/01/97 3/20/97 6/19/97 9/18/97 9/17/98 6/17/99 NATIONAL FUEL GAS COMPANY ------------------------- BY-LAWS ------- ARTICLE I --------- Meeting of Stockholders ----------------------- 1. Meetings of stockholders may be held at such place, within or without the State of New Jersey, as may be fixed by the Board of Directors and stated in the notice of the meeting. 2. In 1999 and thereafter, the annual meeting of stockholders shall be held on the third Thursday in February in each year beginning at ten o'clock in the forenoon, local time, unless such day shall be on a holiday, in which event such meeting shall be held at the same hour on the next succeeding business day. In 1998, the Annual Meeting of Stockholders shall be held on Thursday, February 26, 1998 at ten o'clock in the forenoon, local time. 3. Except as otherwise provided by New Jersey law, written notice of the time, place and purpose or purposes of every meeting of stockholders shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at the meeting. 4. Unless otherwise provided by statute, all Special Meetings shall be called upon the written request of three or more directors or of stockholders owning one-fourth of the capital stock issued and outstanding. 5. Unless otherwise provided in the Company's Certificate of Incorporation or in New Jersey law, (i) the holders of shares entitled to cast a majority of the votes at any meeting of stockholders shall constitute a quorum at such meeting except that the votes that holders of any class or series of shares are entitled to cast shall not be counted in the determination of a quorum for action to be taken at a meeting with respect to which such class or series has no vote, and (ii) the holders of shares of any class or series entitled to cast a majority of the votes of such class or series entitled to vote separately on a specified item of business shall constitute a quorum of such class or series for the transaction of such specified item of business. If a quorum shall not be so represented, the stockholders present at any meeting of stockholders shall have power to adjourn the meeting to another time at the same or at another place. If the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken and at the adjourned meeting only such business is transacted as might have been transacted at the original meeting, it shall not be necessary to give notice of the adjourned meeting unless after the adjournment the Board of Directors fixes a new record date for the adjourned meeting. In the event the Board of Directors fixes such a new record date, a notice of the adjourned meeting shall be given to each stockholder of record at the new record date entitled to notice under Article I paragraph 3 of these By-Laws. 6. At each election of Directors, the proxies and ballots shall be received and all questions respecting the qualification of voters shall be decided by two inspectors, who shall be appointed by the presiding officer of the meeting; provided however, that no candidate for election as Director shall act as inspector. Such inspectors shall be sworn faithfully to perform their duties and shall report in writing the results of the ballot. 7. A. Business transacted at an annual meeting of stockholders may include all such business as may properly come before the meeting. Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders: (i) pursuant to the Corporation's notice of meeting; (ii) by or at the direction of the Board of Directors; or (iii) by any stockholder who was a stockholder of record at the time of giving of notice of the meeting, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 7. B. For nominations or other business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. Such stockholder's notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director: (a) the name, age, business address of such person, (b) the principal occupation of employment of such person, (c) the class and number of shares of the Corporation which are owned beneficially by such person, and (d) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case under applicable SEC regulations (as of February 1999, Regulation 14A under the Securities Exchange Act of 1934, as amended, and Rule 14a-11 thereunder), including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made: (a) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, and (b) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. C. To be timely, a stockholder's notice under this Section 7 must be delivered to the Secretary at the principal executive offices of the Corporation not less than 110 days prior to the date corresponding to the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting of stockholders; provided, however, that if both: ----------------- (i) the date of the annual meeting is changed more than 30 days from the date corresponding to the date of the prior year's annual meeting; and --- (ii) notice (or, if earlier, public disclosure of the date of the annual meeting) is given or made to the stockholders of the Corporation less than 120 days before the date corresponding to the date on which the Corporation first mailed its proxy materials for the prior year's meeting of stockholders; then ---- (iii) a stockholder's notice to be timely must be so received not later than the close of business on the tenth day following the date on which such notice (or, if earlier, such public disclosure of the date of the annual meeting) was mailed or made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice under this Section 7. D. Only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 7. Other than persons nominated by the full Board or any nominating committee thereof, only such persons who are nominated in accordance with the procedures set forth in this Section 7 shall be eligible to serve as directors. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 7 and, if any proposed nomination or business is not in compliance with this Section 7, to declare that such defective proposal or nomination shall be disregarded, unless otherwise provided by any applicable law. E. Notwithstanding the foregoing provisions of this Section 7, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 7. Nothing in this Section 7 shall be deemed to affect any rights of: (i) the stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act; or (ii) the holders of any series of Preferred Stock to elect directors under specified circumstances. F. Business transacted at a special meeting of the stockholders shall be limited to the purposes set forth in the notice of the special meeting. G. For purposes of this Section 7, the term "public disclosure" shall mean disclosure in a news release reported by the Dow Jones News Service, the Associated Press or a comparable national news service, or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. 8. At each meeting of stockholders, the chairman of the meeting shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting and shall determine the order of business and all other matters of procedure. The Board of Directors may adopt by resolution such rules and regulations for the conduct of meetings of stockholders as it shall deem appropriate. Except to the extent inconsistent with any such rules and regulations as adopted by the Board of Directors, the chairman of the meeting may establish rules, which need not be in writing, to maintain order and safety and for the conduct of the meeting. Without limiting the foregoing, the chairman of the meeting may: A. Determine and declare to the meeting that any business is not properly before the meeting and therefore shall not be considered; B. Restrict attendance at any time to bona fide shareholders of record and their proxies and other persons in attendance at the invitation of the chairman of the meeting; C. Restrict dissemination of solicitation materials and use of audio or visual recording devices at the meeting; D. Adjourn the meeting without a vote of the stockholders, whether or not there is a quorum present; and E. Make rules governing speeches and debate, including time limits and access to microphones. ARTICLE II ---------- Board of Directors ------------------ 1. The Board of Directors shall consist of (i) such number of directors, not less than seven nor more than eleven, as may be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors, and (ii) such directors as may be elected by vote of the holders of shares of preferred stock, when and as provided in the Certificate of Incorporation of the Company. In order to qualify for election as a director, a nominee must be a shareholder of the Company. 2. Subject to the provisions of the Statutes of the State of New Jersey, the Certificate of Incorporation, and the By-Laws of the Corporation, the Board of Directors shall have full and complete management and control of the business and affairs of the Corporation. 3. The Board of Directors may hold its meetings or any adjournment thereof either in the State of New Jersey or elsewhere and keep the books of the Corporation at such places within or without the State of New Jersey as the Board of Directors may from time to time determine. 4. Meetings of the Board of Directors may be called at the direction of the Chairman of the Board, the President, or any three of the Directors for the time being in office. 5. Notice of any meetings of the Board of Directors shall be given to each Director by mailing the same to him at his last known address, as the same appears upon the records of the Corporation at least five days before the meeting or by telegraphing, telephoning or delivering the same to him personally at least one day before the meeting. 6. At any meeting of the Board of Directors, there may be transacted without special notice, any business within the powers of the Directors to transact, except that of which the Statutes of the State of New Jersey expressly require special notice shall be given. 7. A. A majority of the Directors in office shall constitute a quorum for the transaction of any business which may properly come before them. If a majority of said Directors shall not be present at any meeting, the Directors present shall have power to adjourn to a day certain, and notice of the adjourned meeting shall be given by mailing the same addressed to each Director at his address as the same appears upon the records of the Corporation, at least two days prior to the adjourned meeting, or by telegraphing, telephoning or delivering the same to him personally at least one day before said adjourned meeting. But, if a majority of the Board of Directors are present, the said meeting, or any adjourned meeting thereof, may be adjourned to a subsequent day; such adjournment may be without notice of such adjournment if such notice is not required by New Jersey Law (as of June 1997, N.J.S.A. 14A:6-10(2)). -------- B. Unless a greater vote is required by applicable law or by the Certificate of Incorporation of the Company or these By-laws (including, but not limited to, subparagraph C of this paragraph 7), any action approved by a majority of the votes of directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. C. Anything in these By-laws to the contrary notwithstanding, any action taken by the Board of Directors pursuant to the terms of any Rights Plan (as hereinafter defined) of the Company shall, unless otherwise provided by the terms of the Rights Plan, be approved by the affirmative vote of three-fourths (3/4ths) of the entire Board of Directors. For purposes of these By-laws, the term "Rights Plan" shall mean any plan pursuant to which shareholders of the Company are, upon the occurrence of certain specified events (including, but not limited to, the acquisition by any person of a specified number of shares of capital stock of the corporation), entitled to purchase shares of capital stock or other securities of either the Company or the acquiring person at a discounted price. 8. A. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any pending, threatened or completed civil, criminal, administrative or arbitrative action, suit or proceeding, and any appeal therein and any inquiry or investigation which could lead to such action, suit or proceeding ("Proceeding") by reason of the fact that such person is or was a director or officer of the Corporation, or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, trustee, employee or agent of another foreign or domestic corporation, or of any partnership, joint venture, sole proprietorship, employee benefit plan, trust or other enterprise, whether or not for profit, to the fullest extent permitted and in the manner provided by the laws of the State of New Jersey. B. Nothing in this paragraph 8 shall restrict or limit the power of the Corporation to indemnify its employees, agents and other persons, to advance expenses (including attorneys' fees) on their behalf and to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation in connection with any Proceeding. C. The indemnification provided by this paragraph 8 shall not exclude any other rights to which a person seeking indemnification may be entitled under the Certificate of Incorporation, By-Laws, agreement, vote of shareholders or otherwise. The indemnification provided by this paragraph 8 shall continue as to a person who has ceased to be a director or officer, and shall extend to the estate or personal representative of any deceased director or officer. 9. A. Except with respect to directors whose service as such ceases on or before February 20, 1997, who will continue to receive the previously-effective Director compensation until such time, each Director who is not a regular full-time employee of the Corporation or one or more of its subsidiaries, shall be paid an annual fee of $12,000 in cash and 400 shares of the common stock of the Corporation, payable in equal quarterly increments, in advance (i.e., as of the first business day of the quarter). There will be proration of payments during quarters in which such Director has only partial service. Each such share of stock of the Corporation will be nontransferable until the later of two years from its issuance or six months after such Director's cessation of service. B. Each Director of the Corporation who is not a regular full-time employee of the Corporation or one or more of its subsidiaries shall also receive a fee of $1,000 for attendance at any meeting of the Board of Directors and a fee of $800 for attendance at any meeting of any committee of the Board of Directors, except that if a Director participates in a committee meeting by telephone, the fee shall be $500. Each Director shall be reimbursed for the travel expenses incurred by him or her in attending any meeting of the Board of Directors or any committee of the Board of Directors. 10. Any contract or other transaction between the Corporation or a subsidiary of the Corporation and any other entity shall not be void or voidable because a Director of the Corporation is interested therein if the Corporation has complied with the provisions of any then-applicable New Jersey statute(s) necessary or sufficient to make the transaction not void or voidable, including, as of June 1997, N.J.S.A. 14A:6-8(1). -------- ARTICLE III ----------- Officers -------- 1. At the first meeting after the annual election, the Board of Directors shall choose a Chairman of the Board and a President, both of whom shall be members of the Board of Directors, and one or more Vice Presidents, a Secretary, a Treasurer and a Controller, who need not be members of the Board of Directors, and who shall hold their respective offices until others are chosen and qualify in their stead. The offices of Secretary and Treasurer may be filled by the same person. 2. In its discretion, the Board of Directors may leave unfilled for such period as it may determine, any office except the offices of the President, Treasurer and Secretary. 3. The Chairman of the Board shall be the Chief Executive Officer of the Corporation. He shall preside at all meetings of the Board of Directors and shall, during the recess of the Board of Directors, have general control and management of the affairs and business of the Corporation. In the absence of the President, he shall preside at stockholders' meetings. 4. In addition to the duties and responsibilities specified in the laws of the State of New Jersey and these By-Laws, the President shall preside at all stockholders' meetings and shall perform such other duties as from time to time may be assigned to him by the Board of Directors. In the absence of the Chairman of the Board, or in the event that there is a vacancy in the office of the Chairman of the Board, the President shall be the Chief Executive Officer of the Corporation and shall perform all the duties of the Chairman of the Board as well as those of President. 5. Each Vice President shall perform such duties as shall from time to time be assigned to him by the Board of Directors, the Chairman of the Board, or the President. 6. The Secretary, in addition to his statutory duties, shall give proper notice of all meetings of the stockholders and of the Board of Directors. He shall act as Secretary of all meetings of the stockholders and shall perform such other duties as shall from time to time be assigned to him by the Board of Directors or President. 7. The Treasurer, in addition to his statutory duties, shall keep full and accurate accounts of receipts and disbursements of the funds belonging to the Corporation, and shall cause to be deposited all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may from time to time be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and Directors whenever they may require it, account of all his transactions as Treasurer, and of the financial condition of the Corporation. He shall perform such other duties as shall be assigned to him by the Board or President, and shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors may from time to time require. 8. The Controller shall see that adequate records of all assets, liabilities and transactions of the Corporation are maintained; that adequate audits thereof, are currently and regularly made, and in conjunction with other officers, initiate and enforce measures and procedures whereby the business of the Corporation shall be conducted with maximum efficiency, safety and economy. He shall also perform all such other duties as usually pertain to the office of Controller. He shall be in all matters subject to the control of and responsible to the Board of Directors alone. 9. The Board of Directors may from time to time appoint such other officers and agents as they may deem necessary or advisable for the transaction of the business of the Corporation, who shall hold their offices during the pleasure of the Board of Directors and perform such duties as may from time to time be designated or assigned to them by said Board of Directors. 10. If the office of the Chairman of the Board, the President, Vice President, Secretary, Treasurer, or Controller or one or more of them becomes vacant for any reason whatsoever, the Board of Directors at any duly convened meeting may, by a majority vote of those present, fill such vacancy and the person elected shall hold office for the unexpired term of such office and until his successor shall be chosen. 11. All officers and agents chosen or appointed by the Board of Directors shall be subject to removal by the Board of Directors at any time with or without cause, and in the case of the absence of any officer or agent of the Corporation, or for any other reason that may seem sufficient to the Board of Directors, the said Board of Directors subject to the limitations herein contained and the statutes in such case made and provided, may, without removal, delegate his powers and duties to any other officer or suitable person for such period as it shall deem proper. 12. All duly authorized bonds and debentures of the Corporation shall be signed on behalf of the Corporation by its Chairman of the Board or its President, or one of its Vice Presidents or, if so provided by resolution of the Board of Directors, by one or more of such officers and such other officer or officers designated by the Board of Directors; any or all such signatures may be manual or facsimile signatures, the signature on interest coupons attached to any said bonds or debentures shall be a facsimile signature; and the corporate seal or a facsimile of such seal may be impressed, affixed, imprinted or otherwise reproduced on said bonds and debentures and, if attested, shall be attested by the Corporation's Secretary or Assistant Secretary by manual or facsimile signature. In case any person whose signature (manual or facsimile) appears upon any said bond or debenture or coupons attached thereto shall cease to be an officer of the Corporation, or shall cease to be the officer specified thereon, before the bonds or debentures so signed shall have been authenticated by the trustee under the indenture or other instrument pursuant to which the bonds or debentures are delivered or sold, such bonds or debentures or coupons may nevertheless be adopted by the Corporation, without further action by the Board of Directors, and authenticated and delivered and sold as though the person or persons who so signed or attested such bonds or debentures or coupons had not ceased to be an officer of the Corporation or the officer specified thereof; and any bonds or debentures may be signed as aforesaid; and the seal of the Corporation impressed, affixed, imprinted or otherwise reproduced thereon may be attested on behalf of the Corporation as aforesaid, and coupons attached may be signed as aforesaid by such persons as at the actual date of the execution of the bonds or debentures or coupons shall be the proper officers of the Corporations, although at the time of the date of the bonds or debentures, such persons may not have been officers of the Corporation. ARTICLE IV ---------- Executive Committee ------------------- 1. The Directors may appoint an executive committee and one or more other committees of not less than three members to be chosen from among the members of the Board of Directors. Such committees may meet at such times and places as the committee shall, by resolution, determine and it shall make its own rules of procedure. A majority of the members of any such committee shall constitute a quorum. 2. Except as otherwise provided by Board resolution or statute (as of June 1997, N.J.S.A. 14A:6-9(1)), each such committee shall have and may exercise -------- the power of the Board of Directors in the management of the business and affairs of the Corporation at any time when the Board of Directors are not in session. Each such committee shall, however, be subject to the specific directions of the Board of Directors. 3. Each such committee shall keep regular minutes of their transactions and shall cause them to be recorded in books to be kept for that purpose in the office of the Corporation, and shall report the same to the Board of Directors at their regular meetings. ARTICLE V --------- Transfer of Shares ------------------ 1. Except as otherwise provided by statute, shares shall be transferred on the books of the Corporation only by the holder thereof in person or by his attorney upon the surrender and cancellation of the certificate or certificates of a like number of shares, except in case of lost or destroyed certificates, and in that case only after the receipt of a satisfactory bond if required by the Board of Directors. 2. The Board of Directors may appoint a transfer agent and a registrar of transfers, and may require all stock certificates to bear the signatures of either or both. ARTICLE VI ---------- Fiscal Year ----------- 1. The fiscal year of the Corporation shall begin on the 1st day of October in each calendar year and end on the 30th day of September of the next succeeding year. ARTICLE VII ----------- Dividends and Working Capital ----------------------------- 1. Before declaring any dividends or making any distribution of profits, the Directors may set apart out of the net profits or out of the surplus of the Corporation as a reserve fund to be used as working capital or for any other proper purpose, such sum or sums as the Directors shall in their discretion deem just and proper and most for the benefit of the Corporation. 2. Dividends upon the capital stock of the Corporation when declared shall be payable on dates to be determined by the Board of Directors. ARTICLE VIII ------------ Closing of Transfer Books and Fixing A Record Book -------------------- The Board of Directors may close the stock transfer books of the Corporation for a period not exceeding sixty days preceding the date of any meeting of stockholders or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect. In lieu of so closing the stock transfer books, the Board of Directors may fix, in advance, a date, not exceeding sixty days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of capital stock, and in such case only stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, or to receive payment of such dividend, or allotment of rights or exercise of such rights, as the case may be, and notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. ARTICLE IX ---------- Waiver of Notice ---------------- 1. Any notice required to be given by these By-Laws may be waived by the person entitled thereto. ARTICLE X --------- Seal ---- 1. The common corporate seal is and until otherwise ordered by the Board of Directors shall be an impression upon paper or wax bearing the words - "NATIONAL FUEL GAS COMPANY, NEW JERSEY, INCORPORATED 1902". ARTICLE XI ---------- Amendment of By-Laws -------------------- 1. Except as otherwise provided by statute, the Board of Directors shall have power to make, alter or repeal the By-Laws of the Corporation by a vote of a majority of all the Directors at any duly convened meeting of the Board, but any By-Laws so made or otherwise promulgated may be altered or repealed and new By-Laws made by the stockholders at any duly conveyed meeting thereof. EX-10 3 EMPLOYMENT CONTRACT NATIONAL FUEL GAS COMPANY EMPLOYMENT CONTINUATION AND NONCOMPETITION AGREEMENT TABLE OF CONTENTS ----------------- Page ---- 1. Operation of Agreement.........................................2 a. Effective Date........................................2 b. Termination of Employment Following a Potential Change in Control............2 2. Definitions....................................................2 a. Change in Control.....................................2 b. Potential Change in Control...........................3 3. Employment Period..............................................3 4. Position and Duties............................................3 5. Compensation...................................................4 a. Base Salary...........................................4 b. Annual Bonus..........................................4 c. Long-term Incentive Compensation Programs.............4 d. Benefit Plans.........................................4 e. Expenses..............................................5 f. Vacation and Fringe Benefits..........................5 g. Indemnification.......................................5 6. Termination....................................................5 a. Death, Disability or Retirement.......................5 b. Voluntary Termination.................................5 c. Cause.................................................6 d. Good Reason...........................................6 e. Notice of Termination.................................7 f. Date of Termination...................................7 7. Obligations of the Company upon Termination....................7 a. Death or Disability...................................7 b. Cause and Voluntary Termination.......................7 c. Termination by the Company other than for Cause and Termination by the Executive for Good Reason......................8 i. Severance Benefits................................8 ii. Continuation of Welfare Benefits..................8 iii.Qualification for Early Retirement................9 d. Discharge of the Company's Obligations...............10 e. Limit on Payments by the Company.....................10 i. Application of Section 7(e)......................10 ii. Calculation of Benefits..........................11 iii.Imposition of Payment Cap........................11 iv. Application of Section 280G......................11 v. Applicable Tax Rates.............................12 vi. Adjustments in Respect of the Payment Cap........12 f. If Termination of Employment Occurs After the Executive Has Reached Age 62...............13 8. Non-exclusivity of Rights.....................................13 9. No Offset .................................................13 10. Non-Competition and Non-Solicitation..........................14 a. Noncompete...........................................14 b. Non-Solicitation of Employees........................14 c. Confidential Information.............................14 d. Non-disparagement....................................14 e. Company Property.....................................15 f. Additional Payment...................................15 11. Injunctive Relief and Other Remedies with Respect to Covenants..........................................15 12. Successors .................................................15 13. Miscellaneous16 a. Applicable Law.......................................16 b. Arbitration..........................................16 c. Amendments...........................................16 d. Entire Agreement.....................................16 e. Notices..............................................17 f. Source of Payments...................................17 g. Tax Withholding......................................17 h. Severability; Reformation............................18 i. Waiver...............................................18 j. Counterparts.........................................18 k. Captions.............................................18 Signature Page.........................................................18 EMPLOYMENT CONTINUATION AND NONCOMPETITION AGREEMENT THIS AGREEMENT between NATIONAL FUEL GAS DISTRIBUTION CORPORATION, a New York corporation (the "Company"), NATIONAL FUEL GAS COMPANY, a New Jersey corporation ("National"), and ________________________ (the "Executive"), dated as of the 11th day of December, 1998. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Company and National wish to attract and retain well-qualified executive and key personnel and to assure continuity of management, which will be essential to its ability to evaluate and respond to any actual or threatened Change in Control (as defined below) in the best interests of shareholders; WHEREAS, the Executive is a valuable employee of the Company, an integral part of its management team and a key participant in the decision making process relative to short-term and long-term planning and policy for the Company; WHEREAS, the Company and National understand that any actual or threatened Change in Control will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company and National wish to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control and to assure to the Company the Executive's services during the period in which such a Change in Control is threatened, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; and WHEREAS, the Board of Directors of National, at its meeting on December 10, 1998, determined that it would be in the best interests of National and its shareholders to assure continuity in the management of National in the event of a Change in Control by entering into an employment continuation and noncompete agreement with Executive; WHEREAS, to achieve these objectives, the Company, National and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change in Control or Potential Change in Control (as defined in Section 2). NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company, National and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this ----------------------- --------------- Agreement shall be the date on which a Change in Control occurs (the "Effective Date"), provided that, except as provided in Section 1(b), if the Executive is not employed by the Company, National or any of their subsidiaries on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change in Control. ---------------------------------------------------------------------- Notwithstanding Section 1(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change in Control and prior to the occurrence of a Change in Control and (ii) a Change in Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change in Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective. 2. Definitions. (a) Change in Control. For the purposes of this Agreement, ------------ ----------------- a "Change in Control" shall be deemed to have occurred if any of the following have occurred: (i) either (a) the Company or National shall receive a report - on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the "1934 Act") disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) ("Person"), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National or (b) the Company or National has actual knowledge of facts which would require any Person to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13(d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National; (ii) purchase by any Person, other than National or a wholly-owned subsidiary of National or an employee benefit plan sponsored or maintained by National or a wholly-owned subsidiary of National, of shares pursuant to a tender or exchange offer to acquire any stock of National (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (iii) approval by the shareholders of National of (a) any consolidation or merger of National in which National is not the continuing or surviving corporation or pursuant to which shares of stock of National would be converted into cash, securities or other property, other than a consolidation or merger of National in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which National is the continuing or surviving corporation but in which the common shareholders of National immediately prior to the consolidation or merger do not hold at least a majority of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least a majority of the common stock of the corporation which owns all of the common stock of National), or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of National; or (iv) a change in the majority of the members of the Board of Directors of National (the "Board") within a 24-month period unless the election or nomination for election by National's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the 24-month period. (b) Potential Change in Control. For the purposes of ---------------------------- this Agreement, a Potential Change in Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least twenty (20) percent of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (ii) National enters into an agreement the consummation of which would constitute a Change in Control; (iii) proxies for the election of directors of National are solicited by anyone other than National; or (iv) any other event occurs which is deemed to be a Potential Change in Control by the Board. 3. Employment Period. Subject to Section 6 of this Agreement, ----------------- the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the earlier to occur of (i) the third anniversary of the Effective Date and (ii) the date on which the Executive attains age 65. 4. Position and Duties. During the Employment Period, the ------------------- Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed in the United States and within 30 miles of the location where the Executive was employed immediately preceding the Effective Date. 5. Compensation. (a) Base Salary. During the Employment ------------- ------------ Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and shall be increased annually at a rate at least equal to the greater of (i) the average percentage increase for the same period in the compensation of salaried employees of National and its subsidiaries who are not executives and (ii) the percentage increase in the national Consumer Price Index for the last completed calendar year. The Executive's base salary, as it shall be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to ------------ the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the --------------------------------------------- Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive ------------- (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive -------- shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment ------------------------------- Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, --------------- National and the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of National or the Company or any of their subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of National or the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive - -------------- hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. 6. Termination. (a) Death, Disability or Retirement. Subject ------------ ------------------------------- to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive's inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company's long-term disability plan, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this ---------------------- Agreement to the contrary, following a Change in Control the Executive may, upon not less than 30 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that ------------- any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's ----- employment for Cause. For purposes of this Agreement, "Cause" means the Executive's gross misconduct, fraud or dishonesty, which has resulted or is likely to result in material economic damage to the Company or National, as determined in good faith by a vote of at least two-thirds of the non-employee directors of National at a meeting of the Board at which the Executive is provided an opportunity to be heard (with representation by counsel of his choosing, should he so desire) (d) Good Reason. Following the occurrence of a Change in ------------ Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change in Control: (i) (A) the assignment to the Executive of any duties - inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or (B) any other material adverse change in such - position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location outside of the United States and/or more than 30 miles (or such other lesser distance as shall be set forth in the Company's relocation policy as in effect at the Effective Date) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change in Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change in Control, absent any further impact on the Executive, be deemed to constitute Good Reason. In the event that the Executive shall in good faith give a Notice of Termination for Good Reason and it shall thereafter be determined that Good Reason did not exist, the Executive shall, unless the Company and the Executive shall otherwise mutually agree, return to employment with the Company within 5 business days of such decision, without any impairment or other limitation of his rights hereunder, except that he shall not be paid his base salary for any period he did not perform services and his annual bonus opportunity for such year may be reduced to reflect his period of absence. (e) Notice of Termination. Any termination by the Company for --------------------- Cause or by the Executive for Good Reason shall be communicated by Notice of Termination given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 30 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 180 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) - indicates the specific termination provision in this Agreement relied upon, (ii) -- sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt --- of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (f) Date of Termination. For the purpose of this Agreement, -------------------- the term "Date of Termination" means (i) in the case of a termination for which - a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment -- terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or -------------------------------------------- -------- Disability. If the Executive's employment is terminated during the Employment - ---------- Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the - Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits -- owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to --- the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 15 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment ------------------------------- Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change in Control), the Company shall pay the Executive (i) the Earned Salary in - cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in -- accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and --------------------------------------------------------- Termination by the Executive for Good Reason. Subject to Section 7(f) below, if, - -------------------------------------------- during the Employment Period, the Company terminates the Executive's employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts: (i) Severance Benefits. The Executive shall be paid the ------------------ following: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to (1) 1.99; times (2) the sum of (i) the Executive's annual Base Salary; and (ii) the average of the annual at risk compensation incentive program bonuses or other bonuses (excluding sign-on bonuses) payable to the Executive (including, for the purposes of this calculation, any amount of such bonuses paid in the form of restricted stock (in lieu of cash), to be valued at the date of grant) for the two fiscal years of the Company ending immediately prior to the Effective Date (the "Average Bonus") ; and (C) the Accrued Obligations. The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination; provided however that if the date payment would otherwise --------------------- be due hereunder is after September 30, payment of the Severance Amount shall be paid on the first business day in the following January. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Welfare Benefits. If, during the ------------------------------------ Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change in Control the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date - of Termination (the "End Date") and (2) the date the Executive becomes - eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's employee and executive welfare and fringe benefit plans, excluding further vacation pay (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Qualification for Early Retirement. If the Executive is ---------------------------------- at least age 52 at his Date of Termination, the Executive shall be deemed to have earned, and to have become vested in, the retirement benefits (including, without limitation, any early retirement subsidy or supplement, retiree life coverage or retiree medical benefits) that would have been payable or made available to the Executive under any employee benefit plan sponsored or maintained by the Company or any of its subsidiaries for which the Executive was eligible at the Date of Termination had he continued in service for three additional years after the Date of Termination. The purpose and intent of this provision is to provide the Executive with vesting and to bridge any gap of three or fewer years of service to qualify for any additional benefits available for an early retiree (such as the benefits under the Executive Retirement Plan ("ERP") or the benefits available under the Retirement Plan ("RP") including the so-called Rule of 90), and not to increase the service taken into account for purpose of determining the amount of benefits payable to the Executive beyond his actual period of service through the Date of Termination. The operation of this provision is illustrated by the following examples: Example 1: Assume that, at the Executive's Date of ----------- Termination, the Executive is exactly 53 years old, and has exactly 4 years of service for purposes of the ERP. Assume further that the relevant RP and ERP provisions have not changed since the date of the execution of this Agreement. The Executive would receive a benefit (in the form of a single life annuity) under the RP and ERP in the aggregate in the form of a benefit beginning at age 56, equal to 4/5 times what he would otherwise have received under a combination of those plans beginning at age 56. (Or, he could elect commencement of benefits at age 55 in reduced amounts per the terms of the relevant plans.) Five is used in the denominator because the current ERP vesting policy is attainment of age 55 and at least 5 years of service. Example 2: The assumptions are the same as in example 1, ----------- except that the Executive has exactly 32 years of service (instead of 4). By reason of the additional credit provided under this Agreement, the Executive would receive a benefit calculated as though payable under the RP (in the form of a single life annuity), under the RP's "Rule of 90," that would begin at age 55-1/2 and would equal [(53 + 32)/90] times what he would otherwise have received under the RP under the Rule of 90 beginning at age 55-1/2 (the earliest date at which he otherwise could have retired and commenced receiving benefits determined under the Rule of 90). In both examples, (i) any portion of the incremental benefit - that could not be paid under the RP will be paid from the ERP or the Company's general assets, (ii) final average salaries would be -- determined under those plans as of the Executive's Date of Termination and (iii) the Executive would be entitled to elect forms of benefit --- other than the single life annuity. Other fact patterns, and examples respecting other post-retirement benefits, would use similar principles, but might use different math. For example, the current provisions concerning an executive's vesting in early retirement benefits under the RP, and concerning retiree medical benefit vesting, have years of service requirements in excess of five years. (d) Discharge of the Company's Obligations. Except as ------------------------------------------- expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e)) following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Limit on Payments by the Company. -------------------------------- (i) Application of Section 7(e). In the event that any amount --------------------------- or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to the Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following delivery ----------------------- of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If ------------------------- (x) the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax and (y) the net-after tax amount (taking into account all applicable taxes payable by the Executive, including any Excise Tax) that the Executive would receive if the limitation contained in this Section 7(e)(iii) were not imposed does not exceed the net-after tax benefit the Executive would receive if such limitation were imposed by more than $25,000, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that the Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining --------------------------- whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the "base amount" allocable to such Covered Payments, or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Applicable Tax Rates. For purposes of determining whether -------------------- the Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(e)(iii), the Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year; provided, however, that the Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as the Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances. (vi) Adjustments in Respect of the Payment Cap. If the ----------------------------------------------- Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that the Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If this Section 7(e) is not applied to reduce the Executive's entitlement under this Section 7 because the Accountants determine that the Executive would not receive a greater net-after tax benefit by applying this Section 7(e) and it is established pursuant to a Final Determination that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to the Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (f) If Termination of Employment Occurs After the Executive ---------------------------------------------------------- Has Reached Age 62. Notwithstanding anything else to the contrary contained in - ------------------ this Section 7, if the Executive's employment with the Company terminates at any time during the 3 year period ending on the first day of the month following the Executive's sixty-fifth birthday (the "Normal Retirement Date"), and the Executive would be entitled to receive severance benefits under paragraphs 7(c), then (i) the multiplier in paragraph 7(c)(i)(B) shall not be 1.99, but shall be - a number equal to 1.99 times (x/1095), where x equals the number of days remaining until the Executive's Normal Retirement Date, and (ii) the End Date -- described in Section 7(c)(ii) shall not be the third anniversary of the Date of Termination, but shall be the Executive's Normal Retirement Date. 8. Non-exclusivity of Rights. Except as expressly provided -------------------------- herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments --------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Non-Competition and Non-Solicitation. (a) Noncompete. --------------------------------------- ---------- Unless the Executive otherwise elects by written notice to the Company prior to his Date of Termination (or in the case of a Company initiated termination, within 5 business days of receipt of a Notice of Termination, if such period extends beyond the Date of Termination) not to be bound by the provisions of this Section 10(a), during the one year period following the Executive's Date of Termination for any reason (the "Restriction Period"), Executive shall not, directly or indirectly, engage in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder (other than a holder of less than 1% of the outstanding voting shares of any publicly held company) of any business or entity that is engaged in any activity which is competitive with the business of the Company, National and their respective subsidiaries or affiliates in any geographic area in which the Company, National and/or any of their respective subsidiaries or affiliates is engaged in such competitive business. (b) Non-Solicitation of Employees. Regardless of whether the ----------------------------- Executive has elected to be bound by Section 10(a), during the Restriction Period, the Executive shall not, directly or indirectly, for his own account or for the account of any other person or entity with which he is or shall become associated in any capacity, solicit for employment, employ or otherwise interfere with the relationship of Employer with any person who at any time during the six months preceding such solicitation, employment or interference is or was employed by or otherwise engaged to perform services for Employer other than any such solicitation or employment during the Executive's employment with Employer on behalf of Employer. (c) Confidential Information. Regardless of whether the ------------------------- Executive has elected to be bound by Section 10(a), the Executive shall hold in a fiduciary capacity for the benefit of National and the Company all secret or confidential information, knowledge or data relating to National, the Company or any of their affiliated companies, and their respective businesses, (i) obtained - by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an -- unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (d) Non-disparagement. Regardless of whether the Executive has ----------------- elected to be bound by Section 10(a), the Executive shall not publicly or privately disparage National or the Company, or any of their subsidiaries or affiliates, including any aspect of their respective business, products, employees, management or Board of Directors, in any manner which could adversely effect the business of National, the Company or such subsidiaries or affiliates. Furthermore, the Executive shall not, directly or indirectly, take any action or fail to take any action with the purpose of interfering with, damaging or disrupting the assets or business operations or affairs of National or the Company or any of their respective subsidiaries or affiliates. National and the Company shall not publicly or privately disparage the Executive, either personally or professionally. Nothing in this paragraph shall be construed to prevent any officer of National or the Company from discussing the Executive's performance internally in the ordinary course of business. (e) Company Property. Except as expressly provided herein, ----------------- promptly following the Executive's termination of employment, the Executive shall return to the Company all property of National and the Company and all copies thereof in the Executive's possession or under his control. (f) Additional Payment. Unless the Executive has elected not ------------------- to be bound by Section 10(a), the Company shall make an additional lump sum payment to the Executive within 30 days following the Executive's Date of Termination equal to one times the sum of (i) the Executive's annual Base Salary - and (ii) the Executive's Average Bonus as compensation for the covenant -- contained in Section 10(a). 11. Injunctive Relief and Other Remedies with Respect to --------------------------------------------------------- Covenants. The Executive acknowledges and agrees that the covenants and - --------- obligations of the Executive set forth in Section 10 relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining the Executive from committing any violation of the covenants and obligations contained in Section 10 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall an asserted violation of the provisions of Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the ---------- Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement ------------- -------------- shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11, ----------- in the event that any dispute, controversy or claim arises between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, such dispute, controversy or claim shall be resolved by binding arbitration before a panel of three arbitrators selected in accordance with the American Arbitration Association (the "AAA"). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal or further dispute. Execution of the determination by such arbitration panel may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in a location selected by the Company which is a convenient forum for such arbitration (taking into account the availability of a sufficient pool of experienced arbitrators) and not more than 100 miles from the Executive's principal place of employment at the Effective Date (or at such other location as may be agreed upon by the parties), and shall be conducted in accordance with the Rules of the AAA. In the event of the occurrence of any proceeding (including the appeal of an arbitration decision) between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company or National shall reimburse the Executive for all reasonable costs and expenses relating to such proceeding, including reasonable attorneys' fees and expenses, regardless of the final outcome, unless the arbitration panel determines that recovery by the Executive of all or a part of such fees, costs and expenses would be unjust. In no event shall the Executive reimburse the Company for any of the costs and expenses relating to such litigation or other proceeding. (c) Amendments. This Agreement may not be amended or modified ---------- otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire ----------------- agreement between the parties hereto with respect to the matters referred to herein and expressly supersedes the Change in Control Agreement by and between the Executive, National and the Company dated as of May 1, 1992; provided, --------- however, that this Agreement is not intended to impair any rights of the - -------------- Executive under any prior written agreement, any employee benefit plan of the Company or a Subsidiary or any written policy, program or procedure of the Company or a Subsidiary unless and to the extent specifically provided herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder ------- 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, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: National Fuel Gas Distribution Corporation 10 Lafayette Square Buffalo, N.Y. 14203 Attention: Corporate Secretary If to National: National Fuel Gas Company 10 Lafayette Square Buffalo, NY 14203 Attention: Corporate Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Source of Payments. All payments provided for in paragraph ------------------ 3 above shall be paid in cash from the general funds of the Company or National; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established by the Company or National to assure such payments. The Company or National shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company or National shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship, between the Company or National and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company or National such right shall be no greater than the right of an unsecured creditor of the Company or National. (g) Tax Withholding. The Company shall withhold from any ---------------- amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Severability; Reformation. In the event that one or more -------------------------- of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 10 are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (i) Waiver. Waiver by any party hereto of any breach or ------ default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or the Executive's rights hereunder on any occasion or series of occasions. (j) Counterparts. This Agreement may be executed in ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of -------- the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. NATIONAL FUEL GAS DISTRIBUTION CORPORATION Attest: /s/ By: /s/ -------------------- ------------------------- Secretary Title: Chairman NATIONAL FUEL GAS COMPANY Attest: /s/ By: /s/ -------------------- ------------------------- Secretary Title: Chairman, President & CEO EXECUTIVE: /s/ ------------------------- EX-10 4 EMPLOYMENT CONTRACT NATIONAL FUEL GAS COMPANY EMPLOYMENT CONTINUATION AND NONCOMPETITION AGREEMENT TABLE OF CONTENTS Page ---- 1. Operation of Agreement.......................................2 a. Effective Date......................................2 b. Termination of Employment Following a Potential Change in Control.........................2 2. Definitions..................................................2 a. Change in Control...................................2 b. Potential Change in Control.........................3 3. Employment Period............................................3 4. Position and Duties..........................................3 5. Compensation.................................................4 a. Base Salary.........................................4 b. Annual Bonus........................................4 c. Long-term Incentive Compensation Programs...........4 d. Benefit Plans.......................................4 e. Expenses............................................5 f. Vacation and Fringe Benefits........................5 g. Indemnification.....................................5 6. Termination..................................................5 a. Death, Disability or Retirement.....................5 b. Voluntary Termination...............................5 c. Cause...............................................6 d. Good Reason.........................................6 e. Notice of Termination...............................7 f. Date of Termination.................................7 7. Obligations of the Company upon Termination..................7 a. Death or Disability.................................7 b. Cause and Voluntary Termination.....................7 c. Termination by the Company other than for Cause and Termination by the Executive for Good Reason....................8 i. Severance Benefits..............................8 ii. Continuation of Welfare Benefits................8 iii.Qualification for Early Retirement..............9 d. Discharge of the Company's Obligations.............10 e. Limit on Payments by the Company...................10 i. Application of Section 7(e)....................10 ii. Calculation of Benefits........................11 iii.Imposition of Payment Cap......................11 iv. Application of Section 280G....................11 v. Applicable Tax Rates...........................12 vi. Adjustments in Respect of the Payment Cap......12 f. If Termination of Employment Occurs After the Executive Has Reached Age 62.....................................13 8. Non-exclusivity of Rights...................................13 9. No Offset ...............................................13 10. Non-Competition and Non-Solicitation........................14 a. Noncompete.........................................14 b. Non-Solicitation of Employees......................14 c. Confidential Information...........................14 d. Non-disparagement..................................14 e. Company Property...................................15 f. Additional Payment.................................15 11. Injunctive Relief and Other Remedies with Respect to Covenants...................................15 12. Successors ...............................................15 13. Miscellaneous16 a. Applicable Law.....................................16 b. Arbitration........................................16 c. Amendments.........................................16 d. Entire Agreement...................................16 e. Notices............................................17 f. Source of Payments.................................17 g. Tax Withholding....................................17 h. Severability; Reformation..........................18 i. Waiver.............................................18 j. Counterparts.......................................18 k. Captions...........................................18 Signature Page.......................................................18 EMPLOYMENT CONTINUATION AND NONCOMPETITION AGREEMENT THIS AGREEMENT between NATIONAL FUEL GAS SUPPLY CORPORATION, a Pennsylvania corporation (the "Company"), NATIONAL FUEL GAS COMPANY, a New Jersey corporation ("National"), and __________________ (the "Executive"), dated as of the 11th day of December, 1998. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Company and National wish to attract and retain well-qualified executive and key personnel and to assure continuity of management, which will be essential to its ability to evaluate and respond to any actual or threatened Change in Control (as defined below) in the best interests of shareholders; WHEREAS, the Executive is a valuable employee of the Company, an integral part of its management team and a key participant in the decision making process relative to short-term and long-term planning and policy for the Company; WHEREAS, the Company and National understand that any actual or threatened Change in Control will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company and National wish to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control and to assure to the Company the Executive's services during the period in which such a Change in Control is threatened, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; and WHEREAS, the Board of Directors of National, at its meeting on December 10, 1998, determined that it would be in the best interests of National and its shareholders to assure continuity in the management of National in the event of a Change in Control by entering into an employment continuation and noncompete agreement with Executive; WHEREAS, to achieve these objectives, the Company, National and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change in Control or Potential Change in Control (as defined in Section 2). NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company, National and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective ---------------------- --------------- date of this Agreement shall be the date on which a Change in Control occurs (the "Effective Date"), provided that, except as provided in Section 1(b), if the Executive is not employed by the Company, National or any of their subsidiaries on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change in ---------------------------------------------------------- Control. Notwithstanding Section 1(a), if (i) the Executive's employment is - ------- - terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change in Control and prior to the occurrence of a Change in Control and (ii) a Change in Control occurs within two years of such -- termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change in Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective. 2. Definitions. (a) Change in Control. For the purposes of ----------- ----------------- this Agreement, a "Change in Control" shall be deemed to have occurred if any of the following have occurred: (i) either (a) the Company or National shall receive a report - on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the "1934 Act") disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) ("Person"), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National or (b) the - Company or National has actual knowledge of facts which would require any Person to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13(d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National; (ii) purchase by any Person, other than National or a wholly-owned subsidiary of National or an employee benefit plan sponsored or maintained by National or a wholly-owned subsidiary of National, of shares pursuant to a tender or exchange offer to acquire any stock of National (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (iii) approval by the shareholders of National of (a) any consolidation or merger of National in which National is not the continuing or surviving corporation or pursuant to which shares of stock of National would be converted into cash, securities or other property, other than a consolidation or merger of National in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which National is the continuing or surviving corporation but in which the common shareholders of National immediately prior to the consolidation or merger do not hold at least a majority of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least a majority of the common stock of the corporation which owns all of the common stock of National), or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of National; or (iv) a change in the majority of the members of the Board of Directors of National (the "Board") within a 24-month period unless the election or nomination for election by National's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the 24-month period. (b) Potential Change in Control. For the purposes of this ----------------------------- Agreement, a Potential Change in Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least twenty (20) percent of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (ii) National enters into an agreement the consummation of which would constitute a Change in Control; (iii) proxies for the election of directors of National are solicited by anyone other than National; or (iv) any other event occurs which is deemed to be a Potential Change in Control by the Board. 3. Employment Period. Subject to Section 6 of this Agreement, ----------------- the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the earlier to occur of (i) the third anniversary of the Effective Date and (ii) the date on which the Executive attains age 65. 4. Position and Duties. During the Employment Period, the ------------------- Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed in the United States and within 30 miles of the location where the Executive was employed immediately preceding the Effective Date. 5. Compensation. (a) Base Salary. During the Employment ------------ ------------ Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and shall be increased annually at a rate at least equal to the greater of (i) the average percentage increase for the same period in the compensation of salaried employees of National and its subsidiaries who are not executives and (ii) the percentage increase in the national Consumer Price Index for the last completed calendar year. The Executive's base salary, as it shall be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to ------------ the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the -------------------------------------------- Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive ------------- (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive -------- shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment ------------------------------- Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, --------------- National and the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of National or the Company or any of their subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of National or the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive - -------------- hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. 6. Termination. (a) Death, Disability or Retirement. Subject ----------- ------------------------------- to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive's inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company's long-term disability plan, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this ---------------------- Agreement to the contrary, following a Change in Control the Executive may, upon not less than 30 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that ------------- any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's ----- employment for Cause. For purposes of this Agreement, "Cause" means the Executive's gross misconduct, fraud or dishonesty, which has resulted or is likely to result in material economic damage to the Company or National, as determined in good faith by a vote of at least two-thirds of the non-employee directors of National at a meeting of the Board at which the Executive is provided an opportunity to be heard (with representation by counsel of his choosing, should he so desire) (d) Good Reason. Following the occurrence of a Change in ------------ Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change in Control: (i) (A) the assignment to the Executive of any duties - inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or (B) any other material adverse change in such - position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location outside of the United States and/or more than 30 miles (or such other lesser distance as shall be set forth in the Company's relocation policy as in effect at the Effective Date) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change in Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change in Control, absent any further impact on the Executive, be deemed to constitute Good Reason. In the event that the Executive shall in good faith give a Notice of Termination for Good Reason and it shall thereafter be determined that Good Reason did not exist, the Executive shall, unless the Company and the Executive shall otherwise mutually agree, return to employment with the Company within 5 business days of such decision, without any impairment or other limitation of his rights hereunder, except that he shall not be paid his base salary for any period he did not perform services and his annual bonus opportunity for such year may be reduced to reflect his period of absence. (e) Notice of Termination. Any termination by the Company for --------------------- Cause or by the Executive for Good Reason shall be communicated by Notice of Termination given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 30 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 180 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) - indicates the specific termination provision in this Agreement relied upon, (ii) -- sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt --- of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (f) Date of Termination. For the purpose of this Agreement, -------------------- the term "Date of Termination" means (i) in the case of a termination for which - a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment -- terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or -------------------------------------------- -------- Disability. If the Executive's employment is terminated during the Employment - ---------- Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the - Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits -- owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to --- the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 15 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment ------------------------------- Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change in Control), the Company shall pay the Executive (i) the Earned Salary in - cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in -- accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and --------------------------------------------------------- Termination by the Executive for Good Reason. Subject to Section 7(f) below, if, - -------------------------------------------- during the Employment Period, the Company terminates the Executive's employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts: (i) Severance Benefits. The Executive shall be paid the ------------------ following: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to (1) 1.99; times (2) the sum of (i) the Executive's annual Base Salary; - and (ii) the average of the annual at risk -- compensation incentive program bonuses or other bonuses (excluding sign-on bonuses) payable to the Executive (including, for the purposes of this calculation, any amount of such bonuses paid in the form of restricted stock (in lieu of cash), to be valued at the date of grant) for the two fiscal years of the Company ending immediately prior to the Effective Date (the "Average Bonus") ; and (C) the Accrued Obligations. The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination; provided however that if the date payment would otherwise --------------------- be due hereunder is after September 30, payment of the Severance Amount shall be paid on the first business day in the following January. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Welfare Benefits. If, during the ------------------------------------ Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change in Control the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date - of Termination (the "End Date") and (2) the date the Executive becomes - eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's employee and executive welfare and fringe benefit plans, excluding further vacation pay (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Qualification for Early Retirement. If the Executive is ---------------------------------- at least age 52 at his Date of Termination, the Executive shall be deemed to have earned, and to have become vested in, the retirement benefits (including, without limitation, any early retirement subsidy or supplement, retiree life coverage or retiree medical benefits) that would have been payable or made available to the Executive under any employee benefit plan sponsored or maintained by the Company or any of its subsidiaries for which the Executive was eligible at the Date of Termination had he continued in service for three additional years after the Date of Termination. The purpose and intent of this provision is to provide the Executive with vesting and to bridge any gap of three or fewer years of service to qualify for any additional benefits available for an early retiree (such as the benefits under the Executive Retirement Plan ("ERP") or the benefits available under the Retirement Plan ("RP") including the so-called Rule of 90), and not to increase the service taken into account for purpose of determining the amount of benefits payable to the Executive beyond his actual period of service through the Date of Termination. The operation of this provision is illustrated by the following examples: Example 1: Assume that, at the Executive's Date of ---------- Termination, the Executive is exactly 53 years old, and has exactly 4 years of service for purposes of the ERP. Assume further that the relevant RP and ERP provisions have not changed since the date of the execution of this Agreement. The Executive would receive a benefit (in the form of a single life annuity) under the RP and ERP in the aggregate in the form of a benefit beginning at age 56, equal to 4/5 times what he would otherwise have received under a combination of those plans beginning at age 56. (Or, he could elect commencement of benefits at age 55 in reduced amounts per the terms of the relevant plans.) Five is used in the denominator because the current ERP vesting policy is attainment of age 55 and at least 5 years of service. Example 2: The assumptions are the same as in example 1, ---------- except that the Executive has exactly 32 years of service (instead of 4). By reason of the additional credit provided under this Agreement, the Executive would receive a benefit calculated as though payable under the RP (in the form of a single life annuity), under the RP's "Rule of 90," that would begin at age 55-1/2 and would equal [(53 + 32)/90] times what he would otherwise have received under the RP under the Rule of 90 beginning at age 55-1/2 (the earliest date at which he otherwise could have retired and commenced receiving benefits determined under the Rule of 90). In both examples, (i) any portion of the incremental benefit - that could not be paid under the RP will be paid from the ERP or the Company's general assets, (ii) final average salaries would be -- determined under those plans as of the Executive's Date of Termination and (iii) the Executive would be entitled to elect forms of benefit --- other than the single life annuity. Other fact patterns, and examples respecting other post-retirement benefits, would use similar principles, but might use different math. For example, the current provisions concerning an executive's vesting in early retirement benefits under the RP, and concerning retiree medical benefit vesting, have years of service requirements in excess of five years. (d) Discharge of the Company's Obligations. Except as ------------------------------------------- expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e)) following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Limit on Payments by the Company. -------------------------------- (i) Application of Section 7(e). In the event that any amount --------------------------- or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to the Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following delivery ----------------------- of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If ------------------------- (x) the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax and (y) the net-after tax amount (taking into account all applicable taxes payable by the Executive, including any Excise Tax) that the Executive would receive if the limitation contained in this Section 7(e)(iii) were not imposed does not exceed the net-after tax benefit the Executive would receive if such limitation were imposed by more than $25,000, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that the Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining --------------------------- whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the "base amount" allocable to such Covered Payments, or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Applicable Tax Rates. For purposes of determining whether -------------------- the Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(e)(iii), the Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year; provided, however, that the Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as the Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances. (vi) Adjustments in Respect of the Payment Cap. If the ----------------------------------------------- Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that the Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If this Section 7(e) is not applied to reduce the Executive's entitlement under this Section 7 because the Accountants determine that the Executive would not receive a greater net-after tax benefit by applying this Section 7(e) and it is established pursuant to a Final Determination that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to the Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (f) If Termination of Employment Occurs After the Executive ---------------------------------------------------------- Has Reached Age 62. Notwithstanding anything else to the contrary contained in - ------------------ this Section 7, if the Executive's employment with the Company terminates at any time during the 3 year period ending on the first day of the month following the Executive's sixty-fifth birthday (the "Normal Retirement Date"), and the Executive would be entitled to receive severance benefits under paragraphs 7(c), then (i) the multiplier in paragraph 7(c)(i)(B) shall not be 1.99, but shall be - a number equal to 1.99 times (x/1095), where x equals the number of days remaining until the Executive's Normal Retirement Date, and (ii) the End Date -- described in Section 7(c)(ii) shall not be the third anniversary of the Date of Termination, but shall be the Executive's Normal Retirement Date. 8. Non-exclusivity of Rights. Except as expressly provided -------------------------- herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments --------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Non-Competition and Non-Solicitation. (a) Noncompete. -------------------------------------- ---------- Unless the Executive otherwise elects by written notice to the Company prior to his Date of Termination (or in the case of a Company initiated termination, within 5 business days of receipt of a Notice of Termination, if such period extends beyond the Date of Termination) not to be bound by the provisions of this Section 10(a), during the one year period following the Executive's Date of Termination for any reason (the "Restriction Period"), Executive shall not, directly or indirectly, engage in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder (other than a holder of less than 1% of the outstanding voting shares of any publicly held company) of any business or entity that is engaged in any activity which is competitive with the business of the Company, National and their respective subsidiaries or affiliates in any geographic area in which the Company, National and/or any of their respective subsidiaries or affiliates is engaged in such competitive business. (b) Non-Solicitation of Employees. Regardless of whether the ----------------------------- Executive has elected to be bound by Section 10(a), during the Restriction Period, the Executive shall not, directly or indirectly, for his own account or for the account of any other person or entity with which he is or shall become associated in any capacity, solicit for employment, employ or otherwise interfere with the relationship of Employer with any person who at any time during the six months preceding such solicitation, employment or interference is or was employed by or otherwise engaged to perform services for Employer other than any such solicitation or employment during the Executive's employment with Employer on behalf of Employer. (c) Confidential Information. Regardless of whether the ------------------------- Executive has elected to be bound by Section 10(a), the Executive shall hold in a fiduciary capacity for the benefit of National and the Company all secret or confidential information, knowledge or data relating to National, the Company or any of their affiliated companies, and their respective businesses, (i) obtained - by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an -- unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (d) Non-disparagement. Regardless of whether the Executive has ----------------- elected to be bound by Section 10(a), the Executive shall not publicly or privately disparage National or the Company, or any of their subsidiaries or affiliates, including any aspect of their respective business, products, employees, management or Board of Directors, in any manner which could adversely effect the business of National, the Company or such subsidiaries or affiliates. Furthermore, the Executive shall not, directly or indirectly, take any action or fail to take any action with the purpose of interfering with, damaging or disrupting the assets or business operations or affairs of National or the Company or any of their respective subsidiaries or affiliates. National and the Company shall not publicly or privately disparage the Executive, either personally or professionally. Nothing in this paragraph shall be construed to prevent any officer of National or the Company from discussing the Executive's performance internally in the ordinary course of business. (e) Company Property. Except as expressly provided herein, ----------------- promptly following the Executive's termination of employment, the Executive shall return to the Company all property of National and the Company and all copies thereof in the Executive's possession or under his control. (f) Additional Payment. Unless the Executive has elected not ------------------- to be bound by Section 10(a), the Company shall make an additional lump sum payment to the Executive within 30 days following the Executive's Date of Termination equal to one times the sum of (i) the Executive's annual Base Salary - and (ii) the Executive's Average Bonus as compensation for the covenant -- contained in Section 10(a). 11. Injunctive Relief and Other Remedies with Respect to --------------------------------------------------------- Covenants. The Executive acknowledges and agrees that the covenants and - --------- obligations of the Executive set forth in Section 10 relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining the Executive from committing any violation of the covenants and obligations contained in Section 10 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall an asserted violation of the provisions of Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the ---------- Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be ------------- -------------- governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11, ----------- in the event that any dispute, controversy or claim arises between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, such dispute, controversy or claim shall be resolved by binding arbitration before a panel of three arbitrators selected in accordance with the American Arbitration Association (the "AAA"). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal or further dispute. Execution of the determination by such arbitration panel may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in a location selected by the Company which is a convenient forum for such arbitration (taking into account the availability of a sufficient pool of experienced arbitrators) and not more than 100 miles from the Executive's principal place of employment at the Effective Date (or at such other location as may be agreed upon by the parties), and shall be conducted in accordance with the Rules of the AAA. In the event of the occurrence of any proceeding (including the appeal of an arbitration decision) between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company or National shall reimburse the Executive for all reasonable costs and expenses relating to such proceeding, including reasonable attorneys' fees and expenses, regardless of the final outcome, unless the arbitration panel determines that recovery by the Executive of all or a part of such fees, costs and expenses would be unjust. In no event shall the Executive reimburse the Company for any of the costs and expenses relating to such litigation or other proceeding. (c) Amendments. This Agreement may not be amended or modified ---------- otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire ----------------- agreement between the parties hereto with respect to the matters referred to herein and expressly supersedes the Change in Control Agreement by and between the Executive, National and the Company dated as of May 1, 1992; provided, --------- however, that this Agreement is not intended to impair any rights of the - -------------- Executive under any prior written agreement, any employee benefit plan of the Company or a Subsidiary or any written policy, program or procedure of the Company or a Subsidiary unless and to the extent specifically provided herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder ------- 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, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: National Fuel Gas Supply Corporation 10 Lafayette Square Buffalo, N.Y. 14203 Attention: Corporate Secretary If to National: National Fuel Gas Company 10 Lafayette Square Buffalo, NY 14203 Attention: Corporate Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Source of Payments. All payments provided for in paragraph ------------------ 3 above shall be paid in cash from the general funds of the Company or National; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established by the Company or National to assure such payments. The Company or National shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company or National shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship, between the Company or National and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company or National such right shall be no greater than the right of an unsecured creditor of the Company or National. (g) Tax Withholding. The Company shall withhold from any ---------------- amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Severability; Reformation. In the event that one or more -------------------------- of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 10 are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (i) Waiver. Waiver by any party hereto of any breach or ------ default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or the Executive's rights hereunder on any occasion or series of occasions. (j) Counterparts. This Agreement may be executed in ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of -------- the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. NATIONAL FUEL GAS SUPPLY CORPORATION Attest: /s/ By: /s/ -------------------- ----------------------- Secretary Title: President NATIONAL FUEL GAS COMPANY Attest: /s/ By: /s/ -------------------- ----------------------- Secretary Title: Chairman, President & CEO EXECUTIVE: /s/ ------------------------- EX-10 5 EMPLOYMENT CONTRACT NATIONAL FUEL GAS COMPANY EMPLOYMENT CONTINUATION AND NONCOMPETITION AGREEMENT TABLE OF CONTENTS Page ---- 1. Operation of Agreement...........................................2 a. Effective Date..........................................2 b. Termination of Employment Following a Potential Change in Control.................2 2. Definitions......................................................2 a. Change in Control.......................................2 b. Potential Change in Control.............................3 3. Employment Period................................................3 4. Position and Duties..............................................3 5. Compensation.....................................................4 a. Base Salary.............................................4 b. Annual Bonus............................................4 c. Long-term Incentive Compensation Programs...............4 d. Benefit Plans...........................................4 e. Expenses................................................5 f. Vacation and Fringe Benefits............................5 g. Indemnification.........................................5 6. Termination......................................................5 a. Death, Disability or Retirement.........................5 b. Voluntary Termination...................................5 c. Cause...................................................6 d. Good Reason.............................................6 e. Notice of Termination...................................7 f. Date of Termination.....................................7 7. Obligations of the Company upon Termination......................7 a. Death or Disability.....................................7 b. Cause and Voluntary Termination.........................7 c. Termination by the Company other than for Cause and Termination by the Executive for Good Reason........................8 i. Severance Benefits..................................8 ii. Continuation of Welfare Benefits....................8 iii.Qualification for Early Retirement..................9 d. Discharge of the Company's Obligations.................10 e. Limit on Payments by the Company.......................10 i. Application of Section 7(e)........................10 ii. Calculation of Benefits............................11 iii.Imposition of Payment Cap..........................11 iv. Application of Section 280G........................11 v. Applicable Tax Rates...............................12 vi. Adjustments in Respect of the Payment Cap..........12 f. If Termination of Employment Occurs After the Executive Has Reached Age 62.........................................13 8. Non-exclusivity of Rights.......................................13 9. No Offset ...................................................13 10. Non-Competition and Non-Solicitation............................14 a. Noncompete.............................................14 b. Non-Solicitation of Employees..........................14 c. Confidential Information...............................14 d. Non-disparagement......................................14 e. Company Property.......................................15 f. Additional Payment.....................................15 11. Injunctive Relief and Other Remedies with Respect to Covenants............................................15 12. Successors ...................................................15 13. Miscellaneous16 a. Applicable Law.........................................16 b. Arbitration............................................16 c. Amendments.............................................16 d. Entire Agreement.......................................16 e. Notices................................................17 f. Source of Payments.....................................17 g. Tax Withholding........................................17 h. Severability; Reformation..............................18 i. Waiver.................................................18 j. Counterparts...........................................18 k. Captions...............................................18 Signature Page...........................................................18 EMPLOYMENT CONTINUATION AND NONCOMPETITION AGREEMENT THIS AGREEMENT between SENECA RESOURCES CORPORATION, a Pennsylvania corporation (the "Company"), NATIONAL FUEL GAS COMPANY, a New Jersey corporation ("National"), and ___________________ (the "Executive"), dated as of the 11th day of December, 1998. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Company and National wish to attract and retain well-qualified executive and key personnel and to assure continuity of management, which will be essential to its ability to evaluate and respond to any actual or threatened Change in Control (as defined below) in the best interests of shareholders; WHEREAS, the Executive is a valuable employee of the Company, an integral part of its management team and a key participant in the decision making process relative to short-term and long-term planning and policy for the Company; WHEREAS, the Company and National understand that any actual or threatened Change in Control will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company and National wish to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control and to assure to the Company the Executive's services during the period in which such a Change in Control is threatened, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; and WHEREAS, the Board of Directors of National, at its meeting on December 10, 1998, determined that it would be in the best interests of National and its shareholders to assure continuity in the management of National in the event of a Change in Control by entering into an employment continuation and noncompete agreement with Executive; WHEREAS, to achieve these objectives, the Company, National and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change in Control or Potential Change in Control (as defined in Section 2). NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company, National and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective ---------------------- --------------- date of this Agreement shall be the date on which a Change in Control occurs (the "Effective Date"), provided that, except as provided in Section 1(b), if ------------- the Executive is not employed by the Company, National or any of their subsidiaries on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change in ---------------------------------------------------------- Control. Notwithstanding Section 1(a), if (i) the Executive's employment is - ------- - terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change in Control and prior to the occurrence of a Change in Control and (ii) a Change in Control occurs within two years of such -- termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change in Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective. 2. Definitions. (a) Change in Control. For the purposes of ----------- ----------------- this Agreement, a "Change in Control" shall be deemed to have occurred if any of the following have occurred: (i) either (a) the Company or National shall receive a report - on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the "1934 Act") disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) ("Person"), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National or (b) the - Company or National has actual knowledge of facts which would require any Person to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13(d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National; (ii) purchase by any Person, other than National or a wholly-owned subsidiary of National or an employee benefit plan sponsored or maintained by National or a wholly-owned subsidiary of National, of shares pursuant to a tender or exchange offer to acquire any stock of National (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (iii) approval by the shareholders of National of (a) any - consolidation or merger of National in which National is not the continuing or surviving corporation or pursuant to which shares of stock of National would be converted into cash, securities or other property, other than a consolidation or merger of National in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which - National is the continuing or surviving corporation but in which the common shareholders of National immediately prior to the consolidation or merger do not hold at least a majority of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least a majority of the common stock of the corporation which owns all of the common stock of National), or (c) - any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of National; or (iv) a change in the majority of the members of the Board of Directors of National (the "Board") within a 24-month period unless the election or nomination for election by National's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the 24-month period. (b) Potential Change in Control. For the purposes of this ----------------------------- Agreement, a Potential Change in Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least twenty (20) percent of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock); (ii) National enters into an agreement the consummation of which would constitute a Change in Control; (iii) proxies for the election of directors of National are solicited by anyone other than National; or (iv) any other event occurs which is deemed to be a Potential Change in Control by the Board. 3. Employment Period. Subject to Section 6 of this Agreement, ----------------- the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the earlier to occur of (i) the third anniversary of the Effective Date and (ii) the date on which the - -- Executive attains age 65. 4. Position and Duties. During the Employment Period, the ------------------- Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed in the United States and within 30 miles of the location where the Executive was employed immediately preceding the Effective Date. 5. Compensation. (a) Base Salary. During the Employment ------------ ------------ Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and shall be increased annually at a rate at least equal to the greater of (i) the average - percentage increase for the same period in the compensation of salaried employees of National and its subsidiaries who are not executives and (ii) the -- percentage increase in the national Consumer Price Index for the last completed calendar year. The Executive's base salary, as it shall be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to ------------ the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the -------------------------------------------- Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive ------------- (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive -------- shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment ------------------------------- Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, --------------- National and the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of National or the Company or any of their subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of National or the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive - -------------- hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. 6. Termination. (a) Death, Disability or Retirement. Subject ----------- ------------------------------- to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive's inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company's long-term disability plan, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this ---------------------- Agreement to the contrary, following a Change in Control the Executive may, upon not less than 30 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that ------------- any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's ----- employment for Cause. For purposes of this Agreement, "Cause" means the Executive's gross misconduct, fraud or dishonesty, which has resulted or is likely to result in material economic damage to the Company or National, as determined in good faith by a vote of at least two-thirds of the non-employee directors of National at a meeting of the Board at which the Executive is provided an opportunity to be heard (with representation by counsel of his choosing, should he so desire) (d) Good Reason. Following the occurrence of a Change in ------------ Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change in Control: (i) (A) the assignment to the Executive of any duties - inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or (B) any other material adverse change in such - position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location outside of the United States and/or more than 30 miles (or such other lesser distance as shall be set forth in the Company's relocation policy as in effect at the Effective Date) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change in Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change in Control, absent any further impact on the Executive, be deemed to constitute Good Reason. In the event that the Executive shall in good faith give a Notice of Termination for Good Reason and it shall thereafter be determined that Good Reason did not exist, the Executive shall, unless the Company and the Executive shall otherwise mutually agree, return to employment with the Company within 5 business days of such decision, without any impairment or other limitation of his rights hereunder, except that he shall not be paid his base salary for any period he did not perform services and his annual bonus opportunity for such year may be reduced to reflect his period of absence. (e) Notice of Termination. Any termination by the Company for --------------------- Cause or by the Executive for Good Reason shall be communicated by Notice of Termination given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 30 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 180 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) - indicates the specific termination provision in this Agreement relied upon, (ii) -- sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt --- of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (f) Date of Termination. For the purpose of this Agreement, -------------------- the term "Date of Termination" means (i) in the case of a termination for which - a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment -- terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or -------------------------------------------- -------- Disability. If the Executive's employment is terminated during the Employment - ---------- Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the - Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits -- owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to --- the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 15 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment ------------------------------- Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change in Control), the Company shall pay the Executive (i) the Earned Salary in - cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in -- accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and --------------------------------------------------------- Termination by the Executive for Good Reason. Subject to Section 7(f) below, if, - -------------------------------------------- during the Employment Period, the Company terminates the Executive's employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts: (i) Severance Benefits. The Executive shall be paid the ------------------ following: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to (1) 1.99; times (2) the sum of (i) the Executive's annual Base Salary; - and (ii) the average of the annual at risk -- compensation incentive program bonuses or other bonuses (excluding sign-on bonuses) payable to the Executive (including, for the purposes of this calculation, any amount of such bonuses paid in the form of restricted stock (in lieu of cash), to be valued at the date of grant) for the two fiscal years of the Company ending immediately prior to the Effective Date (the "Average Bonus") ; and (C) the Accrued Obligations. The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination; provided however that if the date payment would otherwise --------------------- be due hereunder is after September 30, payment of the Severance Amount shall be paid on the first business day in the following January. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Welfare Benefits. If, during the ------------------------------------ Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change in Control the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date - of Termination (the "End Date") and (2) the date the Executive becomes - eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's employee and executive welfare and fringe benefit plans, excluding further vacation pay (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Qualification for Early Retirement. If the Executive is ---------------------------------- at least age 52 at his Date of Termination, the Executive shall be deemed to have earned, and to have become vested in, the retirement benefits (including, without limitation, any early retirement subsidy or supplement, retiree life coverage or retiree medical benefits) that would have been payable or made available to the Executive under any employee benefit plan sponsored or maintained by the Company or any of its subsidiaries for which the Executive was eligible at the Date of Termination had he continued in service for three additional years after the Date of Termination. The purpose and intent of this provision is to provide the Executive with vesting and to bridge any gap of three or fewer years of service to qualify for any additional benefits available for an early retiree (such as the benefits under the Executive Retirement Plan ("ERP") or the benefits available under the Retirement Plan ("RP") including the so-called Rule of 90), and not to increase the service taken into account for purpose of determining the amount of benefits payable to the Executive beyond his actual period of service through the Date of Termination. The operation of this provision is illustrated by the following examples: Example 1: Assume that, at the Executive's Date of ---------- Termination, the Executive is exactly 53 years old, and has exactly 4 years of service for purposes of the ERP. Assume further that the relevant RP and ERP provisions have not changed since the date of the execution of this Agreement. The Executive would receive a benefit (in the form of a single life annuity) under the RP and ERP in the aggregate in the form of a benefit beginning at age 56, equal to 4/5 times what he would otherwise have received under a combination of those plans beginning at age 56. (Or, he could elect commencement of benefits at age 55 in reduced amounts per the terms of the relevant plans.) Five is used in the denominator because the current ERP vesting policy is attainment of age 55 and at least 5 years of service. Example 2: The assumptions are the same as in example 1, ---------- except that the Executive has exactly 32 years of service (instead of 4). By reason of the additional credit provided under this Agreement, the Executive would receive a benefit calculated as though payable under the RP (in the form of a single life annuity), under the RP's "Rule of 90," that would begin at age 55-1/2 and would equal [(53 + 32)/90] times what he would otherwise have received under the RP under the Rule of 90 beginning at age 55-1/2 (the earliest date at which he otherwise could have retired and commenced receiving benefits determined under the Rule of 90). In both examples, (i) any portion of the incremental benefit - that could not be paid under the RP will be paid from the ERP or the Company's general assets, (ii) final average salaries would be -- determined under those plans as of the Executive's Date of Termination and (iii) the Executive would be entitled to elect forms of benefit --- other than the single life annuity. Other fact patterns, and examples respecting other post-retirement benefits, would use similar principles, but might use different math. For example, the current provisions concerning an executive's vesting in early retirement benefits under the RP, and concerning retiree medical benefit vesting, have years of service requirements in excess of five years. (d) Discharge of the Company's Obligations. Except as ------------------------------------------- expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e)) following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Limit on Payments by the Company. -------------------------------- (i) Application of Section 7(e). In the event that any amount --------------------------- or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to the Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following delivery ----------------------- of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If ------------------------- (x) the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax and (y) the net-after tax amount (taking into account all applicable taxes payable by the Executive, including any Excise Tax) that the Executive would receive if the limitation contained in this Section 7(e)(iii) were not imposed does not exceed the net-after tax benefit the Executive would receive if such limitation were imposed by more than $25,000, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that the Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining --------------------------- whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the "base amount" allocable to such Covered Payments, or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Applicable Tax Rates. For purposes of determining whether -------------------- the Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(e)(iii), the Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year; provided, however, that the Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as the Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances. (vi) Adjustments in Respect of the Payment Cap. If the ----------------------------------------------- Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that the Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If this Section 7(e) is not applied to reduce the Executive's entitlement under this Section 7 because the Accountants determine that the Executive would not receive a greater net-after tax benefit by applying this Section 7(e) and it is established pursuant to a Final Determination that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to the Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (f) If Termination of Employment Occurs After the Executive ---------------------------------------------------------- Has Reached Age 62. Notwithstanding anything else to the contrary contained in - ------------------ this Section 7, if the Executive's employment with the Company terminates at any time during the 3 year period ending on the first day of the month following the Executive's sixty-fifth birthday (the "Normal Retirement Date"), and the Executive would be entitled to receive severance benefits under paragraphs 7(c), then (i) the multiplier in paragraph 7(c)(i)(B) shall not be 1.99, but shall be - a number equal to 1.99 times (x/1095), where x equals the number of days remaining until the Executive's Normal Retirement Date, and (ii) the End Date -- described in Section 7(c)(ii) shall not be the third anniversary of the Date of Termination, but shall be the Executive's Normal Retirement Date. 8. Non-exclusivity of Rights. Except as expressly provided -------------------------- herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments --------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Non-Competition and Non-Solicitation. (a) Noncompete. -------------------------------------- ---------- Unless the Executive otherwise elects by written notice to the Company prior to his Date of Termination (or in the case of a Company initiated termination, within 5 business days of receipt of a Notice of Termination, if such period extends beyond the Date of Termination) not to be bound by the provisions of this Section 10(a), during the one year period following the Executive's Date of Termination for any reason (the "Restriction Period"), Executive shall not, directly or indirectly, engage in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder (other than a holder of less than 1% of the outstanding voting shares of any publicly held company) of any business or entity that is engaged in any activity which is competitive with the business of the Company, National and their respective subsidiaries or affiliates in any geographic area in which the Company, National and/or any of their respective subsidiaries or affiliates is engaged in such competitive business. (b) Non-Solicitation of Employees. Regardless of whether the ----------------------------- Executive has elected to be bound by Section 10(a), during the Restriction Period, the Executive shall not, directly or indirectly, for his own account or for the account of any other person or entity with which he is or shall become associated in any capacity, solicit for employment, employ or otherwise interfere with the relationship of Employer with any person who at any time during the six months preceding such solicitation, employment or interference is or was employed by or otherwise engaged to perform services for Employer other than any such solicitation or employment during the Executive's employment with Employer on behalf of Employer. (c) Confidential Information. Regardless of whether the ------------------------- Executive has elected to be bound by Section 10(a), the Executive shall hold in a fiduciary capacity for the benefit of National and the Company all secret or confidential information, knowledge or data relating to National, the Company or any of their affiliated companies, and their respective businesses, (i) obtained - by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an -- unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (d) Non-disparagement. Regardless of whether the Executive has ----------------- elected to be bound by Section 10(a), the Executive shall not publicly or privately disparage National or the Company, or any of their subsidiaries or affiliates, including any aspect of their respective business, products, employees, management or Board of Directors, in any manner which could adversely effect the business of National, the Company or such subsidiaries or affiliates. Furthermore, the Executive shall not, directly or indirectly, take any action or fail to take any action with the purpose of interfering with, damaging or disrupting the assets or business operations or affairs of National or the Company or any of their respective subsidiaries or affiliates. National and the Company shall not publicly or privately disparage the Executive, either personally or professionally. Nothing in this paragraph shall be construed to prevent any officer of National or the Company from discussing the Executive's performance internally in the ordinary course of business. (e) Company Property. Except as expressly provided herein, ----------------- promptly following the Executive's termination of employment, the Executive shall return to the Company all property of National and the Company and all copies thereof in the Executive's possession or under his control. (f) Additional Payment. Unless the Executive has elected not ------------------- to be bound by Section 10(a), the Company shall make an additional lump sum payment to the Executive within 30 days following the Executive's Date of Termination equal to one times the sum of (i) the Executive's annual Base Salary - and (ii) the Executive's Average Bonus as compensation for the covenant -- contained in Section 10(a). 11. Injunctive Relief and Other Remedies with Respect to --------------------------------------------------------- Covenants. The Executive acknowledges and agrees that the covenants and - --------- obligations of the Executive set forth in Section 10 relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining the Executive from committing any violation of the covenants and obligations contained in Section 10 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall an asserted violation of the provisions of Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the ---------- Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be ------------- -------------- governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11, ----------- in the event that any dispute, controversy or claim arises between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, such dispute, controversy or claim shall be resolved by binding arbitration before a panel of three arbitrators selected in accordance with the American Arbitration Association (the "AAA"). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal or further dispute. Execution of the determination by such arbitration panel may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in a location selected by the Company which is a convenient forum for such arbitration (taking into account the availability of a sufficient pool of experienced arbitrators) and not more than 100 miles from the Executive's principal place of employment at the Effective Date (or at such other location as may be agreed upon by the parties), and shall be conducted in accordance with the Rules of the AAA. In the event of the occurrence of any proceeding (including the appeal of an arbitration decision) between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company or National shall reimburse the Executive for all reasonable costs and expenses relating to such proceeding, including reasonable attorneys' fees and expenses, regardless of the final outcome, unless the arbitration panel determines that recovery by the Executive of all or a part of such fees, costs and expenses would be unjust. In no event shall the Executive reimburse the Company for any of the costs and expenses relating to such litigation or other proceeding. (c) Amendments. This Agreement may not be amended or modified ---------- otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire ----------------- agreement between the parties hereto with respect to the matters referred to herein and expressly supersedes the Change in Control Agreement by and between the Executive, National and the Company dated as of March 16, 1995; provided, --------- however, that this Agreement is not intended to impair any rights of the - -------------- Executive under any prior written agreement, any employee benefit plan of the Company or a Subsidiary or any written policy, program or procedure of the Company or a Subsidiary unless and to the extent specifically provided herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder ------- 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, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: Seneca Resources Corporation 1201 Louisiana Street, Suite 400 Houston, TX 77002 Attention: Corporate Secretary If to National: National Fuel Gas Company 10 Lafayette Square Buffalo, NY 14203 Attention: Corporate Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Source of Payments. All payments provided for in paragraph ------------------ 3 above shall be paid in cash from the general funds of the Company or National; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established by the Company or National to assure such payments. The Company or National shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company or National shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship, between the Company or National and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company or National such right shall be no greater than the right of an unsecured creditor of the Company or National. (g) Tax Withholding. The Company shall withhold from any ---------------- amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Severability; Reformation. In the event that one or more -------------------------- of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 10 are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (i) Waiver. Waiver by any party hereto of any breach or ------ default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or the Executive's rights hereunder on any occasion or series of occasions. (j) Counterparts. This Agreement may be executed in ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of -------- the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. SENECA RESOURCES CORPORATION Attest: /s/ By: /s/ -------------------- ----------------------- Secretary Title: Chairman NATIONAL FUEL GAS COMPANY Attest: /s/ By: /s/ -------------------- ----------------------- Secretary Title: Chairman, President & CEO EXECUTIVE: /s/ ------------------------- EX-12 6 RATIO OF EARNINGS
EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES UNAUDITED Twelve Months Fiscal Year Ended September 30 Ended ------------------------------------------------------- June 30, 1999 1998 1997 1996 1995 1994 ------------------------------------------------------------------------------ (Thousands of Dollars) EARNINGS: Income Before Interest Charges and Minority Interest in Foreign Subsidiaries (2) $195,334 $118,085 $169,783 $159,599 $128,061 $127,885 Allowance for Borrowed Funds Used in Construction 299 110 346 205 195 209 Federal Income Tax 21,891 43,626 57,807 55,148 30,522 36,630 State Income Tax 5,870 6,635 7,067 7,266 4,905 6,309 Deferred Inc. Taxes - Net (3) 31,508 (26,237) 3,800 3,907 8,452 4,853 Investment Tax Credit - Net (711) (663) (665) (665) (672) (682) Rentals (1) 4,131 4,672 5,328 5,640 5,422 5,730 -------- ------- -------- -------- -------- -------- $258,322 $146,228 $243,466 $231,100 $176,885 $180,934 ======== ======== ======== ======== ======== ======== FIXED CHARGES: Interest & Amortization of Premium and Discount of Funded Debt $65,267 $53,154 $42,131 $40,872 $40,896 $36,699 Interest on Commercial Paper and Short-Term Notes Payable 17,074 13,605 8,808 7,872 6,745 5,599 Other Interest (2) 3,448 16,919 4,502 6,389 4,721 3,361 Rentals (1) 4,131 4,672 5,328 5,640 5,422 5,730 ------- ------- ------- ------- ------- ------- $89,920 $88,350 $60,769 $60,773 $57,784 $51,389 ======= ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 2.87 1.66 4.01 3.80 3.06 3.52
Notes: (1) Rentals shown above represent the portion of all rentals (other than delay rentals) deemed representative of the interest factor. (2) Twelve months ended June 30, 1999 and, fiscal 1998, 1997, 1996, 1995 and 1994 reflect the reclassification of $1,805, $1,716, $1,716, $1,716, $1,716 and $1,674, representing the loss on reacquired debt amortized during each period, from Other Interest Charges to Operation Expense. (3) Deferred Income Taxes - Net for fiscal 1998 and 1994 exclude the cumulative effect of changes in accounting. EX-27 7 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 09-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 PER-BOOK 2,327,021 0 258,006 13,736 228,401 2,827,164 38,751 428,273 486,099 943,669 0 0 726,272 218,500 0 132,500 159,696 0 0 0 646,527 2,827,164 1,072,484 60,327 840,529 900,856 171,628 7,901 179,529 66,385 110,604 0 110,604 52,617 0 252,083 2.86 2.84
EX-27 8 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 09-MOS SEP-30-1998 OCT-01-1997 JUN-30-1998 PER-BOOK 2,171,854 0 261,103 9,521 237,739 2,680,217 38,389 412,925 448,448 898,703 0 0 795,968 143,900 0 58,000 153,437 0 0 0 630,209 2,680,217 1,070,592 25,085 975,728 1,000,813 69,779 32,413 102,192 63,777 26,263 0 26,263 50,410 0 242,624 .69 .68
EX-99 9 CONSOLIDATED STATEMENT OF INCOME Exhibit 99 Form 10-Q June 30, 1999 NATIONAL FUEL GAS CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Twelve Months Ended June 30, -------------------- 1999 1998 (Thousands of Dollars, Except Per Common Share Amounts) INCOME Operating Revenues $1,249,892 $1,228,156 ---------- ---------- Operating Expenses Purchased Gas 400,790 448,221 Fuel Used in Heat and Electric Generation 54,988 30,160 Operation 308,108 277,817 Maintenance 23,846 26,744 Property, Franchise and Other Taxes 90,715 92,729 Depreciation, Depletion and Amortization 126,398 115,615 Impairment of Oil & Gas Producing Properties - 128,996 Income Taxes - Net 59,266 24,040 ---------- ---------- 1,064,111 1,144,322 ---------- ---------- Operation Income 185,781 83,834 Other Income 11,358 33,012 ---------- ---------- Income Before Interest Charges and Minority Interest in Foreign Subsidiary 197,139 116,846 ---------- ---------- Interest Charges Interest on Long-Term Debt 65,267 48,980 Other Interest 22,626 29,367 ---------- ---------- 87,893 78,347 ---------- ---------- Minority Interest in Foreign Subsidiary (1,717) (3,036) ---------- ---------- Income Before Cumulative Effect 107,529 35,463 Cumulative Effect of Change in Accounting for Depletion - (9,116) ---------- ---------- Net Income Available for Common Stock $ 107,529 $ 26,347 ========== ========== Basic Earnings (Loss) Per Common Share Income Before Cumulative Effect $ 2.79 $ 0.93 Cumulative Effect fo Change in Accounting for Depletion - (0.24) --------- --------- Net Income Available for Common Stock $ 2.79 $ 0.69 ========= ========= Diluted Earnings (Loss) Per Common Share Income Before Cumulative Effect $ 2.76 $ 0.92 Cumulative Effect of Change in Accounting for Depletion - (0.24) --------- --------- Net Income Available for Common Stock $ 2.76 $ 0.68 ========= ========= Weighted Average Common Shares Outstanding Used in Basic Calculation 38,574,864 38,242,231 ========== ========== Used in Diluted Calculation 38,917,221 38,649,662 ========== ========== -----END PRIVACY-ENHANCED MESSAGE-----