File No. 70-8143
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
POST-EFFECTIVE AMENDMENT NO. 2
to
FORM U-1
APPLICATION OR DECLARATION
under
the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
----------------------------------------------
National Fuel Gas Company National Fuel Gas
30 Rockefeller Plaza Distribution Corporation
New York, New York 10112 10 Lafayette Square
Buffalo, New York 14203
Penn-York Energy Corporation National Fuel Gas Supply
10 Lafayette Square Corporation
Buffalo, New York 14203 10 Lafayette Square
Buffalo, New York 14203
Seneca Resources Corporation Empire Exploration, Inc.
10 Lafayette Square 10 Lafayette Square
Buffalo, New York 14203 Buffalo, New York 14203
Utility Constructors, Inc.
10 Lafayette Square
Buffalo, New York 14203
(Names of companies filing this statement
and addresses of principal executive offices)
---------------------------------------------
NATIONAL FUEL GAS COMPANY
(Name of top registered holding company)
--------------------------------------------
Philip C. Ackerman Clive D. Conley, Esq.
Senior Vice President Reid & Priest
National Fuel Gas Company 40 West 57th Street
10 Lafayette Square New York, New York 10019
Buffalo, New York 14203
(Names and addresses of agents for service)
<PAGE>
Item 1. Description of Proposed Transaction.
Paragraph Nos. 32nd through 75th of Item 1 are revised
in their entirety to read as follows:
"National has developed a long-term financing plan
pursant to the authority granted by the Commission in its
Order dated June 18, 1993 (Release No. 35-25833) which may
include entering into one or more interest rate swap
agreements ("swaps") in notional amounts aggregating not in
excess of $350 million at any one time outstanding. By this
Application/Declaration, National is seeking authority to enter
into one or more swaps, plus one or more derivative instruments,
such as interest rate caps, interest rate floors and interest
rate collars (collectively, the swaps and derivative instruments
are sometimes referred to as "Swap and Derivative Transactions"),
with one or more counterparties from time to time through
December 31, 1994, in notional amounts aggregating not in excess
of $350 million at any one time outstanding.
National already has certain authority to enter into
swaps with notional amounts not in excess of $200 million
pursuant to the SEC order granted in connection with National's
short-term borrowing and system Money Pool arrangements (File
No. 70-8297, Release No. 35-25964 dated December 29, 1993).
However, this Application/Declaration requests additional
authority to enter into Swap and Derivative Transactions in
connection with National's long-term debt, as described in
Strategy 1 and Strategy 2 below. The aggregate notional amount
of all such Swap and Derivative Transactions that relate to both
long-term debt and short-term debt, in this file and File No.
70-8297, will not exceed $350 million at any one time
outstanding. National has not engaged in any swap transactions
pursuant to the December 29, 1993 order (File No. 70-8297) as of
November 18, 1994. All Swap and Derivative Transactions will be
directly related to then outstanding long or short-term debt.
Additionally, should the notional amount of any Swap and
Derivative Transaction exceed by more than $25,000,000 the
notional or outstanding principal amount of the underlying
instrument, National will within 90 days following such event
either (a) reduce, restructure or terminate such Swap and
Derivative Transaction or (b) issue a new instrument or
restructure the underlying instrument such that the notional
amount of such Swap and Derivative Transaction will not exceed by
more than $25,000,000 the notional or outstanding principal
amount of the underlying instrument.
National proposes to use two different swap strategies.
Under one swap strategy ("Strategy 1"), National would agree to
make payments of interest to a counterparty, payable
periodically. The interest would be payable at a variable or
floating rate index and would be calculated on a notional (i.e.,
principal) amount. In return, the counterparty would agree to
make payments to National based upon the same notional amount and
at an agreed upon fixed interest rate. This would be a
"floating-to-fixed swap" on National's part. Under another swap
strategy ("Strategy 2"), National and the counterparty may
exchange roles. National would pay a fixed interest rate and
receive a variable interest rate on a notional amount. This
would be a "fixed-to-floating swap" on National's part.
Currently, most swap counterparties are banks, which
generally act as dealers (principals) rather than brokers
(agents). The counterparties themselves sometimes represent all
or part of the opposite side of a swap transaction. Otherwise,
the counterparties enter into one or more transactions with other
entities, to create the opposite side of a swap transaction,
generally intending to make a profit on the spread. National
will enter into Swap and Derivative Transactions only with
counterparties whose deposits or long-term debt have, at the time
the Swap and Derivative Transaction is entered into, no lower
than an "A" rating from Moody's Investors Service, Inc.
("Moody's"), or an equivalent rating from Standard & Poor's
Corporation, Fitch Investors Service or Duff & Phelps (each an
"Alternate Rating Agency"); provided, however, National may enter
into a Swap and Derivative Transaction with a counterparty whose
deposits or long-term debt have, at the time the Swap and
Derivative Transaction is entered into, a "Baa" rating from
Moody's (or an equivalent rating from an Alternate Rating Agency)
if National has at the time outstanding debt similarly rated.
Additionally, National will enter into only those interest rate
swap agreements whose governing law provides generally for the
enforcement of the netting provisions of such agreements upon the
default of the counterparty with National.
Strategy 1
----------
National proposes to enter into Strategy 1 swaps from
time to time (i) in order to reduce the interest costs of
existing high cost debt and/or (ii) in order to reduce the
interest cost of new long-term debt issuances for part or all of
their terms. A reduction in interest cost may occur because, by
using a Strategy 1 swap, National functionally converts some or
all of the fixed interest rate payments on long-term debt to
floating rate payments that vary in relation to a short-term debt
index. A Strategy 1 swap would reduce National's interest costs
of the debentures or medium-term notes associated with the swap
for the term of such a swap as long as the short-term index used
in the swap to determine the floating rate paid by National
remains the same, decreases, or rises modestly. If the short-
term index rises during the term of the swap, the interest costs
saved by National would decrease until the short-term index is
equal to the fixed rate received by National. If the short-term
index rises above the fixed rate received by National, debt costs
to National would be higher than they would be without using a
Strategy 1 swap.
Each time National issues debentures or medium-term
notes, the proceeds are lent to one or more of its subsidiaries
at an all in cost that is equal to the coupon on the debt plus
the amortization of the underwriters' or agents' fees. The loans
are documented by intercompany notes from the subsidiaries to
National. All the interest costs of both long-term and short-
term debt are borne by the subsidiaries. In accordance with
National's current policy of not assuming the interest cost of
debt or the above underwriters' or agents' fees, the gains and
the losses of doing Swap and Derivative Transactions should be
assumed by the subsidiary. National would enter into a swap in
connection with an underlying subsidiary note only after
determining it to be in the best interest of the subsidiary at
the time of consummation of the swap. Subsidiaries that could
receive the Strategy 1 allocations from National include
Distribution, Supply, Seneca, Penn-York, Empire and Utility
Constructors. The subsidiary that would receive the cost
allocations related to a Strategy 1 swap would be obligated
to execute an unsecured note or an agreement with National
to make the interest payments (and receive the fixed rate
interest) at each reset date of the floating rate index.
A Strategy 1 swap is used to convert the existing fixed
payments made by the subsidiary of National to floating payments
for part or all of the term of the debt. National would decide
on which subsidiary's debt to match against a swap under Strategy
1 based on the current cost of the debt, the term remaining for
the debt, whether the debt is redeemable, availability of all
regulatory approvals to do the swap against the underlying debt
and the individual needs of the subsidiary. The effective net
interest payments or receipts realized by National will be passed
along to the subsidiaries of National that issued the underlying
debt. None of the payments or receipts will be retained by
National. No principal payments are made by either party either
upon initiation or termination of a Strategy 1 swap.
Each Strategy 1 swap would be associated with one or
more specific fixed rate debenture(s) or medium-term note(s).
More than one Strategy 1 swap could be associated with one
specific debenture or medium-term note, but the aggregate
notional amount of swaps (Strategy 1 and Strategy 2 and swaps
authorized under the Money Pool) would not exceed $350 million at
any one time outstanding. Furthermore, the aggregate notional
amount of Strategy 1 swaps will not exceed, at the time any swap
contract is entered into, the aggregate principal amount of
National's long-term debt then outstanding. Each Strategy 1 swap
would have a term (which may range from 1 month to 40 years) that
is less than or equal to the remaining maturity of the debenture
or medium-term note it is associated with. National may from
time to time enter into a Strategy 1 swap or swaps with a
counterparty whereby National would pay a floating interest rate
based on one of the following indices: LIBOR (The "London
Interbank Deposit Offered Rate"); the Federal Funds rate;
certificate of deposit indices; or commercial paper indices (H.15
CP index or any other commercial paper index). National would in
return receive a fixed interest rate. The fixed interest rate
would be the Treasury yield for the corresponding term of the
swap plus a swap spread that is based on the "forward curve"
which is a market expectation of the movement of the floating
rate index used in the swap in the future relative to the United
States Treasury Securities rates. There will be no maximum
interest rate respecting payments that National may make under
the Strategy 1 swaps unless National purchases an interest rate
cap.
In no event, under a Strategy 1 swap, will National
enter into a swap contract in which the floating interest rate
paid by National, inclusive of any intermediary fee, would exceed
by more than 200 basis points, at each reset period, the index
used for such Strategy 1 swap.
National's effective net interest payments or receipts
under a Strategy 1 swap will be allocated to the subsidiary of
National that issued the unsecured subsidiary note that
corresponds to the debenture or medium-term note associated with
the Strategy 1 swap. If more than one subsidiary issued
unsecured notes that correspond to the specific debenture or
medium-term note, the net interest payments and receipts of the
Strategy 1 swap will be allocated in proportion to the amounts of
unsecured notes outstanding for each subsidiary, provided all
subsidiaries have the necessary legal authority to make and
receive such payments. (If a subsidiary lacks such authority,
the notional amount of the swap will not exceed the principal
amount of the note or notes issued by the subsidiaries that have
the necessary legal authority, and the payments and receipts will
only be allocated to those subsidiaries.) Thus, the subsidiaries
realize all the savings (costs) associated with the Strategy 1
swap. The allocation of the net interest payments or receipts of
the Strategy 1 swap to the subsidiary will be made at each reset
date of the respective floating rate index. The subsidiary that
issued the unsecured note that corresponds to the debenture or
medium-term note associated with the Strategy 1 swap would be
obligated to execute an unsecured note or an agreement with
National to make the floating rate payments (and receive the
fixed rate receipts) at each reset date of the floating rate
index.
The hypothetical example below, based upon market rates
prevalent on March 25, 1994, illustrates the savings that
National and hence its subsidiaries could achieve by using a
Strategy 1 swap.
Assume National has the following Existing Debenture
Principal $50,000,000
Interest 7.5%
Remaining term 30 years
Proceeds were lent to Supply
Strategy 1 Swap
Notional amount $50,000,000
Term 2 years (4 reset periods,
first one beginning today)
National pays Floating rate equal to
6-month LIBOR (currently at
4.25%)
National receives fixed rate equal to 5.27%.
Savings realized by National at first reset
(pay 4.25%, receive 5.27%) @1.02% $255,000
Savings realized by National for the term of swap<F1>
@ 1.02% $1,020,000
The pre-tax savings would be allocated in their entirety to
Supply, which issued the subsidiary note corresponding to the
underlying debenture.
Therefore, the effective interest cost on the 30-year
issue would be 6.48% (versus 7.50% without the swap) for 2 years
of its term.
In this example, National would realize a pre-tax
savings of $255,000 at the first reset date of the swap. Reset
dates sometimes begin on the date at which the swap is entered
into, or a later date, and then follow at agreed upon intervals.
For Strategy 1 swaps, pre-tax savings or costs at reset dates
will depend upon how the floating rate index changes, and
therefore upon how the floating rate of interest paid by National
changes. Thus, for example, if 6-month LIBOR increases to 5% at
the time of the second reset in this example, the pre-tax savings
realized would be reduced to $67,500. $67,500 = (5.27% - 5% ) X
($50,000,000 divided by 2). Should 6-month LIBOR be higher than
5.27% at the time of such reset, National would incur an
additional cost. For example, if 6-month LIBOR instead increased
to 5.50% at the time of the second reset, National (and hence
Supply) would incur a pre-tax cost of $57,500.
The accounting entries on National and Supply's books
for the Strategy 1 swap transaction described in the above
example (at the first reset date only and assuming flat interest
rates) will be as follows, for a one-month period:
National Fuel Gas Company and Subsidiaries
------------------------------------------
Accounting Entries
------------------
Strategy 1 Swap
---------------
National Fuel Gas Company
-------------------------
Entry No. 1
Accrued Interest Expense $312,500
Interest Payable $312,500
To record accrued interest expense on $50,000,000 7 1/2%
Debentures for the month of April 1994.
Entry No. 2
Interest Receivable $42,500
Accrued Interest Expense $42,500
To record the net proceeds on $50,000,000 swap (pay 4.25%,
receive 5.27%) for the month of April 1994.
Entry No. 3
Accounts Receivable
Associated Companies $270,000
Interest Income $270,000
To charge subsidiary company with net interest cost on
$50,000,000 unsecured subsidiary note minus net swap savings
(cost) for the month of April 1994.
Subsidiary Company
------------------
Entry No. 4
Accrued Interest Expense $270,000
Accounts Payable
Associated Companies $270,000
To record interest expense on $50,000,000 unsecured subsidiary
note plus net swap savings (cost) for the month of April 1994.
Entry No. 5
Accrued Income Taxes $94,500
Federal Income Tax Expense $94,500
To record federal income taxes for the month of April 1994.
National Fuel Gas Company and Subsidiaries
------------------------------------------
Elimination Entries
-------------------
Entry No. 6
Interest Income $270,000
Interest Expense $270,000
To record elimination entries for the month of April 1994.
A Strategy 1 swap transaction, if material, would be
reported as a footnote to the financial statements of National in
accordance with the Generally Accepted Accounting Principles.
The transaction will not have an impact on the balance sheet of
National.
National will not enter into a Strategy 1 swap unless
the estimated savings at the time of initiation of the swap
(derived from the net difference between the interest to be paid
by National and the interest to be received by National under the
Strategy 1 swap using then current market rates) are, on an after-tax
basis, greater than the transaction and ancillary costs of the
Strategy 1 swap.
National may also use other derivative strategies from
time to time in conjunction with a Strategy 1 swap or the
issuance of floating rate medium-term notes or debentures. Such
derivative strategies may include interest rate caps, interest
rate floors, and interest rate collars<F2>. Depending on how low
the interest rate cap is set or how high the interest rate floor
is set, National may pay or receive an upfront fee, and/or share
with the counterparty a portion of the savings realized on the
spread between the capped rate and the floating rate. The
notional amount of interest rate caps, interest rate floors and
interest rate collars to be entered into in conjunction with a
Strategy 1 swap or the issuance of floating rate medium-term
notes or debentures will not exceed, at the time such derivative
strategies are entered into, the sum of (a) the aggregate
notional amount of Strategy 1 swaps then outstanding and (b) the
aggregate principal amount of floating rate medium-term notes or
debentures then outstanding.
For example, National may decide to use a cap to limit
its exposure to interest rate increases that it would be exposed
to by entering into a Strategy 1 swap or issuing floating rate
medium-term notes or debentures. National may purchase a cap for
a notional amount that is less than or equal to the then
outstanding notional amount of Strategy 1 swaps or principal
amount of floating rate medium-term notes or debentures , at an
interest rate that may be higher than the floating rate of
interest at the time of entering into the cap. National would
therefore receive any interest costs above the level of the cap
for the notional amount for which the cap was purchased.
National may also decide to buy a collar, where it
would sell a floor in addition to buying a cap. By selling a
floor at the time the cap would be purchased, National would
receive a fee that would defray some or all the fee paid for
purchasing the cap. National may also sell the floor independent
of the cap. National would be obligated to pay the interest
costs on the notional amount if the floating rate falls below the
floor rate. The interest rate at which the floor would be sold
would depend on the floating rate that would have to be paid for
the Strategy 1 swap or floating rate medium-term notes or
debentures and National's view on interest rates at that time and
in the future.
Caps, collars and floors would enable National to
manage the interest rate risks associated with floating rate
payment obligations.
National would determine whether to use caps, floors or
collars at the time that National enters into a Strategy 1 swap
or issues floating rate medium-term notes or debentures or at any
time during the term of the swap or floating rate medium-term
notes or debentures. The decision on whether to use any of the
derivatives listed above, would depend on National's view of, the
expected interest rate movements during the term of the swap or
floating rate medium-term notes or debentures, the expected risks
of loss, and the cost of buying a cap, floor or collar.
The payments or receipts associated with a cap, collar
or floor will be allocated to the subsidiary that issued the
underlying obligation.
It is anticipated that each Strategy 1 swap would
provide that each party may terminate or "unwind" the agreement
with the other party's consent, by making early termination
payments and/or as may otherwise be set forth in an agreement as
described below. Termination payments would be determined in
accordance with the formula provided in the agreement between the
parties, such as the one provided in the International Swap
Dealers Association Master Agreement filed as Exhibit B-4 to this
Application/Declaration, unless the parties negotiated different
payment arrangements. Termination payments are dependent upon
market conditions and could be substantial at times. Termination
payments or the costs to "unwind" a swap would depend on the
movement of the interest rates for the short term index used in
the swap after the swap is consummated. If National enters into
a Strategy 1 swap where National pays a floating rate and
receives a fixed rate, the fixed rate of the swap is calculated
as the rate of interest that sets the net present value of the
forward curve for the short-term index to zero, plus the bid/ask
spread. The bid/ask spread for a swap can vary from 1 to 10
basis points depending on the market demand for the swap at that
time.
If the interest rates had moved exactly as the forward
curve had predicted, during the term of the swap, the termination
or "unwind" cost for the swap would be zero. If the interest
rates move higher than predicted by the forward curve, National
would incur a cost to "unwind". This cost would be equal to the
present value of the forward curve (at the time the termination
takes place) for the short-term index for the remaining term of
the swap, discounted at the interest rate of the Treasury zero-
coupon bond having the same term as the remaining term of the
swap. Here again a bid/ask spread based on market conditions
would be added/subtracted from the "unwind" cost. If the
interest rates had moved lower than the forward curve had
predicted, National would receive the "unwind" cost, calculated
as described in the above paragraph.
It would be very difficult to determine a dollar figure
for such a termination since the calculations depend entirely on
the movement of interest rates and the implied forward curve at
the time of termination. However, termination or "unwind" costs
(or receipts) are not expected to exceed 10% of the notional
amount in most cases. Termination payments (or receipts)
associated with Strategy 1 swaps would be allocated to the
subsidiary that executed the note or agreement to National
regarding the payment obligations of the terminated swap.
Strategy 2
----------
National could, from time to time, combine new or
existing floating rate debt (such as the floating rate short-term
debt issued from time to time pursuant to National's short-term
borrowing and system Money Pool arrangements (File No. 70-8297,
Release No. 35-25964 dated December 29, 1993)) with a
fixed-to-floating interest rate swap (Strategy 2 swap). National
would enter into a Strategy 2 swap with a counterparty whereby
National would pay a fixed interest rate based on the forward
curve. National would in return receive a floating interest rate
based on such indices as LIBOR, the Federal Funds rate,
certificate of deposit indices or commercial paper indices (H.15
CP index or any other commercial paper index). No principal
payments are made or received by either counterparty upon either
the initiation or termination of an interest rate swap, including
a Strategy 2 swap.
The hypothetical example below, based upon market rates
prevalent on April 8, 1994, illustrates the nature of a Strategy
2 swap and the savings that might be associated with using it.
Amount of short-term debt $50,000,000
Interest paid on short-term debt
(using H.15 CP index
plus credit spread of National-
estimated at 3.87%) $161,250 per month
Strategy 2 Swap
Notional amount of swap $50,000,000
Term of swap 5 years (60
resets)
At each reset, (every month)
National pays a fixed rate @6.853% $285,542 per month
National receives H.15 CP index
at 3.72% $155,000 per month
Total cost of using a swap
($285,542 + 161,250 - 155,000) $291,792
At the next reset, if the H.15 CP
index increases to 4%
Interest paid on short-term debt of
$50,000,000 (using H.15 CP
index plus the credit spread of
National estimated at 4.15%) $172,917 per month
Fixed rate on the swap @ 6.853% $285,542 per month
National receives H.15 CP index
at 4% $166,667 per month
Total cost of using the swap for the
second reset would be $291,792 per month
As long as National's credit spread does not widen during
the 5 years when the swap would be effective, the total interest rate
to National for the 5 years would be 7.003%
(($291,792 x 12)/$50,000,000).
National would enter into a Strategy 2 swap, and not
reduce its short-term debt, as opposed to issuing a 5-year MTN or
Debenture and reducing short-term debt, only if the estimated
costs associated with the swap, including transaction costs,<F3>
were less than the costs of issuing the long-term debt and any
costs of reducing short-term debt.
For example, if National issued a MTN having the same
term as the above swap (5 years) with the following terms:
Principal amount of debt issued $50,000,000
Effective all-in interest cost<F4> 7.14%
Monthly interest cost<F5> $297,500
The net savings to National by using a swap for
each reset are ($297,500 - 291,792) $ 5,708
Total net savings to National by using the swap
over the 5-year period (undiscounted
and pre-tax)<F6> $342,480
National would save 18.9 basis points<F7> in interest
cost calculated on a semi-annual bond basis by using the above
swap and retaining short-term debt instead of issuing the above
MTN.
In the example above, the subsidiary of National which
is allocated the cost of the swap will save $5,708 per month
(each reset), for a total of $342,480 over a period of 5 years,
by keeping the short-term debt levels constant and using the
above swap to fix a particular interest rate for the long-term,
instead of issuing the above MTN, as long as the H.15 CP index
and National's short-term debt costs move in unison.
In the above example, if the interest cost of
National's short-term debt does not move in unison with H.15 CP
index, National may incur additional costs or it may save more,
depending on how the two interest rates change in relation to one
another.
For example, if the short-term interest cost for
National increased to 4.00% at the time of a subsequent reset,
and the H.15 CP index increased to 3.95%, the savings to National
would be calculated as follows:
Interest paid on short-term debt @ 4.00% $166,667 per month
Strategy 2 Swap
National pays a fixed rate @ 6.853% $285,542 per month
National receives H.15 CP index
@ 3.95% $164,583 per month
Total cost of using a swap
($285,542 + 166,667 - 164,583) $287,626
Net savings to National for this
reset ($297,500 - 287,626) $ 9,874
National saved $9,874 for this reset versus $5,708 for
the previous reset because National's short-term borrowing rates
did not increase as much as the H.15 CP index did.
This savings can also decrease, or National may incur
an additional cost, if at the time of a subsequent reset the
difference between National's short-term interest costs and the
H.15 CP index increases. For example, if National's short-term
interest rate is then 4.25% and H.15 CP index is then 3.90%, the
net cost to National at the reset is $2,625. $300,125 (payments)
- $297,500 (receipts) = $2,625.
National does not expect the relative differences
between short-term borrowing rates and the H.15 CP index to vary
substantially over time (i.e., by more than 10 basis points in
either direction), unless National is downgraded by the bond
rating agencies. There is a possibility that such a downgrade
may erase the savings for the rest of the term of the swap or
until National is upgraded by the bond rating agencies.
The accounting entries for the Strategy 2 swap
transaction will be as follows on the books of National and the
affected subsidiary, using the first Strategy 2 example above,
for a one-month period:
National Fuel Gas Company and Subsidiaries
------------------------------------------
Accounting Entries
------------------
Strategy 2 Swap
---------------
National Fuel Gas Company
-------------------------
Entry No. 1
Accrued Interest Expense $161,250
Interest Payable $161,250
To accrue interest on $50,000,000 short-term debt at 3.87% for
the month of April 1994.
Entry No. 2
Accrued Interest Expense $119,292
Interest Payable $119,292
To record net interest expense on $50,000,000 swap (pay 6.853%,
receive 3.72%) for the month of April 1994.
Entry No. 3
Accounts Receivable
Associated Companies $291,792
Interest Income $291,792
To charge subsidiary company with net interest on $50,000,000
short-term subsidiary note for the month of April 1994.
Subsidiary Company
------------------
Entry No. 4
Accrued Interest Expense $291,792
Accounts Payable
Associated Companies $291,792
To record interest expense on $50,000,000 short-term debt for the
month of April 1994.
Entry No. 5
Accrued Income Taxes $102,127
Federal Income Tax Expense $102,127
To record federal income taxes for the month of April 1994.
National Fuel Gas Company and Subsidiaries
------------------------------------------
Elimination Entries
-------------------
Entry No. 6
Interest Income $291,792
Interest Expense $291,792
To record elimination entries for the month of April 1994.
The Strategy 2 swap, if material, would be reported as
a footnote to the financial statements of National in accordance
with the Generally Accepted Accounting Principles. The
transaction would not be reflected on National's balance sheet.
In no event, under any Strategy 2 swap, will National
enter into a swap contract in which the effective fixed rate of
interest paid by National, inclusive of any intermediary fee,
would exceed by more than 2.0% per annum, at the time of entering
into any Strategy 2 swap contract, the yield on direct
obligations of the United States Government as published by the
Federal Reserve (i.e., Treasury Bonds, Notes and Bills) with
maturities comparable to the maturity of such Strategy 2 swap
contract.
The aggregate notional amount of Strategy 2 swaps will
not, at any one time, exceed the difference between a)
$350,000,000 and b) the aggregate principal amount of New
Debentures and New MTNs then outstanding. (The current amount of
New MTNs outstanding under this file is $130,000,000.)
Furthermore, the aggregate notional amount of Strategy 2 swaps
will not exceed, at the time the swap contract is entered into,
the amount of short-term debt then outstanding pursuant to
National's system Money Pool arrangements (File No. 70-8297).
The aggregate notional amount of all the swaps initiated pursuant
to any orders issued in this file (Strategy 1 and Strategy 2
swaps) and swaps initiated pursuant to the SEC's order in File
No. 70-8297, relating to National's short-term borrowings and
system Money Pool arrangement, will not exceed $350 million at
any one time outstanding. The term for any Strategy 2 swaps will
range from 9 months to 40 years.
Each time National issues debentures or medium-term
notes, the proceeds are lent to one or more of its subsidiaries
at an all in cost that is equal to the coupon on the debt plus
the amortization of the underwriters' or agents' fees. The loans
are documented by intercompany notes from the subsidiaries to
National. All the interest costs of both long-term and short-
term debt are borne by the subsidiaries. In accordance with
National's current policy of not assuming the interest cost of
debt or the above underwriters' or agents' fees, the gains and
the losses of doing a swap and one or more derivative instruments
should be assumed by the subsidiary. National would enter into a
swap in connection with an underlying subsidiary note only after
determining it to be in the best interest of the subsidiary at
the time of consummation of the swap.
Since a Strategy 2 swap would be used in lieu of
issuing New MTNs or New Debentures under this file, the
subsidiary that would have received the proceeds of issuing long-
term debt would be the one which would bear the costs (savings)
of the swap. The costs associated with the short-term debt that
is not repaid as a result of using this swap strategy would be
allocated to the subsidiary that would have paid interest
associated with the New MTNs or New Debentures that would
otherwise have been issued. The fixed rate payments and the
floating rate receipts of the Strategy 2 swap would be allocated
to the same subsidiary to which the costs associated with the
short-term debt are assigned. Only those subsidiaries which
would require the use of a certain principal amount of debt for
the life of a proposed Strategy 2 swap would be allocated a
portion of the cost of that swap. Subsidiaries that could
receive the Strategy 2 allocations from National include
Distribution, Supply, Seneca, Penn-York, Empire and Utility
Constructors. The subsidiary that would receive the cost
allocations related to a Strategy 2 swap (short-term debt
principal and interest payments, fixed rate payments under the
swap and floating rate receipts under the swap) would be
obligated to execute an unsecured note or an agreement with
National to make the interest payments (and receive the floating
rate interest) at each reset date of the floating rate index.
It is anticipated that each Strategy 2 swap would
provide that each party may terminate or "unwind" the agreement
with the other party's consent and/or with early termination
payments. Termination payments would be determined in accordance
with the formula provided in the agreement between the parties,
such as the one provided in the International Swap Dealers
Association Master Agreement filed as Exhibit B-4 to this
Application/Declaration, unless the parties negotiated different
payment arrangements. Termination payments are dependent upon
market conditions and could be substantial at times. The
methodology for calculating the cost of "unwinding" a Strategy 2
swap would be the same as that used for a Strategy 1 swap.
Termination payments for a Strategy 2 swap could be functionally
compared to a premium that is paid to the bondholders, for
redeeming or discharging high cost debt. Termination or "unwind"
costs (or receipts) are not expected to exceed 10% of the
notional amount in most cases. Termination payments (or
receipts) for Strategy 2 swaps would be allocated to the
subsidiary that executed the note or agreement to National
regarding the payment obligations of the terminated swap.
National may also use interest rate caps from time to
time in conjunction with a Strategy 2 swap. The payments or
receipts associated with a cap will be allocated to the same
subsidiary to which the costs associated with the underlying
Strategy 2 swap are assigned.
Since a swap is essentially an exchange of interest
payment obligations of National and a counterparty, National will
neither receive nor pay any proceeds (i.e., principal) from any
swaps.
None of the Swap and Derivative Transactions will be
"leveraged." This means that changes in interest payments
(receipts) under any Swap and Derivative Transaction due to
changes in the floating rate index used in such instrument will
not exceed the product of the change in such index and the
notional amount of such instrument.
Reporting Requirement
---------------------
Within thirty days following the trade date of any Swap
and Derivative Transaction, National will submit a report to the
Commission disclosing the following information with respect to
such Swap and Derivative Transaction: the trade date; the type
of Swap and Derivative Transaction traded; the notional principal
amount; a description of the index and margin in the case of a
swap or the underlying index and strike rate in the case of a cap
or a floor; the termination date; the name of the counterparty;
the material terms of the underlying instrument (including the
interest rate (or index and margin) and the maturity or
termination date of such instrument), and the name of the
subsidiary to which the cash inflows and outflows under the Swap
and Derivative Transaction will be allocated.
Within forty-five days following the close of each
fiscal quarter, National will submit a report to the Commission
disclosing the net cash outflow or inflow for each swap, and the
net cash outflow for each floor, that has been open at any time
during such quarter. With respect to swaps, the net outflow
refers to the difference between the interest flow received by
National versus the interest flow paid by National during such
quarter for that swap. With respect to any floor, the cash
outflow refers to the sum of payments made by National during
such quarter under any floor sold by National.
National will additionally disclose, also within forty-
five days following the close of each fiscal quarter, the market
value for each Swap and Derivative Transaction that is open at
the close of such quarter, as of that closing date. National
will also disclose any gains or losses realized from the
liquidation during such quarter of any position in a Swap and
Derivative Transaction, together with the proceeds and sale price
constituting such gain or loss, and its carrying value, if any.
Further, National will disclose, also within forty-five
days following the close of each fiscal quarter, certain
information if the notional principal amount of any Swap and
Derivative Transaction during that quarter exceeds the
outstanding or notional principal amount of the underlying
instrument. Specifically, National will disclose the date and
reason for such condition. In addition, National will disclose
the date (a) the related Swap and Derivative Transaction was
terminated or the notional principal amount of such instrument
was reduced or (b) a new instrument related to the open Swap and
Derivative Transaction was entered into. If National enters into
a new underlying instrument for that Swap and Derivative
Transaction, it will also disclose the terms of the new
underlying instrument."
Item 4. Regulatory Approval.
Paragraph No. 3 of Item 4 is revised in its entirety to
read as follows:
"No State regulatory authority has jurisdiction over
the proposed swap transactions except that the Public Service
Commission of New York and the Pennsylvania Public Utility
Commission have jurisdiction over the allocation of costs and
benefits to Distribution associated with the transactions
proposed herein. National will file the Applications or
Petitions (or amendments to current applications or petitions)
requesting the approval of such commissions, should National
decide to do a swap and allocate the costs to Distribution."
Item 6. Exhibits and Financial Statements.
The following exhibits are made part of this statement:
F-4 Opinion of Reid & Priest, Counsel for National
F-5 Opinion of Stryker, Tams & Dill, New Jersey
Counsel for National
<PAGE>
[FN]
<F1> Assuming that the 6-month LIBOR is constant over the 2-year
period of the swap.
<F2> An interest rate collar occurs when National buys a cap and
sells a floor.
<F3> Transaction costs may include any intermediary fees, credit
spreads, and legal and other costs associated with using a
Strategy 2 swap versus a Debenture or MTN. These other costs
could include (i) slightly higher long-term debt costs that occur
because National's debt rating did not increase as a result of
higher short-term debt levels, and/or (ii) increased bank fees
(e.g., costs of committed credit facilities) occasioned by the
existence of higher short-term debt levels.
<F4> Effective all-in interest cost means the coupon rate of
interest for the MTN plus the agent/underwriter fee allocated
over the life of the MTN.
<F5> Monthly interest is used to compare the cost of the MTN to
the swap because the swap resets monthly.
<F6> Assuming that the H.15 CP index and National's short-term
debt costs move in unison for the term of the swap.
<F7> The savings do not include the transaction costs. Please
see footnote 3 for more details concerning transaction costs.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, the undersigned companies have duly
caused this amendment to be signed on their behalf by the
undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
By /s/ Joseph P. Pawlowski
------------------------
Joseph P. Pawlowski
Treasurer
NATIONAL FUEL GAS
DISTRIBUTION CORPORATION
By /s/ Gerald T. Wehrlin
-------------------------
Gerald T. Wehrlin
Senior Vice President,
Controller
SENECA RESOURCES CORPORATION
By /s/ Gerald T. Wehrlin
-------------------------
Gerald T. Wehrlin
Secretary, Treasurer and
Controller
NATIONAL FUEL GAS SUPPLY
CORPORATION
By /s/ Joseph P. Pawlowski
-------------------------
Joseph P. Pawlowski
Treasurer
PENN-YORK ENERGY CORPORATION
By /s/ Joseph P. Pawlowski
-------------------------
Joseph P. Pawlowski
Treasurer
EMPIRE EXPLORATION, INC.
By /s/ Joseph P. Pawlowski
-------------------------
Joseph P. Pawlowski
Treasurer
UTILITY CONSTRUCTORS, INC.
By /s/ Joseph P. Pawlowski
-------------------------
Joseph P. Pawlowski
Treasurer
DATED: November 18, 1994
<PAGE>
EXHIBIT INDEX
Exhibit Page
------- ----
F-4 Opinion of Reid & Priest,
Counsel for National
F-5 Opinion of Stryker, Tams &
Dill, New Jersey Counsel for
National
EXHIBIT F-4
-----------
Reid & Priest
40 West 57th Street
New York, New York 10019
New York, New York
November 18, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Form U-1 Application-Declaration (File No. 70-8143)
National Fuel Gas Company
National Fuel Gas Distribution Corporation
Penn-York Energy Corporation
National Fuel Gas Supply Corporation
Seneca Resources Corporation
Empire Exploration, Inc.
Utility Constructors, Inc.
---------------------------------------------------
Ladies and Gentlemen:
With reference to the Post-Effective Amendment No. 2 to
the joint Application-Declaration, as heretofore amended (as so
amended, the "Amended Application-Declaration"), filed on
November 18, 1994 by National Fuel Gas Company (the "Company"),
National Fuel Gas Distribution Corporation, Penn-York Energy
Corporation, National Fuel Gas Supply Corporation, Seneca
Resources Corporation, Empire Exploration, Inc. and Utility
Constructors, Inc. under the Public Utility Holding Company Act
of 1935, as amended, regarding the proposed entering into by the
Company of one or more interest rate swap agreements, and/or one
or more derivative instruments, such as interest rate caps,
interest rate floors and interest rate collars (collectively, the
"Swap Transactions"), in notional amounts aggregating not in
excess of $350 million at any one time outstanding, we are of the
opinion that:
1. The Company is a corporation duly organized and validly
existing under the laws of the State of New Jersey.
2. If (i) the proposed transactions are consummated as
contemplated by the Amended Application-Declaration and in
accordance with the terms of the order or orders of the
Securities and Exchange Commission with respect thereto, (ii)
each Swap Transaction is duly authorized, executed and delivered
by the party thereto other than the Company and such party is
duly organized and validly existing under the laws of such
party's jurisdiction of organization and such party has full
power and authority to make and perform the Swap Transactions,
(iii) no act or event other than as described herein shall have
occurred subsequent to the date hereof which would change the
opinions expressed herein, and (iv) the consummation of the
proposed Swap Transactions shall be conducted under our
supervision and all legal matters incident thereto shall be
satisfactory to us, including the receipt in satisfactory form of
opinions of other counsel qualified to practice in any
jurisdiction in which we are not admitted to practice and the
laws of which govern the Swap Transactions or the parties to the
Swap Transaction:
(a) All state laws applicable to the proposed Swap
Transactions as described in the Amended Application-Declaration
will have been complied with;
(b) Each Swap Transaction will be a valid and binding
obligation of the Company in accordance with its terms, subject
as to enforceability to (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other
similar laws of general applicability affecting the enforcement
of creditors' rights, and (ii) the application of general
principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law), including,
without limitation (a) the possible unavailability of specific
performance, injunctive relief or any other remedy, and (b)
concepts of materiality, reasonableness, good faith and fair
dealing; and
(c) The consummation of the proposed Swap Transactions
as described in the Amended Application-Declaration will not
violate the legal rights of the holders of any securities issued
by the Company.
We express no opinion as to (i) the subject matter
jurisdiction of a federal court to consider any dispute arising
out of any Swap Transaction or (ii) any provision of any Swap
Transaction to the extent such provision waives any objection by
any party to the laying of venue of any action or proceeding
brought in any court and any claim that any such action or
proceeding has been brought in any inconvenient forum.
We also express no opinion as to the enforceability of
any provision of any Swap Transaction relating to judgment
currencies.
We are members of the New York Bar and do not hold
ourselves out as experts on the laws of any other state.
Accordingly, in giving this opinion, we have relied, as to all
matters governed by the law of the State of New Jersey, upon the
opinion of Stryker, Tams & Dill. A copy of such opinion will be
filed as an exhibit to the Amended Application-Declaration.
We hereby consent to the use of this opinion as an
exhibit to the Amended Application-Declaration.
Very truly yours,
/s/ Reid & Priest
REID & PRIEST
EXHIBIT F-5
-----------
Stryker, Tams & Dill
Two Penn Plaza East
Newark, New Jersey 07105
New York, New York
November 18, 1994
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: National Fuel Gas Company
National Fuel Gas Distribution Corporation
Penn-York Energy Corporation
National Fuel Gas Supply Corporation
Seneca Resources Corporation
Empire Exploration, Inc.
Utility Constructors, Inc.
Form U-1 Application-Declaration
File No. 70-8143
------------------------------------------
Ladies and Gentlemen:
This opinion relates to Post-Effective
Amendment No. 2 to the joint Application-Declaration, as
heretofore amended (so amended, the "Amended Application-
Declaration"), filed on or about November 18, 1994, by
National Fuel Gas Company ("National") and its subsidiary
corporations, National Fuel Gas Distribution Corporation,
Penn-York Energy Corporation, National Fuel Gas Supply
Corporation, Seneca Resources Corporation, Empire
Exploration, Inc., and Utility Constructors, Inc., under
the Public Utility Holding Company Act of 1935, as amended.
The Amended Application-Declaration seeks authorization for
National to enter into one or more interest rate swap
agreements and other derivative instruments (e.g., interest
----
rate caps, interest rate floors and interest rate collars)
(collectively, the "Swap Agreements") with one or more
third parties (each, a "Counterparty" and, collectively,
the "Counterparties") in notional amounts aggregating not
in excess of $350 million at any one time outstanding.
Based upon the foregoing and having due regard
for legal considerations which we deem relevant, we are of
the opinion that:
1. National is a corporation duly organized and
validly existing under the laws of the State of New
Jersey.
2. If (i) the proposed transactions are duly
consummated in accordance with the Amended
Application-Declaration and the order or orders of the
Securities and Exchange Commission thereon, and (ii)
the Swap Agreements are duly executed and delivered by
National and are duly authorized, executed and
delivered by, and are legal, valid and binding
obligations of, each Counterparty thereto:
A. All laws of the State of New Jersey
applicable to the proposed transactions will have been
complied with;
B. Insofar as New Jersey law is applicable,
the Swap Agreements will be legal, valid and binding
obligations of National; and
C. The legal rights of the holders of any
securities issued by National will not have been
violated.
A copy of this opinion is being delivered to
Messrs. Reid & Priest who, in rendering their opinion of
even date herewith to the Securities and Exchange
Commission, are hereby authorized to rely upon the opinions
expressed herein to the same extent as if this opinion had
been addressed directly to them.
We consent to the use of this opinion as an
exhibit to the Amended Application-Declaration.
Very truly yours,
/s/ Stryker, Tams & Dill
STRYKER, TAMS & DILL
