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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
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Commission File Number 1-3880
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NATIONAL FUEL GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 13-1086010
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Lafayette Square
Buffalo, New York 14203
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(Address of principal executive offices) (Zip Code)
(716) 857-6980
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $1 par value, outstanding at July 31, 1997:
38,148,965 shares.
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<PAGE>
Company or Group of Companies for which Report is Filed:
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NATIONAL FUEL GAS COMPANY (Company or Registrant)
SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution
Corporation)
National Fuel Gas Supply Corporation (Supply Corporation)
Seneca Resources Corporation (Seneca)
Highland Land & Minerals, Inc. (Highland)
National Fuel Resources, Inc. (NFR)
Horizon Energy Development, Inc. (Horizon)
Leidy Hub, Inc. (Leidy Hub)
Data-Track Account Services, Inc. (Data-Track)
Utility Constructors, Inc. (UCI)
INDEX
Part I. Financial Information Page
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Item 1. Financial Statements
a. Consolidated Statements of Income and Earnings
Reinvested in the Business - Three Months and
Nine Months Ended June 30, 1997 and 1996 3 - 4
b. Consolidated Balance Sheets - June 30, 1997 and
September 30, 1996 5 - 6
c. Consolidated Statement of Cash Flows - Nine
Months Ended June 30, 1997 and 1996 7
d. Notes to Consolidated Financial Statements 8 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Part II. Other Information
--------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities 33
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 33
Signature 34
* The Company has nothing to report under this item.
This Form 10-Q contains "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements should be
read with the cautionary statements included in this Form 10-Q at Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (MD&A), under the heading "Safe Harbor for Forward-Looking
Statements." Forward-looking statements are all statements other than statements
of historical fact, including, without limitation, those statements that are
designated with a "1" following the statement, as well as those statements that
are identified by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions.
<PAGE>
Part I. - Financial Information
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Item 1. - Financial Statements
- ------------------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Three Months Ended
June 30,
------------------
1997 1996
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $246,051 $239,330
-------- --------
Operating Expenses
Purchased Gas 82,954 80,078
Operation 59,693 63,420
Maintenance 6,334 6,347
Property, Franchise and Other Taxes 23,194 23,582
Depreciation, Depletion and Amortization 29,286 26,533
Income Taxes - Net 13,307 9,683
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214,768 209,643
-------- --------
Operating Income 31,283 29,687
Other Income 1,275 1,172
-------- --------
Income Before Interest Charges 32,558 30,859
-------- --------
Interest Charges
Interest on Long-Term Debt 10,367 10,539
Other Interest 3,286 3,010
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13,653 13,549
-------- --------
Net Income Available for Common Stock 18,905 17,310
EARNINGS REINVESTED IN THE BUSINESS
Balance at April 1 486,696 437,913
-------- --------
505,601 455,223
Dividends on Common Stock
(1997 - $.435; 1996 - $.42) 16,541 15,784
-------- --------
Balance at June 30 $489,060 $439,439
======== ========
Earnings Per Common Share $0.50 $0.46
===== =====
Weighted Average Common Shares Outstanding 38,141,019 37,674,241
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. - Financial Statements (Cont.)
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National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Nine Months Ended
June 30,
-----------------
1997 1996
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $1,108,247 $1,048,034
---------- ----------
Operating Expenses
Purchased Gas 498,617 460,020
Operation 198,966 204,888
Maintenance 18,300 20,072
Property, Franchise and Other Taxes 83,427 83,040
Depreciation, Depletion and Amortization 84,971 72,086
Income Taxes - Net 69,719 62,267
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954,000 902,373
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Operating Income 154,247 145,661
Other Income 2,598 2,979
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Income Before Interest Charges 156,845 148,640
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Interest Charges
Interest on Long-Term Debt 30,724 30,413
Other Interest 11,516 12,833
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42,240 43,246
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Net Income Available for Common Stock 114,605 105,394
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 422,874 380,123
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537,479 485,517
Dividends on Common Stock
(1997 - $1.275; 1996 - $1.23) 48,419 46,078
-------- --------
Balance at June 30 $489,060 $439,439
======== ========
Earnings Per Common Share $3.01 $2.81
===== =====
Weighted Average Common Shares Outstanding 38,060,709 37,555,248
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
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National Fuel Gas Company
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Consolidated Balance Sheets
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June 30,
1997 September 30,
(Unaudited) 1996
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(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $2,602,316 $2,471,063
Less - Accumulated Depreciation, Depletion
and Amortization 831,172 761,457
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1,771,144 1,709,606
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Current Assets
Cash and Temporary Cash Investments 25,367 19,320
Receivables - Net 165,347 96,740
Unbilled Utility Revenue 13,643 20,778
Gas Stored Underground 9,683 34,727
Materials and Supplies - at average cost 20,472 21,544
Unrecovered Purchased Gas Costs 233 -
Prepayments 14,527 27,872
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249,272 220,981
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Other Assets
Recoverable Future Taxes 86,444 88,832
Unamortized Debt Expense 23,493 25,193
Other Regulatory Assets 45,220 57,086
Investment in Unconsolidated Foreign Subsidiary 19,581 -
Deferred Charges 11,400 7,377
Other 42,393 40,697
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228,531 219,185
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$2,248,947 $2,149,772
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
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National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
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June 30,
1997 September 30,
(Unaudited) 1996
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(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 100,000,000 Shares; Issued
and Outstanding - 38,148,265 Shares and
37,851,655 Shares, Respectively $ 38,148 $ 37,852
Paid in Capital 404,873 395,272
Earnings Reinvested in the Business 489,060 422,874
Cumulative Translation Adjustment (2,245) -
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Total Common Stock Equity 929,836 855,998
Long-Term Debt, Net of Current Portion 532,214 574,000
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Total Capitalization 1,462,050 1,429,998
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Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 132,100 199,700
Current Portion of Long-Term Debt 53,309 -
Accounts Payable 52,573 64,610
Amounts Payable to Customers 6,788 4,618
Other Accruals and Current Liabilities 149,211 82,520
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393,981 351,448
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Deferred Credits
Accumulated Deferred Income Taxes 282,547 281,207
Taxes Refundable to Customers 21,005 21,005
Unamortized Investment Tax Credit 12,208 12,711
Other Deferred Credits 77,156 53,403
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392,916 368,326
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Commitments and Contingencies - -
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$2,248,947 $2,149,772
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. - Financial Statements (Cont.)
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National Fuel Gas Company
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Consolidated Statement of Cash Flows
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(Unaudited)
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Nine Months Ended
June 30,
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1997 1996
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(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $114,605 $105,394
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization 84,971 72,086
Deferred Income Taxes 3,909 9,332
Other 4,540 6,606
Change in:
Receivables and Unbilled Utility Revenue (61,472) (72,882)
Gas Stored Underground and Materials and
Supplies 26,116 13,774
Unrecovered Purchased Gas Costs (233) -
Prepayments 13,345 13,027
Accounts Payable (12,037) 8,003
Amounts Payable to Customers 2,170 (40,687)
Other Accruals and Current Liabilities 63,421 61,760
Other Assets and Liabilities - Net 31,539 2,284
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Net Cash Provided by
Operating Activities 270,874 178,697
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INVESTING ACTIVITIES
Capital Expenditures (134,292) (115,874)
Investment in Unconsolidated Foreign Subsidiary (21,605) -
Other 243 (1,326)
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Net Cash Used in Investing Activities (155,654) (117,200)
-------- --------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper (67,600) (60,400)
Net Proceeds from Issuance of Long-Term Debt - 99,650
Reduction of Long-Term Debt (785) (58,500)
Proceeds from Issuance of Common Stock 6,930 5,759
Dividends Paid on Common Stock (47,718) (45,395)
-------- --------
Net Cash Used in
Financing Activities (109,173) (58,886)
-------- --------
Net Increase in Cash and
Temporary Cash Investments 6,047 2,611
Cash and Temporary Cash Investments
at October 1 19,320 12,757
-------- --------
Cash and Temporary Cash Investments at June 30 $ 25,367 $ 15,368
======== ========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
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National Fuel Gas Company
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Notes to Consolidated Financial Statements
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Note 1 - Summary of Significant Accounting Policies
Quarterly Earnings. The Company, in its opinion, has included all adjustments
that are necessary for a fair statement of the results of operations for the
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, 1996, 1995 and 1994, that are included in the
Company's combined Annual Report to Shareholders/Form 10-K for 1996. The fiscal
1997 consolidated financial statements will be examined by the Company's
independent accountants after the end of the fiscal year.
The earnings for the nine months ended June 30, 1997 should not be
taken as a prediction for the fiscal year ending September 30, 1997, as most of
the Company's business is seasonal in nature and is influenced by weather
conditions. Because of the seasonal nature of the Company's heating business,
earnings during the winter months normally represent a substantial part of
earnings for the entire fiscal year. Earnings during the summer months tend to
decline and may reach a point where expenses exceed revenues. The impact of
abnormal weather on earnings during the heating season is partially reduced by
the operation of a weather normalization clause included in Distribution
Corporation's New York tariff. The weather normalization clause is effective for
October through May billings. Distribution Corporation's tariff for its
Pennsylvania jurisdiction does not have a weather normalization clause. In
addition, Supply Corporation's straight fixed-variable rate design, which allows
for recovery of substantially all fixed costs in the demand or reservation
charge, reduces the earnings impact of weather.
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. Cash interest payments during the nine months ended June 30, 1997
and 1996, amounted to $35.0 million and $36.7 million, respectively. Net income
taxes paid during the nine months ended June 30, 1997 and 1996 amounted to $55.2
million and $49.2 million, respectively.
In January 1997 and April 1997, Seneca entered into non-cash
investing activities whereby it issued notes to third parties totaling $12.3
million in connection with the acquisition of timber properties. For further
discussion, refer to Note 3 - Capitalization.
Reclassification. Certain prior year amounts have been reclassified to conform
with current year presentation.
<PAGE>
Item 1. Financial Statements (Cont.)
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Equity Method of Accounting for Investment in Foreign Subsidiary. In April 1997,
Horizon's wholly owned subsidiary, Beheer-En Beleggingsmaatschappij Bruwabel,
B.V. (Bruwabel), acquired a 34% equity interest in Severoceske Teplarny, a.s.
(SCT). SCT is a power and heating utility located in the northern part of the
Czech Republic. Bruwabel paid $21.6 million, including legal and finders fees,
for its equity interest. There is a Stock Option Agreement whereby SCT may
acquire an additional 34% equity interest in SCT. Management has adopted the
equity method to account for this investment.
Foreign Currency Translation. The functional currency for the Company's foreign
operations is the applicable local currency. The translation from the applicable
foreign currency to U.S. dollars is performed for balance sheet accounts using
current exchange ratios in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period. The resultant
translation adjustment is reported as a Cumulative Translation Adjustment, a
separate component of Common Stock Equity.
New Accounting Pronouncements:
Earnings Per Share. In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). SFAS 128 replaces the standards for computing earnings per
share previously found in Accounting Principles Board Opinion No. 15, "Earnings
per Share" (APB 15). SFAS 128 requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the income statement for all entities
with complex capital structures. Basic EPS is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Such additional shares are added to
the denominator of the basic EPS calculation in order to calculate diluted EPS.
The Company is required to adopt SFAS 128 in the first quarter of
fiscal 1998. Earlier application is not permitted and restatement of all prior
period EPS data presented is required. The Company does not believe that common
stock equivalents in the form of stock options will have a material dilutive
effect on its EPS under SFAS 128. However, since SFAS 128 eliminated the 3%
materiality threshold of APB 15, diluted EPS will be disclosed as required by
SFAS 128.
Comprehensive Income. In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting
and display of comprehensive income in a full set of general-purpose financial
statements. Comprehensive income, as described in SFAS 130, includes Net Income
Available for Common Stock as well as items under existing accounting standards
that are reported as adjustments to stockholders' equity. Such adjustments to
stockholders' equity include foreign currency translation adjustments, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities.
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
The Company is required to adopt SFAS 130 in the first quarter of
fiscal 1999. However, earlier application is permitted. The Company is currently
in the process of determining how it will present comprehensive income and its
components within the guidelines established by SFAS 130. SFAS 130 requires
restatement of prior period financial statements for comparability.
Business Segment Information. In June 1997, the FASB issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Generally, SFAS 131 requires reporting
segment information under a management approach. The management approach is
based on the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. SFAS 131 supersedes
SFAS 14, "Financial Reporting for Segments of a Business Enterprise," but
retains the requirement to report information about major customers.
The Company is required to adopt SFAS 131 in its annual report for
fiscal 1999. However, earlier application is permitted. In the second year of
application, SFAS 131 will be applied to interim periods with prior interim
periods restated for comparability purposes. The Company is currently in the
process of determining how SFAS 131 will impact its segment reporting. SFAS 131
would require restatement of prior period financial statements.
Note 2 - Income Taxes
The components of federal and state income taxes included in the
Consolidated Statement of Income are as follows (in thousands):
Nine Months Ended
June 30,
-----------------
1997 1996
---- ----
Operating Expenses:
Current Income Taxes -
Federal $59,199 $47,947
State 6,611 4,988
Deferred Income Taxes 3,909 9,332
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69,719 62,267
Other Income:
Deferred Investment Tax Credit (502) (501)
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Total Income Taxes $69,217 $61,766
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<PAGE>
Item 1. Financial Statements (Cont.)
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Total income taxes as reported differ from the amounts that were
computed by applying the federal income tax rate to income before income taxes.
The following is a reconciliation of this difference (in thousands):
Nine Months Ended
June 30,
-----------------
1997 1996
---- ----
Net income available for common stock $114,605 $105,394
Total income taxes 69,217 61,766
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Income before income taxes $183,822 $167,160
======== ========
Income tax expense, computed at
statutory rate of 35% $64,338 $58,506
Increase (reduction) in taxes resulting from:
Current state income taxes, net of federal
income tax benefit 4,165 3,266
Depreciation 1,972 1,544
Production tax credits (327) (408)
Miscellaneous (931) (1,142)
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Total Income Taxes $ 69,217 $61,766
======== =======
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
At June 30, 1997 At September 30, 1996
---------------- ---------------------
Deferred Tax Liabilities:
Excess of tax over book
depreciation $180,692 $182,271
Exploration and
intangible well
drilling costs 111,038 98,293
Other 69,447 67,030
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Total Deferred Tax
Liabilities 361,177 347,594
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Deferred Tax Assets:
Overheads capitalized
for tax purposes (18,678) (16,289)
Other (59,952) (50,098)
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Total Deferred Tax
Assets (78,630) (66,387)
-------- --------
Total Net Deferred
Income Taxes $282,547 $281,207
======== ========
<PAGE>
Item 1. Financial Statements (Cont.)
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Note 3 - Capitalization
Common Stock. During the nine months ended June 30, 1997, the Company issued
53,300 shares of common stock under the Company's section 401(k) Plans, 72,154
shares to participants in the Company's Dividend Reinvestment Plan, and 23,050
shares to participants in the Company's Customer Stock Purchase Plan.
Additionally, 146,706 shares of common stock were issued under the Company's
stock option and stock award plans and 1,400 shares were issued under the
Retainer Policy for Non-Employee Directors during such period. Effective March
1, 1997, the Company's section 401(k) Plans, Dividend Reinvestment Plan and
Customer Stock Purchase Plan began purchasing shares of Company common stock on
the open market.
On April 4, 1997, 398,750 stock options were granted at an exercise
price of $41.625 per share.
Long-Term Debt. In January and April 1997, Seneca issued notes to third parties
totaling $12.3 million in connection with its acquisition of timber properties.
All notes have an interest rate of 6.75%. On an $8.6 million note, Seneca will
pay interest and principal on a monthly basis over the period of January 1997
through June 2001. On a $2.1 million note, Seneca will pay interest on a monthly
basis over the period of February 1997 through January 1999. The principal
amount will be repaid in two equal installments in January 1998 and January
1999. On a third note for $1.6 million, Seneca will pay interest and principal
on a monthly basis over the period of June 1997 through October 1999.
Note 4 - Derivative Financial Instruments
The Company, in its Exploration and Production operations, has
entered into certain price swap agreements to manage a portion of the market
risk associated with fluctuations in the price of natural gas and crude oil,
thereby providing more stability to the operating results of that business
segment. These agreements are not held for trading purposes. The price swap
agreements call for the Company to receive monthly payments from (or make
payments to) other parties based upon the difference between a fixed and a
variable price as specified by the agreement. The variable price is either a
crude oil price quoted on the New York Mercantile Exchange or a quoted natural
gas price in "Inside FERC." These variable prices are highly correlated with the
market prices received by the Company for its natural gas and crude oil
production.
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
The following summarizes the Company's activity under price swap
agreements for the quarter and nine-month periods ended June 30, 1997 and 1996,
respectively:
Quarter Ended Quarter Ended
June 30, 1997 June 30, 1996
------------- -------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Billion
Cubic Feet (Bcf) 6.3 5.6
Range of Fixed Prices per Thousand Cubic
Feet (Mcf) $1.77 - $2.06 $1.71 - $1.99
Weighted Average Fixed Price per Mcf $1.90 $1.86
Range of Variable Prices per Mcf $1.84 - $2.41 $2.27 - $2.70
Weighted Average Variable Price per Mcf $2.13 $2.45
Loss $(1,421,000) $(3,311,000)
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent
Barrels (bbl) 360,500 314,000
Range of Fixed Prices per bbl $17.40 - $18.71 $17.40 - $19.25
Weighted Average Fixed Price per bbl $18.02 $18.25
Range of Variable Prices per bbl $19.22 - $20.87 $20.43 - $23.30
Weighted Average Variable Price per bbl $19.94 $21.47
Loss $(692,000) $(1,020,000)
Nine Months Ended Nine Months Ended
June 30, 1997 June 30, 1996
----------------- -----------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Bcf 18.7 17.5
Range of Fixed Prices per Mcf $1.71 - $2.10 $1.71 - $3.05
Weighted Average Fixed Price per Mcf $1.92 $1.93
Range of Variable Prices per Mcf $1.77 - $4.11 $1.67 - $3.43
Weighted Average Variable Price per Mcf $2.65 $2.31
Loss $(13,597,000) $(6,602,000)
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent bbl 1,030,500 732,000
Range of Fixed Prices per bbl $17.40 - $18.71 $17.40 - $19.25
Weighted Average Fixed Price per bbl $17.99 $18.17
Range of Variable Prices per bbl $19.22 - $25.18 $17.40 - $23.30
Weighted Average Variable Price per bbl $22.31 $19.95
Loss $(4,498,000) $(1,236,000)
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
The Company had the following price swap agreements outstanding at
June 30, 1997.
Natural Gas Price Swap Agreements:
Notional Amount Range of Weighted Average
Fiscal Year (Equivalent Bcf) Fixed Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------------- -------------------
1997 6.3 $1.77 - $2.06 $1.90
1998 21.5 $1.77 - $2.55 $2.09
1999 7.3 $2.00 - $2.29 $2.20
2000 1.3 $2.29 $2.29
----
36.4 $2.08
====
Crude Oil Price Swap Agreements:
Notional Amount Range of Weighted Average
Fiscal Year (Equivalent bbl) Fixed Prices Per bbl Fixed Price Per bbl
- ----------- ---------------- -------------------- -------------------
1997 341,000 $17.40 - $18.71 $18.06
1998 600,000 $17.50 - $19.30 $18.19
1999 51,000 $19.30 $19.30
-------
992,000 $18.20
=======
Gains or losses from these price swap agreements are reflected in
operating revenues on the Consolidated Statement of Income at the time of
settlement with the other parties. The Company uses the accrual method to record
such gains or losses. At June 30, 1997, the Company had unrecognized losses of
approximately $6.0 million related to price swap agreements which are offset by
corresponding unrecognized revenues from the Company's anticipated natural gas
and crude oil production over the terms of the price swap agreements. In the
event that the Company ever terminated a price swap agreement prior to the date
of the anticipated natural gas or crude oil production, the Company would defer
the gain or loss from the price swap agreement in the Consolidated Balance Sheet
at the termination date until such time as the anticipated natural gas or crude
oil prouction occurred, at which point the gain or loss from the price swap
agreement would be recognized in the Consolidated Statement of Income. In the
event that the Company ever determined that a portion of its anticipated natural
gas or crude oil production was not going to occur, thus creating a matching
problem between the price swap agreements and the anticipated production, any
price swap agreements not properly matched against anticipated production would
be marked-to-market with any unrealized gain or loss being recorded in the
Consolidated Statement of Income.
The Company has SEC authority to enter into interest rate swaps and
other derivative instruments associated with long-term borrowings up to a
notional amount of $350.0 million at any one time outstanding. All such interest
rate swaps and other derivative instruments must be directly related to then
outstanding long or short-term debt, at the time they are entered into. The
Company also has SEC authority to enter into interest rate and currency exchange
agreements associated with short-term borrowings covering a total principal
amount of $300.0 million. No such agreements were entered into during the
quarter or nine months ended June 30, 1997 and none are currently outstanding.
<PAGE>
Item 1. Financial Statements (Cont.)
- ------------------------------------
Credit Risk. Credit risk relates to the risk of loss that the Company would
incur as a result of nonperformance by counterparties pursuant to the terms of
their contractual obligations under the price swap agreements they have issued.
The Company is exposed to such credit risk when fluctuations in natural gas and
crude oil market prices result in the Company realizing gains on the price swap
agreements that it has entered into. When credit risk arises, such risk to the
Company is mitigated by the fact that the counterparties, or the parent
companies of such counterparties, are investment grade financial institutions.
In those instances where the Company is not dealing directly with the parent
company, the Company has obtained guarantees from the parent company of the
counterparty that has issued the price swap agreements. Accordingly, the Company
does not anticipate any material impact to its financial position, results of
operations or cash flow as a result of nonperformance by counterparties.
Note 5 - Commitments and Contingencies
Environmental Matters. The Company is subject to various federal, state and
local laws and regulations relating to the protection of the environment. The
Company has established procedures for on-going evaluation of its operations to
identify potential environmental exposures and assure compliance with regulatory
policies and procedures.
It is the Company's policy to accrue estimated environmental clean-up
costs when such amounts can reasonably be estimated and it is probable that the
Company will be required to incur such costs. Distribution Corporation has
estimated that clean-up costs related to several former manufactured gas plant
sites and several other waste disposal sites are in the range of $9.2 million to
$9.8 million. At June 30, 1997, Distribution Corporation has recorded the
minimum liability of $9.2 million. The ultimate cost to Distribution Corporation
with respect to the remediation of these sites will depend on such factors as
the remediation plan selected, the extent of the site contamination, the number
of additional potentially responsible parties at each site and the portion, if
any, attributed to Distribution Corporation. 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.
In New York and Pennsylvania, Distribution Corporation is recovering
site investigation and remediation costs in rates. Accordingly, the Consolidated
Balance Sheet at June 30, 1997 includes related regulatory assets in the amount
of approximately $8.9 million. For further discussion, see disclosure in Note H
- - Commitments and Contingencies under the heading "Environmental Matters" in
Item 8 of the Company's 1996 Form 10-K.
Memorandum of Understanding - Green Canyon Project. In November 1996, Supply
Corporation entered into a Memorandum of Understanding (the MOU) with Green
Canyon Gathering Company (Green Canyon), a subsidiary of El Paso Energy,
regarding a project to develop, construct, finance, own and operate natural gas
gathering and processing facilities offshore and onshore Louisiana (the
Project). The total cost of the Project is estimated at approximately $200
million. The MOU provides for the parties to (i) share equally past and future
development costs for the Project through December 31, 1997, and thereafter as
agreed by the parties, (ii) negotiate toward definitive agreements to be signed
on or before December 31, 1997, to form one or more
<PAGE>
Item 1. Financial Statements (Concl.)
- --------------------------------------
50%/50% partnerships, and (iii) negotiate toward definitive agreements to
finance, develop, build, own and operate the Project. The original date
established for signing of the definitive agreements discussed above was January
1, 1997. The date has since been changed to June 1, 1997 and subsequently to
December 31, 1997 because the parties concluded that the prospective customers
of the Project (offshore gas producers) will not be ready to use the natural gas
gathering and processing facilities in 1997. Such prospective customers are more
likely to use the Project facilities in 1998 or 1999.
The Federal Energy Regulatory Commission ruled in March 1997 that
most of the Project would be jurisdictional, so the parties are preparing the
necessary regulatory filings seeking authorization to construct facilities and
place them in service in 1998 if justified by demand at that time. If the
definitive agreements are not executed, or if the Project is not constructed,
Supply Corporation's share of the past and future development costs through
December 31, 1997 is estimated to not exceed $2 million, for which it is
unlikely Supply Corporation would be reimbursed. As of June 30, 1997, Supply
Corporation has paid approximately $0.9 million of such development costs. These
costs are recorded in Deferred Charges on the Consolidated Balance Sheet at June
30, 1997. Supply Corporation is currently using short-term borrowings to finance
the development costs of the Project.
Other. The Company is involved in litigation arising in the normal course of
business. The Company is involved in regulatory matters arising in the normal
course of business that involve rate base, cost of service and purchased gas
cost issues. While the resolution of such litigation or regulatory matters could
have a material effect on earnings and cash flows, none of this litigation, and
none of these regulatory matters, is expected to have a material effect on the
financial condition of the Company at this time.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
Earnings.
The Company's earnings were $18.9 million, or $0.50 per common share,
during the quarter ended June 30, 1997. This compares with earnings of $17.3
million, or $0.46 per common share, during the quarter ended June 30, 1996.
The Company's earnings were $114.6 million, or $3.01 per common
share, during the nine months ended June 30, 1997. This compares with earnings
of $105.4 million, or $2.81 per common share, during the nine months ended June
30, 1996.
The increase in earnings for the quarter and nine months ended June
30, 1997 is primarily attributable to the higher earnings of the Company's
Utility and Pipeline and Storage segments, offset partly by lower earnings in
the Exploration and Production segment. The earnings of the Utility segment
reflect the positive impact of a rate increase effective in October 1996 in the
New York jurisdiction, lower operation and maintenance (O&M) expense and colder
weather, which had the greatest impact in the quarter
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
ended June 30, 1997. In the Pipeline and Storage segment, lower O&M expense and
higher revenue from unbundled pipeline sales and open access transportation
benefited earnings for the quarter and nine months ended June 30, 1997. Partly
offsetting these increases, the Exploration and Production segment experienced a
decline in earnings during the quarter ended June 30, 1997 as a result of lower
oil and gas revenues due to lower prices and production combined with higher
depletion expense. For the nine months ended June 30, 1997, the lower earnings
of the Exploration and Production segment is primarily attributable to higher
depletion and operating expenses, which more than offset the higher revenues
associated with higher total production and higher oil and gas prices.
A more detailed discussion of current period results can be found in
the business segment information that follows.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
OPERATING REVENUES
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
Regulated
Utility
Retail Revenues:
Residential $126,809 $123,214 2.9 $ 642,067 $ 614,691 4.5
Commercial 29,085 27,133 7.2 154,699 152,784 1.3
Industrial 3,901 3,799 2.7 19,110 20,407 (6.4)
-------- -------- ---------- ----------
159,795 154,146 3.7 815,876 787,882 3.6
Off-System Sales 6,661 5,976 11.5 37,337 25,272 47.7
Transportation 13,242 13,218 0.2 41,430 39,428 5.1
Other 723 784 (7.8) 1,358 2,617 (48.1)
-------- -------- ---------- ----------
180,421 174,124 3.6 896,001 855,199 4.8
-------- -------- ---------- ----------
Pipeline and Storage
Storage Service 15,711 16,630 (5.5) 48,402 51,653 (6.3)
Transportation 22,479 22,825 (1.5) 71,058 69,476 2.3
Other 4,924 706 597.5 11,809 8,898 32.7
-------- -------- ---------- ----------
43,114 40,161 7.4 131,269 130,027 1.0
-------- -------- ---------- ----------
Exploration and
Production 27,842 31,367 (11.2) 90,220 84,512 6.8
Other Nonregulated 18,783 19,161 (2.0) 71,847 59,243 21.3
-------- -------- ---------- ----------
46,625 50,528 (7.7) 162,067 143,755 12.7
-------- -------- ---------- ----------
Less-Intersegment
Revenues 24,109 25,483 (5.4) 81,090 80,947 0.2
-------- -------- ---------- ----------
$246,051 $239,330 2.8 $1,108,247 $1,048,034 5.7
======== ======== ========== ==========
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -------------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
Utility $15,750 $10,323 52.6 $134,774 $119,676 12.6
Pipeline and Storage 20,404 17,345 17.6 58,188 56,797 2.4
Exploration and
Production 8,369 12,683 (34.0) 32,815 35,012 (6.3)
Other Nonregulated 487 (564) 186.3 89 (1,863) 104.8
Corporate (420) (417) (0.7) (1,900) (1,694) (12.2)
------- ------- -------- --------
$44,590 $39,370 13.3 $223,966 $207,928 7.7
======= ======= ======== ========
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
SYSTEM NATURAL GAS VOLUMES
(millions of cubic feet-MMcf)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
Utility Gas Sales
Residential 15,954 15,138 5.4 79,478 84,513 (6.0)
Commercial 4,189 3,720 12.6 21,178 23,259 (8.9)
Industrial 1,059 880 20.3 4,082 4,577 (10.8)
Off-System 3,041 2,190 38.9 11,469 8,600 33.4
------ ------ ------- -------
24,243 21,928 10.6 116,207 120,949 (3.9)
------ ------ ------- -------
Non-Utility Gas Sales
Production(in
equivalent MMcf) 12,395 13,055 (5.1) 37,048 36,309 2.0
------ ------ ------- -------
Total Gas Sales 36,638 34,983 4.7 153,255 157,258 (2.5)
------ ------ ------- -------
Transportation
Utility 15,743 15,196 3.6 49,099 47,983 2.3
Pipeline and Storage 62,991 63,174 (0.3) 258,085 281,074 (8.2)
Nonregulated 260 91 185.7 320 559 (42.8)
------ ------ ------- -------
78,994 78,461 0.7 307,504 329,616 (6.7)
------ ------ ------- -------
Marketing Volumes 5,854 5,089 15.0 17,674 17,707 (0.2)
------ ------ ------- -------
Less-Inter and
Intrasegment Volumes:
Transportation 32,473 28,151 15.4 143,138 150,708 (5.0)
Production 1,072 1,145 (6.4) 3,225 3,620 (10.9)
Gas Sales - - - - 814 NM
Marketing - 24 NM - 119 NM
------ ------ ------- -------
33,545 29,320 14.4 146,363 155,261 (5.7)
------ ------ ------- -------
Total System Natural Gas
Volumes 87,941 89,213 (1.4) 332,070 349,320 (4.9)
====== ====== ======= =======
NM = Not meaningful.
Utility.
Operating revenues for the Utility segment increased $6.3 million and
$40.8 million, respectively, for the quarter and nine months ended June 30,
1997, as compared with the same periods a year ago. These increases reflect the
recovery of increased gas costs, higher off-system sales, higher transportation
and the general base rate increase in Distribution Corporation's New York
jurisdiction effective October 1, 1996. Gas costs for the quarter were up
primarily because of higher volumes of gas sold due to colder weather. For the
nine month period, gas costs were up mainly because of an increase in the
average cost of purchased gas compared with the same period a year ago. The
increase in off-system sales reflects increased gas sales utilizing Distribution
Corporation's available capacity on various upstream pipelines. While off-system
sales contributed to the revenue increase, margins on such sales are minimal.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Operating income before income taxes for the Utility segment
increased $5.4 million and $15.1 million, respectively, for the quarter and nine
months ended June 30, 1997, as compared with the same periods a year ago. This
resulted primarily from the revenue increases discussed above combined with
lower O&M expenses. The decrease in O&M expenses is largely due to labor savings
from a manpower reduction, generated mainly by the special early retirement
offer in the fourth quarter of fiscal 1996, and management's continued emphasis
on controlling costs. For the quarter ended June 30, 1997, colder weather had a
positive impact on operating results for both the New York and Pennsylvania
jurisdictions of Distribution Corporation. Although the New York jurisdiction
has a weather normalization clause (WNC) which mitigates the impact of weather
on its utility customers, the mechanism is only in effect for October through
May billings. An increase in weather related throughput subsequent to the May
billing cycle benefited earnings in the quarter and nine months ended June 30,
1997. The impact subsequent to the May 1997 billing cycle was an increase to
pretax operating income of approximately $1.1 million, compared with the same
period a year ago. Nonetheless, for the April 1997 and May 1997 billing cycle,
the WNC resulted in a reduction to pretax operating income of $3.6 million as
the weather was colder than normal. For the October 1996 through May 1997
billing cycles, the WNC resulted in a reduction to pretax operating income of
$0.2 million due to colder than normal weather. The Pennsylvania jurisdiction,
which does not have a WNC, experienced an increase in pretax operating income of
approximately $1.2 million for the quarter ended June 30, 1997 as compared with
the same period a year ago due to colder weather. However, the Pennsylvania
jurisdiction experienced an approximate $3.2 million reduction in pretax
operating income for the nine months ended June 30, 1997 as compared with the
same period a year ago due to warmer weather.
Degree Days
Three Months Ended June 30:
--------------------------
Percent (Warmer) Colder
in 1997 Than
Normal 1997 1996 Normal 1996
- -------------------------------------------------------------------------
Buffalo 923 1,151 1,032 24.7 11.5
Erie 880 1,125 954 27.8 17.9
Nine Months Ended June 30:
-------------------------
Buffalo 6,524 6,601 7,057 1.2 (6.5)
Erie 6,123 6,248 6,645 2.0 (6.0)
- -------------------------------------------------------------------------
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage
segment increased $3.1 million and $1.4 million, respectively, for the quarter
and nine months ended June 30, 1997, as compared with the same periods a year
ago. These increases resulted primarily from higher revenue related to unbundled
pipeline sales and open access transportation combined with lower O&M expense.
Pretax operating income for the nine months ended June 1996 was favorably
impacted by the recording in March 1996 of a retroactive rate
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
increase for the period of June 1, 1995 to September 30, 1995 which was recorded
in March 1996. This retroactive rate increase stemmed from the February 1996
Federal Energy Regulatory Commission (FERC) approval of Supply Corporation's
rate case.
While transportation volumes in this segment decreased 0.2 billion
cubic feet (Bcf) and 23.0 Bcf, respectively, for the quarter and nine months
ended June 30, 1997, the decrease in volumes did not have a significant impact
on earnings as a result of Supply Corporation's straight fixed-variable (SFV)
rate design.
Early Retirement Offer.
In May 1997, the Company made an early retirement offer to its
Pennsylvania operating employees' union in both Distribution Corporation and
Supply Corporation. Of the 90 people eligible, 58 accepted. The early retirement
offer will result in a charge to earnings of approximately $1.4 million in the
fourth quarter of fiscal 1997.
On August 1, 1997, the Company made an early retirement offer to its
New York clerical employees' union in both Distribution Corporation and Supply
Corporation (120 eligible employees). Eligible employees, who must be at least
50 years old with 5 years of service, must make their decision regarding this
offer by September 15, 1997. If accepted, retirement would be effective October
1, 1997. The Company also offered the New York clerical employees' union a
severance package which, if accepted, would be effective October 1, 1997. The
severance package is available to all New York clerical employees. Such
employees must make their decision regarding this severance offer by September
15, 1997.
Exploration and Production.
Operating income before income taxes for the Exploration and Production
segment decreased $4.3 million for the quarter ended June 30, 1997, compared
with the same period a year ago, mainly because of lower oil and gas revenues.
Lower prices for both oil and natural gas and a 5.1% decline in total production
from 13.1 Bcf equivalent to 12.4 Bcf equivalent resulted in this revenue
decrease. The decline in production reflects the decline in production of
onshore horizontal wells and a reduced working interest from Vermilion 252,
which resulted from the early payout on that well. This short-term decline in
production is a direct result of the limited availability of drilling rigs due
to the renewed interest and activity offshore in the Gulf. However, Seneca has
since obtained the drilling rigs in order to increase production.
Operating income before income taxes for the Exploration and Production
segment decreased $2.2 million for the nine months ended June 30, 1997, compared
with the same period a year ago, mainly due to increased depletion, determined
under the unit of revenue depletion method, and other operating expenses, which
more than offset higher natural gas and oil revenues. Total production increased
from 36.3 Bcf equivalent to 37.0 Bcf equivalent. The decline in natural gas
production of 0.7 Bcf for the nine-month period was more than offset by
increased oil production of 245,000 bbls (1.4 Bcf equivalent). In addition,
weighted average prices received for natural gas and oil production increased
$0.33 per Mcf and $2.54 per bbl, respectively.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The fluctuation in prices denoted above does not reflect gains and
losses from hedging activities. These hedging activities resulted in pretax
losses of $2.1 million and $18.1 million, respectively, for the quarter and nine
months ended June 30, 1997. For the quarter and nine months ended June 30, 1996,
hedging activities resulted in pretax losses of $4.3 million and $7.8 million,
respectively. Refer to further discussion of the Company's hedging activities
under "Financing Cash Flow" and in Note 4 - Derivative Financial Instruments.
PRODUCTION VOLUMES
Exploration and Production.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
Gas Production - (MMcf)
Gulf Coast 8,137 8,202 (0.8) 23,658 24,201 (2.2)
West Coast 293 242 21.1 844 747 13.0
Appalachia 1,246 1,350 (7.7) 3,820 4,107 (7.0)
----- ----- ------ ------
9,676 9,794 (1.2) 28,322 29,055 (2.5)
===== ===== ====== ======
Oil Production - (Thousands of Barrels)
Gulf Coast 327 397 (17.6) 1,073 805 33.3
West Coast 124 142 (12.7) 374 392 (4.6)
Appalachia 2 4 (50.0) 7 12 (41.7)
--- --- ----- ------
453 543 (16.6) 1,454 1,209 20.3
=== === ===== ======
WEIGHTED AVERAGE PRICES*
Exploration and Production.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
Weighted Avg. Gas Price/Mcf
Gulf Coast $2.19 $2.48 (11.7) $2.68 $2.35 14.0
West Coast $1.53 $1.25 22.4 $1.81 $1.21 49.6
Appalachia $2.30 $2.89 (20.4) $2.92 $2.63 11.0
Weighted Average Price $2.18 $2.50 (12.8) $2.69 $2.36 14.0
Weighted Avg. Oil Price/bbl
Gulf Coast $19.36 $20.87 (7.2) $22.16 $19.81 11.9
West Coast $16.79 $18.68 (10.1) $19.21 $16.95 13.3
Appalachia $19.61 $20.22 (3.0) $22.03 $18.07 21.9
Weighted Average Price $18.66 $20.29 (8.0) $21.40 $18.86 13.5
* Weighted average prices do not reflect gains or losses from hedging
activities.
Other Nonregulated.
Operating income before income taxes for the Other Nonregulated
segment increased $1.1 million and $2.0 million, respectively, for the quarter
and nine months ended June 30, 1997, compared with the same periods a year
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
ago. The increases are primarily attributable to developments with Horizon. In
the quarter ended December 31, 1996, Horizon dissolved the partnership known as
Sceptre Power Company, the partnership principally engaged in the development of
foreign electric power projects. As a result of this dissolution, Horizon
experienced a reduction in operating costs during the quarter ended June 30,
1997 as compared with the same period a year ago. This reduction in operating
costs included approximately $0.6 million of development costs incurred in the
third quarter of fiscal 1996 related to a power project in Pakistan (Kabirwala
Project). Horizon subsequently withdrew from participation in the Kabirwala
Project during the fourth quarter of fiscal 1996 and sold its rights in that
project during the quarter ended March 31, 1997. For the nine months ended June
30, 1997, operating income before income taxes for the Other Nonregulated
segment reflects the benefit of the sale of the Kabirwala Project, which has
amounted to $2.8 million, including cash proceeds and the assumption of certain
liabilities by the purchaser. Furthermore, the nine months ended June 30, 1996
included approximately $3.2 million of development costs associated with the
Kabirwala Project which did not recur in the nine months ended June 30, 1997.
For both the quarter and nine months ended June 30, 1997, an increase in
depletion expense in this segment's timber operations related to cutting timber
with a higher cost partly offset the contribution associated with Horizon's
activities.
Income Taxes.
Income taxes increased $3.6 million and $7.5 million, respectively, for
the quarter and nine months ended June 30, 1997, mainly because of an increase
in pretax income.
Interest Charges.
Total interest charges increased $100,000 for the quarter ended June
30, 1996, compared with the same period a year ago: other interest increased
$300,000 and interest on long-term debt decreased $200,000. The increase in
other interest primarily reflects a higher average amount of short-term
borrowings. The decrease in interest on long-term debt is primarily attributable
to a lower average amount of long-term debt offset partly by a higher average
interest rate. The lower average amount of long-term debt can be attributed
primarily to the September 1996 retirement of $30.0 million of 4.53% medium-term
notes.
For the nine months ended June 30, 1997, total interest charges
decreased $1.0 million: other interest decreased $1.3 million and interest on
long-term debt increased $0.3 million. The decrease in other interest primarily
reflects lower interest expense on Amounts Payable to Customers. The increase in
interest on long-term debt is primarily attributable to a higher average amount
of long-term debt offset partly by a lower average interest rate. The higher
average amount of long-term debt can be attributed primarily to the issuance of
$100.0 million of 5.58% medium-term notes in March 1996 offset partly by the
December 1995 retirement of $20.0 million and $38.5 million of 8.875% and 8.9%
medium-term notes, respectively, and the September 1996 retirement of $30.0
million of 4.53% medium-term notes.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the nine-month period
consisted of cash provided by operating activities, long-term debt, and
short-term bank loans and commercial paper. These sources were supplemented by
issuances of common stock under the Company's Customer Stock Purchase Plan,
Dividend Reinvestment Plan and section 401(k) Plans, and stock option and stock
award plans. Effective March 1, 1997, the Company's Customer Stock Purchase
Plan, Dividend Reinvestment Plan and section 401(k) Plans began purchasing
shares of Company common stock on the open market.
Operating Cash Flow
Internally generated cash from operating activities consists of net
income available for common stock, adjusted for noncash expenses, noncash income
and changes in operating assets and liabilities. Noncash items include
depreciation, depletion and amortization, deferred income taxes and allowance
for funds used during construction.
Cash provided by operating activities in the Utility and the Pipeline
and Storage segments may vary substantially from period to period because of the
impact of rate cases. In the Utility segment, supplier refunds, over- or
under-recovered purchased gas costs and weather also significantly impact cash
flow. The Company considers supplier refunds and over-recovered purchased gas
costs as a substitute for short-term borrowings. The impact of weather on cash
flow is tempered in the Utility segment's New York rate jurisdiction by its WNC
and in the Pipeline and Storage segment by Supply Corporation's SFV rate design.
Because of the seasonal nature of the Company's heating business,
revenues are relatively high during the nine months ended June 30 and
receivables historically increase from September to June because of winter
weather.
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 last-in, first-out
(LIFO) method, the current cost of replacing gas withdrawn from storage is
recorded in the Consolidated Statement of Income and a reserve for gas
replacement is recorded in the Consolidated Balance Sheet and is included under
the caption "Other Accruals and Current Liabilities." Such reserve is reduced as
the inventory is replenished.
Net cash provided by operating activities totaled $270.8 million for
the nine months ended June 30, 1997, an increase of $92.1 million compared with
$178.7 million provided by operating activities for the nine months ended June
30, 1996. The majority of this increase occurred in the Utility segment as a
result of an increase in cash receipts from gas sales and transportation
service, a net increase in cash received as refunds from upstream pipelines, and
lower O&M costs.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Investing Cash Flow
Capital Expenditures
- --------------------
The Company's cash outlay for capital expenditures totaled $134.3
million during the nine months ended June 30, 1997. Noncash capital expenditures
totaled $12.3 million in the Other Nonregulated segment and related to Seneca's
issuance of long-term notes to third parties in exchange for land and timber.
For further discussion, refer to Note 3 - Capitalization. Total capital
expenditures of $146.6 million for the nine-month period represent 68.5% of the
total current capital expenditure budget for fiscal 1997 of $214.0 million.
The following table presents capital expenditures for the nine months
ended June 30, 1997, by business segment:
(in thousands)
--------------
Utility $47,183
Pipeline and Storage 11,898
Exploration and Production 71,303
Other Nonregulated 16,216
--------
$146,600
========
The bulk of the Utility segment's capital expenditures were made for
replacement of mains and main extensions, as well as for the replacement of
service lines and, to a minor extent, the installation of new services.
The bulk of the Pipeline and Storage segment's capital expenditures
were made for additions, improvements and replacements to this segment's
transmission and storage systems. In July 1997, Supply Corporation received FERC
approval for its 1997 Niagara Expansion Project (1997 Expansion). The FERC order
allows for construction to provide service to shippers for 25,000 Dekatherms
(Dth) per day, but the FERC order did not approve the requested rate design.
Negotiations are under way with the shippers to revise the contracts. Pending
the results of these negotiations, Supply Corporation will either accept the
FERC order or amend its application.1
With respect to the 1998 Niagara Expansion Project (1998 Expansion),
Supply Corporation holds a precedent agreement for 23,000 Dth per day that is
affected by the recent FERC order on rate design for the 1997 Niagara Expansion
Project. Supply Corporation is currently evaluating its options for providing
service under an acceptable rate structure for the 1998 Expansion.
As for the proposed 1999 Niagara Expansion Project (1999 Expansion), as
a result of a recently completed Open Season, service requests for 396,000 Dth
per day of capacity have been received and precedent agreements are being
tendered. These precedent agreements will be contingent upon the shipper's
receipt of upstream pipeline capacity on TransCanada PipeLine. While the 1999
Expansion still remains uncertain at this point in time, Supply Corporation
still plans to file with the FERC in the fall of 1997, with FERC certification
expected to be received by the fall of 1998.1
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
No amount has been included in the budget for either the 1998 Expansion
or the 1999 Expansion as the timing of the "go ahead" for these projects will
depend on several factors, including FERC approval.1
On June 30, 1997, Supply Corporation announced its intention to join as
an equal partner in the Independence Pipeline Project, which is designed to
bring gas from Defiance, Ohio to Leidy, Pennsylvania and is projected to cost
$630 million.1 The Independence Pipeline as filed with the FERC will consist of
approximately 370 miles of 36-inch diameter pipe with an initial capacity of
approximately 900 MMcf per day. Supply Corporation is in the process of
negotiating the partnership agreements with ANR Pipeline Company and
Transcontinental Gas Pipe Line Corporation. There is the possibility of adding
one or more partners to this project.
The Exploration and Production segment spent approximately $60.2
million on its offshore program in the Gulf of Mexico during the nine months
ended June 30, 1997, including offshore drilling expenditures, geological
expenditures and lease acquisitions. Offshore exploratory and development
drilling was concentrated on Ship Shoal 258, West Cameron 182, High Island 194,
Galveston 210, Galveston 316, Main Pass 256 and Main Pass 257. Offshore lease
aquisitions included South Marsh Island 122, Mustang Island 796 and 818 in Texas
state waters and Eugene Island 9 in Louisiana state waters.
Approximately $11.1 million was spent on the Exploration and Production
segment's onshore program during the nine months ended June 30, 1997, including
horizontal onshore drilling in central Texas and developmental drilling in
California.
Other Nonregulated capital expenditures consisted primarily of
timberland purchases.
The Company's capital expenditure program is under continuous review.
The amounts are subject to modification for opportunities in the natural gas
industry such as the acquisition of attractive oil and gas properties and the
expansion of storage facilities and transmission line capacities. While the
majority of capital expenditures in the Utility segment are necessitated by the
continued need for replacement and upgrading of mains and service lines, the
magnitude of future capital expenditures in the Company's other business
segments depends, to a large degree, upon market conditions. 1
Other
- -----
In November 1996, Supply Corporation entered into a Memorandum of
Understanding (the MOU) with Green Canyon Gathering Company (Green Canyon), a
subsidiary of El Paso Energy, regarding a project to develop, construct,
finance, own and operate natural gas gathering and processing facilities
offshore and onshore Louisiana (the Project). The total cost of the Project is
estimated at approximately $200 million.1 The MOU provides for the parties to
(i) share equally past and future development costs for the Project through
December 31, 1997, and thereafter as agreed by the parties, (ii) negotiate
toward definitive agreements to be signed about December 31, 1997, to form one
or more 50%/50% partnerships, and (iii) negotiate toward definitive agreements
to finance, develop, build, own and operate the Project. The original date
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
established for signing of the definitive agreements discussed above was January
1, 1997. The date has since been changed to June 1, 1997 and subsequently to
December 31, 1997 because the parties concluded that the prospective customers
of the Project (offshore gas producers) will not be ready to use the natural gas
gathering and processing facilities in 1997. Such prospective customers are more
likely to use the Project facilities in 1998 or 1999.1
The FERC ruled in March 1997 that most of the Project would be
jurisdictional, so the parties are preparing the necessary regulatory filings
seeking authorization to construct facilities and place them in service in 1998
if justified by demand at that time. If the definitive agreements are not
executed, or if the Project is not constructed, Supply Corporation's share of
the past and future development costs through June 1, 1997 is estimated to not
exceed $2 million, for which it is unlikely Supply Corporation would be
reimbursed.1 As of June 30, 1997, Supply Corporation has paid approximately $0.9
million of such development costs. These costs are recorded in Deferred Charges
on the Consolidated Balance Sheet at June 30, 1997. Supply Corporation is
currently using short-term borrowings to finance the development costs of the
Project.
International Investments
- -------------------------
In April 1997, Horizon's wholly owned subsidiary, Beheer-En
Beleggingsmaatschappij Bruwabel, B.V. (Bruwabel), acquired a 34% interest in
Severoceske Teplarny, a.s., (SCT). SCT is a power and heating utility located in
the northern part of the Czech Republic. Bruwabel paid $21.6 million, including
legal and finders fees, for its equity interest. There is a Stock Option
Agreement whereby SCT may acquire an additional 34% equity interest in SCT.
Management has adopted the equity method to account for this investment.
Financing Cash Flow
Consolidated short-term debt decreased by $67.6 million during the
first nine months of fiscal 1997. The Company considers short-term bank loans
and commercial paper important sources of cash for temporarily financing capital
expenditures, gas in storage inventory, unrecovered purchased gas costs,
exploration and development expenditures and other working capital needs. In
addition, the Company considers supplier refunds and over-recovered purchased
gas costs as a substitute for short-term debt. Fluctuations in these items can
have a significant impact on the amount and timing of short-term debt.
The Company's present liquidity position is believed to be adequate to
satisfy known demands.1 Under the Company's covenants contained in its indenture
covering long-term debt, at June 30, 1997, the Company would have been permitted
to issue up to a maximum of $704.0 million in additional long-term unsecured
indebtedness, in light of then current long-term interest rates. In addition, at
June 30, 1997, the Company had regulatory authorizations and unused short-term
credit lines that would have permitted it to borrow an additional $467.9 million
of short-term debt.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The Company currently has authorization from the Securities and
Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935,
as amended, to issue and sell up to $150.0 million of debentures and/or medium
term notes. The amounts and timing of the issuance and sale of these debentures
and/or medium-term notes will depend on market conditions and the requirements
of the Company.1
The Company, through Seneca, is engaged in certain price swap
agreements as a means of managing a portion of the market risk associated with
fluctuations in the market price of natural gas and crude oil. These price swap
agreements are not held for trading purposes. During the quarter ended June 30,
1997, Seneca utilized natural gas and crude oil price swap agreements with
notional amounts of 6.3 equivalent Bcf and 360,500 equivalent bbl, respectively.
These hedging activities resulted in the recognition of a pretax loss of
approximately $2.1 million. For the nine months ended June 30, 1997, Seneca
utilized natural gas and crude oil price swap agreements with notional amounts
of 18.7 equivalent Bcf and 1,030,500 equivalent bbl, respectively. These hedging
activities resulted in the recognition of a pretax loss of approximately $18.1
million. These losses were offset by higher prices received for actual natural
gas and crude oil production.
At June 30, 1997, Seneca had natural gas price swap agreements
outstanding with a notional amount of 36.4 equivalent Bcf at prices ranging from
$1.77 per Mcf to $2.55 per Mcf. The weighted average fixed price of these swap
agreements is approximately $2.08 per Mcf. Seneca also had crude oil price swap
agreements outstanding at June 30, 1997 with a notional amount of 992,000
equivalent bbl at prices ranging from $17.40 per bbl to $19.30 per bbl. The
weighted average fixed price of these swap agreements is approximately $18.20
per bbl. In addition, the Company has SEC authority to enter into certain
interest rate swap agreements. For further discussion, refer to Note 4 -
Derivative Financial Instruments.
The Company is involved in litigation arising in the normal course of
business. The Company is involved in regulatory matters arising in the normal
course of business that involve rate base, cost of service and purchased gas
cost issues, among other things. While the resolution of such litigation or
regulatory matters could have a material effect on earnings and cash flows, in
the year of resolution, none of this litigation and none of these regulatory
matters are expected to materially change the Company's present liquidity
position, nor have a material adverse effect on the financial condition of the
Company at this time.1
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
RATE MATTERS
Utility
New York Jurisdiction
- ---------------------
In November 1995, Distribution Corporation filed in its New York
jurisdiction a request for an annual base rate increase of $28.9 million with a
requested return on equity of 11.5%. A two-year settlement with the parties in
this rate proceeding was approved by the Public Service Commission of the State
of New York (PSC). Effective October 1, 1996, Distribution Corporation received
an annual base rate increase of $7.2 million. The settlement calls for an
additional annual base rate increase of $7.2 million on October 1, 1997.
Distribution Corporation will be filing tariff amendments no later than August
15, 1997 designed to provide for such additional increase. The settlement did
not specify a rate of return on equity. Generally, earnings above a 12% return
on equity (excluding certain items and determined on a cumulative basis over the
three years ending September 30, 1998) will be shared equally between
shareholders and ratepayers. However, the settlement includes a number of
incentives which could impact return on equity. Distribution Corporation may
earn a maximum of 25 basis points or incur a penalty of 50 basis points on
common equity based on its customer service. The incentives relate to customer
satisfaction, customer complaints, appointments, new service installations,
telephone response, adjusted bills and estimated meter readings. In addition,
there is a gas cost incentive mechanism designed to compare Distribution's spot
gas purchases to monthly gas cost targets. Certain costs above the targets and
savings below the targets will be shared equally between Distribution
Corporation and its customers.
On June 5, 1997, the PSC issued an order requiring jurisdictional
utilities to file plans to offer customers a fixed price service option for the
coming winter heating season. The order also directs the utilities to submit
proposals for increased supply diversity with a view toward fostering price
stability. On August 1, 1997, Distribution Corporation filed in its New York
jurisdiction a plan to comply with the PSC's order. The plan would allow
customers to choose a yet-to-be determined, fixed unit gas cost rate to help
minimize gas price fluctuations like those experienced last winter. Distribution
Corporation is currently in the process of locking in commodity prices for about
30% to 35% of the New York jurisdiction's planned purchases during the period of
November 1997 through March 1998. Other components of customers rates will
remain unchanged.
Pennsylvania Jurisdiction
- -------------------------
Distribution Corporation currently does not have a rate case on file
with the Pennsylvania Public Utility Commission (PaPUC). Management will
continue to monitor its financial position in the Pennsylvania jurisdiction to
determine the necessity of filing a rate case in the future.
On April 2, 1997, Distribution Corporation filed a proposal for a
customer choice pilot program, called Energy Select, with the PaPUC. The PaPUC
approved Energy Select on June 12, 1997. Enrollments are currently under way and
will continue through August 22, 1997 with service commencing on October 1,
1997. Energy Select, which will last one and one-half years, allows
approximately 19,000 small commercial and residential customers of
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Distribution Corporation in Sharon, Farrell, Hermitage, Sharpsville, Shenango,
West Middlesex and Wheatland, Pennsylvania, to purchase gas supplies from
qualified, participating non-utility suppliers (or marketers) of gas. Under
Energy Select, Distribution Corporation will continue to deliver the gas to the
customer's home or business and will remain responsible for reading customer
meters, the safety and maintenance of its pipeline system and responding to gas
emergencies. The Company's marketing affiliate, NFR, has been approved to
participate in Energy Select.
General rate increases 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
regulatory authorities having jurisdiction.
Pipeline and Storage. On October 31, 1994, Supply Corporation filed for an
annual rate increase of $21.0 million, with a requested return on equity of
12.6%. In February 1996, the FERC approved a settlement authorizing an annual
rate increase of approximately $6.0 million with a return on equity of 11.3%.
The new rates were put into effect on April 1, 1996, retroactive to June 1,
1995. With this settlement, Supply Corporation agreed not to seek recovery for
increased cost of service until April 1, 1998. Supply Corporation also agreed
not to seek recovery of revenues related to certain terminated service from
storage customers until April 1, 2000, as long as the terminations were not
greater than approximately 30% of the terminable service. Management has been
successful in marketing and obtaining executed contracts for such terminated
storage service and does not anticipate a problem in obtaining executed
contracts for additional terminated storage service as it arises.1
A Stipulation and Agreement approved by the FERC in February 1996
permits Supply Corporation to fully recover its net investment in production and
gathering plant, as well as its production and gathering cost of service.
OTHER MATTERS
Environmental Matters. The Company is subject to various federal, state and
local laws and regulations relating to the protection of the environment. The
Company has established procedures for on-going evaluation of its operations to
identify potential environmental exposures and assure compliance with regulatory
policies and procedures.
It is the Company's policy to accrue estimated environmental clean-up
costs when such amounts can reasonably be estimated and it is probable that the
Company will be required to incur such costs. Distribution Corporation has
estimated that clean-up costs related to several former manufactured gas plant
sites and several other waste disposal sites are in the range of $9.2 million to
$9.8 million.1 At June 30, 1997, Distribution Corporation has recorded the
minimum liability of $9.2 million. The ultimate cost to Distribution Corporation
with respect to the remediation of these sites will depend on such factors as
the remediation plan selected, the extent of the site contamination, the number
of additional potentially responsible parties at each site and the portion, if
any, attributed to Distribution Corporation.1 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
In New York and Pennsylvania, Distribution Corporation is recovering
site investigation and remediation costs in rates. For further discussion, see
disclosure in Note H - Commitments and Contingencies under the heading
"Environmental Matters" in Item 8 of the Company's 1996 Form 10-K.
New Accounting Pronouncements. During the nine months ended June 30, 1997, the
Financial Accounting Standards Board has issued three new accounting
pronouncements that will impact the Company: Statement of Financial Accounting
Standards No. 128, "Earnings per Share"; SFAS 130, "Reporting Comprehensive
Income"; and SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information." For further discussion, refer to Note 1 Summary of Significant
Accounting Policies.
Year 2000. As the millennium approaches, the Company is preparing all of its
computer systems to be Year 2000 compliant. Management is in the process of
finalizing a comprehensive review of its computer systems to identify the
systems that could be affected and is developing a conversion plan to resolve
the issue. The cost of upgrading systems will be expensed as incurred.
Management does not believe that these costs will materially impact the
Company's results of operations or financial condition.1
Safe Harbor for Forward-Looking Statements. The Company is including the
following cautionary statement in this Form 10-Q to make applicable and take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by, or on behalf of,
the Company. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts. From time to time, the Company may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of the
Company, are also expressly qualified by these cautionary statements. Certain
statements contained herein, including those which are designated with a "1",
are forward-looking statements and accordingly involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based, in
turn, upon further assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including, without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties. There can be no assurance, however, 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 statement:
1. Changes in economic conditions, demographic patterns and weather
conditions
2. Changes in the availability and/or price of natural gas and oil
3. Inability to obtain new customers or retain existing ones
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
4. Significant changes in competitive factors affecting the Company
5. Governmental/regulatory actions and initiatives, including those
affecting financings, allowed rates of return, industry and rate
structure, franchise renewal, and environmental/safety requirements
6. Unanticipated impacts of restructuring initiatives in the natural gas and
electric industries
7. Significant changes from expectations in actual capital expenditures and
operating expenses and unanticipated project delays
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments
9. Ability to successfully identify and finance oil and gas property
acquisitions and ability to operate existing and any subsequently
acquired properties
10. Ability to successfully identify, drill for and produce economically
viable natural gas and oil reserves
11. Changes in the availability and/or price of derivative financial
instruments
12. Inability of the various counterparties to meet their obligations with
respect to the Company's financial instruments
13. Regarding foreign operations - changes in foreign trade and monetary
policies, laws and regulations related to foreign operations, political
and governmental changes, inflation and exchange rates, taxes and
operating conditions
14. Significant changes in tax rates or policies or in rates of inflation or
interest
15. Significant changes in the Company's relationship with its employees and
the potential adverse effects if labor disputes or grievances were to
occur
16. Changes in accounting principles and/or the application of such
principles to the Company
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
- -------------------------------------------------------------------
Currently Not Applicable.
<PAGE>
Part II. Other Information
- ---------------------------
Item 2. Changes in Securities
- ------------------------------
On April 1, 1997, the Company issued 700 unregistered shares of Company
common stock to the seven non-employee directors of the Company, 100 shares to
each such director. These shares were issued as partial consideration for the
directors' service as directors during the quarter ended June 30, 1997, pursuant
to the Company's Retainer Policy for Non-Employee Directors.
These transactions were exempt from registration by Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving any public
offering.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
(10) National Fuel Gas Company Tophat Plan, dated
March 20, 1997.
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended June 30, 1997 and the
fiscal years ended September 30, 1992
through 1996.
(27) Financial Data Schedule
(99) National Fuel Gas Company Consolidated
Statement of Income for the Twelve Months
Ended June 30, 1997 and 1996.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
-------------------------
(Registrant)
/s/Joseph P. Pawlowski
-------------------------------
Joseph P. Pawlowski
Treasurer and
Principal Accounting Officer
Date: August 6, 1997
--------------
<PAGE>
EXHIBIT INDEX
(Form 10Q)
Exhibit 10 National Fuel Gas Company Tophat Plan, dated
March 20, 1997
Exhibit 12 Ratio of Earnings to Fixed Charges for the Twelve
Months Ended June 30, 1997 and the Fiscal Year Ended
September 30, 1992 through 1996
Exhibit 27 Summary Financial Information Extracted from
National Fuel Gas Company's Consolidated Financial
Statements Nine Months ending June 30, 1997
Exhibit 27-2 Summary Financial Information Extracted from National
Fuel Gas Company's Consolidated Financial Statements
Nine Months ending June 30, 1996
Exhibit 99 Consolidated Statement of Income of National Fuel Gas
Company for the Twelve Months Ended June 30, 1997
and June 30, 1996
NATIONAL FUEL GAS COMPANY
TOPHAT PLAN
Effective March 20, 1997
<PAGE>
NATIONAL FUEL GAS COMPANY
TOPHAT PLAN
Table of Contents
-----------------
Page
----
Preamble................................................................ 1
Article 1 - Definitions
1.1 Base Salary..................................................... 2
1.2 Beneficiary..................................................... 2
1.3 Code............................................................ 2
1.4 Committee....................................................... 2
1.5 Company......................................................... 2
1.6 DCP Plan........................................................ 2
1.7 Employer........................................................ 2
1.8 ERP............................................................. 2
1.9 Legal Limits.................................................... 2
1.10 Maximum Matching Contribution Percentage......................... 3
1.11 Participant...................................................... 3
1.12 Plan............................................................. 3
1.13 Plan Year........................................................ 3
1.14 Retirement and Retire............................................ 3
1.15 Retirement Benefit Date.......................................... 3
1.16 Retirement Plan.................................................. 3
1.17 TDSP............................................................. 4
1.18 Termination of Employment........................................ 4
Article 2 - Benefits Provided
2.1 Coordination With Other Benefits................................. 5
2.2 TDSP-Related Tophat Benefits..................................... 5
(a) Match of DCP Plan Deferrals............................... 5
(b) Match on Legally Restricted Contributions................. 5
(c) Example................................................... 6
2.3 Retirement Plan-Related Tophat Benefits.......................... 7
(a) Tophat.................................................... 7
(b) Example................................................... 7
Article 3 - Participants' Termination of Employment
3.1 TDSP-Related Tophat Benefits...................................... 9
(a) Termination................................................ 9
(b) Death...................................................... 9
3.2 Retirement Plan-Related Tophat Benefits........................... 9
(a) Termination................................................ 9
(b) Retirement................................................. 9
(c) Death...................................................... 9
<PAGE>
Article 4 - Beneficiary Designation
4.1 Beneficiary Designation...........................................11
4.2 Change of Beneficiary Designation.................................11
4.3 No Beneficiary Designation........................................11
4.4 Effect of Payment.................................................11
Article 5 - Termination and Modification
5.1 Termination and Amendment.........................................12
5.2 Limited Power of President to Amend Plan.........................12
Article 6 - Administration
6.1 Committee Duties..................................................13
6.2 Agents............................................................13
6.3 Binding Effect of Decisions.......................................13
6.4 Indemnity of Committee............................................13
Article 7 - Miscellaneous
7.1 Unsecured General Creditor........................................14
7.2 Nonassignability..................................................14
7.3 Not a Contract of Employment......................................14
7.4 Health Information................................................14
7.5 Governing Law.....................................................14
7.6 Withholding.......................................................14
7.7 Binding Effect....................................................15
7.8 Borrowing.........................................................15
7.9 Validity..........................................................15
7.10 Incapacity of Person Entitled to Payment..........................15
7.11 Captions..........................................................15
7.12 Construction......................................................15
<PAGE>
NATIONAL FUEL GAS COMPANY
TOPHAT PLAN
Preamble
--------
National Fuel Gas Company has adopted the National Fuel Gas
Company Tophat Plan ("Plan") to help attract and retain high caliber employees
in high-level management positions, to provide such employees with a tax-favored
vehicle to accumulate assets and to enhance retirement benefits, to restore
benefits lost to employees under the TDSP as a result of their participation in
the DCP Plan or as a result of the effect of Legal Limits upon their receipt of
Company matching contributions in the TDSP, and to restore benefits lost to
employees under the Retirement Plan as a result of their participation in the
DCP Plan (with respect to persons not eligible for the ERP). Notwithstanding the
above, the only employees eligible to receive benefits under this Plan are
highly-compensated employees as defined by the Internal Revenue Code and its
corresponding regulations, as the same may be amended from time to time.
The tophat benefits provided by this Plan were previously
contained within the DCP Plan. These tophat benefits have now been segregated
into this separate Plan document, in part because federal legislation enacted in
1996 (which limits the ability of states to impose a source tax on retirement
benefits earned within such states) may penalize employees unless the provisions
authorizing tophat benefits are reflected in a separate plan, and in part to
more fully and accurately describe the tophat benefits.
<PAGE>
ARTICLE 1
Definitions
-----------
For purposes hereof, unless otherwise clearly apparent from
the context, the following phrases or terms shall have the following indicated
meanings:
1.1 "Base Salary" shall mean gross cash compensation per regular
payroll period, including salary continuation payments made by
an Employer on account of sickness or accident, which are paid
to a Participant for employment services rendered to an
Employer, before reduction for compensation deferred pursuant to
the National Fuel Gas Company Deferred Compensation Plan or
pursuant to the National Fuel Gas Company Tax-Deferred Savings
Plan for Non-Union Employees, and shall also include payments
made to a participant pursuant to the Company's Annual At Risk
Compensation Incentive Program or a successor plan thereto (but
only with respect to TDSP-Related Tophat Benefits), but shall
exclude all other fees, bonuses, commissions, special, extra or
nonperiodic compensation in any form.
1.2 "Beneficiary" shall mean the person, persons, or entity
designated by the Participant to receive any benefits payable
under this Plan upon the death of a Participant.
1.3 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.4 "Committee" shall mean the committee appointed to manage and
administer the Plan in accordance with its provisions of Article
6.
1.5 "Company" shall mean National Fuel Gas Company and all successor
companies thereto.
1.6 "DCP Plan" shall mean the National Fuel Gas Company Deferred
Compensation Plan, as amended from time to time or any successor
thereto.
1.7 "Employer" shall mean the Company and each of its subsidiaries
which has one or more eligible employees who have been selected
to participate in the Plan.
1.8 "ERP" shall mean the National Fuel Gas Company and Participating
Subsidiaries Executive Retirement Plan, as amended from time to
time or any successor thereto.
1.9 "Legal Limits" shall mean (i) the provisions of the Retirement
Plan and applicable section(s) of the Code that prevent the
Retirement Plan from including, in calculating "Final Average
Pay," compensation deferred pursuant to the DCP Plan, (ii) the
maximum amount of annual compensation of an employee that may be
taken into account under the Retirement Plan in accordance with
Section 401(a)(17) of the Code, as amended and supplemented, and
the implementing provisions of the Retirement Plan, but only
with respect to Participants who are not members under the ERP,
(iii) the annual limits imposed by Sections 401(k)(3),
<PAGE>
401(a)(17), 402(g) or 415 of the Code, or a successor to any
such sections, and/or (iv) the corresponding requirements of the
Employment Retirement Income Security Act of 1974, as amended
("ERISA"), respecting the Retirement Plan and respecting
deferrals under and employer matching contributions to the TDSP.
1.10 "Maximum Matching Contribution Percentage" shall mean the
maximum employer matching contribution percentage to which a
Participant would be entitled under the TDSP.
1.11 "Participant" shall mean any person currently or formerly in the
regular full-time employment of an Employer,
(a) (i) who was made eligible to defer compensation under
the DCP Plan by the President of the Company or is
eligible to participate in the TDSP; (ii) who has
deferred compensation under one or both of such
Plans; (iii) who has lost benefits under the TDSP as
a result of Legal Limits; and (iv) whose Accounts
have not been completely distributed to him or her;
or
(b) (i) who has vested in his or her benefits under the
Retirement Plan; (ii) who has lost benefits under the
Retirement Plan as a result of Legal Limits; (iii)
whose Retirement Plan benefits have not been
completely distributed to him or her; and (iv) who is
not a member under the ERP.
1.12 "Plan" shall mean the National Fuel Gas Company Tophat Plan, as
amended from time to time.
1.13 "Plan Year" shall mean the 12 consecutive month period
commencing on August 1 and ending on the next following July 31.
1.14 "Retirement" and "Retire" shall mean severance from employment
with the Employer at or after the attainment of age fifty-five
(55), or prior thereto pursuant to the disability retirement
provisions of the National Fuel Gas Company Retirement Plan
("Retirement Plan").
1.15 "Retirement Benefit Date" shall mean the date at which the
Retired Participant has commenced retirement under the
Retirement Plan or a successor plan thereto; i.e., the date as
of which he or she first receives retirement benefits.
1.16 "Retirement Plan" shall mean the National Fuel Gas Company
Retirement Plan, as amended from time to time or any successor
thereto.
<PAGE>
1.17 "TDSP" shall mean the National Fuel Gas Company Tax-Deferred
Savings Plan for Non-Union Employees, as it may be amended from
time to time or any successor thereto.
1.18 "Termination of Employment" shall mean the cessation of
employment with the Company, voluntarily or involuntarily, for
any reason other than Retirement.
<PAGE>
ARTICLE 2
Benefits Provided
-----------------
2.1 Coordination With Other Benefits. The benefits provided for a
Participant under the Plan are in addition to any other benefits
to which the Participant may be entitled under any other plan or
program of the Employer. This Plan shall supplement and shall
not supersede, modify, amend, enhance or diminish any other such
plan or program except as may otherwise be expressly provided.
2.2 TDSP-Related Tophat Benefits. In order to restore to Plan
Participants benefits under the TDSP that are lost as a result
of the Legal Limits as they affect the TDSP, the Plan provides
for the following benefits, commonly known as "tophats":
(a) Match of DCP Plan Deferrals.
---------------------------
Each Participant who has elected a deferral
percentage under the TDSP that otherwise would be
sufficient to entitle him or her to receive the
Maximum Matching Contribution Percentage under the
TDSP and who defers under the DCP Plan compensation
otherwise payable with respect to one or more pay
periods in a DCP Plan Year shall be credited with an
additional amount equal to the Participant's Maximum
Matching Contribution Percentage (as determined under
the TDSP) for each such pay period times the
Participant's Base Salary actually deferred under the
DCP Plan with respect to each such pay period,
adjusted as of the end of the DCP Plan Year to
reflect the change in value of his or her TDSP
accounts had such amounts been actually contributed
as additional employer matching contributions to the
TDSP. If a Participant elects a deferral percentage
under the TDSP that permits him or her to receive
less than the Maximum Matching Contribution
Percentage, the applicable matching contribution
percentage received under the TDSP shall instead be
used in the manner described above to determine the
amount credited to the Participant.
(b) Match on Legally Restricted Contributions.
-----------------------------------------
(i) Each Participant who has elected a deferral
percentage under the TDSP that otherwise
would be sufficient to entitle him or her to
receive the Maximum Matching Contribution
Percentage under the TDSP and who is
prevented, as a result of Legal Limits from
making additional elective deferrals under
the TDSP and thus receiving the maximum
employer matching contribution to which he
or she would otherwise be entitled under the
TDSP, shall be credited with an additional
amount equal to the employer matching
contributions foregone (i.e., that would
have been received if additional elective
<PAGE>
deferrals under the TDSP not subject to such
legal limits could have been made). In
determining the employer matching
contribution forgone for purposes of this
clause, it shall be assumed that the TDSP
Maximum Matching Contribution Percentage
applies to Base Salary as defined in the
Plan, and that the legal limits would not
have permitted the application of such
percentage under the TDSP to any part of the
excess of Base Salary under this Plan over
Base Salary as defined in the TDSP with
respect to any Participant. However, this
paragraph when operated in conjunction with
paragraph (a) shall not result in a "double
tophat" respecting deferrals under the DCP
Plan.
(ii) The amount credited hereunder shall be
adjusted as of the end of the Plan Year to
reflect the change in value that the TDSP
accounts would have had, had such amounts
credited hereunder been actually contributed
as additional employer matching
contributions to the TDSP.
(iii) If a participant elects a deferral
percentage under the TDSP that is less than
the Maximum Matching Contribution
Percentage, the applicable matching
contribution percentage received under the
TDSP shall instead be used in the manner
described above to determine the amount
credited to the Participant.
(c) Example.
-------
This example shall illustrate how the "tophat"
provisions of this Section are to be applied. Assume
that a particular Plan participant's DCP Plan
deferral percentage for an entire calendar year is
10%, that his or her TDSP deferral percentage (salary
contribution percentage) is 7%, and that his or her
Maximum Matching Contribution Percentage under the
TDSP is 6%. Also assume that his or her Base Salary
as defined in the Plan for that calendar year is
$420,000 (i.e., $300,000 base annual pay plus
$120,000 paid under the Annual At Risk Compensation
Incentive Program), that his or her Base Salary as
defined in the TDSP for the same period is $270,000
($300,000 minus the 10% DCP Plan deferral) that the
Code ss.401(a)(17) limit for that year is $150,000,
that the Code ss.402(g) limit is $9,500 for that
year, and that the Code ss.401(k)(3) and ss.415
limits do not adversely affect the Plan participant
in this example. Also, assume that there are no
distortions caused by the operation of the DCP Plan
or this Plan on a Plan Year basis and the TDSP's use
of a calendar year.
Applying these assumptions, under Section 2.2(a), a
"tophat" is provided in the amount of 6% x (10% x
$420,000), or $2,520. Under Section 2.2(b), since the
<PAGE>
$9,500 per annum limit on permitted TDSP deferrals
would result in the participant receiving an $8,143
Maximum Matching Contribution, whereas he or she
should have received a total "tophat" under Section
2.2 of 6% x $420,000, or $25,200 minus the match
received under the TDSP, he or she should, at first
blush, receive $25,200 - $8,143, or $17,057 under
Section 2.2(b). However, he or she has already
received $2,520 by virtue of Section 2.2(a), and thus
should only receive $14,537 by virtue of Section
2.2(b), for a total tophat of $17,057, and a total
aggregate "employer matching contribution" of $25,200
($8,143 in the TDSP and $17,057 by virtue of these
"tophats".) In actuality, these tophat amounts will
be adjusted for changes in the value of Company
common stock, as further alluded to in this
paragraph.
As can be seen by this illustration, the tophats are
intended to make up for and not under- or
overcompensate for Participants' losses of Maximum
Matching Contribution Percentages caused by the
various Legal Limits applying to, and the Base Salary
definition of, the TDSP.
2.3 Retirement Plan-Related Tophat Benefits.
---------------------------------------
(a) Tophat.
------
Any loss of benefits to a Participant under the
Retirement Plan, which results from deferrals made
under the DCP Plan by the Participant, or otherwise
are due to the Legal Limits, shall be restored by the
Company, provided that such Participant is not also a
member of the ERP. This tophat will be paid to the
Participant in the same form as the annuity he or she
receives under the Retirement Plan.
(b) Example.
-------
An example of the Retirement Plan-related tophat
benefit is as follows: Assume that a Participant
eligible for this tophat retired in the year 2000, at
age 60. Assume that his or her "Final Average Salary"
under the Retirement Plan would have been $100,000,
had he or she not participated in the DCP Plan.
Assume further that, as a result of his or her
participation in the DCP Plan, his or her "Final
Average Salary" is reduced to $80,000. Assume further
that his or her Retirement Plan annuity (expressed as
a single life annuity) consequently is reduced from
$3,750/month to $3,000/month. This Participant will
then receive $750 per month for life under this
tophat (or shall receive such other amount as may be
actuarially equivalent thereto, as determined under
the Retirement Plan, to reflect such other form of
annuity as he or she may have selected under the
Retirement Plan).
2.4 Participants shall elect to receive the TDSP tophat entitlements
annually or at their Termination of Employment or Retirement.
<PAGE>
The Committee shall determine how and when such election shall
be made; provided that such election must be irrevocable and
made in advance of the tophat accrual.
2.5 Participants shall commence receipt of their Retirement
Plan-Related Tophat benefits upon their Retirement or at such
other times as may be established in Article IV.
2.6 The tophats shall be paid in the manner and under such terms and
conditions as shall be determined by the Committee and shall in
other respects also be administered by the Committee in
accordance with their intent.
<PAGE>
ARTICLE 3
Participants' Termination of Employment
---------------------------------------
3.1 TDSP-Related Tophat Benefits.
----------------------------
(a) Termination. If the Participant Retires or incurs a
Termination of Employment by means other than death,
such Participant shall receive a lump sum payment
equal to the value of his or her TDSP-Related Tophat
Benefit as of the date of such Termination of
Employment or Retirement, to be paid as soon as
reasonably practicable thereafter.
(b) Death. If the Participant incurs a Termination of
Employment by reason of death, his or her Beneficiary
shall receive a lump sum payment equal to the value
of the Participant's TDSP-Related Tophat Benefit as
of the date of such Termination of Employment, to be
paid as soon as reasonably practicable thereafter.
3.2 Retirement Plan-Related Tophat Benefits.
---------------------------------------
(a) Termination.
-----------
(i) If the Participant incurs a Termination of
Employment by means other than death, and the
Participant is not vested in his or her benefits
under the Retirement Plan, such Participant shall
receive no benefit under this Plan.
(ii)If the Participant incurs a Termination of
Employment by means other than death, is less
than 55 years old and is vested in his or her
benefits under the Retirement Plan, such
Participant shall receive a lump sum payment
equal to the value of his or her Retirement
Plan-Related Tophat Benefit as of the date of
such Termination. Such lump sum payment shall be
determined using a discount rate equal to the
then-current yield to maturity on 30-year
Treasury securities, or in such other manner as
the Committee reasonably determines.
(b) Retirement.
----------
When the Participant retires, he or she shall receive
his or her Retirement Plan-Related Tophat Benefit in
the same form (and with the same actuarial reduction,
as appropriate) as his or her benefit under the
Retirement Plan.
(c) Death.
-----
(i) If the Participant incurs a Termination of
Employment by reason of death, and the
Participant has no surviving spouse, no benefits
shall be paid with respect to the Participant
under this Plan.
<PAGE>
(ii)If the Participant incurs a Termination of
Employment by reason of death, and the
Participant has a surviving spouse, such
surviving spouse shall receive a benefit under
this Plan if and to the extent he or she receives
a spouse's benefit under the Retirement Plan and
deserves a Retirement Plan-Related Tophat Benefit
as a result of the operation of Legal Limits.
This Plan benefit shall be paid in the same form
as his or her surviving spouse's benefit under
the Retirement Plan.
<PAGE>
ARTICLE 4
Beneficiary Designation
-----------------------
4.1 Beneficiary Designation. Each Participant shall have the right,
at any time, to designate any person, persons or entity as his
or her primary and secondary Beneficiary or Beneficiaries.
4.2 Change of Beneficiary Designation. Any Beneficiary designation
may be changed by a Participant at any time by executing and
filing a form prescribed by the Committee. The filing of a new
Beneficiary designation form will cancel all Beneficiary
designations previously filed. The Committee shall be entitled
to rely on the last designation filed by the Participant prior
to his or her death. In addition, the Committee may provide that
the Beneficiary designation made under the DCP Plan and/or
Retirement Plan shall apply to the respective tophats that may
be provided under this Plan.
4.3 No Beneficiary Designation. If a Participant fails to designate
a Beneficiary as provided above, or if all designated
Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits, then the
Participant's designated Beneficiary shall be deemed to be the
surviving spouse. If the Participant has no surviving spouse,
the benefits remaining under the Plan shall be payable to the
Participant's personal representative, executor or administrator
of the Participant's estate.
4.4 Effect of Payment. The payment of benefits under the Plan to the
named Beneficiary shall completely discharge the Employer's
obligations under this Plan.
<PAGE>
ARTICLE 5
Termination and Modification
----------------------------
5.1 Termination and Amendment. The Company reserves the right to
terminate or amend the Plan in whole or in part at any time.
Such termination or amendment shall have a binding effect on
Participants and their Beneficiaries. Upon termination of the
Plan, the Participants' accounts shall be paid out at such time
and in such manner as the Committee deems appropriate.
5.2 Limited Power of President to Amend Plan. The President is
empowered to amend, restate or otherwise change the Plan (i) as
counsel may advise to be necessary or appropriate in order to
ensure that the Plan continues to operate as a plan of deferred
compensation for tax purposes, remains exempt from many of the
provisions of ERISA and otherwise continues to fulfill the
purposes for which the Plan was adopted and intended, (ii) as he
or she may deem necessary in order to make technical or
clarifying changes not inconsistent with or in order to fulfill
the purposes of the Plan, (iii) as counsel may advise to be
necessary to reflect new or revised Legal Limits, and (iv) in
other respects except as will materially increase the cost of
the Plan to the Company or its subsidiaries or the benefits of
the Plan to Participants.
<PAGE>
ARTICLE 6
Administration
--------------
6.1 Committee Duties. This Plan shall be administered by a
Committee, the members of which shall be appointed by the Board
of Directors of the Company. The Committee shall have the
authority to make, amend, interpret, and enforce all appropriate
rules, regulations, and procedures for the administration of
this Plan, and to decide or resolve any and all questions
including interpretations of this Plan, as may arise in
connection with the Plan. Members of the Committee who are
eligible to participate in the Plan may participate to the same
extent as other Participants but shall not take part in any
determination directly relating only to their own participation
or benefits.
6.2 Agents. In the administration of this Plan, the Committee may,
from time to time, employ agents, including employees of the
Company and Plan Participants, and may delegate to them such
administrative duties as it sees fit, and may from time to time
consult with counsel who may be counsel to the Employer.
6.3 Binding Effect of Decisions. The decision or action of the
Committee with respect to any question arising out of or in
connection with the administration, interpretation and
application of the Plan and the rules and regulations
promulgated hereunder shall be final, conclusive and binding
upon all persons having any interest in the Plan.
6.4 Indemnity of Committee. The Company and Employer shall indemnify
and hold harmless the members of the Committee and their agents
and delegates against any and all claims, losses, damage,
expense (including counsel fees) or liability arising from any
action or failure to act with respect to this Plan, except in
the case of willful misconduct by the Committee or any of its
members or agents.
<PAGE>
ARTICLE 7
Miscellaneous
-------------
7.1 Unsecured General Creditor. Participants and their
Beneficiaries, heirs, successors and assigns shall have no legal
or equitable rights, interest or claims in any property or
assets of any Employer, nor shall they be Beneficiaries of, or
have any rights, claims or interests in any life insurance
policies, annuity contracts or the proceeds therefrom owned or
which may be acquired by the Employer ("Policies"). Such
Policies or other assets of the Employer shall not be held under
any trust for the benefit of Participants, their Beneficiaries,
heirs, successors or assigns, or held in any way as collateral
security for the fulfilling of the obligations of the Employer
under this Plan. Any and all of the Employer's assets and
Policies shall be, and remain, the general assets of the
Employer. The Employer's obligation under the Plan shall merely
constitute an unfunded and unsecured promise of the Employer to
pay money in the future.
7.2 Nonassignability. Neither a Participant nor any other person
shall have any right to sell, assign, transfer, pledge, mortgage
or otherwise encumber, hypothecate or convey in advance of
actual receipt, the amounts, if any, payable hereunder, or any
part thereof or interest therein. No part of the amounts payable
shall, prior to actual payment, be subject to seizure or
sequestration for the payment of any debts, judgments, alimony
or separate maintenance owed by a Participant or any other
person, nor be transferable by operation of law in the event of
a Participant's or any other person's bankruptcy or insolvency.
7.3 Not a Contract of Employment. The terms and conditions of this
Plan shall not be deemed to constitute a contract of employment
between the Employer and the Participant, and the Participant
(or his or her Beneficiary) shall have no rights against the
Employer except as may otherwise be specifically provided
herein. Moreover, nothing in this Plan shall be deemed to give a
Participant the right to be retained in the service of the
Employer or to deny to the Employer the right to discipline a
Participant (including reducing his or her salary) or discharge
him or her at any time.
7.4 Health Information. The Participant shall provide to the
Company, if so requested and as a precondition for Plan
participation, all health information and other information as
the Company may require in order to purchase Policies.
7.5 Governing Law. The provisions of the Plan shall be construed and
interpreted according to the laws of the State of New York.
7.6 Withholding. All payments that are to be made by an Employer to
a Participant shall be subject to withholding for any and all
taxes as the Employer in its discretion deems appropriate.
<PAGE>
7.7 Binding Effect. The provisions of this Plan shall bind the
Participant and his or her Beneficiaries, and shall bind and
inure to the benefit of the Employer and its successors and
assigns.
7.8 Borrowing. No portions of any accounts may be borrowed by a
Participant or his or her Beneficiaries under this Plan.
7.9 Validity. In case any provision of this Plan shall be illegal or
invalid for any reason, said illegality or invalidity shall not
affect the remaining parts hereof, but this Plan shall be
construed and enforced as if such illegal and invalid provision
had never been inserted herein.
7.10 Incapacity of Person Entitled To Payment. If the Committee shall
reasonably determine, upon evidence satisfactory to it, that it
is not desirable, because of the incapacity of the person who
shall be entitled to receive any payment in accordance with the
provisions of the Plan, to make such payment directly to such
person, the Committee may apply such payment for the benefit of
such person in any way that the Committee shall deem advisable,
or the Committee may make such payment to any third person who,
in the judgment of the Committee, will apply such payment for
the benefit of the person entitled thereto. Such payment for the
benefit of the person entitled thereto, or to a third person for
his or her benefit, shall be a complete discharge of all
liability with respect to such payment. The Committee may retain
any amount that would otherwise be payable in accordance with
the provisions of the Plan to a person who may be under legal
disability until a representative of such person competent to
receive such payment on his or her behalf shall have been
appointed pursuant to law.
7.11 Captions. The captions of the articles, sections and paragraphs
of the Plan are for convenience only and shall not control or
affect the meaning or construction of any of its provisions.
7.12 Construction. Whenever any words are used herein in the singular
or in the plural, they shall be construed as though they were
used in the plural or the singular, as the case may be, in all
cases where they would so apply.
l:\empb\plan\tophat97.doc
Revised: March 18, 1997
EXHIBIT 12
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
UNAUDITED
Twelve Fiscal Year Ended September 30
Months Ended ----------------------------------------
6/30/97 1996 1995 1994 1993 1992
------------ ---- ---- ---- ---- ----
EARNINGS:
<S> <C> <C> <C> <C> <C> <C>
Income Before Interest Charges (2) $167,804 $159,599 $128,061 $127,885 $125,742 $118,222
Allowance for Borrowed Funds Used in Construction 315 205 195 209 174 1,088
Federal Income Tax 66,401 55,148 30,522 36,630 21,148 17,680
State Income Tax 8,853 7,266 4,905 6,309 2,979 3,426
Deferred Inc. Taxes - Net (3) (1,512) 3,907 8,452 4,853 16,919 14,125
Investment Tax Credit - Net (672) (665) (672) (682) (693) (706)
Rentals (1) 5,396 5,640 5,422 5,730 5,621 5,857
-------- -------- -------- -------- -------- --------
$246,585 $231,100 $176,885 $180,934 $171,890 $159,692
======== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest & Amortization of Premium and
Discount of Funded Debt $41,182 $40,872 $40,896 $36,699 $38,507 $39,949
Interest on Commercial Paper and
Short-Term Notes Payable 8,986 7,872 6,745 5,599 7,465 12,093
Other Interest (2) 4,069 6,389 4,721 3,361 4,727 6,958
Rentals (1) 5,396 5,640 5,422 5,730 5,621 5,857
------- ------- ------- ------- ------- -------
$59,633 $60,773 $57,784 $51,389 $56,320 $64,857
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 4.14 3.80 3.06 3.52 3.05 2.46
</TABLE>
Notes:
(1) Rentals shown above represent the portion of all rentals (other than
delay rentals) deemed representative of the interest factor.
(2) Twelve months ended June 30, 1997, Fiscal 1996, 1995, 1994, 1993 and
1992 reflect the reclassification of $1,716, $1,716, $1,716, $1,674,
$1,374 and $1,129, respectively, representing the loss on reacquired debt
amortized during each period, from Other Interest Charges to Operation
Expense.
(3) Deferred Income Taxes - Net for fiscal 1994 excludes the cumulative
effect of changes in accounting.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL
GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 09-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,771,144
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 249,272
<TOTAL-DEFERRED-CHARGES> 11,400
<OTHER-ASSETS> 217,131
<TOTAL-ASSETS> 2,248,947
<COMMON> 38,148
<CAPITAL-SURPLUS-PAID-IN> 404,873
<RETAINED-EARNINGS> 489,060
<TOTAL-COMMON-STOCKHOLDERS-EQ> 929,836
0
0
<LONG-TERM-DEBT-NET> 532,214
<SHORT-TERM-NOTES> 27,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 105,000
<LONG-TERM-DEBT-CURRENT-PORT> 53,309
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 601,488
<TOT-CAPITALIZATION-AND-LIAB> 2,248,947
<GROSS-OPERATING-REVENUE> 1,108,247
<INCOME-TAX-EXPENSE> 69,719
<OTHER-OPERATING-EXPENSES> 884,281
<TOTAL-OPERATING-EXPENSES> 954,000
<OPERATING-INCOME-LOSS> 154,247
<OTHER-INCOME-NET> 2,598
<INCOME-BEFORE-INTEREST-EXPEN> 156,845
<TOTAL-INTEREST-EXPENSE> 42,240
<NET-INCOME> 114,605
0
<EARNINGS-AVAILABLE-FOR-COMM> 114,605
<COMMON-STOCK-DIVIDENDS> 48,419
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 270,874
<EPS-PRIMARY> 3.01
<EPS-DILUTED> 3.01
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL
GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 09-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,677,386
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 237,936
<TOTAL-DEFERRED-CHARGES> 7,907
<OTHER-ASSETS> 216,040
<TOTAL-ASSETS> 2,139,269
<COMMON> 37,708
<CAPITAL-SURPLUS-PAID-IN> 391,333
<RETAINED-EARNINGS> 439,439
<TOTAL-COMMON-STOCKHOLDERS-EQ> 868,480
0
0
<LONG-TERM-DEBT-NET> 574,000
<SHORT-TERM-NOTES> 52,200
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 35,000
<LONG-TERM-DEBT-CURRENT-PORT> 30,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 579,589
<TOT-CAPITALIZATION-AND-LIAB> 2,139,269
<GROSS-OPERATING-REVENUE> 1,048,034
<INCOME-TAX-EXPENSE> 62,267
<OTHER-OPERATING-EXPENSES> 840,106
<TOTAL-OPERATING-EXPENSES> 902,373
<OPERATING-INCOME-LOSS> 145,661
<OTHER-INCOME-NET> 2,979
<INCOME-BEFORE-INTEREST-EXPEN> 148,640
<TOTAL-INTEREST-EXPENSE> 43,246
<NET-INCOME> 105,394
0
<EARNINGS-AVAILABLE-FOR-COMM> 105,394
<COMMON-STOCK-DIVIDENDS> 46,078
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 178,697
<EPS-PRIMARY> 2.81
<EPS-DILUTED> 2.81
</TABLE>
EXHIBIT 99
NATIONAL FUEL GAS COMPANY
-------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
(UNAUDITED)
-----------
Twelve Months Ended
June 30,
----------------------
1997 1996
---- ----
(Thousands of Dollars)
INCOME
Operating Revenues $1,268,231 $1,171,974
---------- ----------
Operating Expenses
Purchased Gas 515,954 481,564
Operation 276,873 267,413
Maintenance 24,639 27,452
Property, Franchise and Other Taxes 99,880 99,152
Depreciation, Depletion and Amortization 111,116 90,273
Income Taxes - Net 73,737 54,792
---------- ----------
1,102,199 1,020,646
---------- ----------
Operating Income 166,032 151,328
Other Income 3,488 3,671
----------- ----------
Income Before Interest Charges 169,520 154,999
---------- ----------
Interest Charges
Interest on Long-Term Debt 41,182 40,846
Other Interest 14,456 15,725
---------- ----------
55,638 56,571
---------- ----------
Net Income Available for Common Stock $ 113,882 $ 98,428
========== ==========
Earnings Per Common Share
Net Income Available for Common Stock $3.00 $2.62
===== =====
Weighted Average Common Shares Outstanding 37,991,518 37,524,074
========== ==========
