-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ewz9ueRlIaorWpaEBQdw2To2nkRqXP26Vf5eR9rqIQxd9AT8q9y0F9zDjSTeyUPV zAl6ZycIIiGndM1sK3kyAw== 0000950120-94-000051.txt : 19941122 0000950120-94-000051.hdr.sgml : 19941122 ACCESSION NUMBER: 0000950120-94-000051 CONFORMED SUBMISSION TYPE: POS AMC PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19941118 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL FUEL GAS CO CENTRAL INDEX KEY: 0000070145 STANDARD INDUSTRIAL CLASSIFICATION: 4924 IRS NUMBER: 131086010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: POS AMC SEC ACT: 1935 Act SEC FILE NUMBER: 070-08143 FILM NUMBER: 94561199 BUSINESS ADDRESS: STREET 1: 30 ROCKEFELLER PLZ CITY: NEW YORK STATE: NY ZIP: 10112 BUSINESS PHONE: 2125417533 POS AMC 1 POST EFFECTIVE AMENDMENT NO. 2 TO FILE #70-8143 File No. 70-8143 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. POST-EFFECTIVE AMENDMENT NO. 2 to FORM U-1 APPLICATION OR DECLARATION under the PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ---------------------------------------------- National Fuel Gas Company National Fuel Gas 30 Rockefeller Plaza Distribution Corporation New York, New York 10112 10 Lafayette Square Buffalo, New York 14203 Penn-York Energy Corporation National Fuel Gas Supply 10 Lafayette Square Corporation Buffalo, New York 14203 10 Lafayette Square Buffalo, New York 14203 Seneca Resources Corporation Empire Exploration, Inc. 10 Lafayette Square 10 Lafayette Square Buffalo, New York 14203 Buffalo, New York 14203 Utility Constructors, Inc. 10 Lafayette Square Buffalo, New York 14203 (Names of companies filing this statement and addresses of principal executive offices) --------------------------------------------- NATIONAL FUEL GAS COMPANY (Name of top registered holding company) -------------------------------------------- Philip C. Ackerman Clive D. Conley, Esq. Senior Vice President Reid & Priest National Fuel Gas Company 40 West 57th Street 10 Lafayette Square New York, New York 10019 Buffalo, New York 14203 (Names and addresses of agents for service) Item 1. Description of Proposed Transaction. Paragraph Nos. 32nd through 75th of Item 1 are revised in their entirety to read as follows: "National has developed a long-term financing plan pursant to the authority granted by the Commission in its Order dated June 18, 1993 (Release No. 35-25833) which may include entering into one or more interest rate swap agreements ("swaps") in notional amounts aggregating not in excess of $350 million at any one time outstanding. By this Application/Declaration, National is seeking authority to enter into one or more swaps, plus one or more derivative instruments, such as interest rate caps, interest rate floors and interest rate collars (collectively, the swaps and derivative instruments are sometimes referred to as "Swap and Derivative Transactions"), with one or more counterparties from time to time through December 31, 1994, in notional amounts aggregating not in excess of $350 million at any one time outstanding. National already has certain authority to enter into swaps with notional amounts not in excess of $200 million pursuant to the SEC order granted in connection with National's short-term borrowing and system Money Pool arrangements (File No. 70-8297, Release No. 35-25964 dated December 29, 1993). However, this Application/Declaration requests additional authority to enter into Swap and Derivative Transactions in connection with National's long-term debt, as described in Strategy 1 and Strategy 2 below. The aggregate notional amount of all such Swap and Derivative Transactions that relate to both long-term debt and short-term debt, in this file and File No. 70-8297, will not exceed $350 million at any one time outstanding. National has not engaged in any swap transactions pursuant to the December 29, 1993 order (File No. 70-8297) as of November 18, 1994. All Swap and Derivative Transactions will be directly related to then outstanding long or short-term debt. Additionally, should the notional amount of any Swap and Derivative Transaction exceed by more than $25,000,000 the notional or outstanding principal amount of the underlying instrument, National will within 90 days following such event either (a) reduce, restructure or terminate such Swap and Derivative Transaction or (b) issue a new instrument or restructure the underlying instrument such that the notional amount of such Swap and Derivative Transaction will not exceed by more than $25,000,000 the notional or outstanding principal amount of the underlying instrument. National proposes to use two different swap strategies. Under one swap strategy ("Strategy 1"), National would agree to make payments of interest to a counterparty, payable periodically. The interest would be payable at a variable or floating rate index and would be calculated on a notional (i.e., principal) amount. In return, the counterparty would agree to make payments to National based upon the same notional amount and at an agreed upon fixed interest rate. This would be a "floating-to-fixed swap" on National's part. Under another swap strategy ("Strategy 2"), National and the counterparty may exchange roles. National would pay a fixed interest rate and receive a variable interest rate on a notional amount. This would be a "fixed-to-floating swap" on National's part. Currently, most swap counterparties are banks, which generally act as dealers (principals) rather than brokers (agents). The counterparties themselves sometimes represent all or part of the opposite side of a swap transaction. Otherwise, the counterparties enter into one or more transactions with other entities, to create the opposite side of a swap transaction, generally intending to make a profit on the spread. National will enter into Swap and Derivative Transactions only with counterparties whose deposits or long-term debt have, at the time the Swap and Derivative Transaction is entered into, no lower than an "A" rating from Moody's Investors Service, Inc. ("Moody's"), or an equivalent rating from Standard & Poor's Corporation, Fitch Investors Service or Duff & Phelps (each an "Alternate Rating Agency"); provided, however, National may enter into a Swap and Derivative Transaction with a counterparty whose deposits or long-term debt have, at the time the Swap and Derivative Transaction is entered into, a "Baa" rating from Moody's (or an equivalent rating from an Alternate Rating Agency) if National has at the time outstanding debt similarly rated. Additionally, National will enter into only those interest rate swap agreements whose governing law provides generally for the enforcement of the netting provisions of such agreements upon the default of the counterparty with National. Strategy 1 ---------- National proposes to enter into Strategy 1 swaps from time to time (i) in order to reduce the interest costs of existing high cost debt and/or (ii) in order to reduce the interest cost of new long-term debt issuances for part or all of their terms. A reduction in interest cost may occur because, by using a Strategy 1 swap, National functionally converts some or all of the fixed interest rate payments on long-term debt to floating rate payments that vary in relation to a short-term debt index. A Strategy 1 swap would reduce National's interest costs of the debentures or medium-term notes associated with the swap for the term of such a swap as long as the short-term index used in the swap to determine the floating rate paid by National remains the same, decreases, or rises modestly. If the short- term index rises during the term of the swap, the interest costs saved by National would decrease until the short-term index is equal to the fixed rate received by National. If the short-term index rises above the fixed rate received by National, debt costs to National would be higher than they would be without using a Strategy 1 swap. Each time National issues debentures or medium-term notes, the proceeds are lent to one or more of its subsidiaries at an all in cost that is equal to the coupon on the debt plus the amortization of the underwriters' or agents' fees. The loans are documented by intercompany notes from the subsidiaries to National. All the interest costs of both long-term and short- term debt are borne by the subsidiaries. In accordance with National's current policy of not assuming the interest cost of debt or the above underwriters' or agents' fees, the gains and the losses of doing Swap and Derivative Transactions should be assumed by the subsidiary. National would enter into a swap in connection with an underlying subsidiary note only after determining it to be in the best interest of the subsidiary at the time of consummation of the swap. Subsidiaries that could receive the Strategy 1 allocations from National include Distribution, Supply, Seneca, Penn-York, Empire and Utility Constructors. The subsidiary that would receive the cost allocations related to a Strategy 1 swap would be obligated to execute an unsecured note or an agreement with National to make the interest payments (and receive the fixed rate interest) at each reset date of the floating rate index. A Strategy 1 swap is used to convert the existing fixed payments made by the subsidiary of National to floating payments for part or all of the term of the debt. National would decide on which subsidiary's debt to match against a swap under Strategy 1 based on the current cost of the debt, the term remaining for the debt, whether the debt is redeemable, availability of all regulatory approvals to do the swap against the underlying debt and the individual needs of the subsidiary. The effective net interest payments or receipts realized by National will be passed along to the subsidiaries of National that issued the underlying debt. None of the payments or receipts will be retained by National. No principal payments are made by either party either upon initiation or termination of a Strategy 1 swap. Each Strategy 1 swap would be associated with one or more specific fixed rate debenture(s) or medium-term note(s). More than one Strategy 1 swap could be associated with one specific debenture or medium-term note, but the aggregate notional amount of swaps (Strategy 1 and Strategy 2 and swaps authorized under the Money Pool) would not exceed $350 million at any one time outstanding. Furthermore, the aggregate notional amount of Strategy 1 swaps will not exceed, at the time any swap contract is entered into, the aggregate principal amount of National's long-term debt then outstanding. Each Strategy 1 swap would have a term (which may range from 1 month to 40 years) that is less than or equal to the remaining maturity of the debenture or medium-term note it is associated with. National may from time to time enter into a Strategy 1 swap or swaps with a counterparty whereby National would pay a floating interest rate based on one of the following indices: LIBOR (The "London Interbank Deposit Offered Rate"); the Federal Funds rate; certificate of deposit indices; or commercial paper indices (H.15 CP index or any other commercial paper index). National would in return receive a fixed interest rate. The fixed interest rate would be the Treasury yield for the corresponding term of the swap plus a swap spread that is based on the "forward curve" which is a market expectation of the movement of the floating rate index used in the swap in the future relative to the United States Treasury Securities rates. There will be no maximum interest rate respecting payments that National may make under the Strategy 1 swaps unless National purchases an interest rate cap. In no event, under a Strategy 1 swap, will National enter into a swap contract in which the floating interest rate paid by National, inclusive of any intermediary fee, would exceed by more than 200 basis points, at each reset period, the index used for such Strategy 1 swap. National's effective net interest payments or receipts under a Strategy 1 swap will be allocated to the subsidiary of National that issued the unsecured subsidiary note that corresponds to the debenture or medium-term note associated with the Strategy 1 swap. If more than one subsidiary issued unsecured notes that correspond to the specific debenture or medium-term note, the net interest payments and receipts of the Strategy 1 swap will be allocated in proportion to the amounts of unsecured notes outstanding for each subsidiary, provided all subsidiaries have the necessary legal authority to make and receive such payments. (If a subsidiary lacks such authority, the notional amount of the swap will not exceed the principal amount of the note or notes issued by the subsidiaries that have the necessary legal authority, and the payments and receipts will only be allocated to those subsidiaries.) Thus, the subsidiaries realize all the savings (costs) associated with the Strategy 1 swap. The allocation of the net interest payments or receipts of the Strategy 1 swap to the subsidiary will be made at each reset date of the respective floating rate index. The subsidiary that issued the unsecured note that corresponds to the debenture or medium-term note associated with the Strategy 1 swap would be obligated to execute an unsecured note or an agreement with National to make the floating rate payments (and receive the fixed rate receipts) at each reset date of the floating rate index. The hypothetical example below, based upon market rates prevalent on March 25, 1994, illustrates the savings that National and hence its subsidiaries could achieve by using a Strategy 1 swap. Assume National has the following Existing Debenture Principal $50,000,000 Interest 7.5% Remaining term 30 years Proceeds were lent to Supply Strategy 1 Swap Notional amount $50,000,000 Term 2 years (4 reset periods, first one beginning today) National pays Floating rate equal to 6-month LIBOR (currently at 4.25%) National receives fixed rate equal to 5.27%. Savings realized by National at first reset (pay 4.25%, receive 5.27%) @1.02% $255,000 Savings realized by National for the term of swap @ 1.02% $1,020,000 The pre-tax savings would be allocated in their entirety to Supply, which issued the subsidiary note corresponding to the underlying debenture. Therefore, the effective interest cost on the 30-year issue would be 6.48% (versus 7.50% without the swap) for 2 years of its term. In this example, National would realize a pre-tax savings of $255,000 at the first reset date of the swap. Reset dates sometimes begin on the date at which the swap is entered into, or a later date, and then follow at agreed upon intervals. For Strategy 1 swaps, pre-tax savings or costs at reset dates will depend upon how the floating rate index changes, and therefore upon how the floating rate of interest paid by National changes. Thus, for example, if 6-month LIBOR increases to 5% at the time of the second reset in this example, the pre-tax savings realized would be reduced to $67,500. $67,500 = (5.27% - 5% ) X ($50,000,000 divided by 2). Should 6-month LIBOR be higher than 5.27% at the time of such reset, National would incur an additional cost. For example, if 6-month LIBOR instead increased to 5.50% at the time of the second reset, National (and hence Supply) would incur a pre-tax cost of $57,500. The accounting entries on National and Supply's books for the Strategy 1 swap transaction described in the above example (at the first reset date only and assuming flat interest rates) will be as follows, for a one-month period: National Fuel Gas Company and Subsidiaries ------------------------------------------ Accounting Entries ------------------ Strategy 1 Swap --------------- National Fuel Gas Company ------------------------- Entry No. 1 Accrued Interest Expense $312,500 Interest Payable $312,500 To record accrued interest expense on $50,000,000 7 1/2% Debentures for the month of April 1994. Entry No. 2 Interest Receivable $42,500 Accrued Interest Expense $42,500 To record the net proceeds on $50,000,000 swap (pay 4.25%, receive 5.27%) for the month of April 1994. Entry No. 3 Accounts Receivable Associated Companies $270,000 Interest Income $270,000 To charge subsidiary company with net interest cost on $50,000,000 unsecured subsidiary note minus net swap savings (cost) for the month of April 1994. Subsidiary Company ------------------ Entry No. 4 Accrued Interest Expense $270,000 Accounts Payable Associated Companies $270,000 To record interest expense on $50,000,000 unsecured subsidiary note plus net swap savings (cost) for the month of April 1994. Entry No. 5 Accrued Income Taxes $94,500 Federal Income Tax Expense $94,500 To record federal income taxes for the month of April 1994. National Fuel Gas Company and Subsidiaries ------------------------------------------ Elimination Entries ------------------- Entry No. 6 Interest Income $270,000 Interest Expense $270,000 To record elimination entries for the month of April 1994. A Strategy 1 swap transaction, if material, would be reported as a footnote to the financial statements of National in accordance with the Generally Accepted Accounting Principles. The transaction will not have an impact on the balance sheet of National. National will not enter into a Strategy 1 swap unless the estimated savings at the time of initiation of the swap (derived from the net difference between the interest to be paid by National and the interest to be received by National under the Strategy 1 swap using then current market rates) are, on an after-tax basis, greater than the transaction and ancillary costs of the Strategy 1 swap. National may also use other derivative strategies from time to time in conjunction with a Strategy 1 swap or the issuance of floating rate medium-term notes or debentures. Such derivative strategies may include interest rate caps, interest rate floors, and interest rate collars. Depending on how low the interest rate cap is set or how high the interest rate floor is set, National may pay or receive an upfront fee, and/or share with the counterparty a portion of the savings realized on the spread between the capped rate and the floating rate. The notional amount of interest rate caps, interest rate floors and interest rate collars to be entered into in conjunction with a Strategy 1 swap or the issuance of floating rate medium-term notes or debentures will not exceed, at the time such derivative strategies are entered into, the sum of (a) the aggregate notional amount of Strategy 1 swaps then outstanding and (b) the aggregate principal amount of floating rate medium-term notes or debentures then outstanding. For example, National may decide to use a cap to limit its exposure to interest rate increases that it would be exposed to by entering into a Strategy 1 swap or issuing floating rate medium-term notes or debentures. National may purchase a cap for a notional amount that is less than or equal to the then outstanding notional amount of Strategy 1 swaps or principal amount of floating rate medium-term notes or debentures , at an interest rate that may be higher than the floating rate of interest at the time of entering into the cap. National would therefore receive any interest costs above the level of the cap for the notional amount for which the cap was purchased. National may also decide to buy a collar, where it would sell a floor in addition to buying a cap. By selling a floor at the time the cap would be purchased, National would receive a fee that would defray some or all the fee paid for purchasing the cap. National may also sell the floor independent of the cap. National would be obligated to pay the interest costs on the notional amount if the floating rate falls below the floor rate. The interest rate at which the floor would be sold would depend on the floating rate that would have to be paid for the Strategy 1 swap or floating rate medium-term notes or debentures and National's view on interest rates at that time and in the future. Caps, collars and floors would enable National to manage the interest rate risks associated with floating rate payment obligations. National would determine whether to use caps, floors or collars at the time that National enters into a Strategy 1 swap or issues floating rate medium-term notes or debentures or at any time during the term of the swap or floating rate medium-term notes or debentures. The decision on whether to use any of the derivatives listed above, would depend on National's view of, the expected interest rate movements during the term of the swap or floating rate medium-term notes or debentures, the expected risks of loss, and the cost of buying a cap, floor or collar. The payments or receipts associated with a cap, collar or floor will be allocated to the subsidiary that issued the underlying obligation. It is anticipated that each Strategy 1 swap would provide that each party may terminate or "unwind" the agreement with the other party's consent, by making early termination payments and/or as may otherwise be set forth in an agreement as described below. Termination payments would be determined in accordance with the formula provided in the agreement between the parties, such as the one provided in the International Swap Dealers Association Master Agreement filed as Exhibit B-4 to this Application/Declaration, unless the parties negotiated different payment arrangements. Termination payments are dependent upon market conditions and could be substantial at times. Termination payments or the costs to "unwind" a swap would depend on the movement of the interest rates for the short term index used in the swap after the swap is consummated. If National enters into a Strategy 1 swap where National pays a floating rate and receives a fixed rate, the fixed rate of the swap is calculated as the rate of interest that sets the net present value of the forward curve for the short-term index to zero, plus the bid/ask spread. The bid/ask spread for a swap can vary from 1 to 10 basis points depending on the market demand for the swap at that time. If the interest rates had moved exactly as the forward curve had predicted, during the term of the swap, the termination or "unwind" cost for the swap would be zero. If the interest rates move higher than predicted by the forward curve, National would incur a cost to "unwind". This cost would be equal to the present value of the forward curve (at the time the termination takes place) for the short-term index for the remaining term of the swap, discounted at the interest rate of the Treasury zero- coupon bond having the same term as the remaining term of the swap. Here again a bid/ask spread based on market conditions would be added/subtracted from the "unwind" cost. If the interest rates had moved lower than the forward curve had predicted, National would receive the "unwind" cost, calculated as described in the above paragraph. It would be very difficult to determine a dollar figure for such a termination since the calculations depend entirely on the movement of interest rates and the implied forward curve at the time of termination. However, termination or "unwind" costs (or receipts) are not expected to exceed 10% of the notional amount in most cases. Termination payments (or receipts) associated with Strategy 1 swaps would be allocated to the subsidiary that executed the note or agreement to National regarding the payment obligations of the terminated swap. Strategy 2 ---------- National could, from time to time, combine new or existing floating rate debt (such as the floating rate short-term debt issued from time to time pursuant to National's short-term borrowing and system Money Pool arrangements (File No. 70-8297, Release No. 35-25964 dated December 29, 1993)) with a fixed-to-floating interest rate swap (Strategy 2 swap). National would enter into a Strategy 2 swap with a counterparty whereby National would pay a fixed interest rate based on the forward curve. National would in return receive a floating interest rate based on such indices as LIBOR, the Federal Funds rate, certificate of deposit indices or commercial paper indices (H.15 CP index or any other commercial paper index). No principal payments are made or received by either counterparty upon either the initiation or termination of an interest rate swap, including a Strategy 2 swap. The hypothetical example below, based upon market rates prevalent on April 8, 1994, illustrates the nature of a Strategy 2 swap and the savings that might be associated with using it. Amount of short-term debt $50,000,000 Interest paid on short-term debt (using H.15 CP index plus credit spread of National- estimated at 3.87%) $161,250 per month Strategy 2 Swap Notional amount of swap $50,000,000 Term of swap 5 years (60 resets) At each reset, (every month) National pays a fixed rate @6.853% $285,542 per month National receives H.15 CP index at 3.72% $155,000 per month Total cost of using a swap ($285,542 + 161,250 - 155,000) $291,792 At the next reset, if the H.15 CP index increases to 4% Interest paid on short-term debt of $50,000,000 (using H.15 CP index plus the credit spread of National estimated at 4.15%) $172,917 per month Fixed rate on the swap @ 6.853% $285,542 per month National receives H.15 CP index at 4% $166,667 per month Total cost of using the swap for the second reset would be $291,792 per month As long as National's credit spread does not widen during the 5 years when the swap would be effective, the total interest rate to National for the 5 years would be 7.003% (($291,792 x 12)/$50,000,000). National would enter into a Strategy 2 swap, and not reduce its short-term debt, as opposed to issuing a 5-year MTN or Debenture and reducing short-term debt, only if the estimated costs associated with the swap, including transaction costs, were less than the costs of issuing the long-term debt and any costs of reducing short-term debt. For example, if National issued a MTN having the same term as the above swap (5 years) with the following terms: Principal amount of debt issued $50,000,000 Effective all-in interest cost 7.14% Monthly interest cost $297,500 The net savings to National by using a swap for each reset are ($297,500 - 291,792) $ 5,708 Total net savings to National by using the swap over the 5-year period (undiscounted and pre-tax) $342,480 National would save 18.9 basis points in interest cost calculated on a semi-annual bond basis by using the above swap and retaining short-term debt instead of issuing the above MTN. In the example above, the subsidiary of National which is allocated the cost of the swap will save $5,708 per month (each reset), for a total of $342,480 over a period of 5 years, by keeping the short-term debt levels constant and using the above swap to fix a particular interest rate for the long-term, instead of issuing the above MTN, as long as the H.15 CP index and National's short-term debt costs move in unison. In the above example, if the interest cost of National's short-term debt does not move in unison with H.15 CP index, National may incur additional costs or it may save more, depending on how the two interest rates change in relation to one another. For example, if the short-term interest cost for National increased to 4.00% at the time of a subsequent reset, and the H.15 CP index increased to 3.95%, the savings to National would be calculated as follows: Interest paid on short-term debt @ 4.00% $166,667 per month Strategy 2 Swap National pays a fixed rate @ 6.853% $285,542 per month National receives H.15 CP index @ 3.95% $164,583 per month Total cost of using a swap ($285,542 + 166,667 - 164,583) $287,626 Net savings to National for this reset ($297,500 - 287,626) $ 9,874 National saved $9,874 for this reset versus $5,708 for the previous reset because National's short-term borrowing rates did not increase as much as the H.15 CP index did. This savings can also decrease, or National may incur an additional cost, if at the time of a subsequent reset the difference between National's short-term interest costs and the H.15 CP index increases. For example, if National's short-term interest rate is then 4.25% and H.15 CP index is then 3.90%, the net cost to National at the reset is $2,625. $300,125 (payments) - $297,500 (receipts) = $2,625. National does not expect the relative differences between short-term borrowing rates and the H.15 CP index to vary substantially over time (i.e., by more than 10 basis points in either direction), unless National is downgraded by the bond rating agencies. There is a possibility that such a downgrade may erase the savings for the rest of the term of the swap or until National is upgraded by the bond rating agencies. The accounting entries for the Strategy 2 swap transaction will be as follows on the books of National and the affected subsidiary, using the first Strategy 2 example above, for a one-month period: National Fuel Gas Company and Subsidiaries ------------------------------------------ Accounting Entries ------------------ Strategy 2 Swap --------------- National Fuel Gas Company ------------------------- Entry No. 1 Accrued Interest Expense $161,250 Interest Payable $161,250 To accrue interest on $50,000,000 short-term debt at 3.87% for the month of April 1994. Entry No. 2 Accrued Interest Expense $119,292 Interest Payable $119,292 To record net interest expense on $50,000,000 swap (pay 6.853%, receive 3.72%) for the month of April 1994. Entry No. 3 Accounts Receivable Associated Companies $291,792 Interest Income $291,792 To charge subsidiary company with net interest on $50,000,000 short-term subsidiary note for the month of April 1994. Subsidiary Company ------------------ Entry No. 4 Accrued Interest Expense $291,792 Accounts Payable Associated Companies $291,792 To record interest expense on $50,000,000 short-term debt for the month of April 1994. Entry No. 5 Accrued Income Taxes $102,127 Federal Income Tax Expense $102,127 To record federal income taxes for the month of April 1994. National Fuel Gas Company and Subsidiaries ------------------------------------------ Elimination Entries ------------------- Entry No. 6 Interest Income $291,792 Interest Expense $291,792 To record elimination entries for the month of April 1994. The Strategy 2 swap, if material, would be reported as a footnote to the financial statements of National in accordance with the Generally Accepted Accounting Principles. The transaction would not be reflected on National's balance sheet. In no event, under any Strategy 2 swap, will National enter into a swap contract in which the effective fixed rate of interest paid by National, inclusive of any intermediary fee, would exceed by more than 2.0% per annum, at the time of entering into any Strategy 2 swap contract, the yield on direct obligations of the United States Government as published by the Federal Reserve (i.e., Treasury Bonds, Notes and Bills) with maturities comparable to the maturity of such Strategy 2 swap contract. The aggregate notional amount of Strategy 2 swaps will not, at any one time, exceed the difference between a) $350,000,000 and b) the aggregate principal amount of New Debentures and New MTNs then outstanding. (The current amount of New MTNs outstanding under this file is $130,000,000.) Furthermore, the aggregate notional amount of Strategy 2 swaps will not exceed, at the time the swap contract is entered into, the amount of short-term debt then outstanding pursuant to National's system Money Pool arrangements (File No. 70-8297). The aggregate notional amount of all the swaps initiated pursuant to any orders issued in this file (Strategy 1 and Strategy 2 swaps) and swaps initiated pursuant to the SEC's order in File No. 70-8297, relating to National's short-term borrowings and system Money Pool arrangement, will not exceed $350 million at any one time outstanding. The term for any Strategy 2 swaps will range from 9 months to 40 years. Each time National issues debentures or medium-term notes, the proceeds are lent to one or more of its subsidiaries at an all in cost that is equal to the coupon on the debt plus the amortization of the underwriters' or agents' fees. The loans are documented by intercompany notes from the subsidiaries to National. All the interest costs of both long-term and short- term debt are borne by the subsidiaries. In accordance with National's current policy of not assuming the interest cost of debt or the above underwriters' or agents' fees, the gains and the losses of doing a swap and one or more derivative instruments should be assumed by the subsidiary. National would enter into a swap in connection with an underlying subsidiary note only after determining it to be in the best interest of the subsidiary at the time of consummation of the swap. Since a Strategy 2 swap would be used in lieu of issuing New MTNs or New Debentures under this file, the subsidiary that would have received the proceeds of issuing long- term debt would be the one which would bear the costs (savings) of the swap. The costs associated with the short-term debt that is not repaid as a result of using this swap strategy would be allocated to the subsidiary that would have paid interest associated with the New MTNs or New Debentures that would otherwise have been issued. The fixed rate payments and the floating rate receipts of the Strategy 2 swap would be allocated to the same subsidiary to which the costs associated with the short-term debt are assigned. Only those subsidiaries which would require the use of a certain principal amount of debt for the life of a proposed Strategy 2 swap would be allocated a portion of the cost of that swap. Subsidiaries that could receive the Strategy 2 allocations from National include Distribution, Supply, Seneca, Penn-York, Empire and Utility Constructors. The subsidiary that would receive the cost allocations related to a Strategy 2 swap (short-term debt principal and interest payments, fixed rate payments under the swap and floating rate receipts under the swap) would be obligated to execute an unsecured note or an agreement with National to make the interest payments (and receive the floating rate interest) at each reset date of the floating rate index. It is anticipated that each Strategy 2 swap would provide that each party may terminate or "unwind" the agreement with the other party's consent and/or with early termination payments. Termination payments would be determined in accordance with the formula provided in the agreement between the parties, such as the one provided in the International Swap Dealers Association Master Agreement filed as Exhibit B-4 to this Application/Declaration, unless the parties negotiated different payment arrangements. Termination payments are dependent upon market conditions and could be substantial at times. The methodology for calculating the cost of "unwinding" a Strategy 2 swap would be the same as that used for a Strategy 1 swap. Termination payments for a Strategy 2 swap could be functionally compared to a premium that is paid to the bondholders, for redeeming or discharging high cost debt. Termination or "unwind" costs (or receipts) are not expected to exceed 10% of the notional amount in most cases. Termination payments (or receipts) for Strategy 2 swaps would be allocated to the subsidiary that executed the note or agreement to National regarding the payment obligations of the terminated swap. National may also use interest rate caps from time to time in conjunction with a Strategy 2 swap. The payments or receipts associated with a cap will be allocated to the same subsidiary to which the costs associated with the underlying Strategy 2 swap are assigned. Since a swap is essentially an exchange of interest payment obligations of National and a counterparty, National will neither receive nor pay any proceeds (i.e., principal) from any swaps. None of the Swap and Derivative Transactions will be "leveraged." This means that changes in interest payments (receipts) under any Swap and Derivative Transaction due to changes in the floating rate index used in such instrument will not exceed the product of the change in such index and the notional amount of such instrument. Reporting Requirement --------------------- Within thirty days following the trade date of any Swap and Derivative Transaction, National will submit a report to the Commission disclosing the following information with respect to such Swap and Derivative Transaction: the trade date; the type of Swap and Derivative Transaction traded; the notional principal amount; a description of the index and margin in the case of a swap or the underlying index and strike rate in the case of a cap or a floor; the termination date; the name of the counterparty; the material terms of the underlying instrument (including the interest rate (or index and margin) and the maturity or termination date of such instrument), and the name of the subsidiary to which the cash inflows and outflows under the Swap and Derivative Transaction will be allocated. Within forty-five days following the close of each fiscal quarter, National will submit a report to the Commission disclosing the net cash outflow or inflow for each swap, and the net cash outflow for each floor, that has been open at any time during such quarter. With respect to swaps, the net outflow refers to the difference between the interest flow received by National versus the interest flow paid by National during such quarter for that swap. With respect to any floor, the cash outflow refers to the sum of payments made by National during such quarter under any floor sold by National. National will additionally disclose, also within forty- five days following the close of each fiscal quarter, the market value for each Swap and Derivative Transaction that is open at the close of such quarter, as of that closing date. National will also disclose any gains or losses realized from the liquidation during such quarter of any position in a Swap and Derivative Transaction, together with the proceeds and sale price constituting such gain or loss, and its carrying value, if any. Further, National will disclose, also within forty-five days following the close of each fiscal quarter, certain information if the notional principal amount of any Swap and Derivative Transaction during that quarter exceeds the outstanding or notional principal amount of the underlying instrument. Specifically, National will disclose the date and reason for such condition. In addition, National will disclose the date (a) the related Swap and Derivative Transaction was terminated or the notional principal amount of such instrument was reduced or (b) a new instrument related to the open Swap and Derivative Transaction was entered into. If National enters into a new underlying instrument for that Swap and Derivative Transaction, it will also disclose the terms of the new underlying instrument." Item 4. Regulatory Approval. Paragraph No. 3 of Item 4 is revised in its entirety to read as follows: "No State regulatory authority has jurisdiction over the proposed swap transactions except that the Public Service Commission of New York and the Pennsylvania Public Utility Commission have jurisdiction over the allocation of costs and benefits to Distribution associated with the transactions proposed herein. National will file the Applications or Petitions (or amendments to current applications or petitions) requesting the approval of such commissions, should National decide to do a swap and allocate the costs to Distribution." Item 6. Exhibits and Financial Statements. The following exhibits are made part of this statement: F-4 Opinion of Reid & Priest, Counsel for National F-5 Opinion of Stryker, Tams & Dill, New Jersey Counsel for National [FN] Assuming that the 6-month LIBOR is constant over the 2-year period of the swap. An interest rate collar occurs when National buys a cap and sells a floor. Transaction costs may include any intermediary fees, credit spreads, and legal and other costs associated with using a Strategy 2 swap versus a Debenture or MTN. These other costs could include (i) slightly higher long-term debt costs that occur because National's debt rating did not increase as a result of higher short-term debt levels, and/or (ii) increased bank fees (e.g., costs of committed credit facilities) occasioned by the existence of higher short-term debt levels. Effective all-in interest cost means the coupon rate of interest for the MTN plus the agent/underwriter fee allocated over the life of the MTN. Monthly interest is used to compare the cost of the MTN to the swap because the swap resets monthly. Assuming that the H.15 CP index and National's short-term debt costs move in unison for the term of the swap. The savings do not include the transaction costs. Please see footnote 3 for more details concerning transaction costs. SIGNATURES ---------- Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned companies have duly caused this amendment to be signed on their behalf by the undersigned thereunto duly authorized. NATIONAL FUEL GAS COMPANY By /s/ Joseph P. Pawlowski ------------------------ Joseph P. Pawlowski Treasurer NATIONAL FUEL GAS DISTRIBUTION CORPORATION By /s/ Gerald T. Wehrlin ------------------------- Gerald T. Wehrlin Senior Vice President, Controller SENECA RESOURCES CORPORATION By /s/ Gerald T. Wehrlin ------------------------- Gerald T. Wehrlin Secretary, Treasurer and Controller NATIONAL FUEL GAS SUPPLY CORPORATION By /s/ Joseph P. Pawlowski ------------------------- Joseph P. Pawlowski Treasurer PENN-YORK ENERGY CORPORATION By /s/ Joseph P. Pawlowski ------------------------- Joseph P. Pawlowski Treasurer EMPIRE EXPLORATION, INC. By /s/ Joseph P. Pawlowski ------------------------- Joseph P. Pawlowski Treasurer UTILITY CONSTRUCTORS, INC. By /s/ Joseph P. Pawlowski ------------------------- Joseph P. Pawlowski Treasurer DATED: November 18, 1994 EXHIBIT INDEX Exhibit Page ------- ---- F-4 Opinion of Reid & Priest, Counsel for National F-5 Opinion of Stryker, Tams & Dill, New Jersey Counsel for National EX-5 2 EXHIBIT F-4 - OPINION OF REID & PRIEST EXHIBIT F-4 ----------- Reid & Priest 40 West 57th Street New York, New York 10019 New York, New York November 18, 1994 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Form U-1 Application-Declaration (File No. 70-8143) National Fuel Gas Company National Fuel Gas Distribution Corporation Penn-York Energy Corporation National Fuel Gas Supply Corporation Seneca Resources Corporation Empire Exploration, Inc. Utility Constructors, Inc. --------------------------------------------------- Ladies and Gentlemen: With reference to the Post-Effective Amendment No. 2 to the joint Application-Declaration, as heretofore amended (as so amended, the "Amended Application-Declaration"), filed on November 18, 1994 by National Fuel Gas Company (the "Company"), National Fuel Gas Distribution Corporation, Penn-York Energy Corporation, National Fuel Gas Supply Corporation, Seneca Resources Corporation, Empire Exploration, Inc. and Utility Constructors, Inc. under the Public Utility Holding Company Act of 1935, as amended, regarding the proposed entering into by the Company of one or more interest rate swap agreements, and/or one or more derivative instruments, such as interest rate caps, interest rate floors and interest rate collars (collectively, the "Swap Transactions"), in notional amounts aggregating not in excess of $350 million at any one time outstanding, we are of the opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the State of New Jersey. 2. If (i) the proposed transactions are consummated as contemplated by the Amended Application-Declaration and in accordance with the terms of the order or orders of the Securities and Exchange Commission with respect thereto, (ii) each Swap Transaction is duly authorized, executed and delivered by the party thereto other than the Company and such party is duly organized and validly existing under the laws of such party's jurisdiction of organization and such party has full power and authority to make and perform the Swap Transactions, (iii) no act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed herein, and (iv) the consummation of the proposed Swap Transactions shall be conducted under our supervision and all legal matters incident thereto shall be satisfactory to us, including the receipt in satisfactory form of opinions of other counsel qualified to practice in any jurisdiction in which we are not admitted to practice and the laws of which govern the Swap Transactions or the parties to the Swap Transaction: (a) All state laws applicable to the proposed Swap Transactions as described in the Amended Application-Declaration will have been complied with; (b) Each Swap Transaction will be a valid and binding obligation of the Company in accordance with its terms, subject as to enforceability to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights, and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), including, without limitation (a) the possible unavailability of specific performance, injunctive relief or any other remedy, and (b) concepts of materiality, reasonableness, good faith and fair dealing; and (c) The consummation of the proposed Swap Transactions as described in the Amended Application-Declaration will not violate the legal rights of the holders of any securities issued by the Company. We express no opinion as to (i) the subject matter jurisdiction of a federal court to consider any dispute arising out of any Swap Transaction or (ii) any provision of any Swap Transaction to the extent such provision waives any objection by any party to the laying of venue of any action or proceeding brought in any court and any claim that any such action or proceeding has been brought in any inconvenient forum. We also express no opinion as to the enforceability of any provision of any Swap Transaction relating to judgment currencies. We are members of the New York Bar and do not hold ourselves out as experts on the laws of any other state. Accordingly, in giving this opinion, we have relied, as to all matters governed by the law of the State of New Jersey, upon the opinion of Stryker, Tams & Dill. A copy of such opinion will be filed as an exhibit to the Amended Application-Declaration. We hereby consent to the use of this opinion as an exhibit to the Amended Application-Declaration. Very truly yours, /s/ Reid & Priest REID & PRIEST EX-5 3 EXHIBIT F-5 - OPINION OF STRYKER, TAMS & DILL EXHIBIT F-5 ----------- Stryker, Tams & Dill Two Penn Plaza East Newark, New Jersey 07105 New York, New York November 18, 1994 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Re: National Fuel Gas Company National Fuel Gas Distribution Corporation Penn-York Energy Corporation National Fuel Gas Supply Corporation Seneca Resources Corporation Empire Exploration, Inc. Utility Constructors, Inc. Form U-1 Application-Declaration File No. 70-8143 ------------------------------------------ Ladies and Gentlemen: This opinion relates to Post-Effective Amendment No. 2 to the joint Application-Declaration, as heretofore amended (so amended, the "Amended Application- Declaration"), filed on or about November 18, 1994, by National Fuel Gas Company ("National") and its subsidiary corporations, National Fuel Gas Distribution Corporation, Penn-York Energy Corporation, National Fuel Gas Supply Corporation, Seneca Resources Corporation, Empire Exploration, Inc., and Utility Constructors, Inc., under the Public Utility Holding Company Act of 1935, as amended. The Amended Application-Declaration seeks authorization for National to enter into one or more interest rate swap agreements and other derivative instruments (e.g., interest ---- rate caps, interest rate floors and interest rate collars) (collectively, the "Swap Agreements") with one or more third parties (each, a "Counterparty" and, collectively, the "Counterparties") in notional amounts aggregating not in excess of $350 million at any one time outstanding. Based upon the foregoing and having due regard for legal considerations which we deem relevant, we are of the opinion that: 1. National is a corporation duly organized and validly existing under the laws of the State of New Jersey. 2. If (i) the proposed transactions are duly consummated in accordance with the Amended Application-Declaration and the order or orders of the Securities and Exchange Commission thereon, and (ii) the Swap Agreements are duly executed and delivered by National and are duly authorized, executed and delivered by, and are legal, valid and binding obligations of, each Counterparty thereto: A. All laws of the State of New Jersey applicable to the proposed transactions will have been complied with; B. Insofar as New Jersey law is applicable, the Swap Agreements will be legal, valid and binding obligations of National; and C. The legal rights of the holders of any securities issued by National will not have been violated. A copy of this opinion is being delivered to Messrs. Reid & Priest who, in rendering their opinion of even date herewith to the Securities and Exchange Commission, are hereby authorized to rely upon the opinions expressed herein to the same extent as if this opinion had been addressed directly to them. We consent to the use of this opinion as an exhibit to the Amended Application-Declaration. Very truly yours, /s/ Stryker, Tams & Dill STRYKER, TAMS & DILL -----END PRIVACY-ENHANCED MESSAGE-----