10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

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.)
6363 Main Street
Williamsville, New York	14221
(Address of principal executive offices)	(Zip Code)

(716) 857-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ       Accelerated Filer o       Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

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 April 30, 2007: 83,475,537 shares.

GLOSSARY OF TERMS

Frequently used abbreviations, acronyms, or terms used in this report:

National Fuel Gas Companies
Company	The Registrant, the Registrant and its subsidiaries or the Registrant’s subsidiaries as appropriate in the context of the disclosure
Data-Track	Data-Track Account Services, Inc.
Distribution Corporation	National Fuel Gas Distribution Corporation
Empire	Empire State Pipeline
ESNE	Energy Systems North East, LLC
Highland	Highland Forest Resources, Inc.
Horizon	Horizon Energy Development, Inc.
Horizon LFG	Horizon LFG, Inc.
Horizon Power	Horizon Power, Inc.
Leidy Hub	Leidy Hub, Inc.
Model City	Model City Energy, LLC
National Fuel	National Fuel Gas Company
NFR	National Fuel Resources, Inc.
Registrant	National Fuel Gas Company
SECI	Seneca Energy Canada Inc.
Seneca	Seneca Resources Corporation
Seneca Energy	Seneca Energy II, LLC
Supply Corporation	National Fuel Gas Supply Corporation
Regulatory Agencies
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
NTSB	National Transportation Safety Board
NYDEC	New York State Department of Environmental Conservation
NYPSC	State of New York Public Service Commission
PaPUC	Pennsylvania Public Utility Commission
SEC	Securities and Exchange Commission
Other
2006 Form 10-K	The Company’s Annual Report on Form 10-K for the year ended September 30, 2006
Bbl	Barrel (of oil)
Bcf	Billion cubic feet (of natural gas)
Board foot	A measure of lumber and/or timber equal to 12 inches in length by 12 inches in width by one inch in thickness.
Btu	British thermal unit; the amount of heat needed to raise the temperature of one pound of water one degree Fahrenheit.
Capital expenditure	Represents additions to property, plant, and equipment, or the amount of money a company spends to buy capital assets or upgrade its existing capital assets.
Cashout revenues	A cash resolution of a gas imbalance whereby a customer pays Supply Corporation for gas the customer receives in excess of amounts delivered into Supply Corporation’s system by the customer’s shipper.
Degree day	A measure of the coldness of the weather experienced, based on the extent to which the daily average temperature falls below a reference temperature, usually 65 degrees Fahrenheit.
Derivative	A financial instrument or other contract, the terms of which include an underlying variable (a price, interest rate, index rate, exchange rate, or other variable) and a notional amount (number of units, barrels, cubic feet, etc.). The terms also permit for the instrument or contract to be settled net and no initial net investment is required to enter into the financial instrument or contract. Examples include futures contracts, options, no cost collars and swaps.
Dth	Decatherm; one Dth of natural gas has a heating value of 1,000,000 British thermal units, approximately equal to the heating value of 1 Mcf of natural gas.

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GLOSSARY OF TERMS (Cont.)
Exchange Act	Securities Exchange Act of 1934, as amended
Expenditures for long-lived assets	Includes capital expenditures, stock acquisitions and/or investments in partnerships.
FIN	FASB Interpretation Number
FIN 48	FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - - an interpretation of SFAS 109
Firm transportation and/or storage	The transportation and/or storage service that a supplier of such service is obligated by contract to provide and for which the customer is obligated to pay whether or not the service is utilized.
GAAP	Accounting principles generally accepted in the United States of America
Goodwill	An intangible asset representing the difference between the fair value of a company and the price at which a company is purchased.
Hedging	A method of minimizing the impact of price, interest rate, and/or foreign currency exchange rate changes, often times through the use of derivative financial instruments.
Hub	Location where pipelines intersect enabling the trading, transportation, storage, exchange, lending and borrowing of natural gas.
Interruptible transportation and/or storage	The transportation and/or storage service that, in accordance with contractual arrangements, can be interrupted by the supplier of such service, and for which the customer does not pay unless utilized.
LIFO	Last-in, first-out
Mbbl	Thousand barrels (of oil)
Mcf	Thousand cubic feet (of natural gas)
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
MDth	Thousand decatherms (of natural gas)
MMcf	Million cubic feet (of natural gas)
Precedent Agreement	An agreement between a pipeline company and a potential customer to sign a service agreement after specified events (called “conditions precedent”) happen, usually within a specified time.
Proved developed reserves	Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.
Proved undeveloped reserves	Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required to make these reserves productive.
Reserves	The unproduced but recoverable oil and/or gas in place in a formation which has been proven by production.
Restructuring	Generally referring to partial “deregulation” of the utility industry by a statutory or regulatory process. Restructuring of federally regulated natural gas pipelines has resulted in the separation (or “unbundling”) of gas commodity service from transportation service for wholesale and large-volume retail markets. State restructuring programs attempt to extend the same process to retail mass markets.
SAR	Stock-settled stock appreciation right
SFAS	Statement of Financial Accounting Standards
SFAS 87	Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions
SFAS 88	Statement of Financial Accounting Standards No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits
SFAS 106	Statement of Financial Accounting Standards No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions
SFAS 109	Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
SFAS 115	Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities

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GLOSSARY OF TERMS (Concl.)
SFAS 123R	Statement of Financial Accounting Standards No. 123R, Share-Based Payment
SFAS 132R	Statement of Financial Accounting Standards No. 132R, Employers’ Disclosures about Pensions and Other Postretirement Benefits
SFAS 157	Statement of Financial Accounting Standards No. 157, Fair Value Measurements
SFAS 158	Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS 87, 88, 106, and 132R
SFAS 159	Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of SFAS 115
Stock acquisitions	Investments in corporations.
Unbundled service	A service that has been separated from other services, with rates charged that reflect only the cost of the separated service.
WNC	Weather normalization clause; a clause in utility rates which adjusts customer rates to allow a utility to recover its normal operating costs calculated at normal temperatures. If temperatures during the measured period are warmer than normal, customer rates are adjusted upward in order to recover projected operating costs. If temperatures during the measured period are colder than normal, customer rates are adjusted downward so that only the projected operating costs will be recovered.

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INDEX

	Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
a. Consolidated Statements of Income and Earnings Reinvested in the Business — Three and Six Months Ended March 31, 2007 and 2006		6 - 7
b. Consolidated Balance Sheets – March 31, 2007 and September 30, 2006		8 - 9
c. Consolidated Statement of Cash Flows – Six Months Ended March 31, 2007 and 2006		10
d. Consolidated Statements of Comprehensive Income — Three and Six Months Ended March 31, 2007 and 2006		11
e. Notes to Consolidated Financial Statements		12 - 21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22 - 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk		41
Item 4. Controls and Procedures		41 - 42
Part II. Other Information
Item 1. Legal Proceedings		42 - 43
Item 1 A. Risk Factors		43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3. Defaults Upon Senior Securities		•
Item 4. Submission of Matters to a Vote of Security Holders		44
Item 5. Other Information		•
Item 6. Exhibits		45
Signatures		46
EX-10.1
EX-10.2
EX-12
EX-31.1
EX-31.2
EX-32
EX-99

•    The Company has nothing to report under this item.

     Reference to “the Company” in this report means the Registrant or the Registrant and its subsidiaries collectively, as appropriate in the context of the disclosure. All references to a certain year in this report are to the Company’s fiscal year ended September 30 of that year, unless otherwise noted.

     This Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Item 2 — MD&A, under the heading “Safe Harbor for Forward-Looking Statements.” Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those statements that are designated with an asterisk (“*”) following the statement, as well as those statements that are identified by the use of the words “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” and similar expressions.

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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
	March 31,
(Thousands of Dollars, Except Per Common Share Amounts)	2007			2006
INCOME
Operating Revenues	$	812,156		$	890,981
Operating Expenses
Purchased Gas		476,904			566,540
Operation and Maintenance		125,539			121,076
Property, Franchise and Other Taxes		20,233			20,120
Depreciation, Depletion and Amortization		42,061			44,278
		664,737			752,014
Operating Income		147,419			138,967
Other Income (Expense):
Income from Unconsolidated Subsidiaries		942			720
Interest Income		885			965
Other Income		2,526			248
Interest Expense on Long-Term Debt		(17,888	)		(18,149	)
Other Interest Expense		(1,516	)		(1,465	)
Income Before Income Taxes		132,368			121,286
Income Tax Expense		53,921			42,692
Net Income Available for Common Stock		78,447			78,594
EARNINGS REINVESTED IN THE BUSINESS
Balance at December 31		781,728			845,951
		860,175			924,545
Share Repurchases		333			22,619
Dividends on Common Stock (2007 - $0.30; 2006 - $0.29)		24,940			24,327
Balance at March 31	$	834,902		$	877,599
Earnings Per Common Share:
Basic:
Net Income Available for Common Stock	$	0.95		$	0.93
Diluted:
Net Income Available for Common Stock	$	0.92		$	0.91
Weighted Average Common Shares Outstanding:
Used in Basic Calculation		82,895,087			84,346,733
Used in Diluted Calculation		85,033,127			86,253,597

See Notes to Condensed Consolidated Financial Statements

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Item 1. Financial Statements (Cont.)

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

	Six Months Ended
	March 31,
(Thousands of Dollars, Except Per Common Share Amounts)	2007			2006
INCOME
Operating Revenues	$	1,316,396		$	1,601,737
Operating Expenses
Purchased Gas		719,843			1,003,317
Operation and Maintenance		224,913			224,704
Property, Franchise and Other Taxes		37,345			37,302
Depreciation, Depletion and Amortization		84,886			87,324
		1,066,987			1,352,647
Operating Income		249,409			249,090
Other Income (Expense):
Income from Unconsolidated Subsidiaries		2,173			1,985
Interest Income		2,248			2,098
Other Income		3,241			989
Interest Expense on Long-Term Debt		(33,931	)		(36,367	)
Other Interest Expense		(3,366	)		(3,240	)
Income Before Income Taxes		219,774			214,555
Income Tax Expense		86,807			78,542
Net Income Available for Common Stock		132,967			136,013
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1		786,013			813,020
		918,980			949,033
Share Repurchases		34,351			22,619
Dividends on Common Stock (2007 - $0.60; 2006 - $0.58)		49,727			48,815
Balance at March 31	$	834,902		$	877,599
Earnings Per Common Share:
Basic:
Net Income Available for Common Stock	$	1.61		$	1.61
Diluted:
Net Income Available for Common Stock	$	1.57		$	1.58
Weighted Average Common Shares Outstanding:
Used in Basic Calculation		82,786,027			84,385,140
Used in Diluted Calculation		84,891,742			86,256,515

See Notes to Condensed Consolidated Financial Statements

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Item 1. Financial Statements (Cont.)

National Fuel Gas Company

Consolidated Balance Sheets

(Unaudited)

	March 31,		September 30,
	2007		2006
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment	$	4,820,700	$	4,703,040
Less — Accumulated Depreciation, Depletion and Amortization		1,893,449		1,825,314
		2,927,251		2,877,726
Current Assets
Cash and Temporary Cash Investments		121,809		69,611
Hedging Collateral Deposits		2,034		19,676
Receivables — Net of Allowance for Uncollectible Accounts of $44,471 and $31,427, Respectively		335,666		144,254
Unbilled Utility Revenue		58,850		25,538
Gas Stored Underground		17,021		59,461
Materials and Supplies — at average cost		31,853		36,693
Unrecovered Purchased Gas Costs		13,962		12,970
Prepaid Pension and Post-Retirement Benefit Costs		68,483		64,125
Other Current Assets		30,700		63,723
Deferred Income Taxes		23,951		23,402
		704,329		519,453
Other Assets
Recoverable Future Taxes		79,177		79,511
Unamortized Debt Expense		14,482		15,492
Other Regulatory Assets		85,427		76,917
Deferred Charges		5,234		3,558
Other Investments		80,866		88,414
Investments in Unconsolidated Subsidiaries		15,850		11,590
Goodwill		5,476		5,476
Intangible Assets		30,423		31,498
Fair Value of Derivative Financial Instruments		1,866		11,305
Deferred Income Taxes		4,627		9,003
Other		6,010		4,388
		329,438		337,152
Total Assets	$	3,961,018	$	3,734,331

See Notes to Condensed Consolidated Financial Statements

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Item 1. Financial Statements (Cont.)

National Fuel Gas Company

Consolidated Balance Sheets

(Unaudited)

	March 31,		September 30,
	2007		2006
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders’ Equity
Common Stock, $1 Par Value Authorized — 200,000,000 Shares; Issued And Outstanding — 83,132,149 Shares and 83,402,670 Shares, Respectively	$	83,132	$	83,403
Paid in Capital		565,809		543,730
Earnings Reinvested in the Business		834,902		786,013
Total Common Shareholder Equity Before Items of Other Comprehensive Income		1,483,843		1,413,146
Accumulated Other Comprehensive Income		21,733		30,416
Total Comprehensive Shareholders’ Equity		1,505,576		1,443,562
Long-Term Debt, Net of Current Portion		999,000		1,095,675
Total Capitalization		2,504,576		2,539,237
Current and Accrued Liabilities
Notes Payable to Banks and Commercial Paper		—		—
Current Portion of Long-Term Debt		96,393		22,925
Accounts Payable		166,990		133,034
Amounts Payable to Customers		10,596		23,935
Dividends Payable		24,927		25,008
Interest Payable on Long-Term Debt		18,419		18,420
Other Accruals and Current Liabilities		176,307		27,040
Fair Value of Derivative Financial Instruments		32,122		39,983
		525,754		290,345
Deferred Credits
Deferred Income Taxes		556,115		544,502
Taxes Refundable to Customers		10,433		10,426
Unamortized Investment Tax Credit		5,743		6,094
Cost of Removal Regulatory Liability		87,986		85,076
Other Regulatory Liabilities		70,842		75,456
Post-Retirement Liabilities		26,953		32,918
Asset Retirement Obligations		79,609		77,392
Other Deferred Credits		93,007		72,885
		930,688		904,749
Commitments and Contingencies		—		—
Total Capitalization and Liabilities	$	3,961,018	$	3,734,331

See Notes to Condensed Consolidated Financial Statements

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Item 1. Financial Statements (Cont.)

National Fuel Gas Company

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	March 31,
(Thousands of Dollars)	2007			2006
OPERATING ACTIVITIES
Net Income Available for Common Stock	$	132,967		$	136,013
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization		84,886			87,324
Deferred Income Taxes		21,803			(1,435	)
(Income) Loss from Unconsolidated Subsidiaries, Net of Cash Distributions		(960	)		1,166
Excess Tax Benefits Associated with Stock-Based Compensation Awards		(13,689	)		(6,515	)
Other		3,818			(5,297	)
Change in:
Hedging Collateral Deposits		17,642			60,894
Receivables and Unbilled Utility Revenue		(225,511	)		(249,466	)
Gas Stored Underground and Materials and Supplies		47,243			33,486
Unrecovered Purchased Gas Costs		(992	)		14,817
Prepayments and Other Current Assets		28,659			24,372
Accounts Payable		34,417			(9,951	)
Amounts Payable to Customers		(13,339	)		11,492
Other Accruals and Current Liabilities		163,928			139,020
Other Assets		(3,765	)		(11,837	)
Other Liabilities		(2,434	)		19,107
Net Cash Provided by Operating Activities		274,673			243,190
INVESTING ACTIVITIES
Capital Expenditures		(132,313	)		(134,961	)
Investment in Partnership		(3,300	)		—
Net Proceeds from Sale of Oil and Gas Producing Properties		2,330			4
Other		(339	)		(1,396	)
Net Cash Used in Investing Activities		(133,622	)		(136,353	)
FINANCING ACTIVITIES
Excess Tax Benefits Associated with Stock-Based Compensation Awards		13,689			6,515
Shares Repurchased under Repurchase Plan		(43,344	)		(26,577	)
Reduction of Long-Term Debt		(23,207	)		(4,529	)
Dividends Paid on Common Stock		(49,808	)		(48,933	)
Net Proceeds from Issuance of Common Stock		14,604			7,164
Net Cash Used in Financing Activities		(88,066	)		(66,360	)
Effect of Exchange Rates on Cash		(787	)		15
Net Increase in Cash and Temporary Cash Investments		52,198			40,492
Cash and Temporary Cash Investments at October 1		69,611			57,607
Cash and Temporary Cash Investments at March 31	$	121,809		$	98,099

See Notes to Condensed Consolidated Financial Statements

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Item 1. Financial Statements (Cont.)

National Fuel Gas Company

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended
	March 31,
(Thousands of Dollars)	2007			2006
Net Income Available for Common Stock	$	78,447		$	78,594
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment		1,223			(991	)
Minimum Pension Liability Adjustment		(320	)		—
Unrealized Gain on Securities Available for Sale Arising During the Period		483			1,121
Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period		(20,456	)		21,618
Reclassification Adjustment for Realized (Gains) Losses on Derivative Financial Instruments in Net Income		(958	)		25,794
Other Comprehensive Income (Loss), Before Tax		(20,028	)		47,542
Income Tax Benefit Related to Minimum Pension Liability Adjustment		(121	)		—
Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period		209			392
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period		(8,494	)		8,334
Reclassification Adjustment for Income Tax (Expense) Benefit on Realized (Gains) Losses from Derivative Financial Instruments In Net Income		(364	)		10,000
Income Taxes — Net		(8,770	)		18,726
Other Comprehensive Income (Loss)		(11,258	)		28,816
Comprehensive Income	$	67,189		$	107,410

	Six Months Ended
	March 31,
(Thousands of Dollars)	2007			2006
Net Income Available for Common Stock	$	132,967		$	136,013
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment		(3,645	)		(736	)
Minimum Pension Liability Adjustment		(320	)		—
Unrealized Gain on Securities Available for Sale Arising During the Period		1,274			2,263
Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period		(10,955	)		62,615
Reclassification Adjustment for Realized Losses on Derivative Financial Instruments in Net Income		2,218			63,725
Other Comprehensive Income (Loss), Before Tax		(11,428	)		127,867
Income Tax Benefit Related to Minimum Pension Liability Adjustment		(121	)		—
Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period		484			791
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period		(4,764	)		24,110
Reclassification Adjustment for Income Tax Benefit on Realized Losses from Derivative Financial Instruments In Net Income		1,656			24,586
Income Taxes — Net		(2,745	)		49,487
Other Comprehensive Income (Loss)		(8,683	)		78,380
Comprehensive Income	$	124,284		$	214,393

See Notes to Condensed Consolidated Financial Statements

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Item 1. Financial Statements (Cont.)

National Fuel Gas Company

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Summary of Significant Accounting Policies

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

     The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings for Interim Periods. 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, 2006, 2005 and 2004 that are included in the Company’s 2006 Form 10-K. The consolidated financial statements for the year ended September 30, 2007 will be audited by the Company’s independent registered public accounting firm after the end of the fiscal year.

     The earnings for the six months ended March 31, 2007 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2007. Most of the business of the Utility and Energy Marketing segments is seasonal in nature and is influenced by weather conditions. Due to the seasonal nature of the heating business in the Utility and Energy Marketing segments, earnings during the winter months normally represent a substantial part of the earnings that those segments are expected to achieve for the entire fiscal year. The Company’s business segments are discussed more fully in Note 5 – Business Segment Information.

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

Hedging Collateral Deposits. Cash held in margin accounts serve as collateral for open positions on exchange-traded futures contracts, exchange-traded options and over-the-counter swaps and collars.

Gas Stored Underground — Current. In the Utility segment, gas stored underground – current is carried at lower of cost or market, on a LIFO method. Gas stored underground – current normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. In the Utility segment, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets under the caption “Other Accruals and Current Liabilities.” Such reserve, which amounted to $141.8 million at March 31, 2007, is reduced to zero by September 30 of each year as the inventory is replenished.

Accumulated Other Comprehensive Income. The components of Accumulated Other Comprehensive Income, net of related tax effect, are as follows (in thousands):

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Item 1. Financial Statements (Cont.)

	At March 31, 2007			At September 30, 2006
Minimum Pension Liability Adjustment	$	(199	)	$	—
Cumulative Foreign Currency Translation Adjustment		31,056			34,701
Net Unrealized Loss on Derivative Financial Instruments		(17,139	)		(11,510	)
Net Unrealized Gain on Securities Available for Sale		8,015			7,225
Accumulated Other Comprehensive Income	$	21,733		$	30,416

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. For purposes of determining earnings per common share, the only potentially dilutive securities the Company has outstanding are stock options and stock-settled SARs. The diluted weighted average shares outstanding shown on the Consolidated Statements of Income reflects the potential dilution as a result of these stock options and stock-settled SARs as determined using the Treasury Stock Method. Stock options and stock-settled SARs that are antidilutive are excluded from the calculation of diluted earnings per common share. For the quarter and six months ended March 31, 2007, 11,879 and 283,288 stock options, respectively, were excluded as being antidilutive. In addition, there were 11,111 and 5,494 stock-settled SARs excluded as being antidilutive for the quarter and six months ended March 31, 2007, respectively. For the quarter and six months ended March 31, 2006, there were no stock options or stock-settled SARs excluded as being antidilutive.

Share Repurchases. The Company considers all shares repurchased as cancelled shares restored to the status of authorized but unissued shares, in accordance with New Jersey law. The repurchases are accounted for on the date the share repurchase is settled as an adjustment to common stock (at par value) with the excess repurchase price allocated between paid in capital and retained earnings. Refer to Note 3 – Capitalization for further discussion of the share repurchase program.

Stock-Based Compensation. For the quarter and six months ended March 31, 2007, the Company granted 50,000 stock-settled SARs having a weighted average exercise price of $41.20 per share. The weighted average grant date fair value of these stock-settled SARs was $7.81 per share for the quarter and six months ended March 31, 2007. The accounting treatment for such stock-settled SARs is the same under SFAS 123R as the accounting for stock options under SFAS 123R. There were no stock options granted during the quarter ended March 31, 2007. During the six months ended March 31, 2007, the Company granted 448,000 stock options having a weighted average exercise price of $39.48 per share. The weighted average grant date fair value of such options was $7.27 per share for the six months ended March 31, 2007. The Company also granted 10,000 and 25,000 restricted share awards (non-vested stock as defined in SFAS 123R), during the quarter and six months ended March 31, 2007, respectively. The weighted average fair values of such restricted shares were $41.20 and $40.18 per share, respectively, for the quarter and six months ended March 31, 2007.

New Accounting Pronouncements. In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The cumulative effect of applying FIN 48 at

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Item 1. Financial Statements (Cont.)

adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. FIN 48 is effective for the first quarter of the Company’s 2008 fiscal year. The Company is currently assessing the potential effect of FIN 48 on its consolidated financial statements.

     In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. SFAS 157 provides guidance for using fair value to measure assets and liabilities. The pronouncement serves to clarify the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect that fair-value measurements have on earnings. SFAS 157 is to be applied whenever another standard requires or allows assets or liabilities to be measured at fair value. The pronouncement is effective as of the Company’s first quarter of fiscal 2009. The Company is currently evaluating the impact that the adoption of SFAS 157 will have on its consolidated financial statements.

     In September 2006, the FASB also issued SFAS 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans” (an amendment of SFAS 87, SFAS 88, SFAS 106, and SFAS 132R). SFAS 158 requires that companies recognize a net liability or asset to report the underfunded or overfunded status of their defined benefit pension and other post-retirement benefit plans on their balance sheets, as well as recognize changes in the funded status of a defined benefit post-retirement plan in the year in which the changes occur through comprehensive income. The pronouncement also specifies that a plan’s assets and obligations that determine its funded status be measured as of the end of the Company’s fiscal year, with limited exceptions. The Company is required to recognize the funded status of its benefit plans and the disclosure requirements of SFAS 158 by the fourth quarter of fiscal 2007. The requirement to measure the plan assets and benefit obligations as of the Company’s fiscal year-end date will be adopted by the Company by the end of fiscal 2009. If the Company recognized the funded status of its pension and post-retirement benefit plans at September 30, 2006, the Company’s Consolidated Balance Sheet would reflect a liability of $232.5 million instead of the prepaid pension and post-retirement costs of $64.1 million and post-retirement liabilities of $32.9 million that were presented on the balance sheet at September 30, 2006. The Company expects that it will record a regulatory asset for the majority of this liability with the remainder reflected in accumulated other comprehensive income. The Company will recalculate the funded status of its pension and post-retirement benefit plans during the fourth quarter of fiscal 2007.

     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of SFAS 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not otherwise required to be measured at fair value under GAAP. A company that elects the fair value option for an eligible item will be required to recognize in current earnings any changes in that item’s fair value in reporting periods subsequent to the date of adoption. SFAS 159 is effective as of the Company’s first quarter of fiscal 2009. The Company is currently evaluating the impact, if any, that the adoption of SFAS 159 will have on its consolidated financial statements.

Note 2 — Income Taxes

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

-14-

Item 1. Financial Statements (Cont.)

	Six Months Ended
	March 31,
	2007			2006
Operating Expenses:
Current Income Taxes
Federal	$	49,937		$	62,466
State		14,823			15,181
Foreign		244			2,328
Deferred Income Taxes
Federal		14,181			(1,433	)
State		3,546			(223	)
Foreign		4,076			223
		86,807			78,542
Other Income:
Deferred Investment Tax Credit		(348	)		(348	)
Total Income Taxes	$	86,459		$	78,194

     The U.S. and foreign components of income before income taxes are as follows (in thousands):

	Six Months Ended
	March 31,
	2007		2006
U.S.	$	208,512	$	195,503
Foreign		10,914		18,704
	$	219,426	$	214,207

     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):

	Six Months Ended
	March 31,
	2007			2006
Income Tax Expense, Computed at Statutory Rate of 35%	$	76,799		$	74,972
Increase (Reduction) in Taxes Resulting From:
State Income Taxes		11,940			9,723
Foreign Tax Differential		428			(4,704	)(1)
Miscellaneous		(2,708	)		(1,797	)
Total Income Taxes	$	86,459		$	78,194

⁽¹⁾ Includes a $5.1 million deferred tax benefit relating to additional future tax deductions forecasted in the Exploration and Production segment’s Canadian division.

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

-15-

Item 1. Financial Statements (Cont.)

	At March 31, 2007			At September 30, 2006
Deferred Tax Liabilities:
Property, Plant and Equipment	$	593,523		$	569,677
Other		35,876			37,865
Total Deferred Tax Liabilities		629,399			607,542
Deferred Tax Assets:
Capital Loss Carryover		(5,976	)		(8,786	)
Other		(95,886	)		(86,659	)
Total Deferred Tax Assets		(101,862	)		(95,445	)
Total Net Deferred Income Taxes	$	527,537		$	512,097
Presented as Follows:
Net Deferred Tax Asset – Current	$	(23,951	)	$	(23,402	)
Net Deferred Tax Asset – Non-Current		(4,627	)		(9,003	)
Net Deferred Tax Liability – Non-Current		556,115			544,502
Total Net Deferred Income Taxes	$	527,537		$	512,097

     Regulatory liabilities representing the reduction of previously recorded deferred income taxes with rate-regulated activities that are expected to be refundable to customers amounted to $10.4 million at both March 31, 2007 and September 30, 2006. Also, regulatory assets representing future amounts collectible from customers, corresponding to additional deferred income taxes not previously recorded because of prior ratemaking practices, amounted to $79.2 million and $79.5 million at March 31, 2007 and September 30, 2006, respectively.

     A capital loss carryover of $17.1 million existed at March 31, 2007, which expires if not utilized by September 30, 2008. Although realization is not assured, management determined that it is more likely than not that the entire deferred tax asset associated with this carryover will be realized during the carryover period, and as such, no valuation allowance has been provided at March 31, 2007.

     A deferred tax asset of $4.6 million and $9.0 million relating to Canadian operations existed at March 31, 2007 and September 30, 2006, respectively. Although realization is not assured, management determined that it is more likely than not that future taxable income will be generated in Canada to fully utilize this asset, and as such, no valuation allowance has been provided.

Note 3 — Capitalization

Common Stock. During the six months ended March 31, 2007, the Company issued 1,264,117 original issue shares of common stock as a result of stock option exercises and 25,000 original issue shares for restricted stock awards (non-vested stock as defined in SFAS 123R). The Company also issued 4,346 original issue shares of common stock to the non-employee directors of the Company as partial consideration for the directors’ services during the six months ended March 31, 2007. Holders of stock options or restricted stock will often tender shares of common stock to the Company for payment of option exercise prices and/or applicable withholding taxes. During the six months ended March 31, 2007, 368,656 shares of common stock were tendered to the Company for such purposes. The Company considers all shares tendered as cancelled shares restored to the status of authorized but unissued shares, in accordance with New Jersey law.

     On December 8, 2005, the Company’s Board of Directors authorized the Company to implement a share repurchase program, whereby the Company may repurchase outstanding shares of common stock, up to an aggregate amount of 8 million shares in the open market or through privately negotiated transactions. During the six months ended March 31, 2007, the Company repurchased 1,195,328 shares

-16-

Item 1. Financial Statements (Cont.)

for $43.3 million under this program, funded with cash provided by operating activities and/or through the use of the Company’s bi-lateral lines of credit. Since the share repurchase program was implemented, the Company has repurchased 3,721,878 shares for $128.5 million.

Long-Term Debt. On December 8, 2006, the Company repaid $22.8 million of Empire’s secured debt. Such amount was classified as Current Portion of Long-Term Debt on the Company’s Consolidated Balance Sheet at September 30, 2006.

Note 4 — Commitments and Contingencies

Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs.

     As disclosed in Note H of the Company’s 2006 Form 10-K, the Company received, in 1998 and again in October 1999, notice that the NYDEC believes the Company is responsible for contamination discovered at a former manufactured gas plant site in New York for which the Company had not been named as a potentially responsible party. In February 2007, the NYDEC identified the Company as a potentially responsible party for the site and issued a proposed remedial action plan. The NYDEC estimated clean-up costs under its proposed remedy to be $8.9 million if implemented. Although the Company commented to the NYDEC that the proposed remedial action plan contained a number of material errors, omissions and procedural defects, the NYDEC, in a March 2007 Record of Decision, selected the remedy it had previously proposed. The Company has not incurred any clean-up costs at this site. The Company expects to enter negotiations with the NYDEC regarding this site and anticipates that negotiations will extend into 2008.

     At March 31, 2007, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $12.5 million to $16.1 million. The minimum estimated liability of $12.5 million has been recorded on the Consolidated Balance Sheet at March 31, 2007. The Company expects to recover its environmental clean-up costs from a combination of rate recovery and insurance proceeds.

     The Company is currently not aware of any material additional exposure to environmental liabilities. However, changes in environmental regulations or other factors could adversely impact the Company.

Other. The Company is involved in other litigation and regulatory matters arising in the normal course of business. These other matters may include, for example, negligence claims and tax, regulatory or other governmental audits, inspections, investigations and other proceedings. These matters may involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While these normal-course matters could have a material effect on earnings and cash flows in the quarterly and annual period in which they are resolved, they are not expected to change materially the Company’s present liquidity position, nor to have a material adverse effect on the financial condition of the Company.

-17-

Item 1. Financial Statements (Cont.)

Note 5 – Business Segment Information.

     The Company has five reportable segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The division of the Company’s operations into the reportable segments is based upon a combination of factors including differences in products and services, regulatory environment and geographic factors.

     The data presented in the tables below reflect the reportable segments and reconciliations to consolidated amounts. As stated in the 2006 Form 10-K, the Company evaluates segment performance based on income before discontinued operations, extraordinary items and cumulative effects of changes in accounting (where applicable). When these items are not applicable, the Company evaluates performance based on net income. There have been no changes in the basis of segmentation nor in the basis of measuring segment profit or loss from those used in the Company’s 2006 Form 10-K. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the 2006 Form 10-K.

-18-

Item 1. Financial Statements (Cont.)

Quarter Ended March 31, 2007 (Thousands)

			Pipeline		Exploration						Total				Corporate and
			and		and		Energy				Reportable				Intersegment			Total
	Utility		Storage		Production		Marketing		Timber		Segments		All Other		Eliminations			Consolidated
Revenue from External Customers	$	501,473	$	34,952	$	92,610	$	163,338	$	18,184	$	810,557	$	1,403	$	196		$	812,156
Intersegment Revenues	$	5,941	$	20,884	$	—	$	—	$	—	$	26,825	$	2,090	$	(28,915	)	$	—
Segment Profit:
Net Income	$	33,444	$	13,936	$	19,801	$	6,706	$	3,200	$	77,087	$	467	$	893		$	78,447

Six Months Ended March 31, 2007 (Thousands)

			Pipeline		Exploration						Total				Corporate and
			and		and		Energy				Reportable				Intersegment			Total
	Utility		Storage		Production		Marketing		Timber		Segments		All Other		Eliminations			Consolidated
Revenue from External Customers	$	790,256	$	64,761	$	181,318	$	246,656	$	29,947	$	1,312,938	$	3,079	$	379		$	1,316,396
Intersegment Revenues	$	9,970	$	41,252	$	—	$	—	$	—	$	51,222	$	4,287	$	(55,509	)	$	—
Segment Profit:
Net Income	$	50,618	$	27,624	$	40,523	$	7,198	$	3,417	$	129,380	$	1,453	$	2,134		$	132,967

Quarter Ended March 31, 2006 (Thousands)

			Pipeline		Exploration							Total				Corporate and
			and		and		Energy					Reportable				Intersegment			Total
	Utility		Storage		Production		Marketing		Timber			Segments		All Other		Eliminations			Consolidated
Revenue from External Customers	$	536,235	$	39,346	$	88,719	$	206,061	$	19,157		$	889,518	$	1,075	$	388		$	890,981
Intersegment Revenues	$	5,681	$	19,711	$	—	$	—	$	(23	)	$	25,369	$	2,057	$	(27,426	)	$	—
Segment Profit:
Net Income	$	28,654	$	16,892	$	25,845	$	3,877	$	2,242		$	77,510	$	46	$	1,038		$	78,594

Six Months Ended March 31, 2006 (Thousands)

			Pipeline		Exploration						Total				Corporate and
			and		and		Energy				Reportable				Intersegment			Total
	Utility		Storage		Production		Marketing		Timber		Segments		All Other		Eliminations			Consolidated
Revenue from External Customers	$	967,714	$	74,085	$	170,806	$	351,620	$	36,066	$	1,600,291	$	1,058	$	388		$	1,601,737
Intersegment Revenues	$	9,803	$	41,006	$	—	$	—	$	—	$	50,809	$	6,584	$	(57,393	)	$	—
Segment Profit:
Net Income	$	50,407	$	32,742	$	43,280	$	4,864	$	3,706	$	134,999	$	616	$	398		$	136,013

-19-

Item 1. Financial Statements (Cont.)

Note 6 — Intangible Assets

     The components of the Company’s intangible assets were as follows (in thousands):

								At September 30,
	At March 31, 2007							2006
	Gross					Net		Net
	Carrying		Accumulated			Carrying		Carrying
	Amount		Amortization			Amount		Amount
Intangible Assets Subject to Amortization:
Long-Term Transportation Contracts	$	8,580	$	(4,454	)	$	4,126	$	4,660
Long-Term Gas Purchase Contracts		31,864		(5,823	)		26,041		26,838
Intangible Assets Not Subject to Amortization:
Non-Qualified Benefit Plan Intangible Asset		256		—			256		—
	$	40,700	$	(10,277	)	$	30,423	$	31,498
Aggregate Amortization Expense:
(Thousands)
Three Months Ended March 31, 2007	$	666
Three Months Ended March 31, 2006	$	665
Six Months Ended March 31, 2007	$	1,331
Six Months Ended March 31, 2006	$	1,331

     The gross carrying amount of intangible assets subject to amortization at March 31, 2007 remained unchanged from September 30, 2006. The only activity with regard to intangible assets subject to amortization was amortization expense as shown in the table above. Amortization expense for the long-term transportation contracts is estimated to be $0.5 million for the remainder of 2007 and $1.1 million and $0.5 million for 2008 and 2009, respectively. Amortization expense for transportation contracts is estimated to be $0.4 million annually for 2010 and 2011. Amortization expense for the long-term gas purchase contracts is estimated to be $0.8 million for the remainder of 2007 and $1.6 million annually for 2008, 2009, 2010 and 2011.

Note 7 – Retirement Plan and Other Post-Retirement Benefits

     Components of Net Periodic Benefit Cost (in thousands):

Three months ended March 31,

	Retirement Plan						Other Post-Retirement Benefits
	2007			2006			2007			2006
Service Cost	$	3,225		$	4,104		$	1,403		$	2,007
Interest Cost		11,088			10,049			6,800			6,701
Expected Return on Plan Assets		(12,809	)		(12,486	)		(6,740	)		(5,576	)
Amortization of Prior Service Cost		220			239			1			1
Amortization of Transition Amount		—			—			1,782			1,782
Amortization of Losses		3,382			5,777			2,053			5,850
Net Amortization and Deferral
For Regulatory Purposes (Including Volumetric Adjustments) (1)		4,074			1,907			10,732			2,634
Net Periodic Benefit Cost	$	9,180		$	9,590		$	16,031		$	13,399

-20-

Item 1. Financial Statements (Concl.)

Six months ended March 31,

	Retirement Plan						Other Post-Retirement Benefits
	2007			2006			2007			2006
Service Cost	$	6,450		$	8,208		$	2,807		$	4,015
Interest Cost		22,175			20,098			13,599			13,402
Expected Return on Plan Assets		(25,618	)		(24,972	)		(13,480	)		(11,151	)
Amortization of Prior Service Cost		441			478			2			2
Amortization of Transition Amount		—			—			3,563			3,564
Amortization of Losses		6,764			11,554			4,107			11,701
Net Amortization and Deferral
For Regulatory Purposes (Including Volumetric Adjustments) (1)		4,229			379			13,071			(51	)
Net Periodic Benefit Cost	$	14,441		$	15,745		$	23,669		$	21,482

⁽¹⁾ The Company’s policy is to record retirement plan and other post-retirement benefit costs in the Utility segment on a volumetric basis to reflect the fact that the Utility segment experiences higher throughput of natural gas in the winter months and lower throughput of natural gas in the summer months.

Employer Contributions. During the six months ended March 31, 2007, the Company contributed $11.4 million to its retirement plan and $27.6 million to its other post-retirement benefit plan. In the remainder of 2007, the Company expects to contribute in the range of $3.0 million to $7.0 million to its retirement plan and to contribute in the range of $12.0 million to $16.0 million to its other post-retirement benefit plan.

Note 8 – Subsequent Event

     On April 30, 2007, the Company repaid $96.3 million of 6.5% unsecured notes. Such amount was classified as Current Portion of Long-Term Debt on the Company’s Consolidated Balance Sheet at March 31, 2007. These notes were callable by the Company at par at any time after September 15, 2006.

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

OVERVIEW

     The Company is a diversified energy company consisting of five reportable business segments. For the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006, the Company has experienced a slight decrease in earnings primarily due to lower earnings in the Pipeline and Storage, and Exploration and Production segments. Higher earnings in the Utility, Energy Marketing, and Timber segments largely offset these decreases. For the six months ended March 31, 2007 compared to the six months ended March 31, 2006, the Company experienced a decrease in earnings of $3.0 million due primarily to lower earnings in the Pipeline and Storage, and Exploration and Production segments. Higher earnings in the Energy Marketing segment and the Corporate and All Other categories partially offset these decreases. The Company’s earnings are discussed further in the Results of Operations section that follows.

     From a capital resources and liquidity perspective, the Company spent $132.3 million on capital expenditures during the six months ended March 31, 2007, with approximately 72% being spent in the Exploration and Production segment. This is in line with the Company’s expectations.

     The Company is still pursuing its Empire Connector project to expand its natural gas pipeline operations. On December 21, 2006, FERC issued an order granting a Certificate of Public Convenience and Necessity authorizing the construction and operation of the Empire Connector and various other related pipeline projects by other unaffiliated companies. Empire has accepted that Certificate and has also filed a request for clarification of limited aspects of the December 21, 2006 order. The Company expects to make a final decision by May 31, 2007 on whether it will build these facilities and place them in service by November 2008.* The total cost of the Empire Connector project is estimated at $177 million, which is higher than the costs estimated in Empire’s 2005 application.* The Company is seeking to mitigate the impact of this cost increase. There are no other significant changes in the status of the project. The project is discussed further in the Capital Resources and Liquidity section that follows.

     The Company also began repurchasing outstanding shares of common stock during fiscal 2006 under a share repurchase program authorized by the Company’s Board of Directors. The program authorizes the Company to repurchase up to an aggregate amount of 8 million shares. Through March 31, 2007, the Company had repurchased 3,721,878 shares for $128.5 million under this program, including 1,195,328 shares for $43.3 million during the six months ended March 31, 2007. These matters are discussed further in the Capital Resources and Liquidity section that follows.

     On January 29, 2007, the Company commenced a rate case in the New York rate jurisdiction of the Utility segment by filing proposed tariff amendments and supporting testimony requesting approval to increase its annual revenues by $52.0 million annually. The Company explains in the filing that its request for rate relief is necessitated by decreased revenues resulting from customer conservation efforts and increased customer uncollectibles, among other things. The rate filing also includes a proposal for an aggressive efficiency and conservation initiative with a revenue decoupling mechanism designed to render the Company indifferent to throughput reductions resulting from conservation. This matter is discussed more fully in the “Rate and Regulatory Matters” section that follows.

     On April 7, 2006, the NYPSC, PaPUC, and Pennsylvania Office of Consumer Advocate filed a complaint and motion for summary disposition against Supply Corporation with the FERC. The complainants alleged that Supply Corporation’s rates were unjust and unreasonable, and that Supply Corporation was permitted to retain more gas from shippers than it needed for fuel and loss. A settlement was reached with all parties and filed with the FERC in November 2006. On February 9, 2007, the FERC issued an order approving the settlement among the parties and Supply Corporation. No parties sought rehearing or challenged the settlement in court, so the settlement is now final and unappealable. This matter is discussed more fully in the “Rate and Regulatory Matters” and “Results of Operations” sections that follow.

-22-

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

     Lastly, the Company recently announced plans for its Exploration and Production unit, Seneca, to explore the sale of SECI, Seneca’s wholly owned subsidiary that operates in Canada. Seneca plans to focus on areas of value and recent success for its properties in the Gulf of Mexico, maintain its California properties in the West, and dedicate significant additional resources to the development of its Appalachian properties.*

CRITICAL ACCOUNTING ESTIMATES

     For a complete discussion of critical accounting estimates, refer to “Critical Accounting Estimates” in Item 7 of the Company’s 2006 Form 10-K. There have been no subsequent changes to that disclosure.

RESULTS OF OPERATIONS

Earnings

     The Company’s earnings were $78.4 million for the quarter ended March 31, 2007 compared to earnings of $78.6 million for the quarter ended March 31, 2006. The slight decrease in earnings is primarily the result of lower earnings in the Pipeline and Storage, and Exploration and Production segments, largely offset by higher earnings in the Utility, Energy Marketing, and Timber segments. The Exploration and Production segment’s earnings for the quarter ended March 31, 2006 include a $5.1 million benefit to earnings resulting from an adjustment to a deferred income tax balance.

     The Company’s earnings were $133.0 million for the six months ended March 31, 2007 compared to earnings of $136.0 million for the six months ended March 31, 2006. The decrease in earnings of $3.0 million is primarily the result of lower earnings in the Pipeline and Storage, and Exploration and Production segments, partially offset by higher earnings in the Energy Marketing segment and the Corporate and All Other categories. As mentioned above, earnings for the six months ended March 31, 2006 include a $5.1 million deferred income tax benefit in the Exploration and Production segment.

     Additional discussion of earnings in each of the business segments can be found in the business segment information that follows. Note that all amounts used in the earnings discussions are after tax amounts.

Earnings (Loss) by Segment

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase							Increase
(Thousands)	2007		2006		(Decrease)			2007		2006		(Decrease)
Utility	$	33,444	$	28,654	$	4,790		$	50,618	$	50,407	$	211
Pipeline and Storage		13,936		16,892		(2,956	)		27,624		32,742		(5,118	)
Exploration and Production		19,801		25,845		(6,044	)		40,523		43,280		(2,757	)
Energy Marketing		6,706		3,877		2,829			7,198		4,864		2,334
Timber		3,200		2,242		958			3,417		3,706		(289	)
Total Reportable Segments		77,087		77,510		(423	)		129,380		134,999		(5,619	)
All Other		467		46		421			1,453		616		837
Corporate (1)		893		1,038		(145	)		2,134		398		1,736
Total Consolidated	$	78,447	$	78,594	$	(147	)	$	132,967	$	136,013	$	(3,046	)

⁽¹⁾ Includes earnings from the former International segment’s activity.

-23-

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

Utility

Utility Operating Revenues

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase							Increase
(Thousands)	2007		2006		(Decrease)			2007		2006		(Decrease)
Retail Sales Revenues:
Residential	$	394,218	$	422,495	$	(28,277	)	$	619,650	$	767,368	$	(147,718	)
Commercial		67,469		75,758		(8,289	)		103,105		132,648		(29,543	)
Industrial		3,748		6,272		(2,524	)		5,649		10,724		(5,075	)
		465,435		504,525		(39,090	)		728,404		910,740		(182,336	)
Transportation		38,464		32,360		6,104			65,340		59,276		6,064
Other		3,515		5,031		(1,516	)		6,482		7,501		(1,019	)
	$	507,414	$	541,916	$	(34,502	)	$	800,226	$	977,517	$	(177,291	)

Utility Throughput

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase							Increase
(MMcf)	2007		2006		(Decrease)			2007		2006		(Decrease)
Retail Sales:
Residential		29,372		26,807		2,565			46,050		46,331		(281	)
Commercial		5,428		5,038		390			8,296		8,481		(185	)
Industrial		323		459		(136	)		514		786		(272	)
		35,123		32,304		2,819			54,860		55,598		(738	)
Transportation		24,723		22,119		2,604			40,576		36,461		4,115
		59,846		54,423		5,423			95,436		92,059		3,377

Degree Days

							Percent
Three Months Ended							Colder (Warmer) Than
March 31	Normal		2007		2006		Normal			Prior Year
Buffalo		3,327		3,327		2,875		0.0			15.7
Erie		3,142		3,152		2,705		0.3			16.5
Six Months Ended
March 31
Buffalo		5,587		5,274		5,085		(5.6	)		3.7
Erie		5,223		5,030		4,753		(3.7	)		5.8

2007 Compared with 2006

     Operating revenues for the Utility segment decreased $34.5 million for the quarter ended March 31, 2007 as compared with the quarter ended March 31, 2006. The decrease is attributable primarily to lower retail gas sales revenues. Retail gas sales revenues decreased $39.1 million largely due to the recovery of lower gas costs (gas costs are recovered dollar for dollar in revenues), which more than offset the increase in retail gas sales revenues resulting from higher volumes. The increase in volumes primarily reflects colder weather for the period. Partially offsetting this decrease in operating revenues was an increase in transportation revenues of $6.1 million. This increase is primarily attributable to the migration of retail customers to transportation service. Also, in the Pennsylvania jurisdiction, the impact of a base rate increase, which became effective in January 2007, increased operating revenues in the quarter by $4.7 million.

     Operating revenues for the Utility segment decreased $177.3 million for the six months ended March 31, 2007 as compared with the six months ended March 31, 2006. The decrease is primarily attributable to lower retail gas sales revenues. The decrease in retail gas sales revenues was largely a function of the recovery of lower gas costs, and, to a lesser extent, slightly lower throughput, as shown

-24-

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

above. Partially offsetting this decrease was an increase in transportation revenues of $6.1 million, largely due to a 4.1 Bcf increase in transportation throughput. The $6.1 million increase in transportation revenues would have been greater if not for the impact of a $3.9 million positive out-of-period adjustment recorded in the first quarter of 2006 to correct Distribution Corporation’s calculation of the symmetrical sharing component of New York’s gas adjustment rate. The increase in transportation throughput is primarily attributable to the migration of retail customers to transportation service. Slightly offsetting these decreases, in the Pennsylvania jurisdiction, the impact of a base rate increase, which became effective in January 2007, increased operating revenues for the six-month period by $4.7 million.

     The Utility segment’s earnings for the quarter ended March 31, 2007 were $33.44 million, an increase of $4.79 million when compared with earnings of $28.65 million for the quarter ended March 31, 2006. In the Pennsylvania jurisdiction, earnings increased by $6.1 million primarily due to the impact of a base rate increase ($3.0 million), discussed above, colder weather ($1.8 million), and a lower effective tax rate ($1.3 million). In the New York jurisdiction, earnings decreased by $1.3 million principally due to higher operating expenses.

     The impact of weather variations on earnings in the New York jurisdiction is mitigated by that jurisdiction’s WNC. The WNC in New York, which covers the eight-month period from October through May, has had a stabilizing effect on earnings for the New York rate jurisdiction. For the quarter ended March 31, 2007, the WNC preserved earnings of approximately $0.8 million, as weather was slightly warmer than normal for the period. For the quarter ended March 31, 2006, the WNC preserved earnings of approximately $4.2 million, as weather was warmer than normal for that period as well.

     The Utility segment’s earnings for the six months ended March 31, 2007 were $50.6 million, an increase of $0.2 million when compared with the earnings of $50.4 million for the six months ended March 31, 2006. In the Pennsylvania jurisdiction, earnings increased $5.8 million due primarily to a base rate increase that became effective in January 2007 ($3.0 million), discussed above, colder weather ($2.1 million), and a lower effective tax rate ($1.4 million). Higher intercompany and other interest expense of $0.6 million partly offset these increases. In the New York jurisdiction, earnings decreased $5.6 million due primarily to the out-of-period symmetrical sharing adjustment discussed above ($2.6 million), higher bad debt and other operating costs ($2.7 million), and higher property taxes ($0.5 million).

     For the six months ended March 31, 2007, the WNC preserved earnings of approximately $2.4 million, as the weather was warmer than normal. For the six months ended March 31, 2006, the WNC preserved earnings of approximately $4.7 million, as the weather was also warmer than normal.

Pipeline and Storage

Pipeline and Storage Operating Revenues

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase							Increase
(Thousands)	2007		2006		(Decrease)			2007		2006		(Decrease)
Firm Transportation	$	31,774	$	31,738	$	36		$	61,262	$	62,824	$	(1,562	)
Interruptible Transportation		955		1,115		(160	)		1,901		2,438		(537	)
		32,729		32,853		(124	)		63,163		65,262		(2,099	)
Firm Storage Service		16,790		16,408		382			33,192		32,655		537
Other		6,317		9,796		(3,479	)		9,658		17,174		(7,516	)
	$	55,836	$	59,057	$	(3,221	)	$	106,013	$	115,091	$	(9,078	)

Pipeline and Storage Throughput

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase
(MMcf)	2007		2006		(Decrease)			2007		2006		Decrease
Firm Transportation		120,631		114,828		5,803			195,058		217,650		(22,592	)
Interruptible Transportation		932		1,831		(899	)		1,927		5,554		(3,627	)
		121,563		116,659		4,904			196,985		223,204		(26,219	)

-25-

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

2007 Compared with 2006

     Operating revenues for the Pipeline and Storage segment decreased $3.2 million for the quarter ended March 31, 2007 as compared with the quarter ended March 31, 2006. The decrease was primarily due to lower efficiency gas revenues ($4.9 million) reported as part of other revenues in the table above. This decrease was due primarily to the Company’s recent settlement with the FERC, which decreased the efficiency gas retainage allowances, coupled with lower gas prices in the three months ended March 31, 2007 as compared with the three months ended March 31, 2006. This decrease was offset by a $1.4 million increase in other revenues attributable to the lease termination fee adjustment in 2006 (an intercompany transaction) for the Company’s former corporate headquarters, which did not recur in 2007. In addition, there was a $0.4 million increase in firm storage service attributable to an increase in storage rates that began in April 2006.

     Operating revenues for the Pipeline and Storage Segment for the six months ended March 31, 2007 decreased $9.1 million as compared with the six months ended March 31, 2006. The decrease was primarily due to lower efficiency gas revenues ($9.0 million) reported as part of other revenues in the table above. This decrease was due primarily to the Company’s recent settlement with the FERC, which decreased the efficiency gas retainage allowances, coupled with lower gas prices during the six months ended March 31, 2007 as compared with the six months ended March 31, 2006. In addition, there was a $1.6 million decrease to transportation/storage revenues caused by the Utility segment’s reduction in their firm contract volumes in fiscal 2007, coupled with non-recurring market conditions resulting from the effect of hurricane damage to production and pipeline infrastructure in the Gulf of Mexico during the fall of 2005. Offsetting these decreases was a $1.4 million increase in other revenues attributable to the lease termination fee adjustment discussed above.

     The Pipeline and Storage segment’s earnings for the quarter ended March 31, 2007 were $13.9 million, a decrease of $3.0 million when compared with earnings of $16.9 million for the quarter ended March 31, 2006. The decrease primarily reflects the earnings impact associated with lower efficiency gas revenues ($3.2 million). It also reflects higher operation costs of $0.5 million and higher interest expense of $0.9 million. These earnings decreases were partially offset by an earnings increase due to lower depreciation expense ($1.0 million) due to decreased depreciation rates agreed upon by the FERC in the most recent rate settlement. The FERC settlement impacted three specific financial areas: efficiency gas revenues, depreciation expense, and post-retirement benefit expense. As previously mentioned, the settlement called for a decrease to efficiency gas revenues and a decrease to depreciation rates. As for post-retirement benefit expense, the settlement called for an increase that is reflected in higher operation costs discussed above.

     The Pipeline and Storage segment’s earnings for the six months ended March 31, 2007 were $27.6 million, a decrease of $5.1 million when compared with earnings of $32.7 million for the six months ended March 31, 2006. The decrease reflects the earnings impact associated with lower efficiency gas revenues ($5.8 million) due to the recent FERC settlement. It also reflects the earnings impact of lower transportation and storage service revenues ($1.0 million), and higher intercompany interest expense of $2.0 million. These earnings decreases were partially offset by an earnings increase due to lower depreciation expense ($1.0 million), which was caused by decreased depreciation rates agreed upon by the FERC in the most recent rate settlement. There was a $1.9 million positive earnings impact associated with the discontinuance of hedge accounting for Empire’s interest rate collar. On December 8, 2006, Empire repaid $22.8 million of secured debt. The interest costs of this secured debt were hedged by the interest rate collar. Since the hedged transaction was settled and there will be no future cash flows associated with the secured debt, the unrealized gain in accumulated other comprehensive income associated with the interest rate collar was reclassified to the income statement.

-26-

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

Exploration and Production

Exploration and Production Operating Revenues

	Three Months Ended									Six Months Ended
	March 31,									March 31,
							Increase									Increase
(Thousands)	2007			2006			(Decrease)			2007			2006			(Decrease)
Gas (after Hedging)	$	48,156		$	49,432		$	(1,276	)	$	95,170		$	98,774		$	(3,604	)
Oil (after Hedging)		41,599			36,262			5,337			79,925			65,656			14,269
Gas Processing Plant		9,117			10,662			(1,545	)		17,746			24,082			(6,336	)
Other		181			312			(131	)		770			1,835			(1,065	)
Intrasegment Elimination (1)		(6,443	)		(7,949	)		1,506			(12,293	)		(19,541	)		7,248
	$	92,610		$	88,719		$	3,891		$	181,318		$	170,806		$	10,512

⁽¹⁾ Represents the elimination of certain West Coast gas production included in “Gas (after Hedging)” in the table above that was sold to the gas processing plant shown in the table above. An elimination for the same dollar amount was made to reduce the gas processing plant’s Purchased Gas expense.

Production Volumes

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase							Increase
	2007		2006		(Decrease)			2007		2006		(Decrease)
Gas Production (MMcf)
Gulf Coast		2,893		2,752		141			5,616		4,419		1,197
West Coast		920		933		(13	)		1,865		1,951		(86	)
Appalachia		1,339		1,246		93			2,732		2,499		233
Canada		1,856		1,761		95			3,577		3,672		(95	)
		7,008		6,692		316			13,790		12,541		1,249
Oil Production (Mbbl)
Gulf Coast		174		181		(7	)		376		288		88
West Coast		599		639		(40	)		1,190		1,324		(134	)
Appalachia		31		12		19			58		22		36
Canada		61		68		(7	)		117		155		(38	)
		865		900		(35	)		1,741		1,789		(48	)

Average Prices

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase							Increase
	2007		2006		(Decrease)			2007		2006		(Decrease)
Average Gas Price/Mcf
Gulf Coast	$	6.42	$	8.47	$	(2.05	)	$	6.48	$	9.33	$	(2.85	)
West Coast	$	6.95	$	8.02	$	(1.07	)	$	6.51	$	9.62	$	(3.11	)
Appalachia	$	7.39	$	10.03	$	(2.64	)	$	7.30	$	11.83	$	(4.53	)
Canada	$	5.87	$	7.21	$	(1.34	)	$	6.12	$	9.06	$	(2.94	)
Weighted Average	$	6.53	$	8.37	$	(1.84	)	$	6.56	$	9.79	$	(3.23	)
Weighted Average After Hedging	$	6.87	$	7.39	$	(0.52	)	$	6.90	$	7.88	$	(0.98	)
Average Oil Price/bbl
Gulf Coast	$	57.21	$	58.69	$	(1.48	)	$	56.84	$	58.39	$	(1.55	)
West Coast	$	49.99	$	53.65	$	(3.66	)	$	50.55	$	52.46	$	(1.91	)
Appalachia	$	57.88	$	60.28	$	(2.40	)	$	58.76	$	60.84	$	(2.08	)
Canada	$	49.98	$	48.63	$	1.35		$	46.45	$	45.57	$	0.88
Weighted Average	$	51.73	$	54.37	$	(2.64	)	$	51.91	$	52.92	$	(1.01	)
Weighted Average After Hedging	$	48.09	$	40.30	$	7.79		$	45.90	$	36.70	$	9.20

-27-

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

2007 Compared with 2006

     Operating revenues for the Exploration and Production segment increased $3.9 million for the quarter ended March 31, 2007 as compared with the quarter ended March 31, 2006. Oil production revenue after hedging increased $5.3 million due to a $7.79 per barrel increase in weighted average prices after hedging. Gas production revenue after hedging decreased $1.3 million due to a decrease in the weighted average price of gas after hedging ($0.52 per Mcf). This was offset slightly by an overall increase in gas production of 316 MMcf. While oil prices before hedging decreased quarter over quarter, many of the lower priced hedges in place during the quarter ended March 31, 2006 expired and were not replaced, resulting in an increase to the weighted average oil price after hedging received for this segment’s oil production during the quarter ended March 31, 2007.

     Operating revenues for the Exploration and Production segment increased $10.5 million for the six months ended March 31, 2007 as compared with the six months ended March 31, 2006. Oil production revenue after hedging increased $14.3 million due to a $9.20 per barrel increase in weighted average prices after hedging. While oil prices before hedging decreased for the six months ended March 31, 2007 as compared with the six months ended March 31, 2006, many of the lower priced hedges in place during the six months ended March 31, 2006 expired and were not replaced, resulting in an increase to the weighted average oil price after hedging received for this segment’s oil production during the six months ended March 31, 2007. Gas production revenue after hedging decreased $3.6 million. An increase in gas production of 1,249 MMcf more than offset a decrease in the weighted average price of gas after hedging ($0.98 per Mcf). The increase in gas production occurred primarily in the Gulf Coast region (1,197 MMcf). During the quarter ended December 31, 2005, Seneca experienced significant production delays due largely to the impact of hurricane damage to pipeline infrastructure in the Gulf of Mexico. Seneca had substantially all of its pre-hurricane Gulf of Mexico production back on line at the beginning of fiscal 2007.

     The Exploration and Production segment’s earnings for the quarter ended March 31, 2007 were $19.8 million, a decrease of $6.0 million when compared with earnings of $25.8 million for the quarter ended March 31, 2006. The decrease is primarily attributable to a $5.1 million benefit to earnings, recognized during the quarter ended March 31, 2006, resulting from an adjustment to a deferred income tax balance. While higher crude oil prices and higher natural gas production increased earnings by $4.4 million and $1.5 million, respectively, lower natural gas prices and lower crude oil production decreased earnings by $2.4 million and $0.9 million, respectively. Earnings were also negatively impacted by a higher effective tax rate ($3.8 million), largely due to higher New York State taxes. The Company files a combined New York State tax return and allocates such state tax among all subsidiaries.

     The Exploration and Production segment’s earnings for the six months ended March 31, 2007 were $40.5 million, a decrease of $2.8 million when compared with earnings of $43.3 million for the quarter ended March 31, 2006. The decrease can be attributed to the $5.1 million benefit to earnings recognized during the quarter ended March 31, 2006, as discussed above, combined with an additional $4.1 million earnings reduction associated with a higher effective tax rate, as discussed above. While higher crude oil prices and higher natural gas production increased earnings by $10.4 million and $6.4 million, respectively, lower natural gas prices and lower crude oil production decreased earnings by $8.8 million and $1.1 million, respectively.

Energy Marketing

Energy Marketing Operating Revenues

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase							Increase
(Thousands)	2007		2006		(Decrease)			2007		2006		(Decrease)
Natural Gas (after Hedging)	$	163,274	$	206,057	$	(42,783	)	$	246,544	$	351,580	$	(105,036	)
Other		64		4		60			112		40		72
	$	163,338	$	206,061	$	(42,723	)	$	246,656	$	351,620	$	(104,964	)

-28-

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

Energy Marketing Volumes

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2007		2006		Increase		2007		2006		Increase
Natural Gas – (MMcf)		19,935		17,332		2,603		31,049		27,306		3,743

2007 Compared with 2006

     Operating revenues for the Energy Marketing segment decreased $42.7 million and $105.0 million, respectively, for the quarter and six months ended March 31, 2007, as compared with the quarter and six months ended March 31, 2006. The decrease for both the quarter and six months ended March 31, 2007 primarily reflects lower gas sales revenue due to a decrease in natural gas commodity prices that were recovered through revenues, offset in part by an increase in throughput. The increase in throughput was due to the addition of certain large, low-margin commercial and industrial customers, as well as colder weather.

     Earnings in the Energy Marketing segment increased $2.8 million and $2.3 million, respectively, for the quarter and six months ended March 31, 2007 as compared with the quarter and six months ended March 31, 2006. Higher margins of $3.1 million and $2.6 million, respectively, for the quarter and six-month periods are responsible for these increases. The increase in margin is mainly the result of a $2.3 million reversal of an accrual for purchased gas expense related to the resolution of a contingency during the quarter ended March 31, 2007. The increase in throughput noted above, as well as greater financial benefits recognized from increased storage capacity utilization and price differentials, also contributed to the increase in margin.

Timber

Timber Operating Revenues

	Three Months Ended							Six Months Ended
	March 31,							March 31,
					Increase
(Thousands)	2007		2006		(Decrease)			2007		2006		Decrease
Log Sales	$	9,381	$	8,267	$	1,114		$	13,446	$	14,523	$	(1,077	)
Green Lumber Sales		1,347		1,968		(621	)		2,265		3,430		(1,165	)
Kiln Dry Lumber Sales		7,225		8,384		(1,159	)		13,495		16,885		(3,390	)
Other		231		515		(284	)		741		1,228		(487	)
Operating Revenues	$	18,184	$	19,134	$	(950	)	$	29,947	$	36,066	$	(6,119	)

Timber Board Feet

	Three Months Ended							Six Months Ended
	March 31,							March 31,
(Thousands)	2007		2006		Decrease			2007		2006		Decrease
Log Sales		3,025		3,282		(257	)		4,734		5,774		(1,040	)
Green Lumber Sales		2,380		2,982		(602	)		3,910		4,956		(1,046	)
Kiln Dry Lumber Sales		3,794		4,512		(718	)		6,952		8,998		(2,046	)
		9,199		10,776		(1,577	)		15,596		19,728		(4,132	)

-29-

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

2007 Compared with 2006

     Operating revenues for the Timber segment decreased $1.0 million and $6.1 million, respectively, for the quarter and six months ended March 31, 2007, as compared with the quarter and six months ended March 31, 2006. For the quarter ended March 31, 2007, the decrease can be primarily attributed to a decrease in kiln dry lumber sales ($1.2 million and 718,000 board feet) and green lumber sales ($0.6 million and 602,000 board feet). There were fewer logs available for processing due to unfavorable weather conditions earlier in the fiscal year that greatly limited the harvesting of logs. These decreases were partially offset by an increase in cherry veneer log sales ($1.2 million and 146,000 board feet increase) as a result of favorable weather conditions in March 2007 allowing for an increase in harvesting, as compared to unfavorable weather conditions that limited harvesting in March 2006. Although there was an overall decrease in log sales volumes in the table above, most of the decrease came from lower priced logs. Cherry veneer logs command the highest prices and have the largest impact on overall log sales revenue. For the six months ended March 31, 2007, the decrease in revenues can be attributed to unfavorable weather conditions primarily during the first quarter of fiscal 2007 that greatly diminished the harvesting of logs. These conditions consisted of warm, wet weather that made it difficult to bring logging trucks into the forests. Weather conditions were significantly more favorable throughout the six months ended March 31, 2006. These unfavorable conditions for harvesting resulted in a decline in log sales of $1.1 million or 1.0 million board feet. There was also a decline in both green lumber and kiln dry lumber sales of $1.2 million and $3.4 million, respectively, since there were fewer logs available for processing.

     Earnings in the Timber segment were $3.2 million for the quarter ended March 31, 2007, an increase of $1.0 million when compared with earnings of $2.2 million for the quarter ended March 31, 2006. This increase was the result of higher margins from log and lumber sales of $0.6 million as well as a decline in depletion expense of $0.5 million. The decrease in depletion expense reflects the cutting of more low cost or no cost basis timber from Company owned land.

     The Timber segment’s earnings were $3.4 million for the six months ended March 31, 2007, a decrease of $0.3 million when compared with earnings of $3.7 million for the six months ended March 31, 2006. The decrease was primarily due to lower margins from lumber and log sales ($1.0 million) as a result of the decline in revenues noted above. Partially offsetting this decrease was a decline in depletion expense of $0.9 million. The decrease in depletion expense reflects the cutting of more low cost or no cost basis timber from Company owned land.

Corporate and All Other

2007 Compared with 2006

     Corporate and All Other recorded earnings of $1.4 million for the quarter ended March 31, 2007 compared with earnings of $1.1 million for the quarter ended March 31, 2006. For the six months ended March 31, 2006, Corporate and All Other had earnings of $3.6 million compared with earnings of $1.0 million for the six months ended March 31, 2006. These improvements were largely due to an increase in intercompany interest income of $1.4 million and $2.8 million, respectively, for the quarter and six-month periods. On a consolidated basis, all significant intercompany balances and transactions are eliminated. A death benefit gain on life insurance proceeds ($1.9 million) was recognized in the Corporate category during the current quarter as noted below under “Other Income”, but was largely offset by an out-of-period pension expense adjustment associated with the Company’s Non-Qualified defined benefit plan of $1.8 million. The Corporate and All Other category also experienced higher operating costs of $0.5 million and $0.4 million, respectively, for the quarter and six-month periods, exclusive of the pension expense adjustment, and higher interest expense of $0.4 million and $0.8 million, respectively, for the quarter and six-month periods. Horizon LFG’s earnings benefited from higher margins of $0.3 million and $0.7 million, respectively, for the quarter and six-month periods.

Other Income

     Other income increased $2.3 million for both the quarter and six months ended March 31, 2007 as compared to the quarter and six months ended March 31, 2006. The increase can be attributed to a death benefit gain on life insurance proceeds of $1.9 million recognized in the Corporate category.

-30-

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

Interest Charges

     Interest on long-term debt decreased $0.3 million for the quarter ended March 31, 2007 as compared with the quarter ended March 31, 2006. For the six months ended March 31, 2007, interest on long-term debt decreased $2.4 million as compared with the six months ended March 31, 2006 due to a $1.9 million benefit to interest expense as a result of the discontinuance of hedge accounting for Empire’s interest rate collar, as discussed above under Pipeline and Storage. The underlying long-term debt associated with this interest rate collar was repaid in December 2006 and the unrealized gain recorded in accumulated other comprehensive income associated with the interest rate collar was reclassified to interest expense during the quarter ended December 31, 2006.

Income Tax Expense

     The Company’s effective income tax rate for the quarter ended March 31, 2007 was approximately 41%, up from approximately 35% for the quarter ended March 31, 2006. The effective income tax rate increased primarily as a result of the income tax benefit of $5.1 million that was recognized in the Exploration and Production segment in the quarter ended March 31, 2006 that did not recur in 2007. It also reflects higher New York State taxes in the Exploration and Production segment. The Company files a combined New York State tax return and allocates such state tax among all subsidiaries.

CAPITAL RESOURCES AND LIQUIDITY

     The Company’s primary source of cash during the six-month period ended March 31, 2007 consisted of cash provided by operating activities. This source of cash was supplemented by issues of new shares of common stock as a result of stock option exercises. During the six months ended March 31, 2007, the common stock used to fulfill the requirements of the Company’s 401(k) plans and Direct Stock Purchase and Dividend Reinvestment Plan was obtained via open market purchases. During fiscal 2006, the Company began repurchasing outstanding shares of its common stock under a share repurchase program, which is discussed below under Financing Cash Flow.

Operating Cash Flow

     Internally generated cash from operating activities consists of net income available for common stock, adjusted for non-cash expenses, non-cash income and changes in operating assets and liabilities. Non-cash items include depreciation, depletion and amortization, deferred income taxes, and income or loss from unconsolidated subsidiaries net of cash distributions.

     Cash provided by operating activities in the Utility and the Pipeline and Storage segments may vary from period to period because of the impact of rate cases. In the Utility segment, supplier refunds, over- or under-recovered purchased gas costs and weather may also significantly impact cash flow. The impact of weather on cash flow is tempered in the Utility segment’s New York rate jurisdiction by its WNC and in the Pipeline and Storage segment by Supply Corporation’s straight fixed-variable rate design.

     Because of the seasonal nature of the heating business in the Utility and Energy Marketing segments, revenues in these segments are relatively high during the heating season, primarily the first and second quarters of the fiscal year, and receivable balances historically increase during these periods from the balances receivable at September 30.

     The storage gas inventory normally declines during the first and second quarters of the fiscal year and is replenished during the third and fourth quarters. For storage gas inventory accounted for under the LIFO method, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets under the caption “Other Accruals and Current Liabilities.” Such reserve is reduced as the inventory is replenished.

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

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

     Net cash provided by operating activities totaled $274.7 million for the six months ended March 31, 2007, an increase of $31.5 million compared with $243.2 million provided by operating activities for the six months ended March 31, 2006. The timing of gas cost recovery in the Utility segment for the six months ended March 31, 2007 as compared to the six months ended March 31, 2006 is primarily responsible for the increase.

Investing Cash Flow

Expenditures for Long-Lived Assets

     The Company’s expenditures for long-lived assets totaled $135.6 million during the six months ended March 31, 2007. The table below presents these expenditures:

Six Months Ended March 31, 2007 (in millions of dollars)

						Total
	Capital			Investment		Expenditures for
	Expenditures			in Partnership		Long-Lived Assets
Utility	$	25.6		$	—	$	25.6
Pipeline and Storage		10.1			—		10.1
Exploration and Production		95.9			—		95.9
Timber		1.2			—		1.2
Corporate and All Other		(0.5	)		3.3		2.8
	$	132.3		$	3.3	$	135.6

Utility

     The majority of the Utility capital expenditures for the six months ended March 31, 2007 were made for replacement of mains and main extensions, as well as for the replacement of service lines.

Pipeline and Storage

     The majority of the Pipeline and Storage capital expenditures for the six months ended March 31, 2007 were made for additions, improvements, and replacements to this segment’s transmission and gas storage systems.

     The Company continues to explore various opportunities to expand its capabilities to transport gas to the East Coast, either through the Supply Corporation or Empire systems or in partnership with others. In October 2005, Empire filed an application with the FERC for the authority to build and operate the Empire Connector project to expand its natural gas pipeline operations to serve new markets in New York and elsewhere in the Northeast by extending the Empire Pipeline. The application also asked that Empire’s existing business and facilities be brought under FERC jurisdiction, and that FERC approve rates for Empire’s existing and proposed services. Assuming the proposed Millennium Pipeline is constructed, the Empire Connector will provide an upstream supply link for the Millennium Pipeline and will transport Canadian and other natural gas supplies to downstream customers, including KeySpan Gas East Corporation (Keyspan), which has entered into precedent agreements to subscribe for at least 150 MDth per day of natural gas transportation service through the Empire State Pipeline and the Millennium Pipeline systems.* The Empire Connector will be designed to move up to approximately 250 MDth of natural gas per day.* The targeted in-service date is November 2008.* FERC issued on December 21, 2006 an order granting a Certificate of Public Convenience and Necessity authorizing the construction and operation of the Empire Connector and various other related pipeline projects by other unaffiliated companies. Refer to the Rate and Regulatory Matters section that follows for further discussion of this matter. The total cost of the Empire Connector project is estimated at $177 million, which is higher than

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

the costs estimated in Empire’s 2005 application.* The Company is seeking to mitigate the impact of this cost increase by competitive bidding and, as discussed in the Rate and Regulatory Matters section that follows, sales tax exemptions and temporary partial property tax abatements as means of offsetting the impact of rising construction costs. The Company anticipates financing this project with cash on hand and/or through the use of the Company’s bi-lateral lines of credit.* As of March 31, 2007, the Company had incurred approximately $7.4 million in costs (all of which have been reserved) related to this project. Of this amount, $1.0 million and $1.4 million, respectively, were incurred during the quarter and six months ended March 31, 2007, and $0.5 million and $1.2 million were incurred during the quarter and six months ended March 31, 2006, respectively. The Company will continue to reserve for project related costs until such time as a final service agreement is signed with KeySpan, which the Company expects to occur by the end of May 2007.* At such time, the Company anticipates reversing the reserve that has been established since it believes that such costs will be recovered as part of rate base.*

     Supply Corporation continues to view its potential Tuscarora Extension project as an important link to Millennium and potential storage development in the Corning, New York area.* This new pipeline, which would expand the Supply Corporation system from its Tuscarora storage field to the intersection of the proposed Millennium and Empire Connector pipelines, will be designed initially to transport up to approximately 130 MDth of natural gas per day. It may also provide Supply Corporation with the opportunity to increase the deliverability of the existing Tuscarora storage field.* Supply Corporation has launched an “Open Season” seeking customers for new capacity from the Rockies Express Project, Appalachian production, storage and other points to Leidy and to interconnections with Millennium and Empire at Corning which, if successful, could include the Tuscarora Extension. The project timeline depends on market development, and should the market mature, the Company anticipates financing the Tuscarora Extension with cash on hand and/or through the use of the Company’s bi-lateral lines of credit.* There have been no costs incurred by the Company related to this project as of March 31, 2007. The Company has not yet filed an application with the FERC for the authority to build and operate the Tuscarora Extension.

Exploration and Production

     The Exploration and Production segment capital expenditures for the six months ended March 31, 2007 included approximately $20.0 million for Canada, $41.3 million for the Gulf Coast region ($38.3 million for the off-shore program in the Gulf of Mexico), $22.0 million for the West Coast region and $12.6 million for the Appalachian region. The significant amount spent in the Gulf Coast region corresponds to high commodity pricing, which has improved the economics of investment in the area, plus projected royalty relief. These amounts included approximately $16.8 million spent to develop proved undeveloped reserves.

Timber

     The majority of the Timber segment capital expenditures for the six months ended March 31, 2007 were made for purchases of equipment for Highland’s sawmill and kiln operations.

Corporate and All Other

     The majority of the Corporate and All Other category expenditures for long-lived assets for the six months ended March 31, 2007 consisted of a $3.3 million capital contribution to Seneca Energy by Horizon Power, $1.65 million in each of the first and second quarters of fiscal 2007. Seneca Energy generates and sells electricity using methane gas obtained from landfills owned by outside parties. Seneca Energy is in the process of expanding its generating capacity from 11.2 megawatts to 17.6 megawatts. Horizon Power has funded its capital contributions with short-term borrowings.

     The Company continuously evaluates capital expenditures and investments in corporations, partnerships, and other business entities. The amounts are subject to modification for opportunities such as the acquisition of attractive oil and gas properties, timber or natural gas storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures or other investments in the Company’s other business segments depends, to a large degree, upon market conditions.*

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

Financing Cash Flow

     The Company did not have any outstanding short-term notes payable to banks or commercial paper at March 31, 2007. The Company continues to consider short-term debt (consisting of short-term notes payable to banks and commercial paper) an important source of cash for temporarily financing capital expenditures and investments in corporations and/or partnerships, gas-in-storage inventory, unrecovered purchased gas costs, margin calls on derivative financial instruments, exploration and development expenditures, repurchases of stock, and other working capital needs. Fluctuations in these items can have a significant impact on the amount and timing of short-term debt. As for bank loans, the Company maintains a number of individual (bi-lateral) uncommitted or discretionary lines of credit with certain financial institutions for general corporate purposes. Borrowings under these lines of credit are made at competitive market rates. These credit lines, which aggregate to $455.0 million, are revocable at the option of the financial institutions and are reviewed on an annual basis. The Company anticipates that these lines of credit will continue to be renewed, or replaced by similar lines.* The total amount available to be issued under the Company’s commercial paper program is $300.0 million. The commercial paper program is backed by a syndicated committed credit facility which totals $300.0 million and extends through September 30, 2010.

     Under the Company’s committed credit facility, the Company has agreed that its debt to capitalization ratio will not exceed .65 at the last day of any fiscal quarter from September 30, 2005 through September 30, 2010. At March 31, 2007, the Company’s debt to capitalization ratio (as calculated under the facility) was .42. The constraints specified in the committed credit facility would permit an additional $1.7 billion in short-term and/or long-term debt to be outstanding (further limited by the indenture covenants discussed below) before the Company’s debt to capitalization ratio would exceed .65. If a downgrade in any of the Company’s credit ratings were to occur, access to the commercial paper markets might not be possible.* However, the Company expects that it could borrow under its uncommitted bank lines of credit or rely upon other liquidity sources, including cash provided by operations.*

     Under the Company’s existing indenture covenants, at March 31, 2007, the Company would have been permitted to issue up to a maximum of $1.1 billion in additional long-term unsecured indebtedness at then-current market interest rates in addition to being able to issue new indebtedness to replace maturing debt. The Company’s present liquidity position is believed to be adequate to satisfy known demands.*

     The Company’s 1974 indenture pursuant to which $399.0 million (or 36%) of the Company’s long-term debt (as of March 31, 2007) was issued, contains a cross-default provision whereby the failure by the Company to perform certain obligations under other borrowing arrangements could trigger an obligation to repay the debt outstanding under the indenture. In particular, a repayment obligation could be triggered if the Company fails (i) to pay any scheduled principal or interest on any debt under any other indenture or agreement or (ii) to perform any other term in any other such indenture or agreement, and the effect of the failure causes, or would permit the holders of the debt to cause, the debt under such indenture or agreement to become due prior to its stated maturity, unless cured or waived.

     The Company’s $300.0 million committed credit facility also contains a cross-default provision whereby the failure by the Company or its significant subsidiaries to make payments under other borrowing arrangements, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the committed credit facility. In particular, a repayment obligation could be triggered if (i) the Company or any of its significant subsidiaries fail to make a payment when due of any principal or interest on any other indebtedness aggregating $20.0 million or more or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $20.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of March 31, 2007, the Company had no debt outstanding under the committed credit facility.

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

     The Company has an effective registration statement on file with the SEC under which it has available capacity to issue an additional $550.0 million of debt and equity securities under the Securities Act of 1933. The Company may sell all or a portion of the remaining registered securities if warranted by market conditions and the Company’s capital requirements. Any offer and sale of the above mentioned $550.0 million of debt and equity securities will be made only by means of a prospectus meeting the requirements of the Securities Act of 1933 and the rules and regulations thereunder.

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

     On April 30, 2007, the Company repaid $96.3 million of 6.5% unsecured notes. Such amount was classified as Current Portion of Long-Term Debt on the Company’s Consolidated Balance Sheet at March 31, 2007. These notes were callable by the Company at par at any time after September 15, 2006. On December 8, 2006, the Company repaid $22.8 million of Empire’s secured debt. Such amount was classified as Current Portion of Long-Term Debt on the Company’s Consolidated Balance Sheet at September 30, 2006.

     On December 8, 2005, the Company’s Board of Directors authorized the Company to implement a share repurchase program, whereby the Company may repurchase outstanding shares of common stock, up to an aggregate amount of 8 million shares in the open market or through privately negotiated transactions. As of March 31, 2007, the Company has repurchased 3,721,878 shares for $128.5 million under this program, including 11,400 shares for $0.4 million and 1,195,328 shares for $43.3 million during the quarter and six months ended March 31, 2007, respectively. These share repurchases were funded with cash provided by operating activities and/or through the use of the Company’s bi-lateral lines of credit. In the future, it is expected that this share repurchase program will continue to be funded with cash provided by operating activities and/or through the use of the Company’s bi-lateral lines of credit.* It is expected that open market repurchases will continue from time to time depending on market conditions.*

OFF-BALANCE SHEET ARRANGEMENTS

     The Company has entered into certain off-balance sheet financing arrangements. These financing arrangements are primarily operating and capital leases. The Company’s consolidated subsidiaries have operating leases, the majority of which are with the Utility and the Pipeline and Storage segments, having a remaining lease commitment of approximately $39.6 million. These leases have been entered into for the use of buildings, vehicles, construction tools, meters, computer equipment and other items and are accounted for as operating leases. The Company’s unconsolidated subsidiaries, which are accounted for under the equity method, have capital leases of electric generating equipment having a remaining lease commitment of approximately $5.7 million. The Company has guaranteed 50% or $2.9 million of these capital lease commitments.

OTHER MATTERS

     In addition to the legal proceedings disclosed in Part II, Item 1 of this report, the Company is involved in other litigation and regulatory matters arising in the normal course of business. These other matters may include, for example, negligence claims and tax, regulatory or other governmental audits, inspections, investigations or other proceedings. These matters may involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While these normal-course matters could have a material effect on earnings and cash flows in the quarterly and annual period in which they are resolved, they are not expected to change materially the Company’s present liquidity position, nor to have a material adverse effect on the financial condition of the Company.*

Market Risk Sensitive Instruments

     For a complete discussion of market risk sensitive instruments, refer to “Market Risk Sensitive Instruments” in Item 7 of the Company’s 2006 Form 10-K. There have been no subsequent material changes to the Company’s exposure to market risk sensitive instruments.

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

Rate and Regulatory Matters

Utility Operation

     Base rate adjustments in both the New York and Pennsylvania jurisdictions do not reflect the recovery of purchased gas costs. Such costs are recovered through operation of the purchased gas adjustment clauses of the appropriate regulatory authorities.

New York Jurisdiction

     On August 27, 2004, Distribution Corporation commenced a rate case by filing proposed tariff amendments and supporting testimony requesting approval to increase its annual revenues beginning October 1, 2004. Various parties opposed the filing. On April 15, 2005, Distribution Corporation, the parties and others executed an agreement settling all outstanding issues. In an order issued July 22, 2005, the NYPSC approved the April 15, 2005 settlement agreement, substantially as filed, for an effective date of August 1, 2005. The settlement agreement provided for a rate increase of $21 million by means of the elimination of bill credits ($5.8 million) and an increase in base rates ($15.2 million). For the two-year term of the agreement and until new rates should go into effect, the return on equity level above which earnings must be shared with rate payers is 11.5%.

     On January 29, 2007, Distribution Corporation commenced a rate case by filing proposed tariff amendments and supporting testimony requesting approval to increase its annual revenues by $52.0 million. Following standard procedure, the NYPSC suspended the proposed tariff amendments to enable its staff and intervenors to conduct a routine investigation and hold hearings. Distribution Corporation explains in the filing that its request for rate relief is necessitated by decreased revenues resulting from customer conservation efforts and increased customer uncollectibles, among other things. The rate filing also includes a proposal for an aggressive efficiency and conservation initiative with a revenue decoupling mechanism designed to render the company indifferent to throughput reductions resulting from conservation. The NYPSC may accept, reject or modify the Company’s filing. Assuming standard procedure, rates would become effective in late December 2007. The outcome of the proceeding cannot be ascertained at this time. In an unrelated action, on April 30, 2007 the NYPSC adopted a generic order finding that energy efficiency and conservation programs “can create significant cost savings for customers.” The order further states that “existing rate designs still may discourage utilities from actively promoting energy efficiency.” To address these “disincentives,” the order directs utilities, including Distribution Corporation, to develop proposals for true-up based delivery service revenue decoupling mechanisms, among other things. Distribution Corporation believes that the conservation initiative and revenue decoupling mechanism submitted with its rate case is generally consistent with the requirements of the April 30, 2007 directive.

Pennsylvania Jurisdiction

     On June 8, 2006, the NTSB issued safety recommendations to Distribution Corporation, the PaPUC and certain other parties as a result of an investigation of a natural gas explosion that occurred on Distribution Corporation’s system in Dubois, Pennsylvania in August 2004. The explosion destroyed a residence, resulting in the death of two people who lived there, and damaged a number of other houses in the immediate vicinity.

     The NTSB and Distribution Corporation differ in their assessment of the probable cause of the explosion. The NTSB determined that the probable cause was the fracture of a defective “butt-fusion joint” which had joined two sections of plastic pipe, and the failure of Distribution Corporation to have an adequate program to inspect butt-fusion joints and replace those joints not meeting its inspection criteria. Based on the report of its third-party plastic pipe expert and other relevant evidence, Distribution Corporation believes that the probable cause was the improper excavation and backfill operations of a third party that had worked in the vicinity of Distribution Corporation’s pipeline. The NTSB has noted Distribution Corporation’s disagreement with the NTSB’s finding of probable cause and has forwarded to its pipeline staff the information provided by Distribution Corporation.

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

     The NTSB’s safety recommendations to Distribution Corporation involved revisions to its butt-fusion procedures for joining plastic pipe, and revisions to its procedures for qualifying personnel who perform plastic fusions. Although not required by law to do so, Distribution Corporation implemented those recommendations. In December 2006, the NTSB classified its recommendations as “closed” after determining that Distribution Corporation took acceptable action with respect to the recommendations.

     The NTSB’s recommendation to the PaPUC was to require an analysis of the integrity of butt-fusion joints in Distribution Corporation’s system and replacement of those joints that are determined to have unacceptable characteristics. Distribution Corporation is working cooperatively with the Staff of the PaPUC to permit the PaPUC to undertake the analysis recommended by the NTSB. Specifically, Distribution has done the following, in agreement with the PaPUC Staff:

(i)

Distribution Corporation uncovered a limited number of butt-fusions at two locations designated by the PaPUC Staff;

(ii)

Commencing July 6, 2006, Distribution Corporation has uncovered additional butt- fusions throughout its Pennsylvania service area as it has uncovered facilities for other purposes; when a butt-fusion has been uncovered, Distribution Corporation has notified the designated PaPUC Staff representative to permit inspection of the quality of the fusion. Distribution Corporation has removed a number of fusions for further evaluation.

     Distribution Corporation met with the PaPUC Staff in August 2006 to review findings to date and to discuss further procedures to facilitate the analysis. Distribution Corporation and the PaPUC Staff agreed to submit several of the butt-fusion specimens removed during the inspection process to an independent testing laboratory to assess the integrity of the fusions (and to provide an evaluation of the sampling procedure employed). Distribution Corporation and the PaPUC Staff have agreed upon procedures to test the butt-fusion specimens. Distribution Corporation anticipates that it will continue to meet with the PaPUC Staff to review findings pertaining to this matter and address any integrity concerns that may be identified.* At this time, Distribution Corporation is unable to predict the outcome of the analysis or of any negotiations or proceedings that may result from it. Distribution Corporation’s response to the actions of the PaPUC will depend on its assessment of the validity of the PaPUC’s analysis and conclusions.

     Without admitting liability, Distribution Corporation has settled all significant third-party claims against it related to the explosion. Distribution Corporation has been committed to providing safe and reliable service throughout its service territory and firmly believes, based on information presently known, that its system continues to be safe and reliable. According to the Plastics Pipe Institute, plastic pipe today accounts for over 90% of the pipe installed for the natural gas distribution industry in the United States and Canada. Distribution Corporation, along with many other natural gas utilities operating in the United States, has relied extensively upon the use of plastic pipe in its natural gas distribution system since the 1970s.

Pipeline and Storage

     On April 7, 2006, the NYPSC, PaPUC and the Pennsylvania Office of Consumer Advocate filed a complaint and a motion for summary disposition against Supply Corporation with FERC under Sections 5(a) and 13 of the Natural Gas Act (NGA). The complainants alleged that Supply Corporation’s rates were unjust and unreasonable, that Supply Corporation was permitted to retain more gas from shippers than is necessary for fuel and loss, and that Supply Corporation may not have the authority to make sales of gas retained from shippers. The settlement of this complaint was approved by FERC during the quarter ended March 31, 2007, as described below.

     After considerable motion practice, discovery and negotiation, Supply Corporation filed on November 17, 2006 a motion asking FERC to approve an uncontested settlement of all the issues raised or which could have been raised in the proceeding. The terms of that proposed settlement were detailed in the “Rate and Regulatory Matters” section under MD&A in the Company’s Form 10-K for the fiscal year ended September 30, 2006.

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

     On December 20, 2006, the Administrative Law Judge certified the settlement to FERC, and on February 9, 2007, FERC issued an order approving the settlement. No parties sought rehearing or challenged the settlement in court, so the settlement is now final and unappealable. In accordance with the terms of the settlement, tariff sheets implementing the settlement have been filed at and accepted by FERC, effective April 1, 2007, and refunds for the four months ended March 31, 2007 will be made as credits on bills for services performed by Supply Corporation during April 2007. Accounting entries were made during the quarter ended March 31, 2007 implementing various portions of the settlement that, upon its final approval, became effective as of December 1, 2006. Refer to the “Results of Operations” section above for further discussion of the settlement’s impact on current quarter and year-to-date earnings.

     Empire currently does not have a rate case on file with the NYPSC. Management will continue to monitor its financial position in the New York jurisdiction to determine the necessity of filing a rate case in the future.

     Among the issues resolved in connection with Empire’s FERC application to build the Empire Connector are the rates and terms of service that would become applicable to all of Empire’s business, effective upon Empire constructing and placing its new facilities into service (currently targeted for November 2008). At that time, Empire would be designated an interstate pipeline and become subject to FERC regulation.*

     FERC issued on December 21, 2006 an order granting a Certificate of Public Convenience and Necessity authorizing the construction and operation of the Empire Connector and various other related pipeline projects by other unaffiliated companies. The Empire Certificate contains various environmental and other conditions. Empire has accepted that Certificate and has also filed a request for clarification (or, in the alternative, rehearing) of limited aspects of the December 21, 2006 order. Additional environmental permits from the U.S. Army Corps of Engineers and state environmental agencies will also be required.* Empire has also sought from six counties in upstate New York sales tax exemptions and temporary partial property tax abatements necessary to enable the Empire Connector to generate a fair return, in light of construction costs which are expected to exceed the costs anticipated in Empire’s 2005 application to build this project.* In all six of these counties, Empire and the relevant government authority have negotiated an acceptable resolution, and the governmental authority has publicly issued a resolution urging final approval, which the Company expects will happen.* However, at this time Empire has not actually received those tax exemptions and abatements, does not have all the environmental permits necessary for construction, and has not acquired all the land rights necessary for the project. The Company expects to make a final decision by about May 31, 2007 on whether it will build these facilities and place them in service by November 2008.*

Environmental Matters

     The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs.

     The Company received, in 1998 and again in October 1999, notice that the NYDEC believes the Company is responsible for contamination discovered at a former manufactured gas plant site in New York for which the Company had not been named as a potentially responsible party. In February 2007, the NYDEC identified the Company as a potentially responsible party for the site and issued a proposed remedial action plan. The NYDEC estimated clean-up costs under its proposed remedy to be $8.9 million if implemented. Although the Company commented to the NYDEC that the proposed remedial action plan contained a number of material errors, omissions and procedural defects, the NYDEC, in a March 2007 Record of Decision, selected the remedy it had previously proposed. The Company has not incurred any clean-up costs at this site. The Company expects to enter negotiations with the NYDEC regarding this site and anticipates that negotiations will extend into 2008.*

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

     At March 31, 2007, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $12.5 million to $16.1 million.* The minimum estimated liability of $12.5 million has been recorded on the Consolidated Balance Sheet at March 31, 2007. The Company expects to recover its environmental clean-up costs from a combination of rate recovery and insurance proceeds.*

     The Company is currently not aware of any material additional exposure to environmental liabilities. However, changes in environmental regulations or other factors could adversely impact the Company.*

New Accounting Pronouncements

     In July 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The cumulative effect of applying FIN 48 at adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. FIN 48 is effective for the first quarter of the Company’s 2008 fiscal year. The Company is currently assessing the potential effect of FIN 48 on its consolidated financial statements.

     In September 2006, the FASB issued SFAS 157. SFAS 157 provides guidance for using fair value to measure assets and liabilities. The pronouncement serves to clarify the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect that fair-value measurements have on earnings. The Company is currently evaluating the impact that the adoption of SFAS 157 will have on its consolidated financial statements. SFAS 157 is to be applied whenever another standard requires or allows assets or liabilities to be measured at fair value. The pronouncement is effective as of the Company’s first quarter of fiscal 2009.

     In September 2006, the FASB issued SFAS 158, an amendment of SFAS 87, SFAS 88, SFAS 106, and SFAS 132R. SFAS 158 requires that companies recognize a net liability or asset to report the underfunded or overfunded status of their defined benefit pension and other post-retirement benefit plans on their balance sheets, as well as recognize changes in the funded status of a defined benefit post-retirement plan in the year in which the changes occur through comprehensive income. The pronouncement also specifies that a plan’s assets and obligations that determine its funded status be measured as of the end of Company’s fiscal year, with limited exceptions. The Company is required to recognize the funded status of its benefit plans and the disclosure requirements of SFAS 158 by the fourth quarter of fiscal 2007. The requirement to measure the plan assets and benefit obligations as of the Company’s fiscal year-end date will be adopted by the Company by the end of fiscal 2009. If the Company recognized the funded status of its pension and post-retirement benefit plans at September 30, 2006, the Company’s Consolidated Balance Sheet would reflect a liability of $232.5 million instead of the prepaid pension and post-retirement costs of $64.1 million and pension and post-retirement liabilities of $32.9 million that were presented on the balance sheet at September 30, 2006. The Company expects that it will record a regulatory asset for the majority of this liability with the remainder reflected in accumulated other comprehensive income. The Company will recalculate the funded status of its pension and post-retirement benefit plans during the fourth quarter of fiscal 2007. The difference between what the Company currently records on its Consolidated Balance Sheet for its pension and post-retirement benefit obligations and what it will be required to record under SFAS 158 is due to certain unrecognized actuarial gains and losses and unrecognized prior service costs for both the pension and other post-retirement benefit plans as well as an unrecognized transition obligation for the other post-retirement benefit plan. These amounts are not required to be recorded on the Company’s Consolidated Balance Sheet under the current accounting standards, but were instead amortized over a period of time.

     In February 2007, the FASB issued SFAS 159. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not otherwise required to be measured at fair value under GAAP. A company that elects the fair value option for an eligible item will be

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

required to recognize in current earnings any changes in that item’s fair value in reporting periods subsequent to the date of adoption. SFAS 159 is effective as of the Company’s first quarter of fiscal 2009. The Company is currently evaluating the impact, if any, that the adoption of SFAS 159 will have on its consolidated financial statements.

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, projections, 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 in this report, including, without limitation, those which are designated with an asterisk (“*”) and those which are identified by the use of the words “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” and similar expressions, are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995 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 laws and regulations to which the Company is subject, including changes in tax, environmental, safety and employment laws and regulations;
2.	Changes in economic conditions, including economic disruptions caused by terrorist activities, acts of war or major accidents;
3.	Changes in demographic patterns and weather conditions, including the occurrence of severe weather such as hurricanes;
4.	Changes in the availability and/or price of natural gas or oil and the effect of such changes on the accounting treatment or valuation of derivative financial instruments or the Company’s natural gas and oil reserves;
5.	Impairments under the SEC’s full cost ceiling test for natural gas and oil reserves;
6.	Changes in the availability and/or price of derivative financial instruments;
7.	Changes in the price differentials between various types of oil;
8.	Inability to obtain new customers or retain existing ones;
9.	Significant changes in competitive factors affecting the Company;
10.	Governmental/regulatory actions, initiatives and proceedings, including those involving acquisitions, financings, rate cases (which address, among other things, allowed rates of return, rate design and retained gas), affiliate relationships, industry structure, franchise renewal, and environmental/safety requirements;

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

11.	Unanticipated impacts of restructuring initiatives in the natural gas and electric industries;
12.	Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays or changes in project costs or plans, including changes in the plans of the sponsors of the proposed Millennium Pipeline with respect to that project, and the ability to obtain necessary environmental permits;
13.	The nature and projected profitability of pending and potential projects and other investments;
14.	Occurrences affecting the Company’s ability to obtain funds from operations or from issuances of debt or equity securities to finance needed capital expenditures and other investments, including any downgrades in the Company’s credit ratings;
15.	Uncertainty of oil and gas reserve estimates;
16.	Ability to successfully identify and finance acquisitions or other investments and ability to operate and integrate existing and any subsequently acquired business or properties;
17.	Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves;
18.	Significant changes from expectations in the Company’s actual production levels for natural gas or oil;
19.	Regarding foreign operations, changes in trade and monetary policies, inflation and exchange rates, taxes, operating conditions, laws and regulations related to foreign operations, and political and governmental changes;
20.	Significant changes in tax rates or policies or in rates of inflation or interest;
21.	Significant changes in the Company’s relationship with its employees or contractors and the potential adverse effects if labor disputes, grievances or shortages were to occur;
22.	Changes in accounting principles or the application of such principles to the Company;
23.	The cost and effects of legal and administrative claims against the Company;
24.	Changes in actuarial assumptions and the return on assets with respect to the Company’s retirement plan and post-retirement benefit plans;
25.	Increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide post-retirement benefits; or
26.	Increasing costs of insurance, changes in coverage and the ability to obtain insurance.

     The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Refer to the “Market Risk Sensitive Instruments” section in Item 2 – MD&A.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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Item 4. Controls and Procedures (Concl.)

under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, including the Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2007.

Changes in Internal Control Over Financial Reporting

     There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

     In an action instituted in the New York State Supreme Court, Kings County on February 18, 2003 against Distribution Corporation and Paul J. Hissin, an unaffiliated third party, plaintiff Donna Fordham-Coleman, as administratrix of the estate of Velma Arlene Fordham, alleges that Distribution Corporation’s denial of natural gas service in November 2000 to the plaintiff’s decedent, Velma Arlene Fordham, caused the decedent’s death in February 2001. The plaintiff sought damages for wrongful death and pain and suffering, plus punitive damages. Distribution Corporation denied plaintiff’s material allegations, asserted seven affirmative defenses and asserted a cross-claim against the co-defendant. Distribution Corporation believes, and has vigorously asserted, that plaintiff’s allegations lack merit. The court changed venue of the action to New York State Supreme Court, Erie County. Discovery closed in October 2005, and Distribution Corporation filed a motion for summary judgment in November 2005. In February 2006, the court granted Distribution Corporation’s motion for summary judgment to dismiss plaintiff’s claims for wrongful death and punitive damages. The court denied Distribution Corporation’s motion for summary judgment to dismiss plaintiff’s negligence claim seeking recovery for conscious pain and suffering. In March 2006, the plaintiff appealed the court’s dismissal of the wrongful death and punitive damages claims, and Distribution Corporation appealed the court’s denial of its motion to dismiss the negligence claim for pain and suffering. In April 2007, the Appellate Division, Fourth Judicial Department, of the New York State Supreme Court reinstated the plaintiff’s wrongful death and punitive damages claims and denied Distribution Corporation’s appeal. A trial date is scheduled for October 15, 2007.

     On April 7, 2006, the NYPSC, PaPUC and Pennsylvania Office of Consumer Advocate filed a complaint and a motion for summary disposition against Supply Corporation with FERC under Sections 5(a) and 13 of the Natural Gas Act. On June 23, 2006, FERC denied the complainants’ motion for summary disposition, and on February 9, 2007, FERC issued an order approving the settlement of the complaint. For a discussion of the settlement, refer to Part I, Item 2 — MD&A of this report under the heading “Other Matters — Rate and Regulatory Matters.”

     On June 8, 2006, the NTSB issued safety recommendations to Distribution Corporation, the PaPUC and certain others as a result of its investigation of a natural gas explosion that occurred on Distribution Corporation’s system in Dubois, Pennsylvania in August 2004. For a discussion of this matter, refer to Part I, Item 2 — MD&A of this report under the heading “Other Matters — Rate and Regulatory Matters.”

     The Company believes, based on the information presently known, that the ultimate resolution of the above matters will not be material to the consolidated financial condition, results of operations, or cash flow of the Company.* No assurances can be given, however, as to the ultimate outcome of these matters, and it is possible that the outcome could be material to results of operations or cash flow for a particular quarter or annual period.*

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Item 1. Legal Proceedings (Concl.)

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

     In addition to the matters disclosed above, the Company is involved in other litigation and regulatory matters arising in the normal course of business. These other matters may include, for example, negligence claims and tax, regulatory or other governmental audits, inspections, investigations or other proceedings. These matters may involve state and federal taxes, safety, compliance with regulations, rate base, cost of service, and purchased gas cost issues, among other things. While these normal-course matters could have a material effect on earnings and cash flows in the quarterly and annual period in which they are resolved, they are not expected to change materially the Company’s present liquidity position, nor to have a material adverse effect on the financial condition of the Company.*

Item 1A. Risk Factors

     For a complete discussion of risk factors, refer to “Risk Factors” in Item 1A of the Company’s 2006 Form 10-K, as amended by the discussion in Item 1A of the Company’s Form 10-Q for the quarter ended December 31, 2006. There have been no subsequent material changes to that disclosure.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     On January 2, 2007, the Company issued a total of 2,100 unregistered shares of Company common stock to the seven non-employee directors of the Company then serving on the Board of Directors, 300 shares to each such director. On February 23, 2007, the Company issued 146 unregistered shares of Company common stock to Stephen E. Ewing, who was elected to the Board as a non-employee director of the Company at the Company’s Annual Meeting of Stockholders held on February 15, 2007. All of these unregistered shares were issued as partial consideration for the directors’ services during the quarter ended March 31, 2007, pursuant to the Company’s Retainer Policy for Non-Employee Directors. These transactions were exempt from registration by Section 4(2) of the Securities Act of 1933 as transactions not involving a public offering.

Issuer Purchases of Equity Securities

					Total Number of		Maximum Number
					Shares Purchased		of Shares that May
					as Part of Publicly		Yet Be Purchased
	Total Number of				Announced Share		Under Share
	Shares		Average Price Paid		Repurchase Plans		Repurchase Plans
Period	Purchased(a)		per Share		or Programs		or Programs (b)
Jan. 1 - 31, 2007		41,369	$	38.87		11,400		4,278,122
Feb. 1 - 28, 2007		183,202	$	42.67		—		4,278,122
Mar. 1 - 31, 2007		24,718	$	41.70		—		4,278,122
Total		249,289	$	41.94		11,400		4,278,122

(a)

Represents (i) shares of common stock of the Company purchased on the open market with Company “matching contributions” for the accounts of participants in the Company’s 401(k) plans, (ii) shares of common stock of the Company tendered to the Company by holders of stock options or shares of restricted stock for the payment of option exercise prices or applicable withholding taxes, and (iii) shares of common stock of the Company purchased on the open market pursuant to the Company’s publicly announced share repurchase program. Shares purchased other than through a publicly announced share repurchase program totaled 29,969 in January 2007, 183,202 in February 2007 and 24,718 in March 2007 (a three month total of 237,889). Of those shares, 26,095 were purchased for the Company’s 401(k) plans and 211,794 were purchased as a result of shares tendered to the Company by holders of stock options or shares of restricted stock.

(b)

On December 8, 2005, the Company’s Board of Directors authorized the repurchase of up to eight million shares of the Company’s common stock. Repurchases may be made from time to time in the open market or through private transactions.

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

     The Annual Meeting of Stockholders of National Fuel Gas Company was held on February 15, 2007. At that meeting, the shareholders elected directors, appointed an independent registered public accounting firm, approved the Annual At Risk Compensation Incentive Program, approved amendments to the 1997 Award and Option Plan, and rejected a shareholder proposal to reduce the compensation of the Company’s non-employee directors.

     The total votes were as follows:

			For		Withheld
(i	)	Election of directors to serve for a three-year term:
		- Philip C. Ackerman		71,748,527		1,932,966
		- Craig G. Matthews		72,203,373		1,478,120
		- Richard G. Reiten		72,087,456		1,594,037
		- David F. Smith		71,842,593		1,838,900
		Election of directors to serve for a two-year term:
		- Stephen E. Ewing		72,165,280		1,516,213

     Other directors whose term of office continued after the meeting:

     Term expiring in 2008: Robert T. Brady, Rolland E. Kidder, and John F. Riordan.

     Term expiring in 2009: R. Don Cash and George L. Mazanec.

								Broker
		For		Against		Abstain		Non- Votes
(ii)	Appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm		72,822,424		520,972		338,097		—
(iii)	Approval of the Annual At Risk Compensation Incentive Program		68,787,527		4,005,347		888,619		—
(iv)	Approval of Amendments to the 1997 Award and Option Plan		49,009,932		8,413,892		931,326		15,326,343
(v)	Adoption of shareholder proposal to reduce the compensation of non- employee directors		4,344,960		52,189,890		1,820,300		15,326,343

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Item 6. Exhibits

Exhibit
Number	Description of Exhibit
3(ii)	By-Laws:
·	National Fuel Gas Company By-Laws as amended February 15, 2007, effective April 1, 2007 (incorporated herein by reference to Exhibit 3, Form 8-K dated February 21, 2007).
10.1	National Fuel Gas Company 2007 Annual At Risk Compensation Incentive Program.
10.2	National Fuel Gas Company 1997 Award and Option Plan, as amended and restated as of February 15, 2007.
12	Statements regarding Computation of Ratios:
	Ratio of Earnings to Fixed Charges for the Twelve Months Ended March 31, 2007 and the Fiscal Years Ended September 30, 2002 through 2006.
31.1	Written statements of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
31.2	Written statements of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99	National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended March 31, 2007 and 2006.

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SIGNATURES

     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/ R. J. Tanski R. J. Tanski
Treasurer and Principal Financial Officer

/s/ K. M. Camiolo K. M. Camiolo
Controller and Principal Accounting Officer

Date: May 8, 2007

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EX-10.1

Exhibit 10.1

APPENDIX E TO PROXY STATEMENT

NATIONAL FUEL GAS COMPANY
2007 ANNUAL AT RISK COMPENSATION INCENTIVE PLAN

1. Definitions

     As used with respect to At Risk Awards, the following terms shall have the following meanings:

     (a) “Acceleration Date” means (i) in the event of a Change in Ownership, the date on which such change occurs, or (ii) with respect to an Eligible Employee who is eligible for treatment under paragraph 8 hereof on account of the termination of his employment following a Change in Control, the date on which such termination occurs.

     (b) “Award Notice” means a written notice from the Company to a Participant that sets forth the terms and conditions of an Award in addition to the terms and conditions established by this Plan and by the Committee’s exercise of its administrative powers.

     (c) “At Risk Award” means an award granted by the Committee to a Participant under this Plan, and entitling the Participant to a cash payment based upon the extent to which specified Performance Goals are attained for a specified Performance Period, pursuant to such terms and conditions as the Committee may establish in an Award Notice. No Eligible Employee may receive more than one At Risk Award under this Plan in any fiscal year. In no event will the maximum value of any At Risk Award to any Eligible Employee in any fiscal year exceed the lower of (i) twice that employee’s base salary for that fiscal year, or (ii) two million dollars. An At Risk Award may be granted singly, in combination or in the alternative with other Awards granted under any Company benefit plan.

     (d) “Board” means the Board of Directors of the Company.

     (e) “Cause” means (i) the willful and continued failure by a Participant to substantially perform his duties with his employer after written warnings specifically identifying the lack of substantial performance are delivered to him by his employer, or (ii) the willful engaging by a Participant in illegal conduct which is materially and demonstrably injurious to the Company or a Subsidiary.¹

     (f) “Change in Control” shall be deemed to have occurred at such time as (i) any “person” within the meaning of Section 14(d) of the Exchange Act, other than the Company, a Subsidiary, or any employee benefit plan or plans sponsored by the Company or any Subsidiary, is or has become the “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of twenty percent (20%) or more of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at the election of directors, or (ii) approval by the shareholders of the Company of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of stock of the

Company would be converted into cash, securities or other property, other than a consolidation or merger of the Company in which the common shareholders of the Company 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 the Company is the continuing or surviving corporation but in which the common shareholders of the Company 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 the Company), 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 the Company, or (iii) individuals who constitute the Board on January 1, 2007 (the “Incumbent Board”) have ceased for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to January 1, 2007 whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by specific vote or by approval of the proxy statement of the Company in which such person is named as nominee for director without objection to such nomination) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board.

¹ NOTE for internal use: This definition was written so as to be a high standard, not easy to prove. To give the Committee the greatest possible flexibility, this could be amended for future awards to a lower standard such as the “inimical” language in paragraph 9, but that could not be applied to existing At Risk awards because that would be an adverse change in an existing award without the Participant’s consent.

     (g) “Change in Ownership” means a change which results directly or indirectly in the Company’s Common Stock ceasing to be actively traded on a national securities exchange or the National Association of Securities Dealers Automated Quotation System.

     (h) “Code” means the Internal Revenue Code of 1986, and the rules, regulations and interpretations promulgated thereunder, as amended from time to time.

     (i) “Committee” means the Compensation Committee of the Board, or such other committee designated by the Board as authorized to administer this Plan with respect to At Risk Awards. The Committee shall consist of not less than two members, each of whom shall be “outside directors” as defined by Section 162(m) of the Code and the rules, regulations and interpretations promulgated thereunder, as amended from time to time.

     (j) “Common Stock” means the common stock of the Company.

     (k) “Company” means National Fuel Gas Company.

     (l) “Eligible Employee” means those employees of the Company or its Subsidiaries who are expected to constitute “covered employees” within the meaning of Section 162(m) of the Code for the applicable fiscal year(s), and any other key management employee to whom an At Risk Award has been granted by the Committee.

     (m) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

     (n) “Good Reason” means a good faith determination made by a Participant that there has been any (i) material change by the Company of the Participant’s functions, duties or responsibilities which change could cause the Participant’s position with the Company to become of less dignity, responsibility, importance, prestige or scope, including, without limitation, the assignment to the Participant of duties and responsibilities inconsistent with his positions, (ii) assignment or reassignment by the Company of the Participant without the Participant’s consent, to another place of employment more than 30 miles from the Participant’s current place of employment, or (iii) reduction in the Participant’s total compensation or benefits or any component thereof, provided in each case that the Participant shall specify the event relied upon for such determination by written notice to the Board at any time within six months after the occurrence of such event.

     (o) “Participant” means any individual who is holding an At Risk Award granted by the Committee under this Plan.

     (p) “Performance Period” means the period established by the Committee in the Award Notice, for measurement of the extent to which a Performance Goal has been satisfied.

     (q) “Performance Goal” means the performance objectives of earnings per share, Subsidiary net income and customer service/other goals, established by the Committee for each Eligible Employee who receives an At Risk Award.

     (r) “Plan” means this National Fuel Gas Company 2007 Annual At Risk Compensation Incentive Plan, as amended from time to time. Any reference in this Plan to a paragraph number refers to that portion of this Plan.

     (s) “Subsidiary” means a corporation or other business entity in which the Company directly or indirectly has an ownership interest of eighty percent (80%) or more.

2. Administration

     With respect to At Risk Awards the Committee is given full authority to (a) make reasonable, good faith interpretations of this Plan and of Section 162(m) of the Code, to the extent not addressed by regulation, proposed regulation or publicly available interpretation of the Internal Revenue Service; (b) determine who shall be Eligible Employees and select Eligible Employees to receive At Risk Awards; (c) determine all the other terms and conditions of an At Risk Award, including the time or times of making At Risk Awards to Eligible Employees, the Performance Period, Performance Goals, and levels of At Risk Awards to be earned in relation to levels of achievement of the Performance Goals, and such other measures as may be necessary or desirable to achieve the purposes of this Plan; (d) determine whether At Risk Awards are to be granted singly, in combination or in the alternative with other Awards under any other Company benefit plans; (e) grant waivers of Plan terms and conditions, provided that any such waiver shall not be inconsistent with Section 162(m) of the Code and the rules, regulations and interpretations promulgated thereunder, as amended from time to time; and (f) accelerate the vesting, exercise or payment of any At Risk Award or the Performance Period of an At Risk Award when any such action would not cause compensation paid or payable under such At Risk Award to cease to be deductible by the Company for federal income tax purposes. The Committee shall also have the authority to grant At Risk Awards in replacement of Awards previously granted under this Plan or awards under any other executive compensation or stock option plan of the Company or a Subsidiary.

     All determinations of the Committee shall be made by a majority of its members, and its determinations shall be final, binding and conclusive. The Committee, in its discretion, may delegate its authority and duties under this Plan with respect to At Risk Awards to the Company’s Chief Executive Officer or to other senior officers of the Company, but only to the extent, if any, permitted by Section 162(m) of the Code and notwithstanding any other provision of this Plan or an Award Notice, under such conditions as the Committee may establish. For the avoidance of doubt, neither the Committee nor any delegate thereof shall take any action under this Plan, including without limitation pursuant to this paragraph 2 or paragraphs 6 or 7, which would result in the imposition of an additional tax under section 409A of the Code on the Eligible Employee holding an At Risk Award granted hereunder.

3. Grant of At Risk Awards

     At Risk Awards may be made to any Eligible Employee for each of the fiscal years of the Company commencing with the 2007 fiscal year; provided, however, that At Risk Awards for a fiscal year may only be made within the time allowed under Section 162(m) of the Code and the rules, regulations and interpretations promulgated thereunder, as amended from time to time, applicable to such fiscal year. At Risk Awards are made by means of an Award Notice.

4. Payment of at Risk Awards

     Each At Risk Award granted to a Participant shall entitle such Participant to receive a cash payment based upon the extent to which such Participant’s Performance Goals for a particular Performance Period are attained, as specified by the Committee in the Award Notice and certified in writing by the Committee that such Participant’s Performance Goals have been attained. Payment of earned At Risk Awards shall be made in cash promptly after such certification. The Company shall be entitled to deduct from any payment under this Plan the amount of all applicable income and employment taxes required by law to be withheld with respect to such payment or may require the participant to pay to it such tax prior to and as a condition of the making of such payment.

5. Termination of Employment, Retirement, or Death of Participant

     (a) General Rule. If a Participant’s employment with the Company or a Subsidiary terminates for a reason other than death, disability, retirement, or an approved reason, all unearned or unpaid At Risk Awards shall be canceled or forfeited as the case may be, unless otherwise provided in this Section or in the Eligible Employee’s Award Notice. The Committee shall have the authority to promulgate rules and regulations to (i) determine what events constitute disability, retirement, or termination for an approved reason for purposes of the Plan, and (ii) determine the treatment of a Participant under this Plan in the event of his death, disability, retirement, or termination for an approved reason.

     (b) In the event of the disability, retirement or termination for an approved reason of a Participant during a Performance Period, his participation shall be deemed to continue to the end of the Performance Period, and he shall be paid a percentage of the amount earned, if any, according to the terms of the At Risk Award, proportionate to his period of active service during that Performance Period.

     (c) In the event of the death of a Participant during a Performance Period, the Participant’s designated beneficiary (or if none, then the Participant’s estate) shall be paid an amount proportionate to the period of active service during the Performance Period, based upon the maximum amount which could have been earned under the At Risk Award.

6. Amendments to at Risk Awards

     The Committee may, at any time, unilaterally amend any unearned or unpaid At Risk Award, including At Risk Awards earned but not yet paid, to the extent it deems appropriate; provided, however, that any such amendment which is adverse to the Participant shall require the Participant’s consent; and provided further, however, that the Committee shall have no authority to make any amendment which would cause compensation paid or payable under the At Risk Award to cease to be deductible by the Company for federal income tax purposes.

7. Amendment to Plan

     Subject to the shareholder approval requirements of Section 162(m) of the Code, the Committee may, from time to time, amend this Plan in any manner.

8. Change in Control and Change in Ownership

     (a) Background. All Participants shall be eligible for the treatment afforded by this paragraph 8 if there is a Change in Ownership or if their employment terminates within three years following a Change in Control, unless the termination is due to (i) death; (ii) disability entitling the Participant to benefits under his employer’s long-term disability plan; (iii) Cause; (iv) resignation by the Participant other than for Good Reason; or (v) retirement entitling the Participant to benefits under his employer’s retirement plan.

     (b) Vesting. If a Participant is eligible for treatment under this paragraph 8, the provisions of this paragraph shall determine the manner in which such At Risk Award shall be paid to him. For purposes of making such payment, each “current performance period” (defined to mean a Performance Period which period has commenced but not yet ended), shall be treated as terminating upon the Acceleration Date, and for each such “current performance period” and each “completed performance period” (defined to mean a Performance Period which has ended but for which the Committee has not, on the Acceleration Date, made a determination as to whether and to what degree the Performance Goals for such period have been attained), it shall be assumed that the Performance Goals have been attained at a level of 100% or the equivalent thereof. If the Participant is participating in one or more “current performance periods,” he shall be considered to have earned and, therefore, to be entitled to receive, a prorated portion of the At Risk Awards previously granted to him for each such Performance Period. Such prorated portion shall be determined by multiplying 100% of the At Risk Award granted to the Participant by a fraction, the numerator of which is the total number of whole and partial years (with each partial year being treated as a whole year) that have elapsed since the beginning of the Performance Period, and the denominator of which is the total number of years in such Performance Period. A Participant in one or more “completed performance periods” shall be considered to have earned and, therefore, be entitled to receive 100% of the At Risk Awards previously granted to him during each Performance Period.

     (c) Payment of Awards. If a Participant is eligible for treatment under this paragraph 8, whether or not he is still employed by the Company or a Subsidiary, he shall be paid, in a single lump sum cash payment, as soon as practicable but in no event later than 90 days after the Acceleration Date, for all outstanding At Risk Awards.

     (d) Miscellaneous. Upon a Change in Control or a Change in Ownership, (i) the provisions of paragraphs 5 and 9 hereof shall become null and void and of no force and effect insofar as they apply to a Participant who has been terminated under the conditions described in (a) above; and (ii) no action shall be taken which would affect the rights of any Participant or the operation of this Plan with respect to any At Risk Award to which

the Participant may have become entitled hereunder on or prior to the date of the Change in Control or Change in Ownership or to which he may become entitled as a result of such Change in Control or Change in Ownership.

     (e) Legal Fees. The Company shall pay all legal fees and related expenses incurred by a Participant in seeking to obtain or enforce any payment, benefit or right he may be entitled to under the Plan after a Change in Control or Change in Ownership; provided, however, the Participant shall be required to repay any such amounts to the Company to the extent a court of competent jurisdiction issues a final and non-appealable order setting forth the determination that the position taken by the Participant was frivolous or advanced in bad faith.

9. Noncompetition Provision

     Notwithstanding anything contained in this Plan to the contrary, unless the Award Notice specifies otherwise, a Participant shall forfeit all unearned, and/or unpaid At Risk Awards, including At Risk Awards earned but not yet paid, and all interest, if any, accrued on the foregoing if, (i) in the opinion of the Committee, the Participant, without the written consent of the Company, engages directly or indirectly in any manner or capacity as principal, agent, partner, officer, director, employee, or otherwise, in any business or activity competitive with the business conducted by the Company or any Subsidiary; or (ii) the Participant performs any act or engages in any activity which in the opinion of the Committee is inimical to the best interests of the Company.

10. Nonassignability

     No Award under this Plan shall be subject in any manner to alienation, anticipation, sale, transfer (except by will or the laws of descent and distribution or pursuant to a domestic relations court order), assignment, pledge, or encumbrance. Following an approved transfer, any such Award shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and except as provided in the next sentence, the term “Participant” shall be deemed to refer to the transferee. The events of termination of employment of paragraph 5 shall continue to be applied with reference to the original Participant and following the termination of employment of the original Participant, the transferred Award shall be payable to the transferee only to the extent, and for the periods specified in paragraph 5, that the original Participant could have received payment of such Award. Except as expressly permitted by this paragraph, an Award shall be payable during the Participant’s lifetime only to him.

11. No Right to Continued Employment or Grants

     Participation in this Plan shall not give any Participant any right to remain in the employ of the Company or any Subsidiary. The Company or, in the case of employment with a Subsidiary, the Subsidiary, reserves the right to terminate any Participant at any time. Further, the adoption of this Plan shall not be deemed to give any person any right to be selected as a Participant or to be granted an Award.

12. No Right, Title or Interest in Company Assets

     To the extent any person acquires a right to receive payments from the Company under this Plan, such rights shall be no greater than the rights of an unsecured creditor of the Company.

13. Savings Provision

     This Plan is intended to comply with all the applicable conditions of Section 162(m) of the Code, so that compensation paid or payable hereunder shall constitute qualified “performance-based compensation” thereunder. To the extent any provision of this Plan or any action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law.

14. Effective Date

     Upon approval by the shareholders of the Company as required by Section 162(m) of the Code, this Plan shall become effective as of December 7, 2006.

EX-10.2

Exhibit 10.2

NATIONAL FUEL GAS COMPANY
1997 AWARD AND OPTION PLAN

As Amended and Restated As of February 15, 2007

1. Purpose

     The purpose of the Plan is to advance the interests of the Company and its stockholders, by providing a long-term incentive compensation program that will be an incentive to the Core Employees of the Company and its Subsidiaries whose contributions are important to the continued success of the Company and its Subsidiaries, and by enhancing their ability to attract and retain in their employ highly qualified persons for the successful conduct of their businesses.

2. Definitions

     2.1 “Acceleration Date” means (i) in the event of a Change in Ownership, the date on which such change occurs, or (ii) with respect to a Participant who is eligible for treatment under paragraph 23 on account of the termination of his employment following a Change in Control, the date on which such termination occurs.

     2.2 “Award” means any form of Stock Option, stock appreciation right or Restricted Stock granted by the Committee to a Participant under the Plan pursuant to such terms and conditions as the Committee may establish. An Award may be granted singly, in combination or in the alternative.

     2.3 “Award Notice” means a written notice from the Company to a Participant that sets forth the terms and conditions of an Award, in addition to those terms and conditions established by this Plan and by the Committee’s exercise of its administrative powers.

     2.4 “Board” means the Board of Directors of the Company.

     2.5 “Cause” means (i) the willful and continued failure by a Core Employee to substantially perform his duties with his employer after written warnings specifically identifying the lack of substantial performance are delivered to him by his employer, or (ii) the willful engaging by a Core Employee in illegal conduct which is materially and demonstrably injurious to the Company or a Subsidiary.

     2.6 “Change in Control” shall be deemed to have occurred at such time as (i) any “person” within the meaning of Section 14(d) of the Exchange Act, other than the Company, a Subsidiary, or any employee benefit plan or plans sponsored by the Company or any Subsidiary, is or has become the “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of twenty percent (20%) or more of the combined voting power of the outstanding securities of the Company ordinarily

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having the right to vote at the election of directors, or (ii) approval by the stockholders of the Company of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of stock of the Company would be converted into cash, securities or other property, other than a consolidation or merger of the Company in which the common stockholders of the Company 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 the Company is the continuing or surviving corporation but in which the common stockholders of the Company 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 the Company), 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 the Company, or (iii) individuals who constitute the Board on January 1, 1997 (the “Incumbent Board”) have ceased for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to January 1, 1997 whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by specific vote or by approval of the proxy statement of the Company in which such person is named as nominee for director without objection to such nomination) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board.

     2.7 “Change in Ownership” means a change which results directly or indirectly in the Company’s Common Stock ceasing to be actively traded on a national securities exchange or the National Association of Securities Dealers Automated Quotation System.

     2.8 “Code” means the Internal Revenue Code of 1986, and the rules, regulations and interpretations promulgated thereunder, as amended from time to time.

     2.9 “Committee” means the Compensation Committee of the Board, or such other committee designated by the Board, authorized to administer the Plan. The Committee shall consist of not less than two (2) members of the Board, each of whom shall be a Disinterested Board Member. A “Disinterested Board Member” means a member who (a) is not a current employee of the Company or a Subsidiary, (b) is not a former employee of the Company or a Subsidiary who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, (c) has not been an officer of the Company (d) does not receive remuneration from the Company or a Subsidiary, either directly or indirectly, in any capacity other than as a director and (e) does not possess an interest in any other transaction, and is not engaged in a business relationship, for which disclosure would be required pursuant to Item 404(a) or (b) of Regulation S-K under the Securities Act of 1933, as amended. The term Disinterested Board Member shall be interpreted in such manner as shall be necessary to conform to the requirements of Section 162(m) of the Code and Rule 16b-3 promulgated under the Exchange Act.

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     2.10 “Common Stock” means the common stock of the Company.

     2.11 “Company” means National Fuel Gas Company.

     2.12 “Core Employee” means an officer or other core management employee of the company or a Subsidiary as determined by the Committee. Every Key Management Employee is also a Core Employee.

     2.13 “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

     2.14 “Fair Market Value” of a share of Common Stock on any date means the average of the high and low sales prices of a share of Common Stock as reflected in the next-day reports of the high and low sales prices of a share of Company Common Stock, as reported on either www.bloomberg.com or www.yahoo.com (or, if no such shares were publicly traded on that date, the next preceding date that such shares were so traded) or in any other publication selected by the Committee; provided, however, that if shares of Common Stock shall not have been publicly traded for more than ten (10) days immediately preceding such date, then the Fair Market Value of a share of Common Stock shall be determined by the Committee in such manner as it may deem appropriate.

     2.15 “Good Reason” means a good faith determination made by a Participant that there has been any (i) material change by the Company of the Participant’s functions, duties or responsibilities which change could cause the Participant’s position with the Company to become of less dignity, responsibility, importance, prestige or scope, including, without limitation, the assignment to the Participant of duties and responsibilities inconsistent with his positions, (ii) assignment or reassignment by the Company of the Participant without the Participant’s consent, to another place of employment more than 30 miles from the Participant’s current place of employment, or (iii) reduction in the Participant’s total compensation or benefits or any component thereof, provided in each case that the Participant shall specify the event relied upon for such determination by written notice to the Board at any time within six months after the occurrence of such event.

     2.16 “Key Management Employee” means a management employee of the Company or a Subsidiary (i) who has significant policymaking responsibilities, and (ii) whose current base salary at the time an Award is issued is among the highest two percent (2%) of the current base salaries of all the employees of the Company or any Subsidiary, all as determined by the Committee.

     2.17 “Participant” means any individual to whom an Award has been granted by the Committee under this Plan.

     2.18 “Plan” means the National Fuel Gas Company 1997 Award and Option Plan. Any reference in the Plan to a paragraph number refers to that portion of the Plan.

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     2.19 “Restricted Stock” means an Award granted pursuant to paragraph 10.

     2.20 “SAR” means a stock appreciation right as defined in paragraph 9.

     2.21 “Stock Option” or “Option” means an Incentive Stock Option or a Non-Qualified Stock Option as defined in paragraph 8.

     2.22 “Subsidiary” means a corporation or other business entity in which the Company directly or indirectly has an ownership interest of eighty percent (80%) or more.

3. Administration

     The Plan shall be administered by the Committee. The Committee shall have the authority to: (a) interpret the Plan; (b) establish such administrative rules, regulations and procedures as it deems necessary for the proper administration of the Plan; (c) select Key Management Employees and Core Employees to receive Awards under the Plan; (d) determine the form of an Award, whether a Stock Option, SAR or Restricted Stock, the number of shares subject to the Award, all the terms and conditions of an Award, including the time and conditions of exercise or vesting, and any restrictions on transferability of shares related to any Award; (e) determine whether Awards would be granted singly, in combination or in the alternative; (f) grant waivers of Plan terms and conditions, provided that any such waiver granted to an executive officer of the Company shall not be inconsistent with Section 16 of the Exchange Act and the rules promulgated thereunder; (g) accelerate the vesting, exercise, or payment of any Award when any such action would be in the best interest of the Company; and (h) take any and all other action it deems advisable for the proper administration of the Plan, including but not limited to suspending the ability of a Participant to exercise an Award while under investigation for engaging in conduct in violation of paragraph 18. Notwithstanding the foregoing, without the express approval of stockholders, the Committee shall not have the authority to grant Awards in replacement of Awards previously granted under the Plan. All determinations of the Committee shall be made by a majority of its members, and its determinations shall be final, binding and conclusive. The Committee, in its discretion, may delegate its authority and duties under the Plan to the Chief Executive Officer or to other senior officers of the Company to the extent permitted by Section 16 of the Exchange Act and notwithstanding any other provision of this Plan or an Award Notice, under such conditions as the Committee may establish; provided, however, that only the Committee may select and grant Awards and render other decisions as to the timing, pricing and amount of Awards to Participants who are subject to Section 16 of the Exchange Act. For the avoidance of doubt, neither the Committee nor any delegate thereof shall take any action under the Plan, including without limitation pursuant to this paragraph 3, which would result in the imposition of an additional tax under Section 409A of the Code on the Participant holding an Award granted hereunder.

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4. Eligibility

     Any Core Employee is eligible to become a Participant of the Plan and receive Stock Options and SARs only. A Key Management Employee is also eligible to become a Participant of the Plan and receive Stock Options, SARs and Restricted Stock under the Plan.

5. Shares Available

(a)	The maximum number of shares of Common Stock, $1.00 par value, of the Company which shall be available for grant of Awards under the Plan (including Incentive Stock Options) during its term shall not exceed 13,509,100, subject to adjustment as provided in paragraph 16. Awards covering no more than 600,000 shares of Common Stock of the Company may be granted to any Participant in any fiscal year, subject to adjustment as provided in paragraph 16. All of the shares of Common Stock authorized may be used to grant Stock Options and SARs. Of the shares authorized for issuance, only 250,000 may be used for Awards of Restricted Stock on or after February 15, 2007. The shares of Common Stock available for issuance under the Plan may be authorized and unissued shares or treasury shares.
(b)	Shares of Common Stock related to Awards which, on or after December 13, 2006, are (i) settled in cash in lieu of Common Stock, or (ii) exchanged with the Committee’s permission for Awards not involving Common Stock, will not be available again for grant under the Plan. The number of shares that are counted against the limit in Section 5(a) in respect of any portion of a SAR that is exercised shall be the gross number of shares related to that portion of the SAR exercised, and not just the net shares issued upon such exercise. Further, any shares of Common Stock that are used by a Participant on or after December 13, 2006 for the full or partial payment to the Company of the purchase price of shares of Common Stock upon exercise of a Stock Option, or to satisfy any withholding taxes due in respect of the exercise or vesting of any Award, will not be again available for Awards under the Plan.
(c)	Except as provided in paragraph 5(b) above, shares of Common Stock related to any portion of any Award which expires without the issuance of stock, or is cancelled or forfeited, shall again be available for grant under the Plan.

6. Term

     The Plan became effective as of December 13, 1996 subject to its approval by the Company’s stockholders at the 1997 Annual Meeting of Stockholders. The Plan shall terminate on February 16, 2007, except that if stockholders approve the amendments to the Plan presented for approval at the annual meeting held in February, 2007 (the “2007 Amendments”), then the Plan shall terminate on March 31, 2012, provided that no Awards shall be made under the Plan after December 12, 2006, unless the stockholders shall approve the 2007 Amendments, and provided further that the Plan shall be considered still to be effective as to any Awards that are outstanding on March 31, 2012.

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7. Participation

     The Committee shall select Participants, determine the type of Awards to be made, and establish in the related Award Notices the applicable terms and conditions of the Awards in addition to those set forth in this Plan and any administrative rules, regulations and procedures issued by the Committee.

8. Stock Options

(a)

Grants. Awards may be granted in the form of Stock Options. The Stock Options granted under the Plan may be Incentive Stock Options within the meaning of Section 422 of the Code if granted before December 12, 2006, or they may be Non-Qualified Stock Options (i.e., Stock Options which are not Incentive Stock Options), or a combination of both. Only Non-Qualified Stock Options may be issued on or after February 15, 2007.

(b)

Terms and Conditions of Options. Unless the Award Notice provides otherwise, an Option shall be exercisable in whole or in part. The price at which Common Stock may be purchased upon exercise of a Stock Option shall be established by the Committee, but such price shall not be less than the Fair Market Value of the Common Stock on the date of the Stock Option’s grant. The Committee shall not have the authority to decrease such price after the date of the Stock Option’s grant, except for adjustments appropriate to reflect a Change in Stock or a Change in Capitalization pursuant to paragraph 16. Unless the Award Notice provides a shorter period, each Non-Qualified Stock Option shall expire on the day after the tenth anniversary of its date of grant. Incentive Stock Options and Non-Qualified Stock Options granted in combination may be exercised separately. Unless the Award Notice provides otherwise, and except as provided in paragraphs 8(b)(i), 8(b)(ii) and 23 below, each Incentive Stock Option shall first become exercisable on the first anniversary of its date of grant, and each Non-Qualified Stock Option issued on before December 12, 2006 shall first become exercisable on the first anniversary of its date of grant. Except as provided in paragraphs 8(b)(i), 8(b)(ii) and 23, each Stock Option issued on or after February 15, 2007 shall first become exercisable on the third anniversary of its date of grant. The following exceptions to the previous two sentences shall apply:

(i) Each Non-Qualified Stock Option shall first become exercisable, if earlier,

(1) on the date of the Participant’s death occurring after the date of grant,

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(2)	six months after the date of grant, if the Participant has voluntarily resigned on or after his 60th birthday, after the date of grant, and before such six months,
(3)	on the date of the Participant’s voluntary resignation on or after his 60th birthday and at least six months after the date of grant;
(4)	if the Award Notice so provides, on an earlier date for Options awarded on or after February 15, 2007 to a Participant as part of his initial inducement to join the Company or a Subsidiary; or
(5)	if the Award Notice so provides, on an earlier date for Options awarded on or after February 15, 2007 in connection with a merger or acquisition to a Participant who joins the Company or a Subsidiary as the result of a merger or acquisition.

(ii) Subject to paragraph 8(b)(i), unless the Award Notice provides otherwise, Options issued on or after February 15, 2007 shall be exercisable only upon attainment (as determined by the Committee or its delegate) of performance goals established by the Committee pursuant to one or more of performance criteria listed in paragraph 13, with respect to such performance period or periods (including periods of less than three years) specified by the Committee and set out in the Award Notice.

(c)

Restrictions Relating to Incentive Stock Options. Stock Options issued in the form of Incentive Stock Options shall, in addition to being subject to all applicable terms and conditions established by the Committee, comply with Section 422 of the Code. Accordingly, the aggregate Fair Market Value (determined at the time the Option was granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under this Plan or any other plan of the Company or any of its Subsidiaries) shall not exceed $100,000 (or such other limit as may be required by the Code). Unless the Award Notice provides a shorter period, each Incentive Stock Option shall expire on the tenth anniversary of its date of grant. The number of shares of Common Stock that shall be available for Incentive Stock Options granted under the Plan is 12,509,100.

(d)

Exercise of Option. Upon exercise, the option price of a Stock Option may be paid in cash, shares of Common Stock, shares of Restricted Stock, a combination of the foregoing, or such other consideration as the Committee may deem appropriate. The Committee shall adopt administrative rules, regulations or procedures establishing appropriate methods for accepting Common Stock, whether restricted or unrestricted, and may impose such conditions as it deems appropriate on the use of such Common Stock to exercise a Stock Option. The Committee, in its sole discretion, may adopt administrative rules, regulations or

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procedures whereby a Participant, to the extent permitted by and subject to the requirements of Rule 16b-3 under the Exchange Act, Regulation T issued by the Board of Governors of the Federal Reserve System pursuant to the Exchange Act, the Code and other federal income tax laws, and other federal, state and local tax and securities laws, can exercise an Option or a portion thereof without making a direct payment of the option price to the Company. If the Committee so elects to establish a cashless exercise program, the Committee shall determine, in its sole discretion and from time to time, such administrative rules, regulations or procedures as it deems appropriate. Such administrative rules, regulations or procedures shall be binding on any Participant wishing to utilize the cashless exercise program.

9. Stock Appreciation Rights

(a)

Grants and Valuation. Awards may be granted in the form of stock appreciation rights (“SARs”). SARs shall be subject to paragraph 9(c). Unless this Plan or the Award Notice provides otherwise, SARs shall entitle the recipient to receive a payment equal to the appreciation in the Fair Market Value of a stated number of shares of Common Stock from the award date to the date of exercise. Such payment shall be in the form of shares of the Company’s Common Stock, with the number of shares to be delivered to be equal to the amount of such appreciation divided by the Fair Market Value on the date of exercise (with any fractional share to be paid in cash). Once a SAR has been issued, the Committee shall not reprice the SAR by changing the initial Fair Market Value from which the payment is calculated except for adjustments appropriate to reflect a Change in Stock or a Change in Capitalization pursuant to paragraph 16. In the case of SARs granted in combination with Stock Options, the appreciation in value is from the option price of such related stock option to the Fair Market Value on the date of exercise of such SARs. Unless this Plan or the Award Notice provides otherwise, each SAR shall first become exercisable on the first anniversary of its grant. Unless the Award Notice provides a shorter period, each SAR shall expire ten years and one day after its date of grant.

(b)

Terms and Conditions of SARs. SARs shall be exercisable in whole or in such installments and at such time as may be determined by the Committee. The base price from which the value of a SAR is measured shall also be determined by the Committee; provided, however, that such price shall not be less than the Fair Market Value of the Common Stock on the date of the grant of the SAR. Each SAR issued on or after February 15, 2007 shall first become exercisable on the third anniversary of its date of grant, except that:

(i) each SAR shall first become exercisable, if earlier,

(1) on the date of the Participant’s death occurring after the date of grant,

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(2)	six months after the date of grant, if the Participant has voluntarily resigned on or after his 60th birthday, after the date of grant, and before such six months,
(3)	on the date of the Participant’s voluntary resignation on or after his 60th birthday and at least six months after the date of grant;
(4)	upon a Change in Control or Change in Ownership pursuant to paragraph 23;
(5)	if the Award Notice so provides, on an earlier date for SARs awarded on or after February 15, 2007 to a Participant as part of his initial inducement to join the Company or a Subsidiary; or
(6)	if the Award Notice so provides, on an earlier date for SARs awarded on or after February 15, 2007 in connection with a merger or acquisition to a Participant who joins the Company or a Subsidiary as the result of a merger or acquisition.

(ii) Subject to paragraph 9(b)(i), unless the Award Notice provides otherwise, SARs issued on or after February 15, 2007 shall be exercisable only upon attainment (as determined by the Committee or its delegate) of performance goals established by the Committee pursuant to one or more of performance criteria listed in paragraph 13, with respect to such performance period or periods (including periods of less than three years) specified by the Committee and set out in the Award Notice.

(c) Deemed Exercise. The Committee may provide that a SAR not already exercised shall be deemed to be exercised at the close of business on the scheduled expiration date of such SAR, if at such time the SAR by its terms remains exercisable and, if so exercised, would result in a payment to the holder of such SAR.

10. Restricted Stock

(a)

Grants. Awards may be granted in the form of Restricted Stock. Shares of Restricted Stock may be awarded in such amounts and at such times during the term of the Plan as the Committee shall determine.

(b)

Award Restrictions. Restricted Stock shall be subject to such terms and conditions as the Committee deems appropriate, including restrictions on transferability and continued employment. Notwithstanding the previous sentence, unless the Award Notice provides otherwise, the lapse of restrictions on Restricted Stock issued on or after February 16, 2007 shall be conditioned upon attainment (as determined by the Committee or its delegate) of performance goals established pursuant to one or more of performance criteria

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	listed in paragraph 13 and set out in the Award Notice. No more than 100,000 restricted shares may be issued in a single fiscal year. The Committee may modify or accelerate the delivery of shares of Restricted Stock under such circumstances as it deems appropriate.
(c)	Rights as Stockholders. During the period in which any shares of Restricted Stock are subject to the restrictions imposed under paragraph 10(b), the Committee may, in its discretion, grant to the Participant to whom shares of Restricted Stock have been awarded all or any of the rights of a stockholder with respect to such shares, including, but not by way of limitation, the right to vote such shares and to receive dividends.
(d)	Evidence of Award. Any shares of Restricted Stock granted under the Plan may be evidenced in such manner as the Committee deems appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates.

11. Payment of Awards

     At the discretion of the Committee, payment of Awards may be made in cash, Common Stock, a combination of cash and Common Stock, or any other form of property as the Committee shall determine.

12. Dividends and Dividend Equivalents

     If an Award is granted in the form of Restricted Stock the Committee may, at any time up to the time of payment, include as part of an Award an entitlement to receive dividends or dividend equivalents, subject to such terms and conditions as the Committee may establish. Dividends and dividend equivalents shall be paid in such form and manner (i.e., lump sum or installments), and at such time as the Committee shall determine. All dividends or dividend equivalents which are not paid currently may, at the Committee’s discretion, accrue interest, and/or be reinvested into additional shares of Common Stock.

13. Performance Criteria

     The performance measure(s) to be used for purposes of Stock Options, SARs and Restricted Stock shall include one or more measures chosen from among the following, as applied to the Company or to any Subsidiary or combination of Subsidiaries: (a) earnings per share; (b) net income (before or after taxes); (c) return measures (including, but not limited to, return on assets, equity or sales); (d) cash flow return on investments which equals net cash flows divided by owners equity; (e) earnings before or after taxes, depreciation and/or amortization; (f) gross revenues; (g) operating income (before or after taxes); (h) total shareholder return; (i) corporate performance indicators (indices based on the level of certain expenses, certain objectively measurable operational events or certain services provided to customers); (j) cash generation, profit and/or revenue targets; (k) growth measures, including revenue growth, reserve growth or reserve replacement, as

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compared to a peer group or other benchmark; and/or (l) share price (including, but not limited to, growth measures and total shareholder return). In setting performance goals using these performance measures, the Committee may exclude the effect of changes in accounting standards and non-recurring unusual events specified by the Committee, such as write-offs, capital gains and losses, and acquisitions and dispositions of businesses.

14. Termination of Employment

(a)

General Rule. Subject to paragraph 18, if a Participant’s employment with the Company or a Subsidiary terminates for a reason other than death, disability, retirement, or any approved reason, all unexercised, unearned or unpaid Awards shall be cancelled or forfeited as the case may be, unless otherwise provided in this paragraph or in the Participant’s Award Notice. The Committee shall have the authority to adopt administrative rules, regulations or procedures not inconsistent with the Plan to (i) determine what events constitute disability, retirement, or termination for an approved reason for purposes of the Plan, and (ii) determine the treatment of a Participant under the Plan in the event of his death, disability, retirement, or termination for an approved reason.

(b)

Incentive Stock Options. Unless the Award Notice provides otherwise, any Incentive Stock Option which has not theretofore expired, shall terminate upon termination of the Participant’s employment with the Company whether by death or otherwise, and no shares of Common Stock may thereafter be purchased pursuant to such Incentive Stock Option, except that:

(i)

Upon termination of employment (other than by death), a Participant may, within three months after the date of termination of employment, purchase all or part of any shares of Common Stock which the Participant was entitled to purchase under such Incentive Stock Option on the date of termination of employment.

(ii)

Upon the death of any Participant while employed with the Company or within the three-month period referred to in paragraph 14(b)(i), the Participant’s estate or the person to whom the Participant’s rights under the Incentive Stock Option are transferred by will or the laws of descent and distribution may, within one year after the date of the Participant’s death, purchase all or part of any shares of Common Stock which the Participant was entitled to purchase under such Incentive Stock Option on the date of death.

Notwithstanding anything in this paragraph 14(b) to the contrary, the Committee may at any time within the three-month period after the date of termination of a Participant’s employment, with the consent of the Participant, the Participant’s estate or the person to whom the Participant’s rights under the Incentive Stock Options are transferred by will or the laws of descent and distribution, extend the period for exercise of the Participant’s Incentive Stock

11

	Options to any date not later than the date on which such Incentive Stock Options would have otherwise expired absent such termination of employment. Nothing in this paragraph 14(b) shall authorize the exercise of an Incentive Stock Option after the expiration of the exercise period therein provided, nor later than ten years after the date of grant.
(c)	Non-Qualified Stock Options. Unless the Award Notice provides otherwise, any Non-Qualified Stock Option which has not theretofore expired shall terminate upon termination of the Participant’s employment with the Company, and no shares of Common Stock may thereafter be purchased pursuant to such Non-Qualified Stock Option, except that:

(i)

Upon termination of employment for any reason other than death, discharge by the Company for cause, or voluntary resignation of the Participant prior to age 60, a Participant may, within five years after the date of termination of employment, or any such greater period of time as the Committee, in its sole discretion, deems appropriate, exercise all or part of the Non-Qualified Stock Option which the Participant was entitled to exercise on the date of termination of employment or subsequently becomes eligible to exercise pursuant to paragraph 8(b).

(ii)

Upon the death of a Participant while employed with the Company or within the period referred to in paragraph 14 (c)(i), the Participant’s estate or the person to whom the Participant’s rights under the Non-Qualified Stock Option are transferred by will or the laws of descent and distribution may, within five years after the date of the Participant’s death while employed, or within the period referred to in paragraph 14(c)(i), exercise all or part of the Non-Qualified Stock Option which the Participant was entitled to exercise on the date of death.

Nothing in this paragraph 14(c) shall authorize the exercise of a Non-Qualified Stock Option later than the exercise period set forth in the Award Notice.

15. Nonassignability

     No Award under the Plan shall be subject in any manner to alienation, anticipation, sale, transfer (except by will or the laws of descent and distribution or pursuant to a domestic relations court order), assignment, pledge, or encumbrance, except that, unless the Committee specifies otherwise, all awards of Non-Qualified Stock Options or SARs shall be transferable without consideration, subject to all the terms and conditions to which such Non-Qualified Stock Options or SARs are otherwise subject, to (i) members of a Participant’s immediate family as defined in Rule 16a-1 promulgated under the Exchange Act, or any successor rule or regulation, (ii) trusts for the exclusive benefit of the Participant or such immediate family members or (iii) entities which are wholly-owned by the Participant or such immediate family members, provided that (x) there may be no consideration for any such transfer, and (y) subsequent transfers of transferred

12

options shall be prohibited except those by will or the laws of descent and distribution. Following transfer, any such Options or SARs shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and except as provided in the next sentence, the term “Participant” shall be deemed to refer to the transferee. The events of termination of employment of paragraph 14(c) shall continue to be applied with reference to the original Participant, and following the termination of employment of the original Participant, the transferred Options or SARs shall be exercisable by the transferee only to the extent, and for the periods specified in paragraph 14(c), that the original Participant could have exercised such Option or SAR. Except as expressly permitted by this paragraph, an Award shall be exercisable during the Participant’s lifetime only by him.

16. Adjustment of Shares Available

(a)

Changes in Stock. In the event of changes in the Common Stock by reason of a Common Stock dividend, stock split, reverse stock-split or other combination, appropriate adjustment shall be made by the Committee in the aggregate number of shares available under the Plan, the number of shares with respect to which Awards may be granted to any Participant in any fiscal year, and the number of shares or SARs, subject to outstanding Awards, without, in the case of Stock Options, causing a change in the aggregate purchase price to be paid therefor. Such proper adjustment as may be deemed equitable may be made by the Committee in its discretion to give effect to any other change affecting the Common Stock.

(b)

Changes in Capitalization. In case of a merger or consolidation of the Company with another corporation, a reorganization of the Company, a reclassification of the Common Stock of the Company, a spinoff of a significant asset or other changes in the capitalization of the Company, appropriate provision shall be made for the protection and continuation of any outstanding Awards by either (i) the substitution, on an equitable basis, of appropriate stock or other securities or other consideration to which holders of Common Stock of the Company will be entitled pursuant to such transaction or succession of transactions, or (ii) by appropriate adjustment in the number of shares issuable pursuant to the Plan, the number of shares covered by outstanding Awards, the option price of outstanding Stock Options, and the exercise price of outstanding SARs, in each case as deemed appropriate by the Committee.

17. Withholding Taxes

     The Company shall be entitled to deduct from any payment under the Plan, regardless of the form of such payment, the amount of all applicable income and employment taxes required by law to be withheld with respect to such payment or may require the participant to pay to it such tax prior to and as a condition of the making of such payment. Subject to any administrative rules, regulations or procedures established by the Committee, a Participant may pay the amount of taxes required by law to be withheld

13

from an Award, in whole or in part, by requesting that the Company withhold from any payment of Common Stock due as a result of such Award, or by delivering to the Company, shares of Common Stock having a Fair Market Value less than or equal to the amount of such required withholding taxes.

18. Noncompetition Provision

     Notwithstanding anything contained in this Plan to the contrary, unless the Award Notice specifies otherwise, a Participant shall forfeit all unexercised, unearned, and/or unpaid Awards, including Awards earned but not yet paid, all unpaid dividends and dividend equivalents, and all interest, if any, accrued on the foregoing if, (i) in the opinion of the Committee, the Participant, without the written consent of the Company, engages directly or indirectly in any manner or capacity as principal, agent, partner, officer, director, employee, or otherwise, in any business or activity competitive with the business conducted by the Company or any Subsidiary; or (ii) the Participant performs any act or engages in any activity which in the opinion of the Committee is inimical to the best interests of the Company.

19. Amendments to Awards

     The Committee may at any time unilaterally amend any unexercised, unearned, or unpaid Award, including Awards earned but not yet paid, to the extent it deems appropriate; provided, however, that any such amendment which is adverse to the Participant shall require the Participant’s consent. Notwithstanding the foregoing, the Committee may not amend an Award in any manner that would result in the imposition of an additional tax under Section 409A of the Code on the Participant holding such Award.

20. Regulatory Approvals and Listings

     Notwithstanding anything contained in this Plan to the contrary, the Company shall have no obligation to issue or deliver certificates of Common Stock evidencing Awards resulting in the payment of Common Stock prior to (a) the obtaining of any approval from any governmental agency which the Company shall, in its sole discretion, determine to be necessary or advisable, (b) the admission of such shares to listing on the stock exchange on which the Common Stock may be listed, and (c) the completion of any registration or other qualification of said shares under any state or federal law or ruling of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable.

21. No Right to Continued Employment or Grants

     Participation in the Plan shall not give any Participant any right to remain in the employ of the Company or any Subsidiary. The Company or, in the case of employment with a Subsidiary, the Subsidiary, reserves the right to terminate any Participant at any time. Further, the adoption of this Plan shall not be deemed to give any person any right to be selected as a Participant or to be granted an Award.

14

22. Amendment

     The Board may suspend or terminate the Plan at any time. In addition, the Board may, from time to time, amend the Plan in any manner, provided however, that any such amendment shall be subject to stockholder approval (i) at the discretion of the Board and (ii) to the extent that shareholder approval may be required by law or under the applicable requirements of any exchange on which the Common Stock is listed to trade. Notwithstanding the foregoing, the Board may not amend the Plan in any manner that would result in the imposition of an additional tax under section 409A of the Code on any Participant.

23. Change in Control and Change in Ownership

(a)	Background. All Participants shall be eligible for the treatment afforded by this paragraph 23 if there is a Change in Ownership or if their employment terminates within three years following a Change in Control, unless the termination is due to (i) death; (ii) disability entitling the Participant to benefits under his employer’s long-term disability plan; (iii) Cause; (iv) resignation by the Participant other than for Good Reason; or (v) retirement entitling the Participant to benefits under his employer’s retirement plan.
(b)	Vesting and Lapse of Restrictions. If a Participant is eligible for treatment under this paragraph 23, (i) all of the terms and conditions in effect on any unexercised, unearned, or unpaid Awards shall immediately lapse as of the Acceleration Date; (ii) no other terms or conditions shall be imposed upon any Awards on or after such date, and in no event shall any Award be forfeited on or after such date; and (iii) all of his unexercised, unvested, unearned and/or unpaid Awards or any other outstanding Awards shall automatically become one hundred percent (100%) vested immediately upon such date.
(c)	Dividends and Dividend Equivalents. If a Participant is eligible for treatment under this paragraph 23, all unpaid dividends and dividend equivalents and all interest accrued thereon, if any, shall be treated and paid under this paragraph 23 in the identical manner and time as the Award under which such dividends or dividend equivalents have been credited. For example, if upon a Change in Ownership, an Award under this paragraph 23 is to be paid in a prorated fashion, all unpaid dividends and dividend equivalents with respect to such Award shall be paid according to the same formula used to determine the amount of such prorated Award.
(d)	Payment of Awards. If a Participant is eligible for treatment under this paragraph 23, whether or not he is still employed by the Company or a Subsidiary, he shall be paid, in a single lump sum cash payment, as soon as practicable but in no

15

	event later than 90 days after the Acceleration Date, for all outstanding SARs and Stock Options (including Incentive Stock Options), and any other outstanding Awards, based on the Fair Market Value of the Common Stock on the Acceleration Date.
(e)	Miscellaneous. Upon a Change in Control or a Change in Ownership, (i) the provisions of paragraphs 14, 18 and 19 shall become null and void and of no force and effect insofar as they apply to a Participant who has been terminated under the conditions described in paragraph 23(a); and (ii) no action shall be taken which would affect the rights of any Participant or the operation of the Plan with respect to any Award to which the Participant may have become entitled hereunder on or prior to the date of the Change in Control or Change in Ownership or to which he may become entitled as a result of such Change in Control or Change in Ownership.
(f)	Legal Fees. The Company shall pay all legal fees and related expenses incurred by a Participant in seeking to obtain or enforce any payment, benefit or right he may be entitled to under the Plan after a Change in Control or Change in Ownership; provided, however, the Participant shall be required to repay any such amounts to the Company to the extent a court of competent jurisdiction issues a final and non-appealable order setting forth the determination that the position taken by the Participant was frivolous or advanced in bad faith.

24. No Right, Title or Interest in Company Assets

     No Participant shall have any rights as a stockholder as a result of participation in the Plan until the date of issuance of a stock certificate in his name, and, in the case of Restricted Stock, Stock Options, or SARs, until such rights are granted to the Participant under paragraph 10(c). To the extent any person acquires a right to receive payments from the Company under this Plan, such rights shall be no greater than the rights of an unsecured creditor of the Company.

16

EX-12

EXHIBIT 12

NATIONAL FUEL GAS COMPANY
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
UNAUDITED

	For the Twelve			Fiscal Year Ended September 30,
	Months Ended
	March 31, 2007			2006			2005			2004			2003
EARNINGS:
Income from Continuing Operations	$	135,045		$	138,091		$	153,515		$	154,265		$	181,067
Plus Income Tax Expense		84,351			76,086			92,978			94,590			124,150
Less Investment Tax Credit (1)		(697	)		(697	)		(697	)		(697	)		(693	)
(Less Income) Plus Loss from Unconsolidated Subsidiaries (3)		(3,772	)		(3,583	)		796			(805	)		(535	)
Plus Distributions from Unconsolidated Subsidiaries		2,713			4,651			1,990			785			1,238
Plus Interest Expense on Long-Term Debt		70,193			72,629			73,244			82,989			91,381
Plus Other Interest Expense		6,078			5,952			9,069			6,763			11,196
Less Amortization of Loss on Reacquired Debt		(783	)		(1,118	)		(1,066	)		(1,350	)		(2,078	)
Plus (Less) Allowance for Borrowed Funds Used in Construction		304			296			201			298			(102	)
Plus Rentals (2)		2,730			2,810			3,554			4,286			4,573
	$	296,162		$	295,117		$	333,584		$	341,124		$	410,197
FIXED CHARGES:
Interest & Amortization of Premium and Discount of Funded Debt	$	70,193		$	72,629		$	73,244		$	82,989		$	91,381
Plus Other Interest Expense		6,078			5,952			9,069			6,763			11,196
Less Amortization of Loss on Reacquired Debt		(783	)		(1,118	)		(1,066	)		(1,350	)		(2,078	)
Plus (Less) Allowance for Borrowed Funds Used in Construction		304			296			201			298			(102	)
Plus Rentals (2)		2,730			2,810			3,554			4,286			4,573
	$	78,522		$	80,569		$	85,002		$	92,986		$	104,970
RATIO OF EARNINGS TO FIXED CHARGES		3.77			3.66			3.92			3.67			3.91

(1)	Investment Tax Credit is included in Other Income
(2)	Rentals shown above represent the portion of all rentals (other than delay rentals) deemed representative of the interest factor.
(3)	Fiscal 2005 includes the Impairment of Investment in Partnership of $4,158.

EX-31.1

Exhibit 31.1

CERTIFICATION

     I, P. C. Ackerman, certify that:

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

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

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

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2007

/s/ P. C. Ackerman  

P. C. Ackerman 

Chairman of the Board and Chief
Executive Officer 

EX-31.2

Exhibit 31.2

CERTIFICATION

     I, R. J. Tanski, certify that:

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

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

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

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2007

/s/ R. J. Tanski  

R. J. Tanski 

Treasurer and Principal Financial Officer 

EX-32

Exhibit 32

NATIONAL FUEL GAS COMPANY

Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002

          Each of the undersigned, P. C. ACKERMAN, the Chairman of the Board and Chief Executive Officer and R. J. TANSKI, the Treasurer and Principal Financial Officer of NATIONAL FUEL GAS COMPANY (the “Company”), DOES HEREBY CERTIFY that:

1. The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (the “Report”) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and

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

          IN WITNESS WHEREOF, each of the undersigned has executed this statement this 8th day of May, 2007.

/s/ P. C. Ackerman  

Chairman of the Board and Chief 

Executive Officer
 

/s/ R. J. Tanski  

Treasurer and Principal Financial Officer 

EX-99

Exhibit 99

NATIONAL FUEL GAS
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

	Twelve Months Ended
	March 31
	2007			2006
	(Thousands of Dollars)
INCOME
Operating Revenues	$	2,026,318		$	2,289,160
Operating Expenses
Purchased Gas		984,087			1,266,734
Operation and Maintenance		413,935			426,206
Property, Franchise and Other Taxes		69,986			69,425
Depreciation, Depletion and Amortization		177,177			179,751
Impairment of Oil and Gas Producing Properties		104,739			—
		1,749,924			1,942,116
Operating Income		276,394			347,044
Other Income (Expense):
Income from Unconsolidated Subsidiaries		3,772			4,107
Impairment of Investment in Partnership		—			(4,158	)
Interest Income		10,424			7,304
Other Income		5,077			8,355
Interest Expense on Long-Term Debt		(70,193	)		(72,917	)
Other Interest Expense		(6,077	)		(7,955	)
Income from Continuing Operations Before Income Taxes		219,397			281,780
Income Tax Expense		84,352			101,063
Income from Continuing Operations		135,045			180,717
Discontinued Operations
Income (Expense) from Operations, Net of Tax		—			(2,111	)
Gain on Disposal, Net of Tax		—			25,774
		—			23,663
Net Income Available for Common Stock	$	135,045		$	204,380
Earnings Per Common Share:
Basic
Income from Continuing Operations	$	1.62		$	2.15
Income (Loss) from Discontinued Operations		—			0.28
Net Income Available for Common Stock	$	1.62		$	2.43
Diluted
Income from Continuing Operations	$	1.58		$	2.11
Income (Loss) from Discontinued Operations		—			0.27
Net Income Available for Common Stock	$	1.58		$	2.38
Weighted Average Common Shares Outstanding:
Used in Basic Calculation		83,232,743			84,116,896
Used in Diluted Calculation		85,352,796			85,810,270